Investing In Indian Ipos: A Comprehensive Guide

Investing in an IPO can be a great way to get in on the ground floor of a company's public offering. In India, there are a few steps to follow when investing in an IPO. First, you'll need to open a demat or trading account. You can then apply for an IPO online through the ASBA facility available with most banks or through your UPI ID. It's important to remember that investing in IPOs can sometimes be riskier than perceived, so it's crucial to evaluate the companies carefully before investing.

How to apply for an IPO

Applying for an IPO in India can be done through an online IPO application offered by stockbrokers and banks. Here is a step-by-step guide on how to apply for an IPO:

Step 1: Requirements

To apply for an IPO, you must have the following:

• A mobile number linked to your bank account
• A UPI ID

Step 2: Log into Your Trading App or Broker's Website

Log into the trading app or mobile application of your broker. Navigate to the ongoing IPO section. Here, you will select the investor type and the IPO you wish to apply for.

Step 3: Enter Details

Enter the number of shares you wish to apply for, the bid price, and your UPI ID.

Step 4: Submit Application

Once you have entered all the necessary details, submit your application. After submission, a mandate request will be sent to your UPI application for approval.

Step 5: Accept Mandate on UPI App

Log into your UPI application and accept the mandate request. Once accepted, the amount for the IPO will be blocked in your account.

Additional Information:

• The IPO application can be rejected if the person applying is different from the one whose bank account is used to apply.
• You are more likely to receive an allotment if you apply at the cut-off price.
• Upon allotment, if no shares are allotted, the blocked amount will be unblocked. If there is a partial allotment, the requisite amount will be debited, and the remaining amount unblocked. If you are allotted all the shares you applied for, the entire amount will be debited.

How to increase your chances of IPO allotment

Overview

Investing in Initial Public Offerings (IPOs) can be an exciting way to potentially increase your stock market returns. However, getting an IPO allotment is not easy, and many investors are curious about how to increase their chances.

Strategic Approach for IPO Stock Allotment

• Avoid large applications: The Securities and Exchange Board of India (SEBI) treats all retail applications (less than Rs 200,000) equally. Therefore, there is no advantage in making large applications in case of oversubscription. Instead, spread your money across multiple smaller bids using different accounts. This strategy not only diversifies your chances but also allows you to participate in multiple IPOs simultaneously, thus spreading your risk.
• Apply via multiple accounts: Consider applying through multiple accounts linked to different Permanent Account Numbers (PAN) cards. Each application is independent, increasing your overall chances without violating SEBI regulations.
• Bid at the cut-off price: During the IPO application process, bid at the cut-off price, indicating your willingness to accept the final price set by the company after the book-building process. Bidding at the cut-off price demonstrates your commitment and improves your chances of getting into highly sought-after IPOs.
• Apply early: Be proactive and apply early during the IPO subscription window. Avoid waiting until the last day, as technical issues or high demand from institutional investors could hinder your application. Applying early ensures your application is processed efficiently and enhances your chances of receiving an allotment.

Tips to Increase Your Chances

In addition to the strategic approaches above, here are some practical tips to further improve your chances of receiving an IPO allotment:

