IPO has created a lot of buzzes these days. I am sure you must have heard about the recent bumper listing of some IPOs.
And Stellar listing of many companies in the last 6 months has attracted a lot of retail investors towards IPO.
And because of that I frequently get this query, How to apply for IPO.
If we believe numbers, in the last financial year 2020-21, companies raised 4.6 billion dollars through IPO.
Experts believe, this number will be easily surpassed this year, seeing strong participation of investors and positive sentiment.
Interestingly, 14.2 million new individual investors have participated in the Indian stock market in the last financial year.
And credit goes to the high attraction of IPO among retail investors.
Well, It is a good sign that stock market participation is increasing in India. In a country, where the number of Demat accounts is still less than 5% of the total population.
But, the worrisome thing I am seeing is the participation of retail investors without proper study of the company where money is invested.
You should check about the business before putting your hard-earned money into it.
And another essential thing is Not all IPOs are profitable. Pick IPO wisely.
This is the reason why I have written this article.
Does an IPO always give profit? The answer is a big No.
I heard from one friend of mine that he doesn’t invest in the stock market but he has never left any single IPO unattempted.
And the reason is, He finds it much simpler than the secondary stock market.
And he thinks that whenever any company gets listed, it is bound to be listed at a premium.
I asked him why he thinks so because there is no such written rule that it has to always bring profit.
His reply was, simple logic brother, it is making its debut in the market, so it has to come with a big bang.
Instead of answering him, I was thinking many like him are looking for the right information about an IPO.
So, I decided to write this post.
I am sure that after reading this post, you will learn not only how to apply for IPO, but also how to select the right IPO.
Also, we will discuss how an IPO works. We will also discuss whether you should get a listing gain and take the exit after allotment or become a long-term investor.
First of all
What is an IPO
If you are new to the equity market, I am sure you might have heard the word IPO.
You might have wondered as well,
What is the full form of IPO?
The full form of IPO has the answer you are looking for. Once you know its full form, it is easy to understand what it means.
IPO stands for Initial public offer.
Now, let’s try to put it in the context of the stock market.
Imagine there is a company A. It is a private limited company.
Company A wishes to expand its business. For expansion, money is required.
They can raise money in 2 ways, either they would take a loan from the bank or they would raise money from the stock market by issuing shares.
So, to raise money from the stock market in India, they will have to get listed in the stock market.
Not just for expansion, there are also other reasons companies file for IPO.
Like a company has Angel investors (who invest in a company in its very starting phase), IPO allows these early investors to take exit from the business.
IPO also gives an exit opportunity to promoters/founders of the company.
Because of this, there are 2 types of shares offered in the IPO.
- Offer for sale for the shares of founders and angel investors
- Fresh issue of shares
This is the total number of shares offered in the IPO.
Now we will see
How IPO works
Here, We will see how an IPO works from both sides, the company and investors.
First, we will see it from the company side.
As we discussed earlier, to raise money from the equity market, a company is required to get registered with SEBI.
They submit DRHP ( Draft red herring prospectus ).
In simple words, they submit a detailed prospectus about their company, their business, details of their financial performance, and reason for raising money from the equity market.
Once DRHP gets approved, they start preparing for an IPO.
IPO size and schedule get fixed.
IPO is allocated in different quotas.
- Retail investors ( Bidding amount below 2 lakh INR )
- HNI investors ( Bidding amount more than 2 lakh INR )
- QIB ( Quality institution buyers) Big institutions like mutual funds, pension funds
Based on the profitability of previous years, the ratio of allocation to each quota is decided.
Like, if a company has a history of profitability, Retail investors are allocated 35% of the total IPO size.
If a company is loss-making, then 10% of the total IPO size is allocated to retail investors.
Let’s understand the whole thing with the help of an example of the recent IPO of Zomato.
The total IPO size of Zomato was 9,375 crore INR. Out of this, shares worth 9000 crore rupees were fresh issued, while shares worth 375 crores were offered for sale by promoters and early investors to exit.
As zomato is a loss-making company, Out of this 9,375 crore, 10% were fixed to a retail quota which means shares worth 937.5 crores. 75% of the total was fixed for QIB and the rest 15% was fixed for the HNI quota.
The IPO of zomato witnessed a huge response from all categories of investors. Retail quota saw 7.45 times subscription. This means, For 937.5 crores worth of shares retail investors made a bid of 937.5 x 7.45 = whooping 6,984 crores!!
It means not everybody will get an allotment, so with the help of the lottery system allotment was carried out.
Meanwhile, until a company gets listed on the stock market, shares of that company get traded in the grey market.
You might have heard the word grey market premium or GMP and might have wondered what is GMP in the IPO.
The Grey market is unofficial. If stocks of a company are in good demand, in the grey market stocks will be traded at a premium amount over the bidding price in the IPO. This premium is called GMP – Grey market premium.
GMP indicates the price of the stock upon getting listed in the official stock market.
If there is good GMP for any particular IPO, you may get good listing gain accordingly.
I hope I have cleared everything about how an IPO works.
Now we will see how an IPO works from a retail investor’s perspective.
Investors have to bid for shares in lot sizes.
The amount of one lot can not exceed 15,000 rupees.
So, the price of one lot of shares ranges between 14,000 to 15,000 INR
In case of oversubscription ( bidding amount more than IPO size of particular quota),
In the retail quota, the lottery system is used for the allocation of lots.
If your IPO application is selected in the lottery, you will be allotted one lot.
If your application is not selected in the lottery, you will not be allotted anything.
In case of oversubscription, a maximum of 1 lot will be allotted per Demat through lottery.
In case of under subscription, everyone will be allotted lots as per their demand.
While in the HNI quota, everyone will get an allotment on a proportionate basis.
Now we have reached the main thing. How exactly will you apply for it?
You are required to have a Demat account and net banking or UPI id for it.
To make it easy, we will see it with an example of a Zerodha Demat account.
How to apply for IPO in Zerodha
Zerodha gives UPI-based IPO applications in their mobile app.
In the IPO section, you will have to select a company.
Then you will have to bid.
There are two types of prices in the IPO, fixed price and Bookbuild price.
In practice, the bookbuild price system is used in which a price band is given.
You can select any price between the range of price bands decided by the company.
I would suggest putting a tick on the cut-off price, to make your allocation chances higher.
Then write a quantity of one lot and verify your UPI id.
Click the submit button and your application will be submitted.
Then on your UPI app, you will get a notification to Authorize the mandate of your bidding.
You will be required to input your UPI pin, to Authorize the UPI mandate.
By authorizing the UPI mandate, you are letting your bidding money be blocked in your bank account.
In case of allotment, your money will be deducted from your bank account and you will be allotted shares for the same in your Demat account.
In case you do not get an allotment, your money will be unblocked in your bank account.
That’s it about the UPI-based IPO application in Zerodha.
Now you might be wondering, are there any other ways to apply for an IPO?
The answer is Yes, You can either visit your bank branch and apply through a physical form in the given 3 days when IPO is open for application.
Or you can use the ASBA facility provided by Banks. Now, we are going to see it.
How to apply for IPO through ASBA
The full form of ASBA is an Application supported by a blocked amount.
You can access it through the net banking of your bank.
Same as UPI mandate, here too, your money will get blocked in your bank account until allotment day.
For applying through ASBA :
Step 1. Login to your net banking
Step 2. Check for e-services
Step 3 In e-services, find IPO/ASBA option.
Step 4 Fill IPO application form just like UPI based form and submit
Step 5 Bank would trigger OTP for approval.
Step 6 Input OTP and you are done, your money will be blocked in your account until allotment.
In the 3 days timeline, you can apply for an IPO.
Then comes the next step
How to check IPO application status
It is easy, once you submit an application and authorize the UPI mandate, you will get a notification from your bank that the mandate has been created.
In the evening, you will receive an acknowledgment from the exchange that your application for IPO is submitted.
After that, you will have to wait for allotment day.
Then this question arises,
How to check IPO allotment status
Registrar may differ from company to company. You should check it while applying for an IPO, who is the registrar in that IPO.
On that website, you are required to give your PAN number to check whether you have been allotted IPO or not.
You should check the IPO calendar to keep a check on the dates of all upcoming IPOs.
I hope I have cleared all doubts about the IPO and how to apply for it. What do you think about it? If you have any queries or doubts about it let me know in the comment section. I have also answered some frequently asked questions about IPO.
Frequently asked questions
Is it good to buy IPO stocks ?
Yes, if the past track record of the company is good and if you feel this industry has a good future, always go for that IPO.
The Benefit of allotment of stocks from IPO is that you get a better deal than buying from the secondary market.
Because businesses with great future prospects and cash generating ability mostly get bumper listings in the secondary market and in the long run like 10 years you can see multifold growth.
But at the same time, you should be careful about the business in which you are investing. Because poorly performing companies do not get you that type of returns.
Can we fill an IPO online ?
Yes , you can do it either through your demat account. There you can fill IPO applications and block your money with UPI.
Likewise, you can also do it through your netbanking. There you can use ASBA (Application supported by blocked amount) facility provided by your bank for applying IPO online
Can IPO make you rich ?
Well, an IPO can make promoters and early investors rich. For retail investors IPO is a good platform to make decent profits in the short time.
But it definitely can not make you rich with just an IPO. Because the amount invested is very small.
But there is good news for retail investors as well. Stay invested for the long term in companies with strong leadership and good future prospects.
Because the secondary market provides ample opportunity to all entrant companies that have huge potential to become prominent companies in the future.
Stay invested in such companies for more than 10 years to witness the power of compounding. That will definitely make you rich.