IPO is acronym for Initial Public Offering, if you have to understand the meaning of IPO than you need to know the basics of IPO first. This post is a ultimate guide you ever need to understand each and everything in relation to IPO. This will cover most basics to advanced answers for all your concerns related to IPO.
So lets start and know them step by step.
Meaning Of IPO?
Initial Public Offering (IPO) is a process through which any company initially(first time) offers shares to all investors (institutional or big investors, retail investors(common people). Through IPO, a company is actually letting common investors to be part of their company through investing their individual money.
When a company decides to file for an IPO, it will issue shares in public domain with a predetermined price band(Rs.50, 100, 200 etc.), investor who thinks that this company is worth investing, they will apply for its IPO. Hence, the name Initial Public Offer(IPO).
Why Companies Launch IPO?
Companies launch IPO for various reason it can be for raising capital (money), avoiding debt or loan, this can be helpful in growth ,expansion, increasing production, manufacturing units, manpower etc.
Before understanding why does company launch IPO it becomes really important for you to know small difference between share market and stock market:
There are two kinds of share market, the Primary market and the secondary market.
- In the primary market a company gets registered to issue shares and raise money from public or other investors.
- Any company enters primary market to raise capital and the first issuance of share for raising capital is known as IPO (Initial Public Offering).
- Once the shares are sold in the primary market it enters the secondary market for trading. In the secondary market the investors can enter into position or exit as and when they feel like. Any trader or investor now can easily though there fingertips trade or invest its money.
This whole process where one bids for shares, is referred to as the Primary Market. On the other hand when the stock gets listed and debuts on the stock exchange, the stock starts to trade publicly.
This is called the secondary market. Once the stock gets listed it gets traded daily on the stock exchange. Now you can start buying and selling stocks regularly.
Below image represents the same in totality of how share market works step by step.
Let us understand this through an simple example:
Suppose you are owner of a shoe making company, The business is running from last 5 years and you build it with certain other people from scratch. You are producing shoes locally and distributing it in your nearby areas. People are liking it, you came to know through feedback about the demand of your product in different metro cities.
One day you thought of increasing the capacity as well as the manufacturing units. For this you need more manpower as well you may need to acquire land, machine and other requirements.
As you are running the business it will have certain cost attach to it. It can be borrowed from banks, But what if you have borrowed much already? Will the banks still provide them loans?
Any-which ways banks has given you money on interest that you need to pay. So you can’t ask for more now, all your friends or colleagues who are partner in the company does not have enough funds.
The idea seems to be perfect, but how you will going to do that?
For this you need money, The prospects of your company looks good, especially in the booming online industry. Applying for IPO and solve your capital expenditure problem looks like a solution. The reason for any company to go public is to raise funds in order to expand their business & infrastructure or to repay any loans.
This money helps companies in various ways. For example:
- The money that gets generated through IPO helps in growth and expansion.(increasing production, manufacturing units, manpower etc.)
- Through IPO company can also avoid more debt or loan, which increases more profitability.(lesser debt means lesser interest to pay)
- Due to share listing a company credibility also gets increased, which helps to obtain better terms when seeking funds from banks or large investors.
- One more important thing which can be called negative for investors but positive for company is risk. By involving large people they are reducing risk to their business, as being investor you own certain percentage(as you hold shares of that company), if company fails to delivery in future, there shares may hit, company valuation will be down and your money will be lost.
Take this truth as ‘pinch of salt’ but it’s indeed true that you are now part of the risk as a part of the business. But this is also truth that no business can happen with zero risk.
You might have heard of a famous Bollywood Hindi movie inspired by the life of Dhirubhai Ambani named Guru, in which he goes to public to give funds so that he can expand his business, similar to that happens when company launches IPO. By the way reliance went for public offering in the year 1977.
How Companies Apply For Launching an IPO?
This is just good to know info, but before we know how companies apply for IPO you should have a understanding of the ownership structure in a company.
