IPO or Initial Public Offering is a process, wherein a corporation or company, which was earlier privately-held, goes ahead for public investment. The company in question is known as an issuer and sells a part of its stake, so that investors can invest, providing the organization with additional capital for its various requirements. Also, the investors get the chance to earn excellent returns. A company takes part in IPO usually to generate equity capital, raise funds for financial initiatives, or promote the trading of assets.
The existing stakeholders may sell a portion of the stake to cash in on their investments. An underwriter assists the organization to underwrite the stocks. An underwriter can be a merchant banker, financial institution, banker, or broker. If the investors do not pick the stocks in that IPO, then the underwriters subscribe to the balance shares.
The company choosing IPO introduces a prospectus. This document contains the proposals and details of offerings. The prospectus is accessible to the public, high net worth individuals (HNIs), and institutional investors. This document informs the investors about the first sale of shares. The shares of the company get listed after the process of IPO is done. Now, the shares can be traded in the open market, freely.
A minimum free float is applicable on the shares by the Stock Exchange. IPO investment can turn to be lucrative. But it comes with risks as well. Not every IPO offering can guarantee great returns. So, to understand what Initial Public Offering is all about along with its types, eligibility norms, prospectus, how to invest, upcoming IPOs, go through the post below.
Types of IPOs in India
Here are the two IPO types to know about:
- Fixed Price Offering
The company that wants to undertake an IPO sets an issue price before the first sale of shares. So, the investors already know the pre-determined price of stocks meant for public investment. Once the issue is closed, how much the stocks are in demand, comes to be known. When making an application, the investors have to pay the entire price of the shares.
- Book Building Offering
Here, the company that initiates an IPO provides a 20% price band on the stocks. So, the investors can bid on the shares even before the final price of stocks is concluded. The investor has to be specific about the number of shares he/she is interested to purchase. Also, the investor must disclose the amount he/she is prepared to pay per share.
The floor price is the lowest share price, while the highest stock price is the maximum share price. The price of the share ultimately depends on the bids by the investors. The subscription for the issuer’s shares remains open for 3 trading days.
Eligibility Criteria for IPO Investment
Any adult individual who can enter into a legal contract and fulfil the eligibility requirements to apply for a company IPO can apply. Here are some of the additional rules to abide by:
- The investor must have a valid PAN Card issued by the IT Department of India.
- He/she must also have a valid Demat account, and will not need a trading account until it is about selling the stocks on the listings. So, along with a Demat account, it is also advisable to open a trading account if investing in an IPO.
Draft Red Herring Prospectus (DRHP)
After the SEBI approves an IPO, the company releases a DRHP. It informs the public about the company’s listings. It also has details such as the company’s balance sheet, net proceeds, the purpose of raising funds, promoter’s expenses, earning statement of the last 3 years (if applicable), legal opinion on the listings, copy of the underwriting document.
It also details the discounts and commissions of the underwriter. And has information such as the name and address of all the officers, directors, underwriters, and stockholders who hold 10% or more than the outstanding stock.
Tips to Invest in an Initial Public Offering
Here is how you can ace investment in an IPO:
- Open a Demat Account
Demat account stores financial securities and shares electronically. This account acts as a trading account. It is essential for IPO investment. To open a Demat account, you will need PAN Card, Aadhaar Card, and identity and address proofs.
- Pick the IPO in Which to Invest
You must decide the IPO for which you want to apply. To start with, you must go through the prospectus of the company, and understand the details of the offerings. This will give you a realistic idea as to the organization’s purpose of initiating an IPO, and its business plan.
- Arrange Funds for Investment
Once you decide on the IPO to invest in, you will have to arrange funds to purchase the company’s share. You can take a loan from a financial institution for the same if you do not have sufficient funds in hand.
- Apply for an IPO
You can apply for an IPO from your trading account. You can also do so through your bank account. Several financial institutions give access to the trading account, bank account, and Demat account on one platform. Now, you must familiarize yourself with ASBA (Application Supported by Blocked Account) facility. This application allows the bank to lock in the funds in the bank account of the applicant.
IPO applicants can access the ASBA application forms as a physical form or a Demat form. But to avail of this facility, you cannot use Demand Drafts and Cheques. You have to provide your Demat account number, bank account number, bidding details, and PAN number in the application.
