IPO Platform

What is an IPO?

An Initial Public Offering (IPO) is the process by which a company issues its shares to the public for the first time and is listed on a stock exchange. Previously, the company's shares were held only by its promoters, founders, or a select few investors. After the IPO, general investors can also become shareholders. Let's understand this with a simple example: Suppose a company has been operating successfully for the past 8-10 years and now wants to expand its business nationwide. To do this, it needs a large capital infusion. Instead of taking a loan from a bank, it raises funds from the public through an IPO. In return, investors receive shares of the company.

After the IPO is completed, the company is listed on the NSE or BSE, and its shares begin trading on the market. At that time, the share price is determined by investor demand and market conditions.

Simply put, an IPO is a means of raising capital for the company and an opportunity for investors to invest in an emerging or established company at an early stage.

Types of IPO

IPOs come in different types based on their structure. Before investing, it's important to understand the type of issue the company is launching, as the application process and pricing method vary accordingly.

Fixed Price IPO: In a Fixed Price IPO, the company sets a fixed issue price in advance. Investors apply at that fixed price. At the time of investment, you are clear about the price at which you are purchasing shares. However, the actual demand for this type of IPO is only known after the issue closes. Most large IPOs today are book-building, while fixed-price issues are relatively rare.

Book Building IPO: Book Building IPO is the most common method in India. In this method, the company sets a price band such as ₹100 to ₹110. Investors bid within this band or can choose a "cut-off price."

After the issue closes, the final issue price is determined based on the subscriptions received. This process is considered more transparent because it takes into account actual market demand.

Difference between Fixed Price and Book Building: 

In a Fixed Price, the price is pre-determined, and all investors apply at that price. In a Book Building IPO, there is a price band, and the final price is determined based on demand. In a Book Building IPO, you must block the entire application amount (via UPI/ASBA) when applying, while in a Fixed Price, the application amount is also pre-determined. In practice, most mainboard IPOs today are based on the Book Building model.

Why Do Companies Launch IPOs?

An IPO isn't just a step for a company to "enter the stock market." It's a solid financial decision, linked to the company's growth, balance sheet, and future plans.

• Business Expansion: Setting up a new unit, increasing production capacity, entering new markets, or upgrading technology all require capital. An IPO helps a company raise equity funds.
• Debt Repayment: If a company has significant debt, the proceeds from an IPO can be used to reduce debt. This reduces interest expenses and strengthens the balance sheet.
• New Projects or Acquisitions: A company can raise funds for a new product line, R&D, infrastructure, or the acquisition of another company.
• Offer for Sale (OFS): In some cases, promoters or early investors sell their shares. This does not benefit the company, but the selling shareholders.
• Improving the Capital Structure: Increasing equity can balance the debt-to-equity ratio, reducing financial risk.
• Credibility After Listing: After becoming a public company, regular disclosures are required. This increases transparency and strengthens credibility in the market.

How Does an IPO Work?

An IPO is conducted under a set of rules and regulatory procedures. A company goes through several stages before being listed on the market.

• Appointment of Merchant Bankers: First, the company appoints an investment bank or merchant banker. They are also called lead managers. They manage the IPO's structure, valuation, documentation, and overall process.
• Filing the DRHP: The company prepares and submits a Draft Red Herring Prospectus (DRHP) to SEBI. This includes the company's business model, financial data, risk factors, fund use, and promoter information. This document is publicly available.
• SEBI Review and Approval: SEBI reviews the DRHP. If any clarifications or amendments are required, the company must respond. After all compliance is met, SEBI grants permission to launch the IPO.
• Announcement of Price Band: After receiving approval, the company announces the IPO price band. For example, ₹100-₹110. Investors bid within this range. The lot size and open-close date of the issue are also announced.
• Subscription Period: An IPO is typically open for three working days. During this period, retail, HNI, and institutional investors apply. Applications are made through UPI or ASBA, and the amount is blocked in the bank.
• Allotment Process: After the IPO closes, shares are allocated based on the applications received. If the issue is oversubscribed, allocation to the retail category is done through a lottery system or on a proportionate basis. Those who do not receive shares have their blocked amount unblocked.
• Listing on Stock Exchange: After allocation, shares are credited to investors' demat accounts, and the company is listed on the NSE or BSE on the scheduled date. The price of the share on the day of listing is decided based on the market demand and supply.

IPO Eligibility Criteria & Requirements

To apply for an IPO, certain basic conditions must be met. These are regulatory and technical requirements, without which IPO application is impossible.

• Demat Account: Shares available in an IPO are available in electronic form. Therefore, it is mandatory to have an active demat account where the allotted shares are credited.
• Trading Account: A trading account is required if you wish to sell shares after they are listed. This is essential for applying and subsequent trading.
• PAN Card: A valid PAN is mandatory as per SEBI regulations. Without a PAN, IPO applications will not be accepted.
• Bank Account and UPI ID: IPO applications are processed through UPI or ASBA. You must have sufficient funds in your bank account, which will be blocked at the time of application.
• Retail Investor Investment Limit: An investor in the retail category can apply for a maximum of ₹2 lakh. Applications above this limit are considered HNI.
• ASBA / UPI Mechanism: In IPOs, payments are not directly debited; instead, the application amount is blocked in the bank account. The amount is debited only upon allotment; otherwise, it is unblocked.

