IPOs or Initial Public Offers have emerged as an important investment avenue for small, medium and large investors. The IPO application and allotment process has been deliberately kept favourable to the retail category investors with applications below the size of Rs.2 lakhs. This is meant to expand the equity investor base in India. Typically, the IPO has two core purposes. There is a fresh offer by companies looking to raise money from the market and get listed on the stock exchange. Then there is the Offer-for-Sale (OFS) where an existing shareholder offloads stake in the company through the IPO. This investor could be the government, private promoters or anchor investors. There are 5 ways to approach an IPO application:
- Fixed price versus Book Built IPO
In a fixed price IPO the price of the IPO is fixed in advance and communicated to the potential IPO investors accordingly. This is the price at which investors can apply and that is the price at which the shares will get allotted. The other option is the Book Built IPO, which is the more popular method today. In fact, there are hardly any companies coming out with fixed price IPOs nowadays. In a book-built IPO, the company only gives an indicative price and the final price for allotment will be discovered through the process of book building. In case retail and small investors do not know which price to apply at, they can just mention “Cut-Off” price and they will be deemed to have applied at the discovered price. Here the pricing is more realistic as it is set through the forces of demand and supply.
- Offline IPO applications
Offline applications are still quite popular. In this approach, you fill up the physical IPO form and submit it to your broker or an accepting bank. The IPO application must be complete in all respects including the bank mandate and the DP mandate. Any error will lead to rejection of the bids. Once the IPO application form is filled up, it is logged in the system by the broker and uploaded in to the NSDL / CDSL. Allotments are made within a period of 7-10 days of the closure of the IPO.
- Online IPO applications
If you have an online trading account with a registered broker with your demat account and bank account mapped to it, then you are saved the hassles of filling up all the details in the form. You can just log into your trading account, fill up the basic details and download the remaining details directly from your DP master database. The process of online application is not only simpler and quicker but also a lot more efficient.
- Retail versus non-institutional application
Individuals have an option to apply either in the retail category or the non-institutional category. As per SEBI regulations, the retail category is classified as applications up to an application amount of Rs.2 lakhs. Any individual application above Rs.2 lakh has to be necessarily logged in as a non-institutional application. The difference is in the basis of allotment. While the retail applications get allotment based on a formula that ensures maximum allotment to maximum number of shareholders, the non-institutional category gets proportional allotment depending on the extent of oversubscription in that category.
- IPO applications through ASBA
Recently, SEBI has enabled IPO applications through the ASBA mode to reduce the risk of locking in funds by investors. Applications Supported by Blocked Amount (ASBA) is a system where the amount of your application is blocked in your bank account automatically. However, the amount is not debited and you continue do earn interest on the amount. On the date of allotment your bank account is debited only to the extent of the amount required for allotment (depending on the allotment ratio) and the lien block on the remaining amount is automatically removed.