- Bid for the Shares in an IPO
When applying for an IPO, you have to bid for the shares. This is as per the lot size the company quotes in its prospectus. It tells you about the minimum number of shares that you have to mandatorily apply for if interested in that specific IPO. The prospectus has details of the price range in which you have to set your bid. You can change your bids during an IPO but have to maintain the required funds when bidding. While the process is ongoing, the amount you set aside for bidding in the bank earns interest till an allotment is initiated.
- Allotment of Shares
The company releases a certain number of stocks in the secondary market. But sometimes the demand for the shares can shoot up over the specified number of stocks made available for an IPO investment. In this case, you may get a fewer number of shares than what you had applied for. If this happens, the bank can unlock the funds arrested either partially or completely.
In the case of the overallotment option (Green Shoe Option), the underwriter can sell a greater number of shares than what the company planned for initially. Due to oversubscription, the issuer company under the norms of the underwriting agreement can release additional shares in the market for investors.
You can also get a full allotment for the number of shares you demanded. Here, you will get a Confirmatory Allotment Note (CAN) in 6 working days from the completion of the IPO process. The allotted shares will get credited to your Demat account. It takes around 7 days from the finalization of allotment for the stock listing in the share market.
List of Upcoming IPOs (October 2021) in India
|Company Name||Estimated IPO Size|
|Star Health And Allied Insurance Co. Ltd.||Rs.3000 Crore|
|Emcure Pharmaceuticals||Rs.4,500 Crore|
|ESAF Small Finance Bank Ltd||Rs.998 Crore|
|Studds Accessories Limited||Rs.450 Crore|
|CMS Info Systems||Rs.2,000 Crore|
|Arohan Financials||Rs.1,800 Crore|
|Sterlite Power Transmission||Rs.1,250 Crore|
|RateGain Travel Technologies||Rs.1,200 Crore|
|Penna Cement||Rs.1,550 Crore|
|Utkarsh Small Finance Bank||Rs.1,350 Crore|
|Northern Arc Capital||Rs.1,800 Crore|
|Fincare Small Finance Bank||Rs.1,330 Crore|
|Shriram Properties||Rs.800 Crore|
|Shri Bajrang Power And Ispat||Rs.700 Crore|
Here are details of the few upcoming IPOs:
Nykaa is a popular online retail website for wellness and beauty products. Its user base grows exponentially every month. As of November 2020, the valuation of the company was $1.8 billion. And post the IPO process, the market valuation of Nykaa will climb to $5 to 5.5 billion. The valuation of the public issue is about Rs. 4,000 crore. It is expected to have fresh issue shares worth Rs. 525 crore.
- Star Health and Allied Insurance Co. Ltd.
In the private insurance sector of India, Star Health and Allied Insurance Co. Ltd. has a 15.8% market share. As of the 2021 fiscal year, the company has collected a premium of gross Rs. 9348.95 crore value. The IPO will have fresh issue equity shares of Rs. 2,000 crore.
MobiKwik intends to expand its franchise as well as give a boost to its digital wallet with the add-on of fresh funds from the IPO. It is to offer a fresh issue of Rs. 1,500 crore. Also, it will offer a sale of Rs. 400 crore.
Ixigo is one of the leading artificial intelligence-based platforms for booking trains, hotels, and flights. It has been in existence for 14 years now. Through its Rs. 1,600 crore IPO, the organization will provide a fresh issue and sale of Rs. 850 crore and Rs. 750 crore, respectively.
- Utkarsh Small Finance Bank
Utkarsh Small Finance Bank intends to use the IPO proceeds for tier-I business expansion. The IPO will offer a fresh issue of Rs. 750 crore and sale of Rs. 600 crore. In this offering, Utkarsh Coreinvest Limited (current majority shareholders) will liquidate its stake.
IPO allows the issuer company to widen its exposure to the public, monetize on investments, and expand its equity base. The investors on the other hand can invest in the organization and earn great returns. To invest in IPOs, keep a track of the upcoming IPOs, and understand their financials, the purpose of raising funds from the listings, and what you stand to gain out of it.