Pocketful

Category: IPO

  • What are Qualified Institutional Buyers (QIB) in an IPO?

    What are Qualified Institutional Buyers (QIB) in an IPO?

    Qualified Institutional Buyers (QIBs) are large financial entities such as mutual funds, banks, and insurance companies that have the expertise and resources to invest substantial sums in the capital markets. As per Initial Public Offering (IPO), the QIBs play a crucial role by buying large blocks of shares and providing the offering with credibility and financial stability. 

    Because of their deep pockets and extensive knowledge of the market, the QIBs are often prioritized by companies issuing the IPOs. Regulatory bodies often set specific criteria for QIBs, ensuring that only those with significant investment experience and financial strength participate in these high-stakes transactions. In this blog, we will give a detailed overview of the Qualified Institutional Buyers (QIBs), eligibility criteria and their advantages and disadvantages.

    Who are Qualified Institutional Buyers (QIB)?

    Qualified Institutional Buyers (QIBs) are a category of sophisticated investors with expertise and financial resources to invest in public issues, particularly during an Initial Public Offering (IPO). The term “QIB” stands for Qualified Institutional Buyers, encompassing entities like mutual funds, pension funds, insurance companies, banks, and foreign institutional investors. These buyers possess the expertise and resources to evaluate investment opportunities and make significant financial contributions to the market.

    In an IPO, companies often reserve a specific portion of shares exclusively for QIBs. This allocation to QIBs not only provides stability to the IPO but also enhances investor confidence, as institutional buyers bring credibility to the offering. QIBs can bid for shares in an IPO without restrictions, unlike individual retail investors, who have limits on investment amounts. Their large-scale investments and institutional knowledge significantly influence the success of public issues.

    To qualify as a QIB, the investors must meet certain criteria outlined by regulatory bodies like SEBI (Securities and Exchange Board of India). These qualifications ensure that QIBs possess substantial financial strength and investment experience, which are essential for high-stakes investments.

    Furthermore, the QIBs must hold a Demat Account and an electronic account that facilitates the buying, holding, and selling of shares. This account is essential for participation in IPOs, as all shares are allocated electronically. In summary, Qualified Institutional Buyers (QIBs) are major players in IPOs, offering financial strength and market confidence and helping companies raise substantial capital for expansion and growth. 

    Read Also: Anchor Investors in IPOs – Meaning, Role & Benefits

    Regulations on Qualified Institutional Buyers

    There are a wide range of rules and regulations governing the QIBs; the most significant regulations are listed below:

    1. Any listed company in the domestic market can place its securities with the recognized QIBs. However, the company cannot raise funds through QIBs if the company does not have equity shares listed on stock exchanges and does not comply with the prescribed minimum public shareholding patterns.
    1. SEBI has comprehensive regulations for the relationship between a company looking to raise funds and its chosen QIB, with strict norms for both allottees and investors. The QIBs linked to the promoters of the company cannot participate in the QIB category.

    QIB – Advantages and Disadvantages

    The advantages and disadvantages of QIBs are listed below:

    Advantages of QIB

    • Accessing the large Investment opportunities: QIBs can invest large sums of money in private placements, IPOs, and following public offerings (FPOs).
    • Better pricing: The companies will prioritize the QIBs as per their financial strength and strategic importance as it will give you favorable pricing with higher allocations in public and private offerings.
    • Risk Mitigation: The QIBs will have a team of experts and analysts who help them in better risk management by conducting the due diligence before investing.

    Disadvantages of QIB

    • Increased Scrutiny: QIBs are under constant regulatory monitoring as per the market regulations, having a significant impact on their investment decisions. 
    • Impact on existing shareholders: QIBs invest large amounts of money, which can dilute existing shareholders’ stake in the company.

    How Qualified Institutional Buyers Work?

    Qualified Institutional Buyers (QIBs) work by leveraging their significant financial resources and investment expertise to participate in public offerings, especially IPOs. These institutional investors, including mutual funds, insurance companies, banks, and pension funds, purchase large blocks of shares and provide the essential capital to companies going public. In an IPO and a reserved quota often around 50% is allocated specifically for QIBs as their investments lend stability and credibility to the offering.

    When bidding in IPOs, QIBs analyze potential returns and risks and leverage their market knowledge to make well-informed investment decisions. Their active participation often attracts other investors, but their substantial shareholding can impact market prices if they choose to sell or adjust their investments. 

    Who is Classified as QIB in an IPO?

    SEBI will establish the standards for all the entities only if they have the necessary financial resources to participate in these offerings. These entities include:

    • Scheduled Commercial Banks (SCBs)
    • Public Financial Institutions
    • Foreign Institutional Investors registered with SEBI
    • Mutual Funds
    • Foreign Venture capital Investors (VCs) registered with SEBI
    • Domestic Venture capital Investors registered with SEBI
    • SIDCs, known as the State Industrial Development Corporations
    • Provident funds with a minimum investment of Rs 25 Crores
    • IRDAI (Insurance Regulatory and Development Authority of India) will provide insurance products in India.

    What are Some of the Advantages that QIBs in an IPO Get to Enjoy?

    Qualified Institutional Buyers (QIBs) enjoy several advantages when participating in an IPO, given their status as sophisticated and financially powerful investors. One primary advantage is the reserved quota for QIBs in many IPOs. Issuers often set aside a substantial portion, typically around 50%, in a book-building IPO exclusively for QIBs. This gives them priority and ensures they can secure large allocations that may not be as easily accessible.

    QIBs are experienced and well-informed about market risks. This flexibility allows QIBs to act quickly and make large transactions efficiently, backed by thorough research and professional insights. Additionally, QIBs wield significant influence in IPO pricing. Their high volume bids often guide the final price as companies and underwriters view QIB participation as a measure of an IPO’s demand. This influence extends to secondary markets as well, where QIB investments bring credibility, attract other investors, and stabilize stock prices. 

    Read Also: What is IPO Subscription & How Does it Work?

    Conclusion

    Qualified Institutional Buyers (QIBs) perform a unique role in IPOs and enjoy significant advantages due to their financial strength and expertise. With priority access to reserved shares and an influence over IPO pricing, QIBs play a crucial role in stabilizing and promoting initial public offerings. 

    Their involvement not only boosts investor confidence but also attracts further investment and benefits both the issuing company and the broader market. These privileges enable QIBs to act strategically and allow them to optimize returns and adapt swiftly to market dynamics, further reinforcing their impact on the success and credibility of IPOs. 

    Frequently Asked Questions (FAQs)

    1. Why are QIBs important in an IPO?

      QIBs bring stability and investor confidence to an IPO as their substantial investments and expertise support the stock’s initial valuation. Their participation often attracts other investors and helps the company raise capital effectively and boost the IPO’s overall success.

    2. What benefits do QIBs receive in an IPO?

      QIBs enjoy reserved quotas in IPOs, priority access to shares, fewer regulatory restrictions, and significant influence over pricing. Their expertise allows them to make large investments efficiently and gives them a key role in shaping the IPO’s outcome.

    3. How do QIBs differ from retail investors in an IPO?

      Unlike retail investors, the QIBs are institutional entities with extensive market knowledge and large capital. They receive a reserved share allocation in IPOs, which retail investors cannot access.

    4. Are there any requirements for becoming a QIB?

      Yes, QIBs must meet certain financial and regulatory standards set by SEBI in India to qualify.

