Have you ever considered how firms are listed on the stock market and how they initially offer shares to the public? The solution is fairly simple: it is done through an Initial Public Offering (IPO).
Let’s learn everything there is to know about IPOs and how to invest in them in the easiest way possible.
IPO Full Form and Meaning
IPO full form is Initial Public Offering. It is the procedure through which a corporation obtains capital from the general public by selling its stock.
The shares are initially issued in the main market through an IPO and then transferred to the secondary market, where they are exchanged between the general public. The After Issue Market is another name for the secondary market.
Learn the difference between a primary and secondary market.
IPO Process
Here’s how the IPO works: The IPO process begins with the selection of a merchant banker, followed by permission from the Securities and Exchange Board of India (SEBI) and listing on the stock exchange. The SEBI regulates the whole IPO process.
Let’s go over the steps a firm takes to get listed on the stock market:
- First, the firm will hire a merchant banker who will assist in all subsequent processes.
- The firm must then obtain first approval from the SEBI.
- The business then develops and submits a Draft Red Herring Prospectus (DRHP) to SEBI. The DRHP is a document that comprises all of the firm’s financial position and statements.
- The number of shares made available to the public, the goal of the IPO, and so on.
- Later, the firm determines the price range, and the IPO is publicized at least two days before the bidding process begins.
- Finally, stockbrokers such as Alice Blue begin to accept public offers.
- After the auction is completed, shares are distributed to the general public. The shares will then be listed on the stock exchange.
Companies that have filed DRHPs with the SEBI can be found here
Types of IPO
Fixed Price Offering: In this form of IPO, the firm sells its stock at a predetermined price.
Book Building Offering: In the book building method, the firm establishes a pricing range. To obtain the shares, investors must bid within a predetermined price range. Learn more about bidding in the sections below.
How to Invest in an IPO?
Alice Blue makes it simple to invest in an IPO. To begin your investment, just follow these simple steps.
- Open a free Demat account with Alice Blue in only 15 minutes. Already have an account!! Then just simply login to Alice IPO.
- Select the IPO for which you wish to apply and put in your offer.
- Once the bid is put via UPI, the UPI App will block cash in your bank account in proportion to the bid (Till the allotment date). If the shares are assigned to you, the money will be deducted from your account; otherwise, the money will be unblocked.
Are you curious about how shares are bid on and allocated? Don’t worry, the next section got you covered.
How Bidding Works in IPO?
When applying for an IPO, you must put a bid within a certain price range. For example, if the IPO’s price range or issue price is between INR100 and INR110 per share, you must submit your offer between INR100 and INR110.
If your bid meets or exceeds the cut-off price, you will obtain the company’s shares. For example, assume the price range is INR100 – INR110, and the cut-off price is INR107.
- You would not receive the shares if your bid was less than INR107.
- You would receive the shares if your bid was INR107.
- If your bid was higher than INR107, you would still receive the shares, and the difference in price between the bid and the cutoff price will be repaid.
After the auction is completed, the shares will be allotted depending on the allotment class to which you belong. Let us look at the various sorts of allotment classifications.
What is Allotment Class?
There are three allocation classes:
- Retail Institutional Investors (RIIs): These are individual investors like you and me. Usually, at least 35% of the issue is set aside for them.
Also, to be considered a Retail Institutional Investor, you must apply for shares valued at INR2 lakh or less.
- High Networth Individuals (HNIs): You will be deemed a High Networth Individual if you apply for shares worth more than INR2 lakhs. Typically, at least 15% of the issue is set aside for them.
- Qualified Institutional Buyers (QIBs): Banks, insurance companies, mutual fund houses, and foreign institutional investors are examples of QIBs. Usually, they get 50% of the issue.
How is the Allotment of Shares Done?
The allocation is based on the total number of shares subscribed. Consider the following examples to better comprehend this:
- Under Subscription: This occurs when the issue is worth INR 100 crores and the subscription is for INR100 crores or less. In this situation, you will receive all of the shares for which you applied.
- Over Subscription: This occurs when the issue is valued at INR100 crores, and individuals subscribe for more than INR100 crores. Oversubscription can be classified into two types:
- Oversubscription by a number of people: For example, suppose the Issue is valued at INR100 crores, and the cost of one lot is INR10,000. As a result, 1 lakh persons can register for the IPO for one lot (100 crores/10000). If more than one lakh buyers apply for the IPO, the corporation will conduct a lottery. The shares will be distributed to the 1 lakh applicants whose names appear in the fortunate draw.
- Oversubscription by a number of lots: Using the above example, individuals can apply for a total of 1 lakh lots (INR100 crores divided by the lot size [100 crores/10000]). So, if 50,000 individuals apply for 2 lakh lots, everyone would receive shares, but some will receive fewer lots than the number of lots they asked for, while others may receive the exact number of lots.
With this newfound knowledge, why wait to put your money into an IPO?
Open your Demat Account with Alice Blue and Start Investing in IPOs in Just a Few Clicks!!!
IPO Examples: Recent IPOs with Highest Listing Gains
Here is a list of the latest IPOs that performed well.
| Company Name | Listing Date | IPO Price (INR) | Listing |
| HariOm Pipe Industries | 4/13/2022 | 153 | 51.0 |
| DCX Systems | 11/112022 | 207 | 49.0 |
| Harsha Engineers | 9/26/2022 | 330 | 47.4 |
| Electronics Mart | 10/17/2022 | 59 | 43.2 |
| Ruchi Soya | 4/8/2022 | 650 | 42.1 |
| DreamFolks Services | 9/6/2022 | 326 | 41.8 |
| Syrma SGS | 8/26/2022 | 220 | 41.1 |
| Campus Activewear | 5/9/2022 | 292 | 29.8 |
| Global Health | 11/16/2022 | 336 | 23.6 |
| Aether Industries | 6/3/2022 | 642 | 20.6 |
Quick Summary
- IPO stands for Initial Public Offering. It is the procedure through which a corporation decides to obtain capital from the public by selling its shares on the main market.
- There are two types of IPOs
- Fixed Price Offering: In this type of IPO, the company offers its shares at a fixed price.
- Book Building Offering: In the book building method, the company fixes a price band. The investors have to bid within the fixed price band to get the shares. Learn more about bidding below.
- Here’s how to invest in an IPO:
- Step 1: Open your free Demat account with Alice Blue in just 15 minutes and log in to Alice IPO.
- Step 2: Choose from the IPO you want to buy.
- Step 3: Place your bid.
- Once bidding is done the shares will be allocated based on the allotment class you belong in. There are 3 allotment classes:
- Retail Institutional Investors (RIIs)
- High Networth Individuals (HNIs)
- Qualified Institutional Buyers (QIBs)
- The allotment depends on the overall shares subscribed and can be understood with the following scenarios.
- Under Subscription
- Over Subscription
- Oversubscription by a number of people
- Oversubscription by a number of lots