Types of Investors in share market:
However, we are not going to understand the role of each investors here. General public belongs to retail investors category and bid for shares under same during IPO. Not to mention, companies has to go through lot of paper works and hard procedure before filing for IPO in front of SEBI,
So do not think that any outsider or anyone can walk up and say ohh lets go to public to raise funds. You have to present the objectives, your companies growth in previous years and lot of other things.
Now we know why does a Company Goes Public, let us know how it happens in the background. This are just good to know information although it is of no use until you own a company & in future you want to list it in market. Steps needed are listed below :
Appointment of a Investment banker or merchant banker.
Apply to SEBI with a registration statement which consist of details about company finance, why it wants to go public & what it exactly do.
Getting a yes signal from SEBI after receiving registration details.
DRHP (Draft Red Herring Prospectus) After getting a yes from SEBI company needs to prepare DRHP .This includes details about its promoters, reason for raising money, how the money will be used, risks involved with investing in the company etc.
Advertising the IPO through Print, electronic media, raising awareness about IPO.
Select the price band of newly launched IPO for public, for e.g Rs. 200 to 210
Book Building involves process of collecting bids from investors at various prices mentioned while fixing price band. This opens for few days to let the investor subscribe the IPO.
Closure day is when the price of issued share is confirmed, price at which maximum bids are collected.
Listing Day is when the stock gets listed on stock exchange. Depending on subscription of IPO whether over or under subscribe price of share shows up or down on exchange. Normal investor can start trading or investing in market.
Once the share get listed on exchange also known as Secondary market. This is the place where already listed companies trades/sell stocks.
Investor or trader can buy or sell shares in secondary market. This the place where most of the trading happens. Here any investor or trader can buy or sell his share at the current prevailing price of a share, depending up on his strategy.
For a company launching an IPO is inspiring time, as before this company is privately owned. This would be the first time owners of the company give up part of their ownership to stockholders in public. It is one of the prestigious day for any company as they are getting listed on stock exchanges.
When a company goes public besides raising funds it is their hard work, dedication, credibility are also at stake. I hope till now you have thoroughly understood not only the meaning of IPO, reason, but the entire process behind it.
In last 2 years more than 200 companies applied for IPO in various segment few of them are listed below:
List of major IPOs launched in 2018:
List of major IPO’s launched in 2019:
The date on which a company make new issue of securities to the public. For example, as seen in above image, IRCTC offer date is 14, oct 2019 this is said to be the issue date for its IPO. It is also called the offering date.
Offer price is the predetermined price band we talked about, this was the price offer available for investors to buy shares before ipo launches and shares get listed on exchange.
List price is the price at which the shares get listed on exchange, so in case of IRCTC Rs.320 per share, was what you have bought shares, and on the day it got listed on exchange , the listing price is 626, it simply means the 1 share you bought by giving 320 rupees is now available for you to sell at 626. This is huge profit with less than 10 -15 days of investment. You can expect this kind of return from other thing.
LTP means last trading price, this is the price at which the share is trading in the stock market now. so if you have kept your investment even after it got listed on exchange, you would have end up earning about 1400 per share within a span of 2 to 3 months.
As you can see in the image above the astonishing returns within couple of days, who does not want it. You can double even triple your investment if you choose to apply for IPO. However you need to be careful about the company you are applying. For that you need as an investors look at the fundamentals of the company before applying.
As a shareholder, you may get dividends, bonus shares, etc. based on the profit the company earns and based on its discretion. Hence, we should correctly identify the opportunities by which we can make our money grow. Investing in equity that is buying shares of the company is one of the best ways by which you can plan to achieve your long term goals.
How To Apply For IPO Online?
You might have question in your mind that, how you can apply for IPO online? Its very easy, just like transferring money online to your friend using any App like phone-pay, paytm, google pay etc.
Most of the brokers will provide you the online platform to apply. During the bidding process you can bid for shares at a particular price within the specified price band, just need to enter the price band, quantity and make payment.
A Demat Account is a prerequisite to apply for an IPO. This shares you bought will require a place to get stored, now this shares will get stored in your demat account. So whenever you want to sell your shares, you can easily sell those from your trading account and it gets debited from your demat account.
A Demat account can be opened by submitting your PAN card, Aadhaar card, address and identity proofs.
