When a company decides to raise capital from the public through an Initial Public Offering (IPO), it must follow a series of stages. The first step is to appoint bankers or underwriters who oversee the IPO process. These underwriters are crucial in helping the company prepare essential documents such as the Red Herring Prospectus and Registration Statement.
After the company has completed the necessary preparations, it can officially launch its IPO in the market. However, before doing so, the Securities and Exchange Board of India (SEBI) must verify the registration application.
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Once the IPO is officially launched on the stock market and all regulatory requirements have been met, interested investors like you can subscribe to the company's IPO. This allows you to become a shareholder in the company and participate in its growth and success.
Here are a few essential steps you can follow to subscribe for a company’s IPO:
Before subscribing and bidding for an IPO, you must have a bank account and a Demat account with a Depository Participant (DP). You can open a Demat account by submitting documents like your Aadhaar Card, Permanent Account Number (PAN), address, and identity proof.
Once you have a Demat account, it’s time to research the IPO you wish to bid for. You can go through the company’s prospectus available on the SEBI website. Focus on understanding the industry or niche in which the company operates. Identify the company's competitive advantages and factors that set it apart from its competitors. Additionally, pay attention to the company's financial performance, like revenue and margins.
Now that you have your basics ready, you can subscribe for an IPO via a broker or a bank. Every brokerage firm and online trading platform has an IPO page. From here, you can select the issue you want to subscribe to.
Each issuing company sets a lot size. It refers to the minimum number of shares you can subscribe for in an IPO. Lot sizes may vary from company to company. You must provide your bidding details according to the lot size specified in the prospectus. If you want to bid for more shares, you can also choose a multiplication of a lot size.
The maximum amount of subscriptions for retail investors is INR 2 lakh. Subscriptions above this amount are reserved for institutional and Non-Institutional Investors (NIIs).
You can choose to bid or invest at the cut-off price for a lot or a specific number of shares (you can bid at the cut-off price only if you are a retail investor). If you are willing to bid, mention the bid price beside the quantity. The maximum number of bids you can make is three. You will receive your application number and the transaction details once your application is submitted. You need to ensure your bank account has sufficient funds for the application.
You can also subscribe for an IPO offline. All you need to do is submit a duly filled Application Supported by Blocked Amount (ABSA) form along with your Know Your Customer (KYC) details at your respective bank or stockbroker branch. Select the IPO you are interested in, and mention the number of shares and the bid price.
Bidding at the right price is essential. One of the tips you can use here is to bid at the cut-off price. When you bid at a lower price, there are fewer chances of allotment if the cut-off price comes higher. For instance, the price range is 90-100, you bid at 93, and the cut-off comes at 96. You won’t be allotted any shares in this situation.
You should bid at the cut-off price to increase allotment chances, especially when the IPO is oversubscribed. However, since the subscription status is unknown at the bidding stage, your application goes through at the cap price. Any difference between the cut-off price and the application price is given back to you after allotment.
IPOs can be rewarding opportunities for investors. However, you need to understand the IPO process, have the basics ready and apply in the right manner. Make sure you have a trading and a Demat account. The shares are credited to your Demat account once the allotment is made. You can choose to hold or trade them as soon as the trading begins.
At Motilal Oswal, you can open a Demat and a trading account online in a few steps. Reach out to us and start investing in the stock market today!