  • What is Grey Market Premium (GMP) in IPOs?

    What is Grey Market Premium (GMP) in IPOs?

    The GMP (Grey Market Premium) is a term used in the context of IPO ( Initial Public Offering) that shows the additional amount investors are willing to pay above the IPO price. GMP indicates investor demand and the considerable value of an IPO from the demand in people and how much they are willing to pay in the grey market. It works as an indicator for how the stock might perform post-listing. The GMP is tracked closely by investors as a tool to understand the market sentiment and potential of stock gains post listing.

    In this blog post, we will understand what is grey market, grey market premium, how it works, and what is essential for investors to know about its role in the IPO market.

    What is the Grey Market?

    The grey market is the unofficial market where the company’s shares are traded prior to the IPO ( Initial Public Offering). This market is not regulated by SEBI or any other legal authority, and transactions in this market occur through brokers or intermediaries. One of the key concepts related to the grey market is the grey market premium (GMP), which reflects the premium or discount at which a company’s share price is traded prior to the IPO. The grey market allows investors to know the potential of a company based on demand and speculation.

    IPO grey market premium is an important indicator for investors, which helps in assessing the performance of an IPO after listing. The GMP of an IPO helps to predict how much higher or lower the stock can go as compared to its issue price. When the GMP is positive, then it suggests high demand. However, the negative GMP indicates the weak market. 

    How Does the Grey Market Work?

    The grey market is an unofficial market and it is not regulated by SEBI or other legal authority. Here,  the shares of an IPO (Initial Public Offering) are traded before the official listing on the stock exchange. Investors and traders in the grey market IPO buy and sell shares through intermediaries or brokers, and the transactions occur outside the formal stock exchanges. One of the key indicators in this market is the Grey Market Premium (GMP), which is the difference between the IPO’s grey market price and its issue price.

    The IPO grey market premium tells about the expected listing price potential of an IPO on the stock exchange. For example, if the GMP of an IPO is positive, it suggests strong demand, and the expectation of the listing price is higher than than the issue price. Whereas, a negative GMP indicates the low interest and the possibility of the listing price is might be  below the issue price.

    The grey market premium IPO is considered a speculative measure and can be volatile as it is driven by market sentiment and demand rather than fundamental factors.

    To participate in an IPO, the investors need a Demat account where the IPO shares will be credited upon allotment. While the grey market offers a glimpse into the potential listing gains or losses, it should not be solely relied upon for investment decisions due to its speculative nature. 

    What is Grey Market Premium?

    Grey Market Premium (GMP) is the unofficial premium or discount at which the IPO shares are traded in the grey market before being officially listed on the stock exchange. It indicates the market sentiment and the potential of an IPO. 

    The IPO grey market premium is the difference between the expected listing price of the IPO and the issue price. For example, if the IPO issue price is ₹600 and an investor is willing to pay an additional ₹200 to get the IPO share. This means that the GMP of the IPO is ₹200 per share. 

    In the above example, we can see the IPO GMP helps predict listing prices; investors anticipate a listing price of ₹800 ( IPO issue price + GMP, i.e 600+200). However, there is no guarantee that the IPO listing price will exactly match the GMP. The GMP is one of the most important indicator that help investors to predict the IPO price.

    What is Grey Market Premium in IPO

    Grey Market Premium (GMP) in an IPO refers to the unofficial premium or discount at which IPO shares are traded before they are officially listed on the stock exchange. It indicates the market’s expectation of the IPO’s listing price as compared to its issue price. A positive GMP suggests high demand and the potential for a higher listing price, while a negative GMP signals weak demand and a potential listing below the issue price. Investors use IPO grey market premium to understand the market sentiment, but it is speculative and does not guarantee the actual performance of the stock after listing. 

    Types of Trading in the Grey Market

    Trading in the grey market involves two main types of transactions, which are buying and selling of the shares before an IPO is officially listed on the stock exchange. These trades are speculative and occur outside the official exchanges through brokers or intermediaries.

    1. Pre-IPO Grey Market Trading

    This type of trading facilitates buying of shares before the IPO is issued. Investors under this segment purchase the shares of an upcoming IPO at a premium, which is known as the grey market premium or GMP, based on the expected market demand. These shares are sold once the IPO opens for listing and it often opens at a higher price if the GMP is positive. The IPO grey market premium gives the investors an idea of the likely listing price.

    2. Post IPO Grey Market Trading

    After the grey market IPO price is set, shares can be traded in the grey market before the official listing. This trading is influenced by investor sentiment. Hence, the investors might get engaged in these trades if they anticipate strong demand after the listing, hoping to profit from a surge in price.

    Both types of grey market trading involve higher risks as prices are not regulated, and the actual performance of the stock post listing can differ from the expected market conditions. Investors require a Demat account to hold and trade the shares once officially allotted. 

    Steps to Calculate GMP of IPOs

    Calculating the Grey Market Premium (GMP) of an IPO involves determining the difference between the expected listing price of the IPO and its issue price based on market speculation and investor sentiment. Here are the steps to calculate GMP:

    • Determine the Issue Price: The first step is to identify the IPO’s issue price, which is the price at which the company offers its shares to the public. This information is provided in the IPO prospectus.
    • Estimate the Expected Listing Price: The expected listing price is based on the grey market, where the IPO shares are traded before the official listing. Brokers or intermediaries provide a rough estimate of the price based on supply and demand, which is usually influenced by the IPO’s popularity and market sentiment.
    • Calculate the GMP: The GMP is calculated by subtracting the IPO issue price from the IPO grey market price. For example, if the issue price of an IPO is ₹100 and the grey market price is ₹120, then the GMP would be ₹20. This represents the premium or price difference.
    • Monitor the Market: The GMP can fluctuate in the days leading up to the listing as it reflects investor sentiment and market conditions. 

    Important Features to Consider About GMP of an IPO

    When considering the Grey Market Premium (GMP) of an IPO, there are several important features that can help the investors to understand the potential performance of the stock:

    • Indicator of Market Sentiment: The GMP of the IPO reflects the investor sentiment and demand for the IPO. A high GMP suggests strong interest and the possibility of a higher listing price, while a low or negative GMP indicates weak demand and the potential for a listing below the issue price.
    • Speculative Nature: GMP is based on speculation and may not always be accurate. Since, grey market trading is unofficial and it also operates outside regulated exchanges, the premium can fluctuate rapidly and is influenced by market factors like investor interest, news, and trends.
    • Timing of GMP: The GMP can change frequently, leading up to the IPO’s official listing. It is important for investors to monitor it closely to understand how market conditions evolve.
    • Risk Factor: Investing based on GMP involves risk as actual performance on the listing day may differ from grey market expectations. GMP does not guarantee success and should be used alongside other research and analysis.
    • Effect on IPO Listing: A positive grey market premium IPO indicates a higher listing price from the issue price, while a negative GMP signals a disappointing market sentiment.
    • Demat Account Requirement: To participate in an IPO, the investors must have a Demat account where shares will be credited upon allotment, making it essential for trading. 

