Initial Public Offering or IPO is a mode of raising funds for a company. The investors put money in a company which gives them the right to information pertaining to that company. You can read more about what is an IPO, how a company applies for it, and the advantages and disadvantages in the 1st part of this article. This article is for people interested in applying for upcoming IPOs in India. It will touch upon the concept and nuances of IPO from an investor’s perspective.
The article covers:
How can you apply for an IPO?
There are 2 ways to apply for an IPO, which are the online mode and the offline mode. Online mode is the most preferred mode by investors as it is convenient, fast, and hassle-free. You need to have a Demat/Trading account with a registered broker or a bank to apply for an IPO. Once you have your Demat account opened, log in to it and look for upcoming IPOs, transfer funds from your bank account to this Demat account, enter the number of lots and finally the price you want to bid. Now, if you get an allotment, then shares will be credited to your Demat account. Else, the money deducted will be deposited back in your account. All other essential IPO details are available online.
How are IPOs allotted?
The company receives bids from a pool of investors and then they reject all the invalid bids. If the remaining bids are less than the number of shares being issued by the company, every investor with a valid bid will be allotted the shares they applied for. If the number of remaining bids is ‘marginally’ higher than the total number of shares being issued, every investor will get at least one lot of shares. The remaining shares are allotted in proportion to what investors applied for. If the number of remaining bids is ‘significantly’ higher than the total number of shares being issued, the process of lucky draw is carried out to allocate shares. This is the IPO process in India.
How can you increase your chances of getting an IPO?
The following tricks can be used to increase your chances of getting an IPO:
- Bid through different Demat accounts: The famous law of probability is at play here; applying to 5 lots from one Demat account has a lesser probability of allotment than applying for a single lot from 5 different Demat accounts. Thus, if you want to increase your chances of getting an IPO, then bid from multiple Demat accounts.
- Prefer bidding with cut-off price: There is usually a price band from which one price has to be chosen by a bidder to submit a bid, or else they have the option to select the cut-off price. The latter means that the bidder is flexible to buy at any price in that price band. Thus, a bidder should either select the cut-off price option or enter the price band’s maximum price.
- Buy holding company’s share: If a company going for an IPO has a listed parent or holding company, a bidder should buy a single or a few shares of that parent company. It will make them eligible to apply for the IPO via the ‘shareholder’ category. Your chances of IPO allotment are much higher if you apply through the shareholder route.
How do you know an IPO is successful?
There are no set guidelines that determine the success or failure of an IPO, but usually, a bumper listing on the stock exchange is considered a success. If the listing price per share is higher than the price at which you placed the bid, then the IPO is successful. It is known as ‘Listing Gains’. Many investors apply for an IPO to get listing gains and sell shares on the day of listing. This helps in booking profits. In a medium to long-term forecast, if the current share price is higher than the listing price, then it is a sign that the company made the right decision by going public.
What are the upcoming IPOs 2021 in India?
The year gone by was phenomenal for IPO; India saw many companies going public such as CAMS, Chemcon, Route Mobiles, Happiest Minds Technologies, Angel Broking, Burger King, Gland Pharma, and so on. These witnessed bumper listings on the first day itself and investors had many reasons to cheer. Some of the IPOs issued in the first two months of 2021 were Indigo Paints, Stovekraft, IRFC, and Home First Finance Company. This year also has many upcoming IPOs in India lined up, such as RailTel Ltd., Nureca, Bajaj Energy, Nykaa, Barbeque Nation, and Suryoday Small Finance Bank. LIC’s IPO could come this year.
Selling an IPO (lockup and waiting period)
There is a lockup period in an IPO which prevents existing shareholders and the company’s founders from selling their shares for a specific period after the IPO. It is done to avoid volatility in the share price and to ensure a support level by curbing selling pressure. The lockup period could be for 90 days, 180 days or more as it varies from one company to another. Once this lockup period is over, these initial investors and promoters are free to sell their stake if they want.
The selling process of allotted shares for other retail investors is at their discretion entirely. You can either sell the shares on listing day or, if you see any value, you can hold it according to your target price.