How to Invest in IPO
One of the ways of investing in shares is investing in them via the Initial Public Offer (IPO) route i.e. when any company issues shares to the public for the first time and gets listed on the stock exchange.
Until an IPO is released, the stakeholders in the company are usually family, friends, venture capitalists, professional investors, banks, etc. Post an IPO, shares of the company are traded on the stock exchanges.
A company making a public issue of securities has to file a draft prospectus with SEBI, through an eligible merchant banker, at least 21 days prior to the filling of the prospectus with the Registrar of Companies (ROC). If SEBI has any observations, it has to convey them to the issuer within the specified period of 21 days.
Eligibility Requirements for a Company to File an IPO:
SEBI has stipulated the eligibility norms for companies planning an IPO which are as follows:
1. Minimum net tangible assets, of at least Rs 3 Crores each, not more than 50% of which are held in monetary assets, in the preceding three full years.
2. Minimum Rs 15 Crores as average operating profit (before tax) in at least three out of five preceding years.
3. Minimum net worth of Rs 1 Crore in each preceding three full years.
4. If there has been a change in the company’s name, at least 50% of the revenue for the preceding year be from the new activity denoted by the new name.
5. Issue size should not exceed 5 times pre-issue net worth.
Alternative Route (QIB Route):
For all those companies who genuinely require a larger capital base, but fail to accomplish any of the rules laid down above, SEBI has introduced an alternative.
Through this alternative route, companies can come out with a public issue, with a condition that at least 75% of the net offer to the public be mandatory allotted to the Qualified Institutional Buyers (QIBs). In this case of the minimum subscription of QIB is not achieved, the company shall refund the subscription money.
Contribution of Promoters:
Investing in Shares via IPO According to SEBI regulations, the promoter’s contribution
in case of public issues by unlisted companies and promoters shareholding in case of offers for sale should not be less than 20% of the post-issue capital.
Lock-In Period for Promoters Holding:
For any issue of capital to the public, the minimum promoter’s contribution is locked in for a period of three years. If the promoter’s contribution exceeds the required
minimum contribution, such excess is also locked in for a period of three years.
Intermediaries involved in Public Issues:
Main intermediaries involved in Public Issues include –
- Book Running Lead Managers (BRLMs)
- Registrars to the Issue
- Bankers for the Issue
- IPO Grading Agencies
Book Running Lead Managers (BRLMs):
Book-running lead managers play a very important role in an IPO’s process. They are responsible for ensuring compliance with SEBI guidelines and legal formalities in the entire issue process and marketing of the issue. They also, manage some post-issue activities.
BRLM’s pre-issue activities include drafting and designing the offer documents, prospectus, statutory advertisements, and memorandum containing salient features of the prospectus and also carrying out various marketing strategies for the issue.
BRLM’s post-issue activities include coordinating non-institutional allocation, intimation of allocation and dispatch of refunds to bidders, management of escrow accounts, etc.
They are the most important intermediary in the case of the primary market. In case of fixed price issues, BRLMs are known as Merchant Bankers.
Registrar to the Issue:
Registrar of a public issue is a SEBI-registered entity, responsible for the processing of IPO applications, allocating shares to applicants based on SEBI guidelines, processing refunds to unsuccessful applications, and transferring allocated shares to investors’ Demat accounts.
Bankers to the Issue:
Bankers to the issue are responsible for carrying out all the activities of ensuring that the funds are collected and transferred to the escrow accounts for the public issue.
Underwriters are institutions or individuals who agree to subscribe to the securities offered by the company in case these are not fully subscribed by the public, in case of an
underwritten issue. For providing this assurance, underwriters charge a commission to the company issuing securities via public issue.
IPO Grading Agencies:
IPO Grading Agencies are basically Credit Rating Agencies (CRAS) registered with SEBI that are responsible for grading IPOs. This is done in order to facilitate investors to assess the quality of equity issues offered through an IPO. IPO grading has been made mandatory by SEBI. The details of the above-mentioned intermediaries i.e., their names and addresses, telephone/fax numbers, registration numbers, and contact person and email addresses are disclosed in the offer document.
Prospectus of an Issue:
As per SEBI guidelines, any company that wishes to float a public issue needs to provide adequate disclosures about the company to the public. These disclosures are made by the company in form of a document which is known as a Prospectus.
Prospectus provided all the details about the company, its sector, clients, details of promoters, financials, need for raising money, the way the money is proposed to be spent, associated risks and expected returns, and various other issue-related details.
The prospectus is drafted and designed by Book Running lead Managers or Merchant Bankers of the Issue as per the SEBI guidelines.
