IPO Bidding: Understanding Money Flow

In the last few years, India has witnessed a surge of companies going public via the IPO route. The upbeat market sentiment has led to many of the IPOs receiving a positive response from the investor community. Bidding for an IPO can be an important step towards your future investment growth. However, understanding the flow of your money during the IPO bidding process is critical for making good investment decisions. By getting familiar with the technicalities of IPO bidding, you may begin your investment journey with optimism and trust. Read on to learn more about the IPO bidding process in detail.

What Happens to Your Money Once You Bid for an IPO

Here's a detailed look at what happens to your money during and after the IPO bidding process:

• Before Bidding:

  Before you consider bidding on an IPO, make sure you have two important accounts: a bank account and a Demat account with a Depository Participant (DP). These accounts serve as the foundation for your IPO bidding experience.

• The Bidding Process:

  When you are ready to bid on an IPO, your bid money is blocked in your bank account via the Application Supported by Blocked Amount (ASBA) mechanism. This ensures that your money is reserved for the IPO and cannot be used for any other purpose during the bidding period.

• Application Submission:

  After you submit your bid for the IPO, it is reviewed and registered. To avoid disqualification during this stage of the process, you must ensure that your bid is filed correctly.

• Evaluation of Share Demand:

  After the IPO bidding period ends, the company and its underwriters assess the demand for shares. This assessment is critical in setting the bid price and allocation of shares.

• Allotment of Shares:

  If the number of qualified applications equals or is fewer than the number of available shares, the shares are allotted in full. This means you receive the same number of shares that you bid for. Your blocked money is subsequently deducted from your bank account, and the assigned shares are purchased with those funds.

• The Outcome of Oversubscription:

  Oversubscription occurs when demand for shares exceeds available supply, making the process more complicated. Depending on the level of oversubscription, you may receive a partial allocation of shares or have your entire bid price reimbursed to you.

• Multiple Bids and Allotment:

  If you submit multiple bids for different IPOs, each bid is treated independently. If several bids are successful, shares will be allocated according to the allotment process for each particular IPO.

• Post-Allotment Considerations:

  Your investment journey does not end once you have received your shares. The value of your investment may fluctuate depending on market circumstances and the company's performance after listing. You must stay informed and monitor your investment properly.

Read Also: How to Bid for an IPO – Tips and Tricks

What Happens to Your Money When an IPO is Oversubscribed

When an IPO receives more offers than available shares, it is considered ipo oversubscribed. This occurs when the demand for shares exceeds the supply. So, what happens to your money if an IPO is oversubscribed?

Assume you bid on an IPO with the hopes of obtaining a part of the company's available shares. You are excited about the prospective investment opportunity. However, once the bidding process concludes, it becomes clear that the demand for shares far exceeds what the company had planned to provide. Don't worry if the bids received are a little greater than the issued shares. As a retail bidder, you can expect to receive at least one lot of shares. This implies you will receive a portion of the shares you bid for. However, due to the oversubscription, you may not receive the full quantity you expected. Nonetheless, you will retain a stake in the company, which is a good outcome.

But what if demand is extremely high and there aren't enough shares to meet all bids? In such instances, it is possible that you will not receive any shares at all. This may be discouraging, particularly after eagerly expecting the IPO. However, it is critical to recognise that oversubscription demonstrates the company's popularity and investor trust. It reflects favourably on the company's prospects and market perception.

When you bid on an oversubscribed IPO, an amount equal to your bid is reserved in your bank account. This is a part of the Application Supported by Blocked Amount (ASBA) mechanism. You cannot access this money until the IPO allotment procedure is completed. If you are granted shares, the blocked amount is deducted from your account while the remaining funds are released. However, if you do not receive any shares due to oversubscription, you will receive a refund for the total bid amount.

It's crucial to remember that oversubscription doesn't always imply you've missed out on a good investment opportunity. The IPO market is dynamic and constantly changing. Companies with oversubscribed IPOs frequently see strong market demand after listing, which can drive share prices upward. So, even if you missed out on the IPO allotment, you can still invest in the company after it is listed on the stock exchange.

Understanding the IPO Allotment Process

• Criteria for Allotment:

  When you bid on an IPO, you will be allocated shares based on a variety of factors. The company and its underwriters take into account subscription numbers, bid sizes, and regulatory guidelines. Your chances of receiving shares increase if your bid is higher and the IPO is oversubscribed, which means there are more bids than available shares.

• Prorating in Oversubscription:

  Occasionally, the demand for shares in an IPO exceeds the quantity of shares available. This circumstance is known as oversubscription. In such instances, shares are distributed proportionally to investors. For example, if an IPO is two times oversubscribed and you bid on 100 shares, you may only receive 50. This is referred to as prorating.

• Inclusion of Retail Investors:

  Retail investors play an important role in IPO allocation. Regulatory requirements ensure that retail investors participate in the allotment process. This means that regular investors, as well as institutional investors, have a chance to acquire shares.

• Transparency and Fairness:

  The IPO allotment process is intended to be fair and transparent. All qualified participants, whether institutional or individual investors are given an equal opportunity to acquire shares. Companies and underwriters attempt to ensure that the allotment procedure is done professionally and impartially.

• Informed Decision Making:

  Understanding how IPO allotment works allows you to make smart decisions. Knowing the factors that determine allotments, such as bid size and subscription levels, allows you to plan your bidding strategy. This understanding enables you to manage the IPO bidding process with clarity.

• The Role of Bid Size:

  The magnitude of your bid in an IPO might have a major impact on your prospects of receiving shares. Larger bids are more likely to receive allotment, particularly in oversubscribed IPOs. However, it is important to match the size of your bid with your investment objectives and risk tolerance.

• Regulatory Guidelines:

  To guarantee fairness and transparency, regulatory agencies such as the Securities and Exchange Board of India (SEBI) regulate the IPO allotment process. They provide guidelines for companies and underwriters to follow during the IPO process. These rules contribute to the integrity and trust in the capital markets.

Read Also: How to apply for an IPO online?

Conclusion

The fate of your funds following an IPO bid is determined by the outcome of the rigorous IPO process. A successful bid results in the debiting of cash for share acquisition, whereas unsuccessful bids result in swift reimbursements. Nonetheless, the journey post-allotment is marked by market changes and the company's success, both of which require careful consideration.

As a result, while IPOs provide interesting investment opportunities, they are not without risks. Thorough research on the company's fundamentals, market position, and growth potential is required. Furthermore, having a Demat account is an absolute must for bidding for an IPO.