• Persistence and Ingenuity: Avoid submitting large bids, especially for oversubscribed IPOs. Spreading your investment across numerous smaller bids is advantageous, as SEBI treats all retail applications equally up to Rs 2,00,000. This approach diversifies your applications, increasing the likelihood of at least one successful allocation. By not concentrating your investment on a single application, you reduce the risk of missing out due to oversubscription.
• Democratic Lottery Approach: Increase your chances by involving several accounts in the IPO application process. Encourage family members or close friends to apply for the same IPO using their own demat accounts. Each application stands alone, significantly boosting your chances of receiving an allocation. This method leverages the cumulative effect of multiple applications, improving your overall prospects of success.
• Maximise IPO Opportunities: Stay proactive and informed about upcoming IPOs to take advantage of various investment opportunities. Participating in multiple IPOs expands your portfolio and increases your chances of receiving allotments. This strategy requires vigilance and the ability to act quickly when new IPO opportunities arise. By staying ahead of the curve and continuously evaluating potential investments, you can position yourself for success in the competitive IPO market.
• Open Accounts with Multiple Brokers: Diversify your IPO applications by creating accounts with several brokerage firms. Each broker may obtain allocations from different IPOs, increasing your exposure to potential allotments. This strategy ensures you are not dependent on a single broker's allocation capacity, enhancing your overall chances of success in securing IPO shares.
• Leverage Family Participation: Encourage your family members to join you in IPO applications. By pooling money and applying through multiple family accounts, you significantly increase your chances of obtaining at least one allocation. This collaborative approach spreads the risk and improves the likelihood that family members will secure IPO shares.
• Explore Lesser-Known Brokerages: When applying for an IPO, don't overlook smaller or lesser-known brokerage firms. These businesses may face less competition for allotments than larger, more famous brokers. Conduct thorough research to find hidden gem brokers who can provide unique opportunities to acquire IPO shares. Diversifying your application sources improves your chances of successful allotment in a competitive IPO environment.
• Consistency and Persistence: Persistence is key when navigating the IPO market. Even if your initial attempts are unsuccessful, continue to apply for IPOs regularly. Over time, consistent participation improves your understanding of the IPO process and market dynamics. This meticulous approach increases your chances of receiving allotments by leveraging past experience and making informed adjustments.

Additional Considerations

• Stay Informed and Analytical: Keep up with market trends and upcoming IPOs. Before applying, conduct thorough research on companies, paying close attention to their financial health and market potential. This proactive approach will enable you to make more informed decisions and increase your chances of receiving successful allotments.
• Monitor IPO Subscription Levels: Track IPO subscription levels, particularly across different investor segments such as retail, High Net Worth Individuals (HNI), and Qualified Institutional Buyers (QIB). Understanding demand patterns will help you strategise your application approach, ensuring that you apply strategically to maximise your chances of allotment.
• Avoid Last-Moment Subscription: If you have decided to apply for an IPO, do so on the first or second day. Applying on the last day may lead to issues such as non-responsive bank accounts due to high subscription levels or technical problems. Applying early ensures you don't miss out on investment opportunities.
• Attention to Detail: When filling out IPO forms, take your time and provide accurate information, including the amount, name, Depository Participant (DP) ID, and bank details. Printed forms are also available, providing an additional layer of security. The most secure way to apply for an IPO is through the Application Supported by Blocked Amount (ASBA) process. Double-check the details before submitting to avoid technical rejections.
• Buy Parent or Holding Company Shares: This technique applies only to certain IPOs. If the parent company of the IPO company is already listed on the stock exchange and there is a reservation for shareholders in the parent company, having at least one share of the parent company in your Demat Account entitles you to apply through the Shareholder Category, which often results in a higher likelihood of being allocated IPO shares.

By following these guidelines and adopting a strategic approach, you can significantly enhance your chances of receiving IPO allotments and capitalising on attractive investment opportunities in the Indian stock market.

What to know before investing in an IPO

An Initial Public Offering (IPO) is the process by which private companies raise funds by issuing shares to the public for the first time. Companies may opt for this for a variety of reasons, such as raising capital for upcoming projects, debt repayment, or to facilitate the exit of early investors.

How to Invest in an IPO

In India, investors can apply for IPO stocks by filling out an online IPO application offered by stockbrokers and banks. There are two methods of application: the ASBA facility, available with most banks, and through your UPI ID.

Do Your Research

Before investing in an IPO, it is important to evaluate the company carefully and note the advantages and potential risks associated with them. Read the Draft Red Herring Prospectus (DRHP) thoroughly, as this provides crucial details about the company, including its business, past performance, assets and liabilities, and possible risk factors.

Understand the Purpose of Capital Raised

Consider the 'why' behind the company's need for capital. If the company is burdened with debt and intends to use the proceeds to pay this off, investors should be cautious. However, if the proceeds will be used for a mixed purpose of debt payment and expansion, it may be worth investing in.

