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?

How does IPO WorkAn 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.

  1. The first and foremost thing, as mentioned earlier, that is required to apply for an IPO is to have a Demat and Trading Account.
  2. Login to your Demat Account and select the IPO that you wish to apply for and invest in.
  3. The next step required is to transfer funds from your bank account to your Demat/Trading Account.
  4. 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.
  5. 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.

Conclusion

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.

FAQ

Ques- How to apply for an IPO and get latest updates related to it?

Answer- Investors can apply for IPOs through any of the discount brokerage firms. A trader simply needs to have a bank account for facilitating IPO related transactions. One simply needs to select he intends to buy and then proceed with completing the transaction. After submission of the IPO bid, the trader receives an SMS from the stock exchange that confirms his application. Besides this, users can simply check the status of their IPO allotment and you’ll be presented with the facts about last updated bids of your account. Apart from consulting the stock brokers for an IPO application, investors can also apply through ASBA.

Ques- What is the process of getting a BHIM UPI ID?

Answer- Any individual who owns a smartphone and has an operational bank account is eligible for BHIM UPI ids. A trader simply needs to have access to his mobile number registered with the bank account and a operational debit card of the same bank. Users can simply download the desired BHIM UPI app from their respective app stores. After running and installing the app, the user will have to authenticate the SMS verification process, whose successful authentication will provide with a fully functioning BHIM UPI id.

Ques- Can an individual apply for IPO if he doesn’t use UPI?

Answer- An individual can use his discount brokerage firm’s net banking payment facility if he doesn’t use UPI.

Ques- What is the cost incurred for IPO application process?

Answer- Most of the discount brokerage firms don’t charge a penny for IPO application.

Ques- Where can an individual place an IPO order on the software of discount brokerage firm?

Answer- When the IPO order window is open the trading happens between 10 am to 5 pm. A trader needs to get the bid verified placed with the discount brokerage firm by the exchange withing the above-mentioned order window, post which the trader receives the UPI mandate request.

Ques- How does the allotment process proceed if an IPO has been oversubscribed?

Answer- An IPO is termed as oversubscribed when it receives greater application than the proposed share limit available for allotment to traders. In such cases the decision is taken through a draw of lots.

Ques- Which banks/apps support IPO application through UPI?

Answer- Traders can get information on the list of banks and apps supporting IPOs through NPCI’s registered website.

Ques- In how much time a mandate request is processed on BHIM app?

Answer- After placing the order, it is submitted to the exchange. The exchange then conveys the bid to the trader’s bank via NPCI for mandating request through the UPI app.

Ques- Haw can traders accept the mandate on UPI apps such as PhonePe?

Answer- If a trader has applied for an IPO with his registered UPI ID then he’ll receive a pop-up containing information about the mandate approval. One can verify the details and then proceed further by clicking he ‘Accept’ button.

Ques- How can NRI professionals apply for IPO?

Answer- NRIs can apply for IPO in the same way as the resident individuals.

Ques- Can minors apply for IPO?

Answer- Minors cannot apply for IPO through discount brokerage firms as they don’t fulfil the necessary criteria.

Ques- From when can traders process status checks on IPO allotment?

Answer- The discount brokerage firms submit the IPO application to the exchange which then conveys it to the Sponsor bank of the issue. The sponsor bank then demands a mandate request to the UPI app for fund blocking activities.

Ques- When is mandate revoked if a trader doesn’t receive any allotment?

Answer- Generally, the mandate concerned with IPO applications is revoked after facilitating allotment. After revocation the funds will be blocked in the beneficiary’s bank account.

Ques- How do traders apply for the IPO in the pre-existing shareholder division?

IAnswer- n most of the public issues the listed company reserves positions for existing shareholders of the holding company or group. If an individual applies for the IPO in the shareholder division, then the likelihood of the allotment is generally higher as most other traders make application in the retail category. Rest of the process id same in the shareholder category as the general process.

Ques- Does a trader have a link in the primary bank account with the UPI ID that can help place an IPO application bid?

Answer- Traders can fulfil the IPO application bid through BHIM UPI IDs in any bank accounts where they are account holders. The account may not be demarcated as a primary or secondary bank account with the discount brokerage firm.

Ques- Which set of individuals are eligible for applying for the IPO through UPI ASBA medium?

Answer- An individual investor of the retail domain can apply through the UPI ASBA medium. Note that only a single application for an IPO can be made using same UPI Id.

Ques- What is the significance of cut-off price?

Answer- The cut-off price is the price value at which the shares get issued in the name of investors. An IPO book building issue opens within a price range. There is maximum and minimum price limit for an issue. The investor has the freedom of placing bids of the desired quantity in lot size multiples with price range lying between the specified range.

 

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