Methods of IPO

26th January 2021 0 By indiafreenotes

The Initial Public Offering IPO Process is where a previously unlisted company sells new or existing securities and offers them to the public for the first time.

Prior to an IPO, a company is considered to be private with a smaller number of shareholders, limited to accredited investors (like angel investors/venture capitalists and high net worth individuals) and/or early investors (for instance, the founder, family, and friends).

After an IPO, the issuing company becomes a publicly listed company on a recognized stock exchange. Thus, an IPO is also commonly known as “going public”.

The steps an investor needs to follow are:

Decision

The primary step for an investor would be to decide the IPO he wants to apply for. Though the existing investors may have the expertise, it could be an intimidating one for the new ones. The investors can form a choice by going through the prospectus of the companies initiating IPO.

The prospectus helps the investors to form an informed idea about the company’s business plan and its purpose for raising stocks in the market. Once the decision has been made, the investor needs to look forward to the next step.

Funding

When an investor has formed the decision regarding the IPO he would like to invest in, the very next step would be to arrange the funds. An investor can use his savings to buy a company’s share.

In case the investor does not have enough savings, he can avail a loan from certain banks and Non-Banking Financial Organisations (NBFCs) at a definite rate of interest.

Opening a Demat-cum-trading account

Any investor without a Demat account cannot apply for an IPO. The function of a Demat account is to provide the investors with the provision to store shares and other financial securities electronically. One can open a Demat account by submitting his Aadhaar card, PAN card, address and identity proofs.

The application process

An investor can apply for an IPO through his bank account or trading account. Some financial organisations will offer you the provision to bunch your Demat, trading and bank accounts.

After an investor has created the demat-cum-trading account, he needs to be familiar with the Application Supported by Blocked Account (ASBA) facility. It is mandatory for every IPO applicant. The ASBA is an application that enables the banks to arrest funds in the applicant’s bank account.

The ASBA application forms are made available to the IPO applicants in both demat and physical form. However, the use of cheques and demand drafts cannot be made to avail the facility. An investor needs to specify his demat account number, PAN, bidding details and bank account number in the application.

Bidding

An investor needs to bid while applying for the shares in an IPO. It is done according to the lot size quoted in the company’s prospectus. Lot size can be referred to as the minimum number of shares that an investor has to apply for in an IPO.

A price range is decided and the investors require to bid within the price range. Though an investor can make a revision in his biddings during an IPO, it should be noted that he needs to block the required funds while bidding. In the meantime, the arrested amount in the banks earns interest until the process of allotment is initiated.

Allotment

In many cases, the demand for the shares can exceed the actual number of stocks released in the secondary market. One can also face situations where he can get a fewer number of shares than what he had demanded. In these cases, the banks unlock the arrested funds either entirely or partially.

But, if an investor is lucky enough to get a full allotment, he would receive a CAN (Confirmatory Allotment Note) within six working days after the IPO process is done. After the shares have been allotted, they are credited to the investor’s demat account.

Once the above-mentioned steps are carried on successfully, the investor will have to wait for the listings of the stocks in the share market. It is generally done within seven days after the shares are finalised.