What is an IPO?
As the name suggests, an IPO (Initial Public Offering) is the first offering of shares to general public. Prior to an IPO, shares might be offered to a different set of investors such as angel investors, venture capital firms and private equity players. Thus, this is the first time a company approaches folks like us for money.
Why are IPOs conducted?
Companies need funds for their regular operations, expansion plans etc and IPOs allow them to raise loads of equity capital in a distributed manner. Unlike bank loans and other forms of debt, equity is interest free capital for companies.
Who can invest in IPOs?
All Indian nationals who are competent to contract under the Indian Contract Act, 1872, in single or joint names. Ok, in simple terms it means that any citizen of the country, aged 18 years or more, with a sound mind is eligible to contract, provided he/she is not disqualified from contracting by any other law. What this means is that most people with no police or criminal investigations going against them are safe.
One needs a valid PAN (Permanent Account Number) and bank account can invest in IPOs. Parents of minors can also apply on the behalf of their kids under a guardianship account opened for the benefit of a minor. It is important to note that all applicants need to have demat account before applying to IPOs.
What are categories in which IPO allotment applications can be made?
IPO applications are broadly classified in these three categories:
Qualified Institutional Bidder (QIB) – As the name suggests, QIBs are qualified institutional buyers as defined by SEBI’s Issue of Capital and Disclosure Requirements (ICDR) regulations. Generally, 50% of the offer is reserved for QIBs. Typical examples are foreign portfolio investors (FPIs) (other than Category III FPIs), scheduled commercial banks, mutual funds registered with the SEBI, venture capital funds registered with SEBI, foreign venture capital investors (FVCIs), alternative investment funds (AIFs), multilateral and bilateral development financial institutions, state industrial development corporations, insurance companies registered with the Insurance Regulatory and Development Authority (IRDA), provident funds with a minimum corpus of INR250 million, pension funds with a minimum corpus of INR250 million.
Non-Institutional Investor (NII) – This category is a mix of institutional and individual buyers. Generally, 15% of the offer is reserved for this category. Bids in the category need to exceed INR200,000. Typical examples include Category III FPIs, resident Indian individuals, HUFs (in the name of Karta), companies, corporate bodies, eligible NRIs, scientific institutions, societies and trusts.
Retail Individual Investor (RII) – This category is purely meant for small investors, whose bid should not exceed INR200,000 per person. Usually, 35% of the offer is reserved for this category, although companies have started reducing allocation to this category in recent months. Resident Indian individuals, HUFs (in the name of the Karta) and eligible NRIs not falling in the NII category can apply under the RII category. The biggest differentiating criterion between NII and RII is the size of application.
What are anchor investors?
Anchor investors are qualified institutional bidders (QIBs) who are roped in a day ahead of the IPO opening date. Anchor investors are allocated shares up to 60% of the QIB category. One-third of the Anchor Investor Portion is reserved for domestic mutual funds.
What is Application Supported by Blocked Amount (ASBA)?
This is an application mechanism which completely eliminates the need for refunds in the case of partial allotment and no allotment. ASBA allows the investors money to remain with the bank till the shares are allotted after the IPO. The funds are transferred after the allotment and to the extent of allotted shares. Initially, QIBs were not allowed to participate in IPOs through ASBA facility; however, with effect from May 2010, investors in all categories can apply through ASBA. It is important to note that all banks do not offer this facility. A list of Self Certified Syndicate Banks (SCSBs), which is updated regularly, can be found on SEBI website. As on September 2014, there are 57 banks registered with SEBI to act as SCSBs.
To get more details about this feature and how you can benefit from it, visit our Online ASBA FAQ page.
What is meant by Kostak and GMP?
Before an issue lists, trading activity may start in the informal market and both these terms are important benchmarks in the grey market. In grey market trades, shares allotted to IPO applications are sold by brokers without actually transferring the securities to their own accounts. The market is typically driven by high net-worth individual (HNI) investors who direct brokers to purchase applications from investors at a price which is called Kostak. IPO investors who sell their applications at kostak rates are not bothered about the allotment as kostak is not dependent on successful allotment.
GMP stands for Grey Market Premium and it indicates the premium per share on which IPO trades happen in the informal market. GMP is the amount per share which an investor gets from the broker or individual who buy them before listing of the shares which might get allotted in the application.
To get issue-specific GMP and kostak rates, please check out our IPO discussion section.