Initial Public Offering (IPO) is a wayof offering shares/securities of a private company to the public.IPOis the transition from a private (new, an old companyor a young company) to a public companyby listing on an exchange.Companies can raise their equity capital with the help of an IPO in two ways as follows: first is by issuing new shares to the public and the second one is where the existing shareholders can sell their securities/shares to the public without raising any fresh capital. In India, Securities and Exchange Board of India (SEBI) is the regulatory authority which can grant an IPO.
IPO is Categorized in two types
Fixed Price Offering (FPO)
In Fixed Price Offering, price is known in advance to the investor at which the securities/shareswill begiven to the investors.
Book Building Offering (BBO)
In Book Building Offering, investors can bid within a 20% price band which is offered by the issuing companyandonly after closure of the bidding the final price is defined by the issuing company.The final price of the shares is regulated by the bidding of the investors.The lowest offered price of the securities is known as floor price and the highest price of the securitiesisreferredto as cap price.
IPO Allotment Process
Following are three different investor categories when it comes to IPOs:
Qualified Institutional Buyers (QIBs)
Non-Institutional Investors (NIIs)
Retail Individual Investors (RIIs)
The allocation process of securities differs for all the above categories. As an individual investor, we are coming under the last category.
The allotment is based on rules set by the SEBI, the regulatory authority. An individual investorallowed to invest in small lots worth Rs 14,500-15,000, with a maximum allowed limit of Rs 2 lacs in an IPO. Under the retail category, the demand ofsecurities is analyzed by the number of applications received. A full allotmentis subscribed when the demand is less than or equal to the number of shares.For an IPO allocation the term over-subscribed can be used when the demand is greater than the allocation. Which means that the demand is exceeding the supply. In such cases, as per SEBI rules the allotment is accomplished by lottery basis. This lottery is an impartial computerized process of the allocation of shares to the investors.
When any Company intend to bring IPO in the market then SEBI approval is required in this regard. The draft prospectus which contains all the details of the Company, promoters, directors, lead manager, Registrar, company financials, issue price,utilization of IPO proceeds and other IPO details, is required to submitted to SEBI for approval and once the approval of prospectus is done by the SEBI, then Company steps forward to list its shares on exchange.
Client can apply an IPO application through net banking, custom software of stockbrokers (like GCL through link https://www.gclbroking.com/apply_ipo.php). If client opt to apply through custom software then client will receive UPI mandate on their specified App (like BHIM, Phonepe, Google pay etc.). Client will have to accept that mandate sent on their App. Thereafter amount will get blocked till allotment of shares. Once, client receives allotment, then said application amount will get debited from their bank account. In case, clients do not receive allotment of shares, then the amount will get released. When the shares get listed on the exchange at that time clients can sell their allotment as per their choice.
Any adult individual who can enterin a legal contract iseligible as per norms to apply in an IPO. Though, it is required that the investor must have a PAN card issued by the Income Tax department.One should also need to have a valid trading account or a Demat account.
It is repeatedly recommended to open a trading account along with the Demat account when you are looking to invest in an IPO for the first time. You can open a trading and Demat account with GCL.
Benefit from an IPO
When famous companiesannounce their IPO, we get a chance to buy the companys shares at a much lower price. This is because in secondary market the reputed companys share price may go up quickly.
If the company has good fundamentals, thenbuying shares of that IPO can be profitingfor you. Strong fundamentals of the company mean that it has a good chance of growing bigger. This can be advantageous to you as well. You stand a chance to earn good returns over the short as well as long-term.
When a company gets listed to stock exchange, it may be traded at a price that is either above or lower than the allotment price. Listing gain term is used when the opening price of an IPO is higher than the allotment price.
Many factors affect listing gain of an IPO to perform well on listing day such as market demand, track records and positive bias. However, this is not true for always, it may also happen for a stock on first trading day that the stock price drops by the end.
In that case, the investor may not get the long-term listing gains or good returns. So, if you are a trader interested in quick returns, it may be suitable. But for long term investors, it is important to identify a company that can offer high returns five or even ten years down the line, so for long term investor it is important to go through for fundamentals of that company.
To sum up
IPOs are very important and big events in the stock market. By investing in the right company, you stand a chance to earn good. But one should do proper research to identify the good performers from the rest.
Amit Khare - AVP- Research
Ganganagar Commodity Limited