What is the Process of Investing in an IPO Online?

IPO application is done in two main ways – through UPI or through ASBA.

1. UPI Method for IPO Apply 

IPO application is done in two main ways through UPI or through ASBA.

Step 1: Login

Login to your account in the Pocketful app or web platform and navigate to the IPO section.

Step 2: Select an IPO

Select the IPO you want to invest in from the list of ongoing or upcoming IPOs. Here, you'll see information about the price band, lot size, and open/close date.

Step 3: Fill in the Bid Details

Enter the number of shares according to the lot size. You can choose a cut-off price or place your bid within the price band.

Step 4: Confirm UPI

Retail investors typically apply through UPI. After entering your UPI ID, you need to approve the mandate in your bank app.

Step 5: Submit the Application

Check all the details and submit the application. The amount will be blocked in your bank account.

Step 6: Track the Status

You can check your application and allotment status on the Pocketful app or the registrar's website.

2. Application through Bank (ASBA Method)

In ASBA (Application Supported by Blocked Amount), you apply for an IPO directly through your bank's net banking portal.

• Login to your bank's net banking account.
• Go to the IPO / ASBA section.
• Select the IPO and enter your Demat Account details (DP ID and Client ID).
• Enter the lot size and bid price.
• Confirm the application.

Benefits of Investing in IPO with Pocketful

• Easy and Fast Application Process: The IPO section is clearly visible on both the app and the web, making it easy to complete your application in just a few steps.
• Real-Time IPO Updates: Information such as the open/close date, price band, lot size, and subscription status of ongoing IPOs is available in one place.
• Simple UPI-Based Application: Mandate approval can be done directly through UPI. The amount is only blocked, not immediately debited.
• Transparent Order Tracking: You can easily track your application status and allotment status.
• Secure and Streamlined Experience: The application is processed in accordance with the regulatory process, ensuring a secure and structured transaction.

Pre-requisites for Applying for an IPO

Before applying for an IPO, it's important to have some basic information ready to avoid any problems during the application process.

• Active Demat and Trading Account: Shares allotted in an IPO are credited to a demat account, and a trading account is required for sale after listing. Both accounts must be active and KYC updated.
• Sufficient Balance in Bank Account: Your bank account must have sufficient balance for the lot you are applying for. The amount is blocked at the time of application.
• Valid UPI ID (For Retail Investors): If you are applying via UPI, your UPI ID must be linked to your bank account and active.
• Understanding Lot Size and Price Band: The minimum investment in an IPO is determined by the lot size. It's important to understand the lot size and price band before applying.
• Reviewing Company Basics: Before investing, it's important to review the company's financials, debt situation, and the IPO's objective to ensure a fact-based decision.

IPO Investment - Things You Should Know Before Investing

Investing in an IPO shouldn't be a decision based solely on hype or market buzz. As an investor, it's important to examine some fundamental financial aspects.

• Financial Performance: Look at the company's earnings, net profit, operating margins, and debt levels over the past few years. If the company has consistently posted losses or has high debt, this could increase risk. Stable and growing earnings are considered a better indicator.
• Assess Valuation: It's important to consider how the IPO price compares to other listed companies in the sector. If the company's price-to-earnings (P/E) or other valuation ratios are too high, it could lead to pressure after listing.
• Purpose of Funds Use: What will the company use the funds raised from the IPO for expansion, repayment of debt, or simply selling the promoter's stake? This information is crucial in making the decision.
• Subscription Pattern: Strong participation from institutional investors (QIBs) is considered positive, but investing based solely on oversubscription is not sufficient.
• Risk Factors: It is important to understand the key risks listed in the prospectus, pending legal matters, or uncertainties related to the industry. Ignoring these is not advisable.
• Keep the investment objective clear: Determine whether the IPO is being taken solely for listing gains or for long-term investment. It is not necessary that every IPO lists at a premium.

How to Increase Your Chances of IPO Allotment?

Allotment in an IPO is not entirely within your control, especially when the issue is oversubscribed. However, there are some practical steps that can improve your chances of allotment.

• Apply at the Cut-Off Price: As a retail investor, choosing the Cut-Off Price is considered a safe bet. This ensures you apply at the final price and reduces the chance of rejection due to a price mismatch.
• Apply for a Minimum of 1 Lot: If an IPO is highly oversubscribed, a "lottery system" is often applied in the retail category. In such cases, even applying for 1 lot has the same chance of allotment. Multiple lots may not always be beneficial.
• Apply with Different PANs: Applying with different family members (different PANs and different bank/UPIs) can increase the overall allotment probability. Multiple applications with the same PAN are not valid.
• Approve UPI Mandate on Time: Many applications are rejected simply because the UPI mandate wasn't approved on time. It's important to confirm the mandate by going to the bank app immediately after applying.
• Avoid Technical Errors: Entering incorrect DP ID, Client ID, PAN, or bank details may invalidate the application. Check all details carefully before submitting the application.
• Understand Oversubscription: If the retail category is 20-30 times oversubscribed, allotment is based on a lottery. In such cases, the strategy is to submit the correct application as per the rules, as the final decision is made through a computerized draw.