Frequently Asked Questions on IPO

The three most important IPO basics to keep in mind are:

• Invest in companies that use the influx of capital to expand or refine their business. This shows that the capital will be used to generate more revenue.
• Run a background check on all the promoters of the company. Only invest in companies that are led by a distinguished management team.
• Invest in companies that have promising growth potential. You should invest in IPOs of companies that provide value to the customer and have the potential to bring something new to the market.

There are typically two different types of IPOs, a fixed price issue and a book building issue. While a fixed price issue provides a fixed rate at which the company's shares will be sold, a book building issue offers a price range within which company shares are valued. A book building issue is one of the IPO types wherein the company's value is fixed after evaluating the bids.

There are many advantages of IPO for an investor:

• One of the main benefits of IPO investments is their ability to provide a significantly high rate of returns.
• It helps you buy the shares of a company at a low price. This is extremely helpful when investing in companies that have a promising growth prospect.
• IPOs of good companies are great to meet long term goals.

There are three main guidelines for investing in IPO for beginners, namely:

• IPOs of well-known companies do not guarantee huge returns. Analyse the growth prospect of the company before making an investment decision.
• The performance of the IPO is linked to the performance of the market. If the market is bullish, the IPO of a company has more chances of doing well.
• Make sure the applicant's name matches the name of the bank account holder. This will help to ensure that your IPO application is not rejected.

An IPO allows you to buy shares of a private company going public for the first time. The process of how does an IPO work is straightforward. The IPO process in India allots the subscription of shares randomly to interested investors. The company issues a pre-defined quantity of shares. The influx of capital into the company can help it increase its revenue: thus, growing in valuation. This, in turn, benefits the investors by providing capital gains.

Here is how to buy IPO:

• You would first need a savings account, a trading account, a DEMAT account.
• Enter the name of the company whose IPO you wish to subscribe to. Input the number of shares you want to buy.
• Block the payment via the ASBA application process for IPO on the broker's website.
• If the company's shares are allotted to you, they will be directly credited into your DEMAT account.

The application process for IPO in India is relatively straightforward. To help you understand here is how to apply for IPO:

• Sign into your trading account on the broker's website and click the IPO subscription button.
• Choose the investor type that applies to you and select the initial public offering you wish to apply for.
• Input the number of shares you would like to purchase and enter your bid price.
• Your money will be blocked via a process known as ASBA, and funds will be debited from your account when your IPO units are allotted.

The IPO process in India follows the method of random allotment. Hence, not everyone who applies for the IPO receives the shares. The IPO allotment process is random, implying, the shares are only given to a set number of investors who have placed the correct bid and are chosen for the subscription by luck. The best way to increase the probability of getting the allotment of shares in a company's initial public offering process is to place IPO bids at the cut-off price.

An IPO calendar comprises important IPO dates, price band of the issue, the face value of the shares, and a few other details. The IPO calendar helps in knowing the upcoming IPO listing dates. Hence, it makes it easy for investors to plan their finances and get ready with their applications. You can easily find the upcoming IPO calendar on the internet and the websites of SEBI-recognised brokerage firms like Mirae Asset.

An IPO Registrar is appointed by the company issuing its shares to manage various aspects of the IPO process, as mandated by the Securities and Exchange Board of India (SEBI).

Simply put, the primary responsibility of the registrar is to manage the entire IPO registration process. However, the role of the registrar stays relevant from the initial filing of the prospectus with SEBI to the allotment of shares to investors. Here is a summary of the key responsibilities and roles of a registrar of an IPO:

• Verify investor details: The registrar is responsible for verifying the details provided by the investors in the application forms and checking for errors or discrepancies.
• Allot shares: The registrar is responsible for allotting shares to investors after verifying the number of shares applied for and the payment made by the investor, based on the allocation rules decided by the company and under the guidance of depositories, such as NSDL and CDSL. Wherever applicable, the role of the registrar also includes refunding the excess payment to the applicant.
• Provide post-IPO services: After the IPO is completed, the IPO registrar provides services such as handling share transfers, issuing duplicate certificates, and processing dividends.
• Compliance with SEBI regulations: The registrar is responsible for ensuring compliance with SEBI regulations related to IPOs and all investor complaints and grievances are resolved in a timely and efficient manner.

Lead managers in an IPO are SEBI-registered financial institutions, most commonly merchant banks, appointed by the company going public and play a crucial role in helping the company raise capital by issuing shares to the public. Here are some of the key responsibilities of IPO Lead Managers:

• Due Diligence: Lead Managers conduct due diligence of the company going public, including reviewing its financial statements, business operations, and legal documentation to ensure that the company meets the regulatory requirements for launching an IPO.
• Structuring the IPO: They help structure the IPO by determining the number of shares to be issued, the price band, and even the timing of the IPO.
• Marketing and Advertising: Marketing and advertising are also a part of the role of Lead Managers in an IPO. They help the company create the IPO prospectus, red herring prospectus, and other marketing materials that provide details about the company to potential investors.
• Compliance with SEBI Regulations: Lead Managers ensure that the company complies with all SEBI regulations related to IPOs. They help prepare the necessary documents and disclosures and ensure that they meet regulatory requirements.
• Allocation of Shares: Lead Managers work with the registrar to allot shares to investors and ensure that the allotment process is fair and transparent. They also coordinate with depositories to credit the shares to investors' demat accounts.