    Risk and challenges in GMP IPO

    Investing in an IPO based on Grey Market Premium (GMP) carries several risks and challenges:

    • Speculative Nature: The GMP of IPO is highly speculative and it is influenced by market sentiment rather than fundamental analysis. Since grey market trading is unregulated, the fluctuations in GMP can be sudden and unpredictable, making it unreliable.
    • Volatility: The grey market premium IPO can drastically lead to high volatility due to investor emotions, news and trends, which can lead to significant losses if the market doesn’t align with expectations.
    • No Guarantee of Profit: A positive GMP doesn’t always translate to gains once the IPO lists. The actual listing price can be lower or higher than expected, leading to unexpected outcomes for investors.
    • Market Manipulation: Since the grey market operates outside official exchanges, there’s a risk of market manipulation where traders may artificially inflate or deflate GMP to create false expectations.
    • Lack of Regulation: Without the oversight of stock exchanges, there’s no protection for investors, making the grey market trades riskier. 

    Read Also: From Private to Public: Decoding the IPO Journey

    Conclusion

    The Grey Market Premium (GMP) offers an IPO with significant risks and challenges. The speculative nature of GMP of IPO is known for its volatility and manipulation, making it an unreliable predictor of the actual listing price. Investors must be cautious when they rely on the grey market premium IPO figures, as they do not guarantee profits. It is essential to research thoroughly so that you can understand the other factors, such as company fundamentals and market conditions, before making investment decisions. A Demat account is necessary to participate in IPOs ensuring the proper share allotment. 

    Frequently Asked Questions (FAQs)

    1. How is Grey Market Premium Calculated?

      The GMP is calculated by subtracting the IPO’s issue price from the grey market price. For example, if an IPO is priced at ₹100 and the grey market price is ₹120, the GMP would be ₹20.

    2. How Accurate is the IPO GMP?

      IPO GMP is based on market sentiment and speculation, so it is not always accurate. While it provides an indication of investor demand, but actual performance may differ once the stock officially lists.

    3. Can I Trade in the Grey Market?

      Yes, you can trade in the grey market through the intermediaries, but it operates outside of official stock exchanges, which makes it risky.

    4. Do I Need a Demat Account to Participate in IPO GMP?

      Yes, you need a Demat account to apply for an IPO, if the shares are allotted to you, It will be credited to your Demat account once the IPO is officially listed.

  • Key Difference Between IPO and FPO

    Key Difference Between IPO and FPO

    Adequate capital is a fundamental necessity for any business to run its operations. Whether a company plans to expand its operations or wants to repay its debts, it raises funds through public offerings through the equity market.

    There are two popular ways to raise funds from the market- Initial Public Offering (IPO) and Follow-up Public Offering (FPO). These mechanisms allow companies to raise capital from public investors, but they serve distinct purposes and have unique characteristics. Understanding the difference between IPO and FPO is crucial for making informed investment decisions.

    Let us understand this in detail through this blog. We will also explore various nuances of IPO and FPO.

    What is an IPO?

    An IPO is a process by which the company sells its shares to the public for the first time. It marks the transition of a private company into a publicly traded entity. Through an IPO, businesses raise capital for various purposes, such as expanding operations, reducing debt, or funding new projects.

    IPO not only helps companies access substantial funds but also enhances their credibility and visibility in the market. Once listed on NSE or BSE, the stock exchanges, the shares are publicly traded, which offers liquidity to early investors.

    Types of IPO

    The three different types of IPOs are:

    1. Fixed Price Issue: In this type of IPO, the company offers its shares at a predetermined share price. Investors can only subscribe to the IPO by submitting their bids at a fixed price.

    2. Book-Building Issue: Book-building issues allow investors to bid within a price range. The final price is determined based on investor demand, providing companies with flexibility and enabling a fair market-based valuation of their shares.

    3. Dutch Auction: It is also known as the Descending Price Auction. The auctioneer starts at a high price and then gradually lowers it until investors place bids equivalent to the total number of shares offered.

    Advantages and Disadvantages of IPO

    Before making investment decisions, it is important to understand the benefits and potential drawbacks of an IPO.

    Advantages of IPO

    • Access to Capital: It is a convenient and effective way to raise funds so that companies can fund their operations and expansion plans. 
    • Market Visibility: Another vital benefit of the IPO is it provides market visibility and enhances the credibility of the firm.
    • Liquidity for Shareholders: Early investors and employees can sell their shares in the stock market after listing. 
    • Potential for Growth: IPOs often attract strategic investors who can drive future success.

    Disadvantages of IPO

    • High Costs: Launching an IPO involves significant expenses, including legal, marketing, and regulatory compliance fees. 
    • Regulatory Scrutiny: Launching an IPO can be a tedious task as companies have to adhere to stringent disclosure norms and reporting standards.
    • Market Volatility Risks: Stock prices are subject to market fluctuations, which may adversely impact the company’s valuation.
    • Loss of Control: Founders and early investors may lose control over the company after an IPO due to the dilution of their ownership stake.

    What is FPO?

    An FPO stands for a Follow-on Public Offer and refers to the process of issuance of additional shares by a company that is already publicly listed. The primary objective of an FPO is to raise additional capital for expansion, debt repayment, or other corporate purposes.

    The Securities and Exchange Board of India (SEBI) verifies the details and approves the FPO Prospectus. All the remaining steps are the same as the issuing of an IPO. For investors, it is easier to analyze an FPO than an IPO as the company is publicly listed, and its financial data for a significant time period is easily available, which can help you anticipate how well the company will use funds raised from the FPO.

    Types of FPO

    FPO can be of two types- Dilutive and Non-Dilutive. Before investing in an FPO, you should understand the two types of FPO. 

    1. Dilutive FPO: In a dilutive FPO, the company issues new shares to the public, which increases the total number of outstanding shares. While this dilutes the existing shareholders’ equity, it provides the company with much-needed funds for growth. On the other hand, it diminishes the share price and decreases earnings per share metric.

    2. Non-Dilutive FPO: It involves existing shareholders selling their stake in the company. This does not change the total number of shares in circulation, and the funds go to the selling shareholders rather than the company. Since it does not affect the number of shares, earnings per share is also unaffected.

    Advantages and Disadvantages of FPO

    Similar to IPOs, the FPOs also come with several advantages and potential challenges. Before making any investment decision, it is advised to keep these points in mind.

    Advantages of FPO

    • Established Track Record: The best part of FPOs is that you get an established track record of a company’s financial performance, which can help you analyze the growth potential of the company.
    • Lower Risk: Considering the above point, FPOs are less risky compared to IPOs as the publicly available data helps in better analysis.
    • Additional Liquidity: FPOs provide an opportunity for the company to increase the number of shares in the market, which increases liquidity.
    • Growth Opportunities: The capital raised through FPOs can be used to fund expansion projects, debt repayment, or other corporate purposes, fostering growth.

    Disadvantages of FPO

    • Dilution of Ownership Stake (in Dilutive FPOs): Issuing new shares increases the total number of outstanding shares, which dilutes the ownership of current investors and reduces earnings per share (EPS).
    • Impact on Market Sentiment: A frequent reliance on FPOs might signal financial instability or a lack of strategic planning by the company’s management to investors.
    • Limited Upside for Non-Dilutive FPOs: In non-dilutive FPOs, funds go to selling shareholders rather than benefiting the company directly.
    • Compliance Costs: Even though the company is already listed, conducting an FPO still involves regulatory, legal, and administrative expenses.

