You might have come across the phrase “X company has decided to go public” often in the press and have wondered what it means. For any organization to grow bigger, it needs a massive influx of capital, loans or investments from new or existing investors. However, there is also another way companies can raise money to allow quick trading of the current properties, raise capital for the future, or monetize the investments made by existing stakeholders; this method is known as IPO. Initial Public Offering (IPO) is the process through which a private company or corporation goes public by selling a portion of its shares to the investors who could be either public or firms.
The company that has decided to go public should make a lengthy document that lists the details of the proposed offerings, and this document is known as white paper. The white paper will be available in the public domain and accessed by institutional investors, high net worth individuals (HNIs), and the public alike. Post completion of the IPO, the company’s shares can be traded freely on the centralized stock exchanges. There are two types of IPOs, and they are:
Fixed Price Offering
Fixed Price IPO is also known as the issue price that companies set for the initial sale of their shares in the IPO. The cost of the stocks that the company wishes to make public is revealed to the investors. Once the issuance of the shares is closed, the consumer demand for the stocks is determined. When investors participate in this IPO, they must pay the total price of the shares at the time of the application itself.
Book Building Offering
In book building offering, the company that is going public will offer a 20% price band on the stocks to the investors. The investors interested in the IPO will then bid on the shares before the final price is decided. In this type of IPO, the investors must specify the number of shares they are planning to buy and the amount they are willing to pay per share. The lowest share price is known as the floor price, while the highest stock price is referred to as the cap price. The ultimate decision regarding the price of the shares is decided based on investors’ bids.
The process involved in investing in IPO
As an investor, before you get started with investing in an IPO, there are certain things you ought to know, and one such thing is the steps involved in it. the process involved in investing in an IPO is as follows:
The first step in any investment process is making the decision, and it holds for IPO as well. Every company that is initiating an IPO will come up with a prospectus known as a white paper. Whether you are a new investor or a seasoned professional, it is essential to go through it. The white paper will help investors form an informed idea about the company’s future business plan and its purpose for raising stocks in the market.
Once the investor has decided on the IPO to invest in based on the data available in the White paper and other external sources, the next step is to raise funds. The investor can use their savings to fund the IPO, and if they don’t have enough money, they can avail of a loan from certain banks and Non-Banking Financial Organizations (NBFCs) at a definite rate of interest.
- Opening a Demat and trading account
In India, no investor can apply for an IPO without a Demat account as it holds the share you have purchased in the IPO. You also need a trading account to facilitate the trading of stock. We at Tradeplus offer an all-in-one account that lets you do both functions at absolutely zero cost.
An investor can apply for an IPO either through their bank account or trading account. The investor should be familiar with the Application Supported by Blocked Account (ASBA) facility, which is mandatory for every IPO applicant. The ASBA is a facility that enables the banks to arrest funds in the applicant’s bank account.
The application forms for the ASBA are made available to the IPO applicants in both Demat and physical state. The applicant needs to specify their Demat account number, PAN, bidding details, and bank account number in the application form.
The next step is the bidding process, where the investor needs to bid for the shares in an IPO. The bidding is done according to the lot size quoted in the company’s whitepaper. The Lot size is defined as the minimum number of shares that an investor can apply for in an IPO. The investors need to bid within the price range decided by the company. However, the investor has the provisions to make alterations in their biddings during an IPO; to do that, they need to block the required funds during bidding. It is also to be noted that the arrested amount in the banks earns interest until the company initiates allotment.
There are cases where the demand for the shares can exceed the actual number of stocks released in the market. In such cases, the investor is allocated fewer shares than what they bid for, and in these cases, the banks unlock the arrested funds either entirely or partially based on the demand. In cases where the investor gets a full allotment, they would receive a CAN (Confirmatory Allotment Note) within six business days after the IPO process. The shares are credited to the investor’s Demat account after the shares have been allotted. Post allocation of shares, the investor needs to wait for a period that may take up to seven business days to be traded in the share market.
Tradeplus is a great platform that helps you be up-to-date with the upcoming IPOs and aid you in investing in one. Keep following this space to know about the upcoming IPOs.