The company usually sets a price band as we have discussed earlier. The upper limit is known as the cap price while the lowest is called floor price. You have to bid for shares in this price range.
Once you have done Bidding, possibility that you may get all shares or fewer shares. You might even fail to get any at all. In these cases, the bank will unlock your bid money (in part or full). However if you are lucky enough you might get a full allotment.
After that you would get a Confirmatory Allotment Note (CAN) within six working days after closure of the IPO process, also known as book-built issue.
That’s it Once the shares are allotted, they will be credited to your demat account. After that you need to wait for the listing of shares on stock exchanges. This is done within seven days from the finalization of issue.
Once the stock get listed you can either sell them (depending your profitability) or keep them till you want.
How do I get a BHIM UPI ID?
Any user having a smartphone and bank account is eligible to use BHIM. That being said, you need your mobile number registered with the bank and a debit card linked to that account. You can download the app from Playstore or AppStore.
After installing and running the app for the first time:
- Select Language
- The app will ask permission to send SMS to verify.
- Successful attempt will take you to Home page
- If unsuccessful, after 45 seconds an OTP will be sent to you.
- If step 4 is unsuccessful, you will be prompted to dial a USSD code.
- Once NPCI recognizes your mobile number and handset, your registration is complete.
On successful registration, a default ID i.e. [email protected] will be created. You can add one more VPA by going in the profile section.
Click here for a video description of the process to register on the BHIM app.
How To Apply for IPO Using UPI?
1.After necessary mobile verification in this flow and placing the IPO (online) order you need to mention your VPA (Virtual Payment Address) in Payment option.
2.On successful placement of your bid you will receive a collect request on your Bank’s Mobile app for your authentication.
3.On successful authentication the Bid amount will be mark as lien in your account by your bank (as per ASBA guidelines) and your bid will be registered with exchange.
4.On allotment of shares the amount will be debited from your account else the amount will be released.
Note – Under the ASBA process, the amount is not debited from your bank account until successful allotment. Until such allotment, the amount will remain blocked in your bank account.
Graphical illustration of the aforesaid process is as under:
At the end of the day after submitting the IPO bid, you will receive an SMS from the exchange confirming your application. For more information on UPI related issues you can follow this guide from SEBI.
IPO Online Investment Tips:
- Try to fill for the same IPO online from different DP ID i.e if in your family have more than 1 account you can possibly get the allocation done in case of over subscription.
- You should have a good knowledge of the sector and the company you are planning to invest.
- Analysis of the company’s balance sheet is very crucial. A clear understanding of the company’s future projects and vision is very necessary to know whether it will have a sustainable future.
- Investment decision has to be taken carefully and not in a hurry.
- Read as much as you can about the company, its objectives for launching the IPO, its past history in business and its futures prospectus.
- Don’t go for hype in the new your analysis should be based on facts rather than gossips and rumors.
- Many IPOs are oversubscribed. What this means is that the demand for shares is much higher than the shares available for sale. In such a situation, it is no surprise that many investors fail to get any shares allotted to them. This is why it is advisable to apply for IPO shares on the last day of bidding. This way, one can have a good estimate on how large the subscription will be. Also, in that case, one should bid for just one lot and not unnecessarily lock up their capital.
Can IPO Be Applied After Market Hours?
Yes, you can apply for IPO anytime online through ASBA or UPI, however make sure to do it before the last hour closing day of IPO, which is generally kept till 5Pm.
Can IPO Application Be Withdrawn?
No, it is not possible to withdraw an IPO application. This is because as soon as you apply for IPO through ASBA, a block is created on your linked bank account for the application amount. This block is removed only after the allotment of the issue is over.
Can I cancel my Bid for online IPO order ?
Yes, you can cancel your bid for online order anytime before Modification/ Revision / Cancellation cut-off time
In case of cancellation, the blocked amount is released and only after it you can withdraw.
Refunds are directly credited by IPO registrar to your Bank account linked to your Demat account on the date of allotment, provided the MICR number of your bank account is updated in your Demat account.
Is it compulsory to have a Demat Account while applying an IPO?