    IPO Vs. FPO

    As mentioned earlier, IPO and FPO are methods to raise funds for a company. The motive behind both of them is the same. However, there are a few differences between them, as mentioned below:

    AspectIPOFPO
    DefinitionIt marks the first instance when shares are issued to the public.Additional issuance of shares by a listed company
    Track RecordNo prior public track record exists as the company is not listed. Only information available in RHP can be used to analyze an IPO.The company is already listed; therefore, a significant amount of information about the company is available for evaluation.
    Risk for InvestorsHigher due to the lack of significant financial data for analysis and no record of share price performance.Lower as investors can evaluate the company’s share performance after the IPO.
    Regulatory Requirement IPOs are subject to more strict regulatory requirements.FPOs involve fewer regulatory requirements as the company is already listed.

    How to Invest?

    Whether you want to subscribe for an IPO or FPO, the process is the same. You need to have a demat account to initiate the process. Besides this, a strategic approach is required to maximize returns and mitigate risks. Open a Demat and trading account with a trusted brokerage platform to apply for shares during the subscription window.

    Assess the financial health of the company, industry position, and growth prospects. For IPOs, review the prospectus to understand their business model and objectives. For FPOs, analyze the company’s recent share performance, past financial statements and reasons for raising additional capital. Keep an eye on market sentiment and set realistic expectations, especially during volatile market conditions. 

    Read Also: Strategies To Boost Your IPO Allotment Chances

    Conclusion

    As an investor, it is important to understand the differences between IPO and FPO to make informed investment decisions and give your money a better chance to grow.

    IPOs are a way by which a company issues shares and gets listed, and FPOs serve as a tool for already listed companies to fund future growth. Each has its distinct advantages and challenges, and the choice between them depends on the company’s objectives and the investor’s risk appetite.

    Frequently Asked Questions (FAQs)

    1. What is the primary distinction between IPO and FPO?

      IPO involves the sale of shares to the public for the first time, while FPO involves additional issuance of shares by an already listed company.

    2. Which is riskier: IPO or FPO?

      IPOs are generally riskier due to the lack of historical data, whereas FPOs are easier to analyze due to the company’s established track record.

    3. Can a company launch multiple FPOs?

      Yes, companies can launch multiple FPOs to raise capital as needed.

    4. Do FPOs always involve the issuance of new shares?

      No, only dilutive FPOs involve the issuance of new shares, whereas, in a non-dilutive  FPO, existing shareholders sell their shares.

    5. How does market sentiment affect IPO and FPO?

      Positive sentiment can drive high demand and better pricing, while negative sentiment can hinder the successful launch of both IPOs and FPOs.

  • ASBA Meaning, Benefits, and Process

    ASBA Meaning, Benefits, and Process

    One way to get good returns on your investment is to invest in Initial Public Offerings (IPOs). However, the process of participating in an IPO needs to be straightforward, easy, and reliable. Previously, investors had to wait three months for their share allotment without earning any interest on the blocked amount. 

    Luckily, this process became more manageable for investors after the Securities and Exchange Board of India (SEBI) introduced the ASBA (Applications Supported by Blocked Amount) in 2008, which became mandatory in 2016. 

    In this blog post, we will delve deeper into the ASBA process, its benefits, its eligibility criteria, and its application process, both offline and online.

    What is ASBA and How Does it Work?

    During the 90s, applying for an initial public offering (IPO) was a challenging process. Investors who wanted to apply for an IPO had to fill out a form and send a check to their banker or broker in a fixed price issue. Additionally, it takes around three months to receive notification regarding the IPO allocation, and applicants didn’t receive any interest on the blocked amount.

     However, the introduction of ASBA, or Applications Supported by Blocked Amount, by the Securities and Exchange Board of India (SEBI) fundamentally changed the IPO application landscape. The ASBA restricts the number of IPO applications exclusively for the duration of the application window. 

    In this case, the money gets blocked in your bank account to the extent of application value and will not be deducted until the shares are issued to you and credited to your demat account. If the shares are not issued to the applicant, the money will get unblocked in their bank account. The exciting part is that you would still be able to receive interest on your blocked amount.  Now, all applications are submitted exclusively via ASBA or Applications Supported by Blocked Amount mode. 

    Benefits of ASBA

    There are many advantages to investing in an IPO through the ASBA procedure; a few of these are listed below:

    • Interest – While applying for an IPO, your fund will be blocked in your bank account, but you continue to earn interest on it, which means you do not lose an opportunity to earn income from the blocked fund.
    • Simple – Applying in IPO through ASBA eliminates the lengthy documentation and payments of cheques, as this process is entirely digital.
    • Easy Refund – If you have not been allotted any shares in the IPO, your money will be unblocked and released into your bank account.
    • Average Balance – To prevent fines for failing to maintain the required balance, the money applied through ASBA is simply blocked in your bank account rather than removed, as different banks determine the average quarterly balance in your account.
    • Transparency – ASBA is a secure process in which an investor personally authorizes to block the amount in their bank account. Both the bank and the Securities and Exchange Board of India oversee the process, which minimizes the risk of fraud.
    • Prompt Action – Through ASBA, one can immediately apply for the IPO, and the blocked amount will be promptly refunded to your bank account. 

    Eligibility Criteria for ASBA

    The eligibility criteria for using the ASBA facility are as follows-

    1. The ASBA process can be used by any individual who is a resident of India.

    2. To use ASBA, an applicant needs to have a Demat account and a Permanent account number (PAN).

    3. Individuals need to have a bank account with a Self-Certified Syndicate Bank (SCSB).

    4. Investors should have sufficient funds in their bank account to cover the bid amount.

    How to Apply for ASBA?

    Investors can apply either online or offline, depending on their preferences. Here are the processes mentioned below: 

    Online ASBA Application method

    Applying for an IPO through the ASBA facility is an easy and faster process; you can apply through Net Banking or your Demat account:

    Net Banking:  An investor can apply through their net banking for an IPO; here are the steps mentioned below-

    •   An investor is required to log in to their net banking application.
    •  Select the IPO section from the listed applications.
    •  You will be redirected to the application form.
    • You need to fill out the required details, including your name, PAN card number, bid price, bid quantity, and the 16-digit unique DP number.
    • Then click on the submit button, and your application will be submitted successfully, and the amount will be blocked in your account.
    • After applying for an IPO through the ASBA process, you can check your application on the NSE or BSE website.

    Demat Account: The other platform on which you can apply through ASBA is as follows-

    • Login to your demat account using login credentials.
    • Once you log into the demat account, go to the IPO section.
    • Select the IPO in which you wish to apply, and enter the bid quantity and bid price.
    • Then, you will be required to enter the details of the bank’s UPI, which is registered with your demat account.
    • You will receive a UPI mandate request in your mobile application after applying.
    • Approve the request received on your mobile UPI app, and after completing this step, your IPO application will be submitted successfully.

    Offline ASBA Application method

    Applying an IPO through an offline method, you need to follow some steps, which are mentioned below:

    • The investor is required to download the ASBA form from the NSE and BSE websites.
    • You need to fill in the details like your name, your PAN card number, Demat account number, bid quantity, bid price, bank account number and Indian Financial System Code(IFSC).
    •  Submit the application form at the Self-Certified Syndicate bank and collect the acknowledge receipt. 
    •  The SCSB will verify your application form and block the bid amount in your bank account.
    • The bank will upload the details to the bidding platform.
    • It’s necessary to ensure that the details provided in the ASBA form are correct to avoid being rejected.

    Can You Cancel an ASBA Application?