In India, there are two types of IPO Prospectus –
1. Draft Prospectus (DRPH)
2. Red Herring Prospectus (RPH)
1. Draft Prospectus: It is prepared by the lead manager and submitted to SEBI for approval of the Public Issue. It takes a few months to get the DRHP approval from SEBI. If there are any observations made by SEBI then they have to be incorporated and a revised DRHP has to be submitted to SEBI for approval.
2. Red Herring Prospectus: It is also known as the final prospectus is an extended version of the DRHP which is prepared after getting approval from SEBI. It includes additional detail about IPO dates, prices, and the latest issue financial data.
Before investing in any public issue, it is advisable that investors should go through the RHP to understand the current state of the company, future plans, IPO detail, investment risks, promoter’s background, and business of the company.
Fixed Price Issue & Book Building Issue:
In case of public issues, the sale of shares can be either through Fixed Price Method or through Book Building Method.
In case of a Fixed Price Issue, the company issues shares to the public at a pre-decided fixed price whereas, in the case of a Book Building Issue, the company only announces an indicative price band within which the shares will be offered and leaves it to the market forces to determine the final issue price.
Under Book, Building demand can be known every day as the book is being built. But in the case of the public issue demand is known at the close of the issue. Here, the lower price of the price bank is known as the floor price or asks price while the upper price is known as the cap price or bid price.
If an investor is not sure what price to quote in the issue, then such an investor can always mention the cut-off price which means he/she is okay with whatever price is discovered as the final issue price.
Allotment & Listing of Shares:
According to the current SEBI rules and regulations, a listing of shares must be completed within 6 working days of the IPO subscription closing date (T+6 cycle).
Normally in a day or 2 prior to this, allotment of shares is done. If shares are allotted to you, then you will get an alert via SMS and email from the registrar of the issue and your depository (CDSL or NSDL) when shares are credited to your Demat account. Earlier this process used to consume more time. In fact, SEBI is planning to reduce this time to 3 days in the future.
Process of Applying for an IPO:
Gone are the days when you had to give attach a cheque or demand draft along with an IPO application form and then wait for 30 or more days to get an allotment of shares or
refund of money.
Nowadays applying for IPOS has become very simple and the time required between applying for shares and their allotment has greatly reduced due to various measures taken by SEBI in this regard. One such measure is ASBA which was introduced by SEBI and was made mandatory for all public issues on 1st January 2016.
Applications Supported by Blocked Amount (ASBA) is a process developed by SEBI for applying to IPO, Rights issues, FPS, etc.
In this process, the applicant’s money remains blocked in their bank account and the account gets debited only if their application has been selected for allotment of shares after finalization of the basis of allotment. In case of non-allotment, the block is withdrawn.
One of the main advantages of ASBA is that since money remains in the applicant’s account till shares are allotted, they don’t lose interest during that period between the application of IPO and the allotment of shares. They also do not need to worry about loss of funds or delay in refunds which were the main problem earlier.
Ways to Apply for IPO:
Presently there are two ways to apply for any public issue – Offline or Online.
1. Offline Method for Applying for IPO:
Physical application forms for IPO are available with any stockbroker, bank, depository participant, registrar, etc.
You need to obtain the form and completely fill in the below-mentioned details.
1. Name. address and contact details of the bidder
2. PAN Number of bidder
3. Bidder’s depository account details
4. Maximum 3 bidding options specifying bidding for how many lots of shares and at what bid price, with a ‘cut-off’ option available only for retail investors
5. Category of investor (Retail, Non-institutional, or QIB)
6. Investor Status (Retail, HUF, Bodies Corporate, etc)
7. Payment details including amount blocked, ASBA-supported bank account details, or UPI details
8. Signature of the bidder
Now you need to submit this form to your stock broker, self-certified syndicate bank (SCSB), depository participant, or registrars to the issue who will stamp the form and acknowledge uploading it on the stock exchange bidding system for the IPO.
An applicant or the bidder will be given an acknowledgment slip by the stock broker, self-certified syndicate bank (SCSB), depository participant, or registrars to the issue, to whom you submitted the form.
2. Online Method for Applying for IPO:
In case you are using net banking, then today almost all banks have the ASBA service under the e-services section on their website.
Steps to follow in this case –
1. log in to your Net Banking Account.
2. Locate a link that might be named “ASBA” or “IPO Application” under the Services Section Menu.
3. Select one of the IPOS you want to apply for and mention up to 3 bids.
4. Enter your depository details.
5. Click Submit to Submit your bid. It is just 5 minutes job to apply for IPOS using this online
method. The best benefit of this method is that you can apply for IPOs at the last minute on the last day after you feel it is worth applying for looking at the overall demand generated for the IPO.
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