Introduction

Despite the Covid pandemic in India, there has been a substantial rise in the number of companies coming with their IPOs.

In the year 2021, 65 companies went public in India. Zomato, Paytm, and Nykaa were some of the prominent companies to come up with an IPO in 2021.

All the companies that have launched their IPOs in 2022 have also seen a positive gain in their issue price. IPOs seem to be an excellent investment opportunity for both seasoned investors and the public.

But do you know what exactly an IPO is and how you can apply for it? Let us see.

What is an IPO?

An IPO refers to the process of offering shares of a private company to the public for the first time. It is a way of raising money from the public by the company. 

After the company issues an IPO to the public, it gets listed on the stock exchange. The shareholders can easily buy and sell the shares of the company.

Why does a company go public?

To raise capital for growth and expansion

Once a company becomes mature, it needs more capital to expand its operations and enter new product lines. To fund these activities, it raises capital via IPO.

Exit strategy for early investors

Many companies bring out their IPO to allow early investors and venture capitalists to sell their stake and reap the returns.

Media attention

A company gets a lot of media attention when it files for an IPO. This is a great way for a company to promote its products and services.

How does an investor benefit from an IPO?

Listing gains

When a company gets listed on the stock market at a price higher than the allotment price, it is known as listing gain. However, the company may also trade at a price lower than the allotment price which causes loss to the investor. 

First mover advantage 

If a fundamentally strong company issues an IPO, the investor can benefit greatly because the allotment price is very low. The share price might rise sharply after coming to the secondary market.

Achieve long term goals 

IPO investments are equity investments. Long term goals like wealth creation and buying house can be achieved by holding quality companies for the long term.

What do you need to apply for an IPO?

Demat account 

It is a mandatory requirement before investing in an IPO. Shares allotted in an IPO will be stored in a demat account.

Bank account 

 It is required to pay for the shares applied in an IPO. Security Exchange Board of India (SEBI) introduced Application Supported by Blocked Amount (ASBA) for simplifying payment procedure. Via ASBA, a certain amount of money is blocked depending on the number of shares you bid for.

After the allotment, cash is debited from your bank, and if you get fewer shares than you bid for, then the rest of the amount is unblocked.

Trading account 

It is mandatory to have a trading account to invest in an IPO online. You can open a trading account with any of the SEBI registered depository participants like Zerodha and Upstox.

UPI ID 

It can be your existing UPI Id linked to your bank account or you can create a new UPI Id to invest in an IPO via UPI process.

How to apply for an IPO offline?

You can visit the nearest branch of the broking firm or bank and submit an IPO application. First, you will have to fill out an ASBA application and provide essential KYC details. 

After that, your funds will get blocked, and the amount invested will be debited after shares are allotted. For example, if you invested your money worth 5 lakh and got shares worth 3 lakh, only 3 lakhs would be debited from your bank account.

How to apply for an IPO online – Through a broker

Step 1

Log in to your online account with the broker.

Step 2

Locate the IPO tab and go to the current IPO section. Select the IPO name from the current IPO list. 

Step 3

Enter the lot size or the number of stocks you want to bid for. Also, select the bid price. If you want to increase the chances of IPO allotment, prefer bidding at the cut-off price or the maximum price at the upper end of the price band. 

Step 4

Type your UPI ID in the next step and hit the submit button. You will need to approve the transaction on your UPI app, and your bid will be approved by the exchange.

Step 5

Wait for the mandate notification in the UPI app. The application money will remain blocked until the IPO allotment date.

How to apply for an IPO online – Through Internet Banking

Step 1

Log in to the Internet Banking account with your login ID and password. 

Step 2

Locate the ASBA (Application Supported by Blocked Amount) tab and click on it. 

Step 3

Click on the ‘Apply IPO’ tab and select the IPO from the IPO list.

Step 4

Enter the applicant’s name and PAN. Also, enter the bid quantity and price and click on submit. If you submit the bid before 2 PM on a business day, the bid will be accepted on the same day. However, if you place your bid after 2 PM, the bid will be scheduled for the next day.

How to analyse an IPO?

The performance of companies going for Initial Public Offer (IPO) can be difficult to analyze. There is no trade history available of new companies which makes it challenging to analyze. 

You need to follow a different approach for evaluating an IPO. Here’s what you should look for before investing in an IPO:

Why is the company going public?

It is wise for an investor to know the reason behind a company going public. If the funds raised from an IPO are used to expand the business or pay off the debt, it may be a good sign as it will boost future profitability and revenue. 

However, a company should be avoided if the funds raised are used to meet working capital requirements.

Company financials

An investor can look at the past performance of the company to get an idea of its prospects. Positive trend in revenue and profits in the past few years is a sign of a healthy company.

However, investors should be cautious when they see falling revenues and profits. Ratings given by credit rating agencies such as CRISIL and CARE reveal a lot about the company.

Company valuation

It is essential to know whether the shares being offered in an IPO are undervalued or overvalued. If a company is overvalued, there are chances that its shares may drop after it goes public.

Economic analysis

It is essential to check the condition of the global economy as well as the Indian economy before investing. Sometimes the company might be performing well but the general economy might not be in a very good condition. In such cases, investing in IPOs might not be a very good option.

IPO demand

If a company is undersubscribed, it signals that investors do not have much faith in the future prospects of the company. However, this might not always be the case.

For example, the IPO of Infosys was undersubscribed in 1983. However, Rs 9500 invested in the IPO is now worth over 2 crores along with Rs 20 lakh dividend.

Management analysis

A company’s management is the driving force behind any organization. A strong and competent management can turn even a loss-making entity into a profitable one.

Some investors even consider the management of the company to be more important than the products and services of the company. Therefore, it is essential to check the background and experience of the management running the company.

Conclusion

These were some of the key factors to look at before investing in an IPO. 

Investing in an IPO is a great way to earn money in a short period but only if the company is headed in the right direction and shows signs of positive prospects. 

The trend of IPOs in the Indian market is likely to continue for a long period of time. With adequate research and analysis, you can make the most out of them.