    You can cancel your application anytime till the issue is open for bidding. After cancelling the application, your money will be unblocked and will be available the next day.

    Read Also: Apply in IPO Through ASBA- IPO Application Method

    Conclusion

    In conclusion, the Securities and Exchange Board of India (SEBI) made the process of applying for an initial public offering (IPO) much easier, safer, and more transparent in 2008 when it introduced the Applications Supported by Blocked Amount or ASBA method. Retail investors are encouraged and empowered to apply for initial public offerings (IPOs) and take part in the expansion of new businesses. Previously, applying through ASBA was the only option, but now, after 2016, it has become mandatory to apply for an IPO. IPOs contain a lot of risk, so it’s better to consult with your financial advisor before making any investment decisions.

    Frequently Asked Questions (FAQs)

    1. Can I cancel my ASBA IPO application?

      Yes, you can cancel your ASBA IPO application until the issue is open or the IPO application window is open. Once the application window is closed, you cannot withdraw your application.

    2. What is the meaning of a Self-Certified Syndicate Bank?

      Self-certified Syndicate banks are the banks that provide ASBA services to their customers.

    3. Does applying through ASBA increase the chances of allotment of shares?

      No, applying through ASBA doesn’t increase the chances of alloting shares; it only provides simplicity in the process of applying for an IPO and secures your fund.

    4. Is it mandatory to apply for an IPO through ASBA only?

      Yes, as per the SEBI regulations issued in the year 2016, application in IPO is acceptable only through ASBA; no other method, such as payment through cheques, etc., is acceptable.

    5. Can my ASBA application be rejected?

      Yes, your ASBA application might get rejected sometimes because of reasons like insufficient funds in your bank account, multiple applications by the same investor, incorrect information, etc.

  • How to Cancel an IPO Application?

    How to Cancel an IPO Application?

    Companies are going public every week via IPOs, and you may find yourself wanting to invest in several companies. However, when applying for an IPO, you might be wondering if you can cancel your IPO application due to shifting market conditions or any unfavorable information about the firm. Don’t worry, we’ve got you covered.

    In this blog, we will explain the procedure for canceling your IPO application and understand the reasons behind it. 

    What is Withdrawal of an IPO Application?

    Withdrawal of IPO application is the process used by investors who decide they do not want to proceed with their initial application and want to release their blocked funds. An investor applies to purchase shares offered in the IPO. If, for any reason, he later decides not to buy the share, he can easily do so. It must be noted that the IPO application can only be withdrawn before the issue’s closing date. Some investors withdraw their applications due to market sentiment or the grey market premium, which predicts the company’s likely listing profits. 

    IPO Cancellation Rules for Different Investor Categories

    A variety of investors, including retail investors, anchor investors, non-institutional investors, qualified institutional buyers, and others, apply for an initial public offering (IPO). The investor categories are listed below, along with the regulations governing their IPO application cancellation.

    1. Qualified Institutional Buyer (QIB) – QIBs are considered institutional investors who have high capital and cannot cancel their IPO bid.

    2. Non-Institutional Investors (NII) or High Net-worth Individuals (HNI) – These are investors who invest more than two lakhs in an IPO application. They cannot cancel their application, but they can modify their bid. However, they cannot lower their initial bid.

    3. Retail Investors – This is the category of investor who invests less than INR 2 Lakh in an IPO. They can cancel or modify their bid any time before the closing period of the subscription.

    4. Anchor Investors – This is a category of investors who can apply for the IPO before it gets open for the public, and they cannot cancel or withdraw their bid after the allotment of shares because the anchor investor increases confidence in the retail investors about the IPO.

    5. Employee – Employees of a company launching an IPO can apply under the employee quota. If the application size is lower than two lakhs, then they can cancel and modify their applications at any time before the IPO closes.

    Cancellation Process of IPO Application During the Subscription Period

    One may withdraw their IPO application, although the procedure varies depending on the application method. 

    Withdrawing Your IPO Application via ASBA

    If you have applied through the ASBA process, then you need to follow the steps mentioned below-

    1. Login to the mobile application through which you submitted your bid.

    2. Go to the IPO section, and you will find the order book section.

    3. Open the order book and click on the IPO in which you had made the bid.

    4. There, you will find an option to withdraw or cancel your bid.

    5. By confirming it, your process will be completed.

    Withdrawing Your IPO Application via Non-ASBA

    An investor can follow the below steps to cancel their IPO applications if they have applied for an IPO via non-ASBA method:

    1. First, you need to log into the mobile app or the web platform provided by your stock broker.

    2. You need to go to the IPO section and need to select the IPO application in which you want to withdraw your application.

    3. You can choose the option to cancel or withdraw the bid.

    4. Then, you can revoke the UPI mandate to complete the process.

    How to Cancel Your IPO Application on the Pocketful App?

    If you have applied for an IPO through Pocketful, then you need to follow the steps mentioned below to cancel your IPO application:

    1. Log in to your mobile application with your user ID and password.

    2. Then go to the IPO section.

    3. Select the IPO in which you wish to withdraw your application.

    4. There will be an option to cancel your bid; choose the option.

    5. Confirmation will be required, and you need to submit it.

    6. Your IPO application will be canceled.

    Important Points to Keep While Canceling IPO Application

    Before canceling an IPO application there are certain points one should keep in mind before canceling an IPO application-

    1. While canceling an IPO application, nothing will be charged from the investor. Hence, there are no charges for canceling any IPO application.
    2. The bidding process is processed only from 10 AM to 5 PM. Hence, you can cancel your application during this window.
    3. It is suggested that you cancel your bid before the last day, as it may be more stringent on the last day of the issue.
    4. The money blocked in your account might take some time to get back to your bank account as it depends from bank to bank.

    Reason to Cancel an IPO application

    There are various reasons why an investor cancels an IPO application; the major reasons are mentioned below:

    • Market Conditions – If there are sudden changes in market conditions or an increase in volatility in the market, because of this, sometimes the investor cancels their application to avoid loss in IPO.
    • Negative News – Sometimes, the discovery of financial irregularities, legal issues of the company, and weak financial performance will make an investor cancel their IPO application.
    • Valuation – Sometime after the application made by the investor, they came to realize that the IPO was overvalued, which led to the cancellation of applications by the investors.
    • Under Subscription – Low demand for the IPO will decrease confidence among the investors, forcing them to cancel their applications.
    • Peer Comparison – When comparing the company’s performance with its peers, it will result in the cancellation of IPO applications by the investors.

    Read Also: Why Invest in an IPO and its Benefits?

    Conclusion

    In conclusion, there are no fees if you choose to withdraw your IPO application prior to allocation, and the cancellation process is now completed online, making it simple for investors of all stripes. However, before withdrawing the application, you as an investor must weigh all the facts; your choice should be well-reasoned rather than hasty. But before investing in IPOs, one needs to think about their risk tolerance. 

    Frequently Asked Questions (FAQs)

    1. How can you cancel an IPO application before allotment?

      To cancel an IPO application, an investor has to log in to their Demat account, go to the IPO section, open the order book, select the IPO in which they wish to cancel their application, select the option to cancel or withdraw their bid and confirm their selection, and then your IPO application will be canceled.

    2. Are there any fees to be payable when canceling an IPO application?

      No, there are no fees payable while canceling any IPO applications. However, it should also be noted that no fees or charges are payable while submitting IPO applications.