Know the People Behind the Company

The company's promoters and key officials in management are the driving force behind the company's success, so it is important to assess their ability to make the right business decisions. Consider how long the key management officials have spent with the company.

Identify Potential Growth Drivers

Factors such as the company's positioning in its sector, market share, accessibility and visibility of its products, geographical spread, expansion plans, estimated profitability, supply chain, ability to handle crises, and efficiency could be among the various growth drivers that would decide the upcoming business prospects.

Be Mindful of Risk Factors

Risk factors, as mentioned by the company in its DRHP, can make or break the deal when it comes to investing in IPOs. These range from legal litigations and weather calamities to policy-related changes and interest rate fluctuations.

Assess Your Risk Tolerance

As with any investment, it is important to assess your risk tolerance before investing in an IPO. If the business looks too risky and does not match your risk appetite, it is better to avoid investing.

How to fund your IPO application

To fund your IPO application in India, you will need a few things. Here is a list of requirements:

• Demat Account: A Demat account is essential for investing in IPOs. This account will store your shares after allotment.
• Trading Account: A trading account with a SEBI-certified depository participant is mandatory for applying for an IPO online.
• UPI ID: You can use an existing UPI ID linked to your bank account or create a new one using the BHIM app.
• Bank Account: You will need a bank account to pay for the shares you apply for. The ASBA (Application Supported by Blocked Amounts) system simplifies the payment procedure by blocking a certain amount of money based on the number of shares you bid for. After allotment, the cash is debited from your bank, and any excess amount is unblocked.
• PAN: You must have a Permanent Account Number (PAN).

Once you have these requirements in place, you can choose to apply for an IPO online or offline.

Applying for an IPO Online

You can apply for an IPO online through a broker or via internet banking. Here are the steps for each method:

Through a Broker:

• Log in to your online account with the broker. If you don't have an account, register with your email and phone number.
• Locate the IPO tab and go to the current IPO section. Select the IPO you want to invest in.
• Enter the lot size or the number of stocks you want to bid for, along with the bid price. Bidding at the cut-off or maximum price can increase your chances of IPO allotment.
• Enter your UPI ID and submit your bid. Approve the transaction on your UPI app.
• Wait for the mandate notification in the UPI app. The application money will remain blocked until the IPO allotment date.

Through Internet Banking:

• Log in to your Internet Banking account.
• Locate and click on the ASBA (Application Supported by Blocked Amount) tab.
• Click on the 'Apply IPO' tab and select the desired IPO from the list.

Applying for an IPO Offline

If you prefer not to apply online, you can visit the nearest branch of the broking firm or bank and submit an IPO application. You will need to fill out an ASBA application and provide essential KYC details. Your funds will be blocked, and the amount invested will be debited after shares are allotted.

Types of IPOs

There are two common types of IPOs: a fixed-price offering and a book-building offering. A company can use either type separately or combine them.

Fixed-Price Offering

In a fixed-price offering, the company going public determines a fixed price at which its shares are offered to investors. The investors know the share price before the company goes public. The demand from the markets is only known once the issue is closed. To partake in this IPO, the investor must pay the full share price when making the application. The oversubscription levels are high in fixed-price offerings, sometimes several hundred times.

Book-Building Offering

In a book-building offering, the company going public offers a 20% price band on shares to investors. Investors then bid on the shares before the final price is settled once the bidding has closed. Investors must specify the number of shares they want to buy and how much they are willing to pay. Unlike a fixed-price offering, there is no fixed price per share. The lowest share price is known as the floor price, while the highest share price is known as the cap price. The final share price is determined using investor bids.

Other Types of IPOs

In addition to the two main types of IPOs, there are also SME IPOs and Mainline IPOs. SME IPOs are listed on the NSE Emerge or BSE SME platform, while Mainline IPOs are listed on the BSE and NSE.

Frequently asked questions