IPO stands for Initial Public Offering. It is a process where a company decides to raise funds from the public by selling its shares.
The shares are first issued in the primary market via IPO and then moved to the secondary market, where it is traded among the public. The secondary market is also known as the After Issue Market.
Step-by-step process a company follows to get listed on the stock market:
- Firstly the company will appoint a merchant banker who helps in all the following steps.
- Then, the company has to get an initial nod from the SEBI.
- Next, the company prepares a Draft Red Herring Prospectus (DRHP) and submits it to SEBI. DRHP is a document that contains all the information about the company like:
- Financial Statements
- Number of shares offered to the public
- Objective of the IPO, etc.
- Later, the company fixes the price band and the marketing of the IPO is done at least 2 days before the bidding process starts.
- Finally, stockbrokers like Alice Blue start accepting bids from the public.
- Once the bidding is complete, shares are allotted to the public. Then, the stock will be listed on the stock market.
Types Of IPO
Fixed Price Offering: In this type of IPO, the company offers its shares at a fixed price.
Book Building Offering: In the book building method, the company fixes a price band. The investors have to bid within the fixed price band to get the shares. Learn more about bidding below.
How To Invest In An IPO?
Investing in an IPO is made simple through Alice Blue. Follow these easy steps to start your investment.
- Step 1: Open your free Demat account with Alice Blue in just 15 minutes. Already have an account !! Then just, simply log in to Alice IPO.
- Step 2: Choose from the IPO you want to apply and place your bid.
- Step 3: Once the bid is placed via UPI, the UPI App will block funds in your Bank account proportional to the bid (Till the allotment date). If the shares are allotted to you, the money will be debited from your account, if not, the money will be unblocked.
How Bidding Works In IPO?
While applying for an IPO, you need to place a bid within the fixed price band. For example: Let’s say the price band or issue price of the IPO is between ₹ 100-110, you need to place your bid between 100-110.
If your bid matches or is greater than the cut-off price, you will receive the shares of the company. For example: Let’s assume that the price band is between 100-110 and the cut-off price is 107.
- If your bid was below 107, you will not get the shares.
- If your bid is 107, you will get the shares.
- If your bid is above 107, you will still get the shares and the price difference between the bid and cutoff price will be refunded.
Once bidding is done the shares will be allocated based on the allotment class you belong in. Let us learn about different types of allotment classes.
What Is Allotment Class?
There are 3 allotment classes:
- Retail Institutional Investors (RIIs): These are individual investors like you and me. Usually, at least 35% of the issue is reserved for them.
Also note, you need to apply for shares worth ₹ 2 Lakhs or less to be considered as a Retail Institutional Investor.
- High Networth Individuals (HNIs): If you apply for shares of more than ₹ 2 Lakhs, you will be considered as a High Networth Individual. Usually, at least 15% of the issue is reserved for them.
- Qualified Institutional Investors (QIBs): QIBs are institutions like Banks, Insurance Companies, Mutual Fund Houses, Foreign Institutional Investors, etc. Usually, 50% of the issue is reserved for them.
How Is the Allotment of Shares Done?
The allotment depends on the overall shares subscribed.
- Under Subscription: This happens when the Issue is worth 100 Crores and the people have subscribed for 100 Crores or Less. In this case, you will receive all the shares you applied for.
- Over Subscription: This happens when the issue is worth 100 Crores and the people have subscribed for more than 100 crores. There are two types of oversubscription:
- Oversubscription by a number of people: For instance, let’s assume, the Issue is worth 100 crores and the cost of 1 lot is ₹ 10,000. So, 1 lakh people can apply for the IPO for 1 lot each (100 crores/10000). If more than 1 lakh people apply for the IPO, the company will have a lucky draw. The 1 lakh people whose name appears in the lucky draw will get the shares.
- Oversubscription by a number of lots: Keeping the above example in mind, overall people can apply for 1 lakh lots (100 crores divided by the lot size[100 crores/10000]). So let’s say 50,000 people apply for 2 lakh lots, in this case, everyone will get the shares but some people will get lesser lots as opposed to the number of lots they applied for, while some may get the exact number of lots.