    3. Can I withdraw my IPO application in parts?

      No, partial withdrawal is not allowed in IPO applications because IPOs are issued in an equal market with lots of shares.

    4. When can I cancel my IPO bid?

      You can easily cancel your IPO bid before the closure of the IPO subscription window; however, if the subscription period is over and the allotment has not been completed yet, then in this case, you may submit a request for cancellation of your bid to the registrar.

    5. What is the maximum amount an investor can apply under the retail quota?

      Up to 2 lakh is the maximum amount under which a retail investor can apply for the IPO.

  • What is the IPO Allotment Process?

    What is the IPO Allotment Process?

    An initial public offering (IPO) is a significant event for a company as it is a process by which the company offers its shares to the public for the first time. IPO investing has been quite popular among investors, and if you intend to invest in one, you must be aware of the regulations governing the distribution of shares in an initial public offering (IPO).

    In this blog, we will give you an overview of IPO allotment rules and explain how these shares are allocated.

    IPO Allotment Rules

    A corporation must launch an initial public offering (IPO) to offer its shares to the general public when it wishes to go public. In India, the Securities and Exchange Board has established various rules that a company must follow to issue its shares to the general public. 

    The rules related to IPO are mentioned below.

    1. The Registrar oversees the allotment of IPO shares in consultation with the registered stock exchange.
    2. The allotment of IPO depends on the number of shares the company offers and the investor’s bid.
    3. There are different categories of investors, such as Retail, NII and QIB; however, the rules are different for different categories.
    4. Only valid applications are accepted for the allotment. Applications with incorrect information, such as an invalid demat account number or multiple applications using the same PAN card, are rejected.
    5. Applications made at or above the cut-off prices are considered for allotment in the book-building process.
    6. Oversubscription in a particular category can be adjusted with the undersubscription of another category with the consultation of the lead manager, exchange, etc.
    7. The registrar prepares and publishes a document that states the basis of allotment.

    How are IPO Shares allotted?

    The allotment of shares in an IPO takes several steps, a few of which are mentioned below-

    1. Process of IPO Application – Investors apply for an IPO through a bidding process within a specific price range through the ASBA (Application Supported by Blocked Amount) process.

    2. Categories and Reservation – Shares are reserved for different categories of investors, such as retail, NII and QIB.

    3. Allocation – After the categorization of investors, the shares are allocated to them based on the bid information.

    4. Finalization – Once the IPO is closed for subscription, the shares are allotted to the successful bidder based on SEBI guidelines.

    5. Debit of Amount – The shares are allotted or credited to the investor’s demat account, and the amount is debited from the investor’s bank account.

    6. Refund – For applicants who do not get any shares, the amount reserved for IPO application is unblocked.

    7. Communication – The proper communication is made to the successful investor and the shareholders who do not get any shares.

    Procedure for Allotment of Shares in IPO

    Let’s look at a firm called ABC Limited that issued 10,000 shares and then split those shares into lots of 50 shares. This refers to there being 200 lots overall, and an investor may apply for more than one lot. Various subscription scenarios are mentioned below. This can lead to several results, some of which are listed below: 

    1. Under Subscription – This situation occurs when the investor’s bids for IPO shares are less than the total number of shares issued by the company. Since more shares are available, each investor is allotted shares for which they applied. 

    2. Oversubscription – Oversubscription of shares occurs when the total number of shares applied for by investors exceeds the number of shares the company is offering. For this scenario, the Securities and Exchange Board of India (SEBI) establishes the rules that govern the distribution of shares to investors.

    3. Small Oversubscription – Every investor with a valid application receives one lot if there is a slight oversubscription, and the remaining lots will be distributed proportionately. 

    4. Large Oversubscription – According to the rules established by the Securities and Exchange Board of India, the lottery mechanism will randomly distribute the shares to investors and at least one lot to each bidder in the event of a very high oversubscription.

    IPO Allotment Calculation

    Based on the subscription data, the IPO shares are distributed. The two probable scenarios are listed below.

    • Undersubscription – All successful bidders are given shares in the event of undersubscription, and each bidder receives the quantity of shares they requested. 
    • Oversubscription – Oversubscription of shares is a situation when the total number of shares applied for by investors exceeds the number of shares the company is offering. Two techniques will be used to distribute the shares to the investors: the lottery system and proportionate distribution. 
    • Proportionately – Under this method, the shares are allotted to the investor proportionately. If an investor has applied for 100 shares and the IPO has been subscribed 20 times, then each investor will receive 5 shares.
    • Lottery System – Under the lottery method, a random applicant who has applied for the shares at or above the cut-off price is selected.

    Important Aspects of IPO Allotment

    The process of IPO allotment involves various steps to keep the process transparent; below mentioned are the major aspects of IPO allotment-

    • Categorization – The applicants are categorized into retail, QIB or NII, and each category has a reservation in the IPO.
    • Allotment – The shares are allotted to the investors based on the subscription status, such as oversubscription or undersubscription.
    • Market Lot – The total issue will be divided into lots, which represent an equal number of shares and an investor is required to apply in multiples of the lot size.
    • ASBA – An investor can bid for an IPO only through ASBA or an Application Supported by the Blocked Amount, a mechanism in which the application amount is blocked in the investor’s bank account.
    • Communication – Once the allotment is finalized, a message is sent to the investor by the registrar through mail or SMS.
    • Credit of Shares – The investors to whom the shares are allotted receive shares in their demat account. 

    Reason for no Allotment of Shares

    There can be various reasons why investors might not get any shares in an IPO. Some of these are listed below.

    • Oversubscription – In case of high demand for shares during the IPO, the chances of receiving an allotment decrease.
    • Computerized Lottery System – In case of oversubscription, the shares are allotted through a lottery system. In this case, if you are not selected for the allotment, you will not receive any shares.
    • Error in Application – If you have made an error such as wrong PAN Card details or an incorrect Demat account number while submitting the IPO application, then your application will be rejected, and you will not be allotted any shares.
    • Multiple Applications – As per the regulations issued by the Securities and Exchange Board of India, if you have submitted multiple applications using the same PAN details, your IPO application will be rejected.
    • Low Bid Amount– If you have submitted your application with a bid amount below the cut-off price, your application will be rejected and will not be considered for allotment.

    Read Also: Aadhar Housing Finance: IPO And Key Insights

    Conclusion

    To sum up, investors must comprehend the IPO allocation regulations before applying for an IPO. The SEBI has several regulations regarding the IPO process. Investors are categorized into different categories, with a reservation for each category in the IPO. If the IPO is undersubscribed, each applicant is allotted shares for which they applied. On the other hand, if the IPO is oversubscribed, shares are either allotted proportionately or through a lottery system. You must speak with your investment advisor before investing. 

    Frequently Asked Questions (FAQs)

    1. What could be the possible reason for the non-allotment of shares?

      Several factors can lead to the non-allotment of shares in an initial public offering (IPO), but the two main reasons are multiple applications from the same PAN number and oversubscribed IPOs.

    2. How long does the IPO allotment process take?

      The IPO allotment process takes around seven days, during which the registrar allots shares to the successful bidder.

    3. How can we increase the chances of getting an IPO allotment?

      You can improve your chances by applying through multiple demat accounts registered under different PAN cards and submitting the IPO application at the cut-off price.

