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The IPO market in India has been growing by leaps and bounds over the past few years. In just 2021 alone, the country witnessed as many as 63 successful IPOs that raised about Rs. 1,19,882 crores. And although we’re only 5 months into 2022, we’ve already seen 12 successful IPOs that have managed to raise about Rs. 37,748 crores already.

Clearly, IPOs are fast becoming a preferred investment avenue for retail investors in the country. If you’ve been on the fence about investing in an IPO because you don’t quite understand what it is all about, here is everything you need to know about Initial Public Offerings.

What is an IPO?

IPO is an acronym for Initial Public Offering. It is the process through which a public limited company sells its shares to institutional investors and the general public, with a view to raise funds.

Once a company has successfully completed its IPO, its shares will be listed on stock exchanges like the National Stock Exchange and the Bombay Stock Exchange. The shares can then be freely bought and sold by traders.

There are many ways in which a company may use the funds raised via an IPO, such as -

Business expansion
Research and development
Acquiring new businesses
Debt repayment

An overview of the IPO process

From an investor’s perspective, the IPO process can be quite fascinating. Here’s a quick general overview of the process that companies follow.

1. Conducting due diligence

The first step of the company’s IPO journey begins with the appointment of a SEBI-registered lead manager. The lead manager is responsible for assisting and advising the company about the process that has to be followed. They also conduct thorough due diligence of the financials, regulatory compliances, and the corporate governance aspects of the company.

2. Creating the Draft Red Herring Prospectus

After the due diligence exercise, the lead manager moves on to creating the Draft Red Herring Prospectus (DRHP). The DRHP, also known as the prospectus, is one of the most important documents in the entire IPO process. It contains key information about the company and the Initial Public Offering. Investors can take a look at the DRHP for details of the issue size, the proposed use of the IPO funds, the company’s financials, risks, strengths, and more.

3. Filing the paperwork with SEBI and the ROC

After the DRHP is drafted, the lead manager then files this as well as other required documents with regulatory authorities such as the Registrar of Companies (RoC), the Securities and Exchange Board of India (SEBI), and the stock exchanges.

4. Book building

Once all the relevant paperwork is filed with the authorities and approved, the lead manager then works towards the marketing and pricing of the IPO. This is done in collaboration with the issuing company. After the price band for the IPO is determined, the lead manager starts the book building process. Here, a particular window of time is opened up, during which the public and other institutional investors can bid for the shares of the company.

5. Share allotment

After the book building process is complete, the lead manager starts the share allotment process. Here, investors’ demat accounts are credited with the shares of the issuing company. A few days after the allotment takes place, the shares of the issuing company are listed on the stock exchanges.

How can you apply for an IPO?

Unlike the IPO process which can be quite tedious, applying for shares via an IPO is very easy. All you need is an active demat account. There are two primary ways through which you can apply for an IPO online.

Through the trading portal of a stock broker

If you have a trading account with a stock broker, here’s what you would have to do to apply for one.

Log into the stock broker’s trading portal.
Navigate to the IPO section.
Search for the IPO that you wish to invest in.
Fill up the application form by specifying details such as the number of lots and the price at which you wish to bid for.
Enter your UPI ID and submit the application.
Your application will be submitted and you will receive a mandate request on your UPI application for the total value of shares that you’ve applied for.
Approve the mandate to complete the IPO application.
An amount equivalent to the total value of shares that you’ve applied for will be blocked in the bank account linked with UPI until the share allotment phase of the IPO.

Through a bank account

Alternatively, if you possess a demat account but not a trading account, you can still apply for an IPO through your bank account. This process is known as ASBA or Application Supported by Blocked Amount. Here’s how you can do this.

Log into your bank’s internet banking portal.
Navigate to the Investments section or the IPO section.
Select the IPO that you wish to apply for.
Enter details such as your Depository ID (DP ID) or client ID, the number of lots, and the price at which you wish to bid for.
Submit the application.
The amount equivalent to the total value of shares that you’ve applied for will be blocked in your account until the share allotment phase of the IPO.

In both cases, if the shares of the company are allotted to you, the blocked amount will be automatically withdrawn from your account. If not, then the blocked amount will be released.

Things to keep in mind before applying for an IPO

Investing in the IPO of a company can be highly advantageous to you as an investor, since you get to involve yourself in the company’s wealth creation process quite early on. But here’s a list of things that you should keep in mind when applying for one.

Company’s financials

The company’s financial performance is something that you should look into thoroughly before applying for an IPO. Check if the company’s revenues and its profits have been growing consistently over the years. If the company has been making losses consistently, it may be prudent to stay away from investing in the IPO.

Background of the promoters

Another major factor that you should look at is the promoters’ background. Check to see whether the promoters have a clean record, and also look into the amount of experience they have.

Use of the IPO funds

It is important to also take a look at what the company plans to do with the IPO funds. If the company is planning on using it for productive purposes such as launching new products, expanding their business, or for enhancing their infrastructure, it may be a good option to invest in the IPO.

Conclusion

To invest in an IPO, you first need an active demat account. If you are keen on hopping on the IPO bandwagon but do not possess a demat account yet, make sure you open one right away. With online KYC processes and the government’s DigiLocker initiative, it is now possible to open and activate your account in just a day or two.

A quick guide to IPOs - India's new favorite investment option

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