Contents
Introduction
IPO stands for initial public offer. The first time a company offers its shares on a public stock exchange is called an IPO. Assume you have plans to start your own cupcake business. The primary expenses you will need to fund for this business are raw materials, machinery, workers to help you, and a place to sell your product. You might have the capital to invest in these expenses. If not, you might even borrow from friends and relatives and other angel investors. If you want to expand and buy an industrial machine that costs several thousand rupees, or if you’re going to rent out another location to grow, you need more investors to support your cause. That is where offering your shares to the public will help. By providing your claims to the public, you will raise the amount of capital that you need to fund your expenses and run your business.
Once you offer your shares in the primary market, investors will subscribe to these shares. The process of allocating these shares in the allowed percentage to the investors and receiving money from them is called an Initial public offer. Your company goes from being entirely private to being a public entity.
Types of investors
There are different types of investors who will subscribe to your shares. Let us look at who they are and the percentage of shares allocated to them in your company.
Qualified institutional buyers (QIBs)
The Securities Exchange Board of India defines this investor as having the necessary expertise and financial background to evaluate and strategically invest in capital markets carefully. A limit of 50% of the offer of your IPO is allowed to QIBs.
Retail Individual Investors (RIIs)
These are individual investors who have do not have much capital as a QIB. They are unique or non-professional investors who buy and sell shares through brokerage firms for their accounts. Their bids are for a lower amount compared to institutional investors. The maximum sum that an RII can invest in your IP can be two lakhs rupees. They are allowed to receive at least 35% of the offer.
Non-institutional bidders (NIIs)
These investors are typically high-net-worth individuals and foreign bodies. They can apply for a sum greater than two lakhs rupees in your IPO and are allowed 15% of the total offer.
If you apply for an IPO but do not have three straight years of profit, you can allot 75% of the shares on offer to QIBs, 15% to HNIs, and only 10% to RIIs.
How to apply for an IPO
You need a trading account and a dematerialization (demat) fund to invest in shares, but for applying for an IPO, a Demat account is enough. It is an electronic record of your shares. The Securities Exchange Board of India has also made it easy for you to block the application money required for an IPO. Via the “application supported by blocked amount” facility (ASBA), your bank will automatically debit money from your bank account for the shares allotted to you.
Nowadays, it is easy to apply for an Initial public offering (IPO). It can be done offline and online. Most online brokers have ASBAthat helps investors efficiently use for an IPO.
With ICICI direct, you can invest in all the upcoming and current IPOs. You can view, among other details, an analysis of the top-performing IPOs, the closed IPOs, and the delisted IPOs.
You can apply for an IPO in two modes:
Online:
Application supported by the blocked amount (ASBA)
The Securities Exchange Board of India has also made it easy for you to block the application money required for an IPO. The regulatory body has made it mandatory for investors to have an ASBA account when bidding for an IPO. Your bank will automatically debit money from your bank account for the shares that are allotted to you. You can directly apply for an IPO via the ASBA facility offered to you by your broker. You do not have to bother about other modes of payment but can block the amount in your bank account. This money will continue to earn interest in your bank. Only an amount equal to the shares allotted to you in the IPO is taken from your bank account. This amount is taken from the bank only when the shares are assigned to you.
UPI in ASBA
A unified payments interface (UPI)is an instant payment system to transfer money between banks. You need to create a UPI id to use it. Retail individual investors and shareholders bidding in shareholders reservation portion of up to Rs.2,00,000 can avail the application via the UPI facility of a bank. Once the investor submits the IPO application, the amount required would be blocked by the bank and debited from the account once the shares are allocated.
How to apply for an IPO using UPI:
- Enter mobile number
- Enter the OTP that pops up on the screen
- Select the IPO which you are interested in
- Fill in all the required details
- Fill in the bid details
- Confirm all the details
- Click on submit.
Offline:
You first need to create a Demat account. An investor can apply in the offline mode by filling the Initial public offer form and submitting it in the bank’s branch or to the stockbroker. Your funds in your bank account are blocked in an equal amount to the value of the shares.
Conclusion:
Investing in an IPO can be tricky for even the most seasoned investors. It is easy to get lured into subscribing to companies that look flashy. While these companies might boast of good profits and handsome returns, they might not be able to keep up their performance, and share price might fall after the IPO day. It is always better to research as much as possible before you invest your money in an IPO. The returns might look good but the risks can be huge as well.
Disclaimer:
ICICI Securities Ltd. ( I-Sec). The registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No: 022 – 2288 2460, 022 – 2288 2470. Please note, IPO-related services are not Exchange-traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to the Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purposes.