How does IPO Work
Many times we have heard the word IPO floating in the market. Most of us are aware of its basic meaning, while some of us still don’t have an understanding of what an IPO stands for? Though it has become a common term in the market, there are still various things we don’t know regarding the working of an IPO. There is no proper understanding of how to apply for an IPO, the role of ASBA release of block funds, and much more. But before we discuss anything else, let us first understand what an IPO is?
What is an IPO?
An Initial Public Offering, commonly referred to as an IPO is an offer from the company to the general public for the first time. It is a process wherein a private company raises funds/capital from the general public by declaring itself as a public company by selling its stock to the general public.
Any company irrespective of its time of incorporation, size, and type of business can go public by listing itself on any of the exchanges and issuing stocks through an IPO. IPOs are mostly common during a bulls market as it provides a fertile environment for such corporate events.
The company that sells the shares is known as the issuer and takes the help of private banks while issuing an IPO for the public in the market. The shares of the company are traded in the open market. The amount of funds raised by the company through an IPO is used by the company to further grow and expand its business.
How to apply for an IPO?
Now that you have a fair idea about what an IPO is, you must be wondering how one can apply for an IPO? With the effect of digitalization, you can now apply online for the IPOs. In order to apply online for an IPO, an investor is required to hold a Demat and a Trading Account with a financial institution that provides the facility of applying for an IPO. If you are wondering where to find such financial institutions, let us bring to your knowledge that most of the popular national banks like SBI, PNB, HDFC, ICICI, and top stockbrokers in the country provide the facility to apply for IPOs online.
If you are interested in applying for an upcoming IPO, you can follow the steps mentioned below.
- The first and foremost thing, as mentioned earlier, that is required to apply for an IPO is to have a Demat and Trading Account.
- Login to your Demat Account and select the IPO that you wish to apply for and invest in.
- The next step required is to transfer funds from your bank account to your Demat/Trading Account.
- Next in the process is to select the number of shares that you propose to buy and apply for and the price at which you wish to place the bid for it.
- Once you are sure of the number and price of shares you are applying for, just click the submit button. Your application is now submitted.
What is ASBA?
ASBA stands for Application Supported by Blocked Amount. It plays an important role in IPO application as it does not lets the investors furnish demand drafts or cheques when applying for an IPO. The cheques and demand drafts were accepted earlier when investors used to apply for an IPO. While applying for an IPO through ASBA, the investors apply for the same through banks. The bank, in this case, holds a lien on investors, which means that the amount remains in the bank account of the investor until and unless the shares applied for are allotted to him.
There are two main advantages offered by ASBA:
- It helps avoid problems related to refunds.
- The funds that are blocked in ASBA continue to earn an interest amount even during the application process.
To make it more clear, ASBA is a mechanism that contains an authorization to block the application money in the investors’ bank account when subscribing for an IPO. It ensures that the investors’ money is debited only when the shares applied for are reviewed and allotted after the basis of allotment of stocks is finalized. The blocked funds for an IPO is released by ASBA after 1-2 days of allotment of the IPO stocks.
Advantages of ASBA
Applying for an IPO through ASBA provides the following advantages to the investors:
- Investors are not required to pay the application amount through a cheque. The application for IPO through ASBA includes the authorization to block the bank account.
- When applying for IPO through ASBA, the investors need not worry about the refund. This is because only the amount that is required for application is taken from the bank account linked to ASBA, and only when the application of the investor is selected for the allotment of shares.
- The investors get the benefit of earning interest on the amount of application because the money continues to stay in the bank account of the investors.
- The application form to apply for an IPO through ASBA is simple.
- The intermediary is known to the investors.
How does the listing of IPO take place?
The listing of the IPO is a new listing. It is a process through which a company is already listed on a stock exchange. The issuer company, i.e., the company issuing the IPO, has to undergo certain steps to get its IPO listed.
- The issuer needs to have an in-principal approval of the draft prospectus. The issuer has to file a draft prospectus along with the documents that are mentioned in the checklist for applying for the IPO. The company needs to keep in mind that the draft prospectus is prepared in accordance with the SEBI regulations and guidelines, notifications, circulars, for issuing the draft prospectus.
- The issuer needs to submit an application to issue the IPO. Before the opening of the issue, the issuer is required to deposit an amount of security fees. The issuer is also required to comply with all the prevailing requirements that are mentioned in the list of requirements by the exchange on which it is issuing the IPO.
- The company issues are open for three days for the public to apply for the subscription.
Process of filing for an IPO
The process of applying for an IPO by a company involves the following steps that every company issuing the IPO is required to follow.
- Appointing a merchant banker: A merchant banker underwrites the shares of the company issuing the IPO by buying some or all the shares of the IPO and selling them to the public. A Merchant banker helps the company in the entire process of IPO and bears the risk of the transaction.
- File for the IPO and get SEBI’s Approval: When talking about India, companies willing to apply for an IPO have to file for an IPO with SEBI. For applying for the IPO, the company needs to include the documents listed for the IPO vetting process, includes the DRHP, details of the promoters of the company and the annual report of the company. The initial listing fee that the companies are required to pay is Rs.50,000 along with a subsequent annual listing fees which solely depends on the paid-up share capital of the company.
- Preparing the DRHP: The next step in the process of applying for the IPO is to prepare for the DRHP.
- Marketing the IPO: The marketing of IPO is essential just like of any other financial product. The company markets the IPO in order to create its awareness among the investors regarding the company’s offering. This process of advertising and marketing the IPO is called as IPO roadshow.
- Fixing the price and book building: The IPO price is decided by the underwriters and merchant bankers once the price band has been decided. The company’s shares are available for a period of three days for subscription by the general public.
IPO, as we told, is an important process through which private companies go public by raising the required share capital. The capital is raised by issuing the stocks of the company for the public to invest in. The amount thus raised is used by the company as a capital for meeting out the capital requirement of the company issuing the IPO. It is also clear by now that ASBA plays an important role in the application process. The application for an IPO through ASBA provides a variety of advantages to the investors including the fact that the amount needs not be refunded. This is because the amount of money remains in the bank account of the investor till the allotment of shares takes place. The other advantage of applying for an IPO through ASBA is that since the money remains in the bank account it continues to earn interest and is safe. The company issuing the IPO is required to follow the SEBI guidelines in this direction.