How to invest in an IPO? -Application Process,prerequisites and allotment

The year 2022 has been abuzz with a lot of IPOs and NFOs giving retail investors a good opportunity to invest in stock markets. There are reports of approximately 22 IPOs to be launched in 2022 of companies belonging to various sectors giving investors a diverse group of investment opportunities throughout the year. These IPOs have to go through a series of stringent rules and regulations set by SEBI to safeguard the interest of the shareholders. So how does one invest in these IPOs? Are there any specific requirements? Discussed hereunder are the answers to these questions and other related details of an IPO. 

Read More: All you need to know about IPO allotment process

What is an IPO?

Let us start with the basic meaning of an IPO. IPO stands for Initial Public Offer which is essentially the first time that the shares of a company are introduced or listed in the stock markets for a subscription. Investors can subscribe to the shares of a company either through the IPO or by subsequently purchasing them through the open market or by investing in units of equity mutual funds. IPOs are one of the modes of raising capital for a company and getting listing benefits along the way. Some IPOs are issued at a discounted price which allows the investors to gain the advantage of buying shares at a lower value and aiming for short-term or long-term gains. The quality of the company and its market perception is what determines the demand for the stock post-launch of the IPO. 

How to invest in an IPO?

IPOs usually come in two formats, Fixed Price IPOs and Book Built IPOs. in recent times, most IPOs are in the nature of Book Built IPOs, where the company lists the price band for the IPO within which investors can bid for the lots at their discretion. The process of investing in IPOs is listed below.

1. Application process

The application for IPO can be done through online or offline modes. 

1. In the offline mode, investors will have to submit the physical IPO application to the IPO Banker or their broker.
2. In the online format, the same form can be submitted to the broker through their online platform.
   1. Under this mode, investors will have to login into their account with the broker and select the link to the IPO.
   2. Next, they will have to select the investor type from the drop-down options as well as the number of lots that they want to bid for and the bid price.
   3. Payment for the lots can be through UPI and the same has to be submitted at the time of application.
3. ASBA

Investors have to be aware of the ASBA (Application Supported by Blocked Amount) which is mandatory for IPOs now thereby eliminating the need for cheques or demand drafts for IPO allocation. Under this mode, the amount of shares bid by the investor is blocked from their bank account and upon allotment, the same is debited in the favour of the company. 

3. Bidding for lots

If the IPO is Book Built IPO, investors can bid for their desired lots within the price band offered by the company. Bidding for fractions of lots is not permitted. 

4. Allotment

Upon the closure of the IPO the allotment of shares beings. If the investor is allotted shares in part or full, they will receive a Confirmatory Allotment Note (CAN). Such a note will be issued within six working days after the closure of the IPO process. The allotted shares will be credited to the Demat account of the investor and will be available for trading once they are listed on the stock exchange.

What are the prerequisites to invest in an IPO?

Investors can use IPOs as a good way to build their investment portfolios. However, there are a few prerequisites that need to be considered before investing in IPOs. These prerequisites make investing in IPOs quite easier and also allow the portfolio to grow. The details of the same are mentioned hereunder.

1. Choosing a brokerage firm and opening a Demat account

The primary requirement to invest in stock markets is to have a Demat account and a trading account. There are multiple brokerage firms available today that provide good investment options and support too. The choice of brokerage can be based on factors like the cost of investment, ancillary services offered by the brokers, the ease of the online trading portal provided to them, etc. After providing the necessary KYC for opening the Demat account, investors can invest in the IPO by selecting the same from the online portal or by contacting the brokers to buy on their behalf. 

2. Getting surplus funds

The next step is to arrange the funds for investing in IPOs. Shares available in the IPOs are generally in lots and investment in a fraction of shares or individual shares is not allowed. Therefore, investors will need to arrange the funds to apply for the required lots of shares and block them in the ASBA account. In case of a shortage of funds for investing in IPOs, there is an option to get a loan too from banks or NBFCs.

3. Bank details along with a registered mobile number

The allotment of shares is done after the IPO is closed and at such time it is possible that the investor may not be allotted any shares from the IPO or less than what they had bid for. In such a case, the company will refund the applicable amount to investors in their bank accounts, and the notification for the same will be duly sent as well. Therefore, investors need to provide valid bank details as well as a mobile number registered with such an account.

4. PAN card

As per the guidelines of the Income Tax Act, of 1961, and the Companies Act, of 2013, investors need to provide their valid PAN number at the time of investing in an IPO. Therefore, having a valid PAN is another crucial requirement for investing in an IPO. 

5. Analyzing the company and the intrinsic value of shares

One of the basic rules of investing is knowing the company before investing in it. It is essential to understand the fundamentals of the company to ascertain if the shares of the company are a good bet. 

Conclusion

Investment through an IPO can be a good opportunity for investors if the company has strong financials and there is a good buzz for its shares in the markets. This will help in getting an opportunity for short-term gains. On the other hand, such a company can also be a good addition to the long-term portfolio based on the evaluation of growing demand for its products and a solid business model. 

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