    4. Are IPO shares allotted on a first-come, first-served basis?

      No, IPO shares are not distributed on a first-come, first-served basis; instead, the distribution procedure is based on the subscription status of an IPO. A computerized lottery procedure will be used to finalize the allocation if the IPO is oversubscribed, and each investor will receive the shares they applied for if it is undersubscribed.

    5. How do you check if an IPO is allotted or not?

      You can check the IPO allotment status by visiting the registrar’s website and entering relevant information.

  • Greenshoe Option – Meaning, Types, Example and Benefits

    Greenshoe Option – Meaning, Types, Example and Benefits

    The Indian stock market has witnessed many IPOs recently, with most of them generating huge listing gains. However, huge price increases can cause instability in the financial markets and attract new investors to buy shares near the top. Conversely, an IPO can perform poorly on the listing day, causing panic among investors. This is where the concept of a Greenshoe Option comes in. 

    In this blog, we will walk you through the concept of the Greenshoe Option, its types and how it works.

    What is the Greenshoe Option?

    The term “Greenshoe option” is derived from Greenshoe Manufacturing, the first company to use this price stabilization mechanism during its IPO in 1960. It tackles the issue of excess demand for shares and prevents steep price increases once they are listed on a stock market. This option allows the investment banks or underwriters to sell more shares than initially intended, up to 15%. On the other hand, the Greenshoe option also allows underwriters to support the share price by repurchasing the shares at the proposed price if the IPO has not been fully subscribed. 

    In 2003, the Securities and Exchange Board of India introduced this option for IPOs. The choice benefits the market, investors, underwriters, and businesses. With these choices, businesses can rest assured of their share’s performance on the listing day. This improves investor confidence and makes the IPO more appealing to potential investors. 

    Types of Greenshoe Options

    There are three types of Greenshoe options, and each one uses a unique method to keep prices stable: 

    1. Full Greenshoe Option – In the event of high demand, the Full Greenshoe option allows underwriters to purchase an additional 15% of the shares originally offered from the issuer at the predetermined price. The underwriter then sells these shares in the market at a profit and tries to control the steep price rises. This also helps in increasing liquidity.

    2. Partial Greenshoe Option – In this type, the underwriters can issue more than the shares initially offered but don’t issue the maximum number of shares permitted, i.e., 15%. The underwriters buy additional shares, less than 15% of the issue size, from the company and sell them in the stock market to control excess demand.

    3. Reverse Greenshoe Option – The underwriters use this option to protect against sharp declines in share prices on the listing date. In this option, underwriters purchase the shares from the stock market and sell them back to the issuer company at the offer price. 

    How Does the Greenshoe Option Work?

    Below are the steps through which a Greenshoe option works-

    1. Commitment of Underwriter – The underwriters decide to buy a certain number of shares from the firm that is issuing them at a specific price. 

    2. Initial Public Offer – Following that, during the IPO process, the underwriter sells these shares to the general public. 

    3. Demand for Shares – Following the listing, stock prices may rise with higher demand for the shares. 

    4. Using the Greenshoe Option – The underwriters choose this option to stabilize the excessive price fluctuations because it enables them to buy more shares from the company at the initial issue price. These shares are then sold to the public, increasing the supply of shares and lowering prices.

    Greenshoe Option Process

    Below is a description of the entire Greenshoe option procedure.-

    1. Agreement – To enable them to sell an extra 15% of the entire issue if demand for shares surpasses expectations, the firm issuing the shares appoints an underwriter and enters into a contract with them. 

    2. Setting Conditions – In this phase, the business determines the IPO price and the quantity of shares to be distributed. 

    3. Exercising the Greenshoe Option – Underwriters exercise the Greenshoe option and sell their 15% excess shares over the allotted size when the stock price increases; if the stock price falls, they repurchase shares from the market to make up for the over-allotment.

    4. Price Stabilization – There will be a stabilization phase of 30 days after the company’s stock is listed on the exchange and trading starts, during which the underwriters watch the stock price. The underwriter sells more shares if the share price continues to be higher than the IPO price. 

    Example of Greenshoe Option

    Greenshoe options come in many forms, some of which are listed below-

    1. Uber – Because of the extreme market volatility in 2019, Uber’s underwriter used the full Greenshoe option to stabilize the share after listing. 

    2. Alibaba – Alibaba, a Chinese firm, launched one of the biggest initial public offerings (IPOs) ever in 2014. To handle the overwhelming demand for shares, the underwriters used the Greenshoe option. 

    The aforementioned instances demonstrate that the Greenshoe option is a crucial instrument for controlling share price volatility to benefit investors and the business. 

    Benefits of the Greenshoe Option

    The major benefits of Greenshoe options are as follows –

    1. Benefit for Issuing Companies – The major for companies issuing IPO and using the Greenshoe option are as follows-

    • Price Stability – The business can keep its share price stable during the initial trading phase by using the Greenshoe option. 
    • Reduces the Risk – The Greenshoe option assists the business in lowering the risk associated with a stock price correction. 
    • Increase Capital – By choosing this option, the businesses can raise more money to finance their expansion. 
    • Increase Investor Participation – A successful initial public offering (IPO) boosts investor trust and draws in additional investors. 

    2. Benefits for Underwriters – The major benefits of the Greenshoe option for underwriters are as follows-

    • Mitigation of Risk –They can support the share price by using the reverse Greenshoe option.
    • High Profit – After the listing of shares, if the share prices rise, the underwriters can increase their profits by selling the additional shares at a higher price offered in the market.
    • Goodwill – If an underwriter has a good reputation regarding post -IPO share price stabilization, more companies will appoint them as their underwriter, increasing their business.

    Read Also: Green Hydrogen Industry in India

    Conclusion

    To sum up, the underwriter uses the Greenshoe option as a key instrument to keep the price of shares stable after listing. This option allows underwriters to issue additional shares in the market to tackle excess demand, which controls sharp price increases. On the other hand, the option also allows them to purchase shares and sell them back to the issuer at the offer price to control sharp share price declines. A 15% limit is set under the Greenshoe option in India. Before making any investment decisions, you are advised to speak with your investment advisor.  

    Frequently Asked Questions (FAQs)

    1. How can a Greenshoe option help an investor?

      The Greenshoe option helps stabilize the stock price and protects investors from extreme price fluctuations.

    2. How many shares can an underwriter sell with the Greenshoe option?

      According to the Securities and Exchange Board of India’s regulations, an underwriter may purchase up to 15% more shares at the offer price from the issuer if the demand seems to rise. 

    3. What is the meaning of the Greenshoe option?

      Once a stock is listed on the stock exchange following an issuance, the Greenshoe option offers price stability. By using this option, the underwriters attempt to manage the stock price volatility by adjusting the supply of shares.

    4. How many types of Greenshoe options are there?

      There are three different kinds of Greenshoe options: Full, Partial, and Reverse Greenshoe options.

    5. What is the stabilization period for the Greenshoe option?

      The stabilization period for the Greenshoe option is thirty days. During this time, the underwriters monitor the stock price and may buy or sell shares to prevent excessive volatility by using the Greenshoe option.

