IPO – Process, How to buy Shares, Risks and Returns

An IPO, or Initial Public Offering, is when a private company sells to the general public for the first time. This means the company becomes listed on the stock market. By doing this, the company can raise money to spend on its business or to pay off its debts.

What is an IPO

IPO stands for Initial Public Offering. It's a step-by-step process that allows companies to raise capital by issuing their equity shares to the general public. This can also be done by selling off the shares of the existing shareholders (promoters) without raising any new capital. A company that offers shares to the public is in no way obligated to repay the capital to the investors (public).

The company offering its shares is referred to as the issuer. The issuing of shares is done with the help of investment banks. Once the IPO is done, the shares of the company are traded in the open market. These shares can then be further sold by investors through tradings in the secondary market.

What is the need for an IPO?

IPO is an avenue through which companies can access capital and grow. The main objective of an IPO is to raise money by borrowing through the issuing of shares to the public. This is known as the first public invitation in the stock markets and hence the name IPO. Buying these shares allows the investor an ownership in the company in accordance with the value of the shares owned.

Process of an IPO in India

In India, the Securities and Exchange Board (SEBI) that regulates markets and the process of an IPO and companies hoping to issue shares through an IPO have to first register with SEBI and needs to follow the below process

Step 1: A company which is going for IPO must send all the required documents to SEBI (Securities and Exchange Board of India). SEBI checks and approves the documents only if everything looks good as per its terms and conditions.

Step 2: While SEBI is reviewing the documents, the company prepares a draft prospectus called RHP (a document with company and offer details) and clearly mentioning that SEBI’s approval is still pending.

Step 3: Once SEBI gives the approval for the IPO, the company needs to decide two major things:

• The price band (lower cap and upper cap) of the shares.
• The number of shares it wants to sell which includes fresh issue and OFS.

Step 4: The company must choose the type of IPO:

• Fixed Price IPO: The share price is fixed which the company decides and announced in advance.
• Book Building IPO: The company gives a price range, and investors neds to place their bids within that range. The final price is decided based on demand.

Step 5:  After deciding the IPO type, the shares are offered to the public. People who want to invest apply for shares in the given IPO tentative timeline.

Step 6: Once the investors apply the applications are received to the registrar who manages the IPO process and the registrar allots the shares on the basis of subscription to the investors.

Step 7: Once the registrar allots the shares the shares will be credited to the investors demat account within 1 trade day.

Step 8: After crediting if the shares, the company lists its shares on the stock exchange. After this, the shares can be bought and sold in the secondary market, where daily trading happens at the exchange.

Note: The official listing time of the IPO is 10:00 AM on the listing day it is same for the mainline and the SME IPOs.

How to Buy Shares from an IPO?

IPO shares can be bought on two modes one is physical mode and online mode, now most of the people prefers online mode of applying the IPO

Step 1: You may acquire the physical application form from a broker or a distributor or a bank branch. The same can be accessed online

Step 2: You can then fill the form with your details, both personal and bank and demat account related.

Step 3: Provide your total investment amount.

Step 4: The shares will be allotted within 2 days from the date of closing of the IPO.

Important considerations before an IPO subscription

It is important to know of the market dynamic before investing in shares. Read the prospectus issued by the company and go throughout the financial details. These will shed light on the amount of money the company intends to raise and the types of shares they plan to issue. 

It is wise to also understand how the company plans to use the money raised from the IPO and its expansion plans. All these will help an investor make an informed decision.

If you are applying for listing gains you need to watch the GMP and its fluctuations carefully and you shouldn’t totally depend on GMP it may gives wrong data most of the times.

The Risk and Reward

When you subscribe to a share during an IPO, you become one of the first shareholders of the company. As the company flourishes, the share price will rise, and you will stand to profit. But there is also the risk of the stock markets. The returns on your investment will depend on the growth potential of the company and if the company fails, you will risk losing your money. 

Particularly in the case of IPO, one has to be very careful as these companies are not going to publish their past financials from the beginning of the company and thus, you can’t analyse their past performance.

Conclusion

IPO investments carry the risk of market fluctuations and must be undertaken after careful consideration. If you are unsure about investing, visit ClearTax where we have a list of handpicked investment options for you to pick from.

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2. IPO vs FPO: Key Difference Between FPO and IPO
3. Accretion Pharmaceuticals IPO - Check Issue Date, Price, GMP, Allotment Status
4. Scoda Tubes IPO - Check Issue Date, Price, GMP, Allotment Status