It is a well-known fact that trading shares comes with its own set of risks, and the same is the case with IPOs. It is important to know these risks so that your trading decisions are aligned with your goals and risk tolerance. Here are some of the main risk factors in applying for an IPO:

• The first risk is that you may or may not be allotted the shares. Filing a successful application does not guarantee the allocation of shares. Furthermore, you be allotted shares but lesser than what you had applied for. However, in such a case, the balance amount is unblocked and released back to your account.
• Overvaluation is another risk in applying for an IPO. In this case, the share may list at a higher price than its actual intrinsic value. While this can be beneficial in the short term, once a market correction happens, the price can go down significantly reducing the value of your holdings.
• Poor demand or a cold response to the IPO may mean the share debuts on the stock market at a price lower than what you paid for it, leading to an immediate loss for you.
• Since the company issuing the IPO is not public yet, the information available on it is mainly through its website and draft red herring prospectus. Both of which, may not provide the holistic data that is needed before investing in a company.

Generally, the life cycle of an IPO consists of the following stages:-

• Identifying and employing an Investment Banker to prepare the company for the IPO process, determine the amount to be raised, establish the offer price, and create an underwriting agreement.
• Conducting a due diligence exercise that includes investigating and verifying the accuracy of the company's financial and other information. This is a holistic activity that covers financial reports, regulatory compliances, legal structure, etc.
• Drafting the IPO prospectus – also known as the Draft Red Herring Prospectus (DRHP). This document contains all the relevant information about the IPO offering and the company’s history, business model, growth plans, operations, performance, financials, strengths, and risks, etc.
• Seeking approval from SEBI by submitting the DRHP and declaring the intention to take the company public.
• Organising roadshows to generate excitement and buzz in the investor community regarding the future prospects of the company and its upcoming IPO and drive the price and subscription of the offer.
• Setting the price of the IPO using the fixed price or the book-binding method. At the end of this stage, the company determines the cut-off price, which is the final price at which the issue will be sold.
• Allocating shares based on successful bids and determining the number of shares that are to be allotted to each bidder.
• Listing the shares on the stock exchange completes the IPO life cycle.

No, as per SEBI regulations, a PAN number is compulsory to apply for an IPO as it contains all the relevant information that is necessary to verify the identity and eligibility of the applicant and prevent cases of fraud.

Although there is no fixed period for this, there is a time frame for an IPO to be open for public bidding. SEBI rules state that this period needs to be a minimum of three working days and a maximum of ten. The company issuing the IPO can decide on any number within this range. In exceptional cases, such as a price band revision, the period may be extended as long as it stays within the cap of ten working days.

These days, the IPO application process is quick, easy, and paperless. After filling out the IPO application form, you can pay the fee through any of the available digital-banking options such as UPI or net banking. Upon a successful IPO application form submission, you will get an application number and a message from your bank confirming the blocking of the payment amount. Keep this information saved to track the status of your application and to ensure (in the case of an unsuccessful bid) that the amount has returned to your account.

The market lot size in an IPO defines the number of shares a lot consists of. There is a maximum and a minimum IPO lot size that applicants can bid for. Usually, the minimum lot size does not exceed Rs. 15,000 while the maximum lot size stays under Rs. 2,00,000. This is calculated by multiplying the price of the IPO share by the number of shares in the lot. For example, if the price is Rs. 250 and the lot size is 50, then the value of the lot becomes Rs. 12,500.

Minimum Order Quantity (MOQ) stands for the minimum number of shares an investor needs to bid for. In the above example, one lot consists of 50 shares that makes 50 as the minimum order quantity. Bidding for less than the defined MOQ will disqualify your bid. Moreover, you can only apply for multiples of the MOQ. In the example considered, you will be able to apply for shares in multiples of 50 – 50, 100, 150, etc. Applying for 75 shares will not be possible.

Yes, if you wish to cancel your IPO application then this can be done through the platform that you had placed the bid originally. Most platforms allow you to check your active applications, select them, and choose to cancel them. The amount blocked for the IPO cancellation will be released to your bank within 2-3 working days after the allotment process is completed.

Similarly, you can also revise your IPO application in case you want to apply for more or less market lots than you had in your original application. Accordingly, you may need to add more money as part of the IPO purchase (if buying additional lots) or get back funds in your account after the allotment is done.

Do note: most platforms allow cancellation and revision of IPO applications between 10:00 AM and 4:30 PM on trading days. An IPO application cannot be withdrawn once the IPO closes for its subscription.

Minors can apply for an IPO if they have an active demat account and a PAN card. There are more criteria that need to be fulfilled before filling an IPO application for a minor. These include:

Linking the minor’s demat account with the parent or guardian’s trading account. Without this, the minor can hold the shares (if allotted) but will not be able to trade them.

This account also needs to be linked to the minor’s bank account in which they are the primary holder.

Dual-KYC will need to be done to verify both the minor’s as well as the parent/guardian’s information.

In many cases, the parent/guardian’s PAN number will also be needed to complete the IPO application process.

Note: m.Stock does not provide provision to apply for IPO for minors.

The offer price of a share is the price at which the shares were purchased in the IPO process. Once the shares are listed on the stock exchange, the company goes public. The opening price at which the share debuted on the stock market is known as the IPO listing price. While the underwriting investment bank decides the offer price based on a vast array of commercial and operational factors, they cannot control the IPO listing price.

How is the listed price decided? – Market sentiments play a critical role in deciding the listed price. The principle of demand and supply is the key here. If sufficient buzz had been created regarding the IPO and the demand from investors is high, then it is quite likely that the listed price will be higher than the offer price. In the case of under-subscription or low demand, the listed price may fall short of the offer price leading to a loss to investors.