  • Apply in IPO Through ASBA- IPO Application Method

    Apply in IPO Through ASBA- IPO Application Method

    Investing in Initial Public Offerings (IPOs) remains one of the most popular ways to create wealth and diversify investment portfolios. Investing in an IPO allows individuals to take an ownership stake in companies during its initial phases or just before it uses the funds raised in the IPO for future growth. However, applying for IPOs can be challenging, particularly if you are new to the stock markets. That is where the Application Supported by Blocked Amount (ASBA) comes into the picture. ASBA is a SEBI-approved mechanism that simplifies the process of applying in IPOs.

    This detailed guide outlines the basics of an IPO, how ASBA works, and its advantages. Whether you apply for an IPO online or offline, this guide will provide the steps and tips to ensure a smooth investing experience.

    What is an IPO?

    IPO refers to the first time the shares are offered to the general public by a private company. This makes it possible for a company to raise capital from the general public and make it a publicly traded company on the stock exchange.

    Why Do Companies Launch IPO?

    Different reasons why companies launch an IPO are mentioned below:

    • Capital for Growth: Companies use IPO proceeds to expand operations, invest in new projects, or pay off debt.
    • Enhance Market Position: An IPO increases the visibility and credibility of a company in the market.
    • Liquidity for Founders and Early Investors: IPOs offer an exit opportunity for early investors or founders wishing to liquidate part of their stake.

    Advantages to Investors

    The advantages of IPOs to investors are listed below:

    • Equity Ownership: Investors have an opportunity to buy shares in a company with good future growth prospects.
    • Strong Returns: In most cases, an IPO can result in significant listing day returns. This is particularly true if the company has priced its shares lower than the actual value to attract more investors and cause oversubscription.
    • Regulated Process: SEBI’s oversight ensures fair pricing and transparency in the IPO process.

    How to Apply for IPO Online & Offline

    Applicants can submit IPO applications either online or offline, as it suits the applicant. Let’s divide each into detail.

    Online Application for IPO

    Today, the method of applying for IPOs online has received an excellent response primarily because of its convenient and speedy application process. Here is a step-by-step guide for online application.

    1. Open a Demat Account

    A Demat account is essential for filing IPOs because it stores shares electronically if the shares are allotted to the investors. 

    2. Log in to Your Trading Platform

    Login to your broker’s trading platform, through which you access the IPO section.

    3. Select an IPO & Enter 

    Look for the IPOs open for subscription. Based on your analysis, select the IPO you wish to apply for. Select the investor category and enter the number of lots you wish to apply for.

    4. Submit ASBA request

    Enter the UPI (Unified Payments Interface) ID. You will receive a request to approve the ASBA request.

    5. Authorize Fund Blocking

    Authorize the ASBA request to block funds in your bank account. The funds are only blocked and not debited until shares are allotted. 

    6. Track Your Application

    You will be able to track the status of your application from your trading account and the registrar’s website.

    Offline IPO Application

    Here is the process an individual can follow to apply for IPOs offline.

    1. Get the IPO Application Form

    Get this form from the nearest branch of your bank.

    2. Fill up the Form

    Fill out the IPO application form with the required details, such as a Demat account, PAN card, and bid information. Provide the bank account number or UPI ID you want to use for the ASBA process.

    3. Submit the Form

    Sign the mandate instructing the bank to block the amounts in your bank account and submit it along with the IPO application form. 

    4. Confirmation and Tracking

    Once submitted, receive an acknowledgment slip from the bank branch. Track the status of your application using the reference number on the slip.

    What is ASBA?

    Application Supported by Blocked Amount (ASBA) is a mechanism introduced by SEBI to facilitate the IPO application process. In this mechanism, the applicant does not need to transfer any money when applying for the IPO. Instead, the money stays in the bank account but remains blocked for the IPO application.

    Key Features of ASBA

    The key features of the ASBA mechanism are:

    • Funds are Blocked in Your Account: The amount required, according to the bid information in the IPO application, gets blocked, but it continues to earn interest in your savings account.
    • No Withdrawal till Allotment: Funds get debited only if shares are allotted.
    • Refund Without Delay: If no shares are allotted, the blocked amount is automatically released.
    • Transparency: The ASBA process is secure as no amount is deducted from the bank account.

    Eligibility to Apply for IPO Through ASBA

    To apply for an IPO using ASBA, you must have all the following:

    • Valid Demat Account: You must have a Demat account wherein your shares will be held in electronic form.
    • Bank Account with ASBA Services: Your bank should have ASBA services. Most of the big banks operating in India support ASBA.
    • PAN Card: Applying for an IPO requires a valid PAN card.
    • Sufficient Funds: Your account should have sufficient funds required to apply for an IPO.

    How to Apply for IPO through ASBA (Online and Offline)

    Online Process

    • Login into your broker’s trading platform.
    • Navigate to the IPO section and select the desired IPO.
    • Fill out the details related to bid price, quantity, investor type, etc., and submit the UPI ID.
    • Approve the ASBA request for blocking funds in your bank account and monitor the status of your IPO application.

    Offline Process

    • Visit the nearest branch of your bank and collect the IPO application form.
    • Fill out the form with details related to the bid price, quantity, Demat account number, etc. Approve the mandate that allows your bank to block the funds required for IPO applications and submit them at your bank’s branch.
    • Upon submission, the bank verifies the credentials and blocks funds in your bank account.
    • Obtain an acknowledgment slip, which can be used to track your IPO application.

    Advantages of Applying through ASBA

    The advantages of applying for IPO through ASBA are:

    • Interest on Funds: The blocked funds in your bank account earn interest until shares are allotted. 
    • No Refund Hassles: Before ASBA was introduced, investors had to wait for refunds in case of non-allotment of shares as amounts were deducted at the time of application. In ASBA, the funds are released immediately as they were only blocked in the bank account. 
    • No Additional Charges: ASBA applications do not have extra processing fees.

    Read Also: ASBA Meaning, Benefits, and Process

    Conclusion

    Applying for an IPO through ASBA is a safe and hassle-free process, wherein your money will be blocked until the shares are allocated. Moreover, investors don’t have to wait for a refund if the shares are not allotted and the funds continue to earn interest in their bank accounts. It is a SEBI-approved process that ensures hassle-free IPO investments. 

    Whether applying for an IPO online or offline, ASBA has been a key component in the IPO application process due to its reliability and convenience. As IPOs witness a rise in participation by retail investors, ASBA has become a preferred method of payment in IPO applications.

    Frequently Asked Questions (FAQs)

    1. What is ASBA in an IPO?

      ASBA stands for Application Supported by Blocked Amount, a mechanism introduced by SEBI that permits applicants to apply for an IPO by blocking application amounts in their bank accounts. In this scenario, the funds are safe and deducted only from the applicant’s account when the shares are allotted.

    2. Can I apply for an IPO without a Demat account?

      Investors require a Demat account to apply for IPOs. The Demat account stores stocks in electronic form if the investor gets allotted shares.

    3. ASBA or UPI: Which is better for an IPO?

      ASBA doesn’t require investors to have a smartphone, and thus, it allows offline IPO applications. On the other hand, UPI offers convenience as investors can easily apply for IPOs through mobile apps.

    4. How would I know the status of my IPO application?

      You can track the status of your application by entering your details on the registrar’s website.

    5. Can an IPO application form be canceled or modified?

      Retail investors can cancel or modify their IPO bids. However, QIBs and NIIs can only increase their bid and are not allowed to cancel their IPO applications.

  • What is the IPO Cycle – Meaning, Processes and Different Stages

    What is the IPO Cycle – Meaning, Processes and Different Stages

    