It seems that IPOs are raining over the stock markets with the current year having already seen nearly 40 new companies getting listed and many more in the pipeline. Some of the recent weeks saw as many as four IPOs open together and still managing to attract huge subscriptions. It is believed that 2021 would set a new benchmark in terms of fund raising through IPOs with cumulative amount expected to cross the ₹1 lakh crore mark for the first time ever.
What is an IPO?
An IPO or an initial public offer is a public issue of shares by companies that are privately held. There are millions of companies in India that are owned by families or by a closed set of shareholders. These are all private companies. When such a company wants to enter the stock markets and list on exchanges like BSE or the National Stock Exchange (NSE), the most popular route is the public issue or an IPO. In an IPO, the company sells shares to public shareholders at large and then becomes listed on the stock exchange where its shares can be freely bought or sold among all public shareholders.
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How exactly is an IPO done?
IPO process comprises of many stages. To start with, a company desirous of going public has to appoint a merchant banker who is registered with the capital market regulator the Securities and Exchange Board of India (SEBI). The merchant banker – also known as an investment banker – will manage all the compliance and regulatory requirements and file an IPO prospectus – known as draft red herring prospectus in technical parlance – with SEBI. Once the IPO prospectus receives the regulatory approval, the company can launch its IPO to attract bids from public shareholders.
The draft document of an IPO is an important document as it includes all relevant information about the company, its shareholders, financials, business activities, ongoing litigations, risk factors and almost everything that one should know before deciding if the company is worth investing. All investors should go through the important disclosures made in the draft document. Meanwhile, an IPO has reservations for different categories of investors like institutional, retail and high net worth individuals. Retail investor is defined as one who can bid for a maximum value of ₹2 lakh.
Also read: IPO boom! Over 30 companies file papers with SEBI in last one month; will the trend continue?
How can investors apply in an IPO?
An investor needs to have a demat account to apply for shares in an IPO. A demat account can be opened with any of the broking firms but it is always advisable to open a demat account with a well-known broking firm. A demat account is needed as shares are now held in the dematerialised form, which means there is no paper certificate or physical share certificate, which was the case many years ago. All broking firms allow their clients to bid for shares in an IPO and nowadays, this can be managed through their trading app as well. Every IPO has a price band, which essentially is a price range within which one can bid for shares.
For instance, an IPO could have a price band of ₹100 to ₹110. This means that investors can bid for the shares at any price between ₹100 and ₹110. There is also an option to bid at the ‘Issue Price’, which is the price at which the shares will be finally allotted to all bidders. For retail investors, the total bid value cannot exceed ₹2 lakh.
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According to the current regulatory norms, IPO bidding has to be done electronically, which means one need not issue cheques or any other physical instrument to get shares in an IPO. An investor’s bank account is linked to the demat account, and the money remains blocked in the bank till allotment of share is done. Some of the new-age broking firms backed by strong technology even allow investors to reserve their bids for shares before the IPO opens. An IPO typically remains open for three working days.
What happens after IPO closes?
Once the IPO is closed for bidding, all the bids are screened to check if they comply with all the regulatory requirements. Any invalid bids are rejected and then based on the final subscription number; the shares are allotted. If the issue is undersubscribed – number of shares bid for is less than the total number of shares on offer – all valid bidders receive the number of shares that they bid for.
In the case of oversubscription, allotment can be done on pro-rata basis and the number of shares allotted would differ from the number that each investor bid for. Post the allotment, the number of shares will be reflected in the investor’s demat account. Finally, shares are listed on the stock exchanges where they are available for buying or selling.
Also read: IPO corner: 12 cos raised Rs 27,000 cr in April-July; issues worth Rs 70,000 cr in pipeline
