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IPO(initial public offering)

What is Initial Public Offering (IPO)?


An Initial Public Offer (IPO) is when an unlisted company issues shares to the public. The IPO can either be through an issue of fresh shares or the existing shareholders may be selling part of their stake to the public. In the first case, the new offer increases the capital base and dilutes EPS. In the latter case of an Offer for sale (OFS), the capital base remains the same and only ownership shifts hands. The OFS is not EPS dilutive.

An obvious answer to why companies go public would be to raise funds for expansion. But that is only one of the reasons that trigger an IPO. There are a lot of other reasons, both tangible and intangible why companies adopt the IPO route. Let us look at some of them.

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Why Should you Invest in an IPO?

As a retail investor you stand a better chance of allotment


If you apply in retail quota of an IPO, you stand a better chance to get an IPO allotment. That is because the IPO allotment process has been designed in such a way that the ownership is as varied and widely spread out as possible. The intent is to bring as many people into the equity cult as possible and you stand to benefit in the process. That substantially increases your chances of getting allotment in an IPO.

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Steps to Apply for Upcoming IPOs

Your IPO application commences from the point of deciding that you want to apply for the IPO after reading through the prospectus. You will have to start off with choosing whether you want to invest online or offline. That is the first step.

STEP 1Choosing between Offline and online investing

The IPO application for any book built issue can be either made offline by filling up a physical form and submitting to the broker or the banker or online through your online trading account. Actual online IPO applications are a lot more convenient because data pertaining to your account is automatically downloaded from your DP master data and the online application process for IPOs is a lot simpler and more efficient. This also reduces the chances of errors.

STEP 2Ensure that your bank account is adequately funded

Whether you apply for the IPO via ASBA or through non-ASBA, you need to ensure that your bank account is adequately funded. The only difference in ASBA is that the amount gets blocked. In both the cases, if there are insufficient funds in the bank account then the application gets rejected outright.

STEP 3At what price to bid for the Book Built IPO?

Normally, companies define a price range for bidding in the IPO. In case you are not sure what price to bid at, then you can just bid at the cut off price. In that case, it will be assumed that you have bid at the discovered price and the allotments will be done accordingly. You will be allotted shares at the discovered price. This is a good idea if you don’t want to bid at a price and get rejected because your bid was lower than the discovered price of the IPO. The problem with quoting a price is that if the discovered price is above the bid price then your bid gets automatically rejected.

STEP 4Applying in retail quota versus HNI quota

Mention clearly what quota you are applying under. While the retail quota has a 35% allocation, the HNI quota has a 15% allocation and includes all bids above Rs.2 lakh. You can select your quota based on your discussion with the broker as to which quota will be better to apply in. Ensure that all your bank details and DP details are filled up fully and properly.

Factors to consider before you apply for an IPO

An IPO is after all an investment in equities so you need to apply most of the secondary market checks here too. However, since not much is available on the public forums, you need to rely extensively on the prospectus of the IPO. Here is what you need to consider before applying

Demat Account TYPES OF
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Initial Public Offering (IPO) versus Direct Listing

An IPO is an offer of shares to the public by a company ahead of listing.
DIRECT LISTING Direct Listing cannot be used to raise fresh funds because that requires stringent SEBI compliance.
Here the company appoints a merchant banker to manage the issue and then the IPO is kept open for a select number of days before the allotment is made and the stock is listed.
The risk is that you need to know the company in-depth before participating in a Direct Listing as there is little by way of oversight in such cases.
An IPO can either be a new issue or an offer for sale. A direct listing does not require any merchant banker to be appointed or any elaborate regulatory process to go through.
existing shareholders can sell shares to the public via a Direct Listing process.


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