Yes it is compulsory to have a Demat Account for applying in IPO.
What are the different types of investor categories?
Investors are broadly classified under following categories:
- Retail individual Investor (RIIs)
- Non-Institutional Investors (NIIs)
- Qualified Institutional Buyers (QIBs)
What is cut-off price?
Retail investors can bid at any price within the price band or can bid at cut-off. “Cut-off price” means the investor is ready to pay whatever price is decided by the company at the end of the book building process.
While making the application at Cut off, the investor is required to pay the amount at the highest price band. The excess amount, in case the price discovered is lower, is refunded. Cut-off option can be exercised only by Retail Investors and Employee Categories.
What is a Price band?
Price band is a band of price within which investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. The price band can be revised. If revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.
What is the difference between Fixed Price Issue and Book Built Issue?
As the name suggests, a “Fixed Price Issue” is an initial public offering (IPO) where the issuer at the outset decides the issue price & mentions it in the offer document. It is a process of price discovery. In a “Book Built Issue” the price of an issue is discovered on the basis of demand received from the prospective investors at various price levels.
What Is A Lot Size?
A lot size is a collection of shares.
Another term which is very important to understand is the minimum order quantity. As name suggests, it is the minimum number of shares an investor needs to apply for while bidding for an IPO.
If an investor wants to bid for more shares, he/she can do so in multiples of lot size.
Where To Find The IPO Prospectus?
(DRHP)Draft Red Herring Prospectus, (RHP)Red Herring Prospectus and Final Offer Document can all be found on SEBI’s website under Filings > Public Issue (https://www.sebi.gov.in/filings/public-issues.html).
Final Offer Document: https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=3&ssid=15&smid=12
Where To Check IPO Application And Allotment Status?
As an investor or trader generally we are curious and anxious to know the results of the application as soon as possible. To ease the anxiety, both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have come up with dedicated pages and links which investors can use.
The NSE has an IPO bid verification module. It can be used to verify the IPO application details uploaded on the exchange bidding system by your member/bank. The data of the bid details uploaded by the member/bank would be available on T+1 day (where T would be date receipt of bid on NSE platform).
In addition, the data would be available until six days after the issue closure date. This gives the investor enough time to verify the data and instruct the member/bank to make any changes, if required.
Exchange will also provide allotment information as provided by the registrar to the issue.
An investor can avail this facility by registering using his/her PAN details. After registration, the investor will receive an email notification from NSE on the registered email address. That email will provide the login details.
The following link can be used for the same:
The BSE has also come up with a similar platform.
This unique facility allows investors to verify the status of their application submitted to a Trading Member or a SCSB (Self-Certified Schedule Banks).
The investor can check his application status/information on the website until one week after issue close.
The following link can be used by investors:
Where to Find Upcoming IPO Watch-list?
IPO watch-list can be found easily from your broker website you do not need to check anywhere else, however you can check directly on NSE exchange website here for the upcoming IPO’s.
I hope you have much better understanding of IPO and its overall process. Applying for IPO is quite simple, you just need to check with your broker as most of the stock broker in India provide you the platform to apply directly through their portal instead of ASBA process or from bank.
The only thing which should be bothering you is the research you did before applying for the IPO. Investing in IPO is risky as well as profitable.
If you are not someone who trades regularly or do investments, you can save 3k everything month from your salary or whatever mode of income you have and place at least a lot, which is usually cost around Rs.14,500. So in a year you can apply for at-least 2 major IPO if not more.
This way you can churn some good profit instead of just keeping it in bank.
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If you are a beginner in trading and investing, please read this amazing guide on how share market works in India?
Do you know the concept of present value of your future money, if not then you should.
Just like 100 rupees in your pocket today will not have value of 100 rupees after 5 years, similarly 100 rupees you receive in future, invested today won’t have the same value. ?Confused??
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Note: Please do not take this as any recommendation, to trade or invest. This is just for reference, to make you understand about meaning of IPO, under no circumstances intended to be used or considered as financial or investment advice, a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset.
Please do your own research and make investment. Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only. All investments are subject to risks, which should be considered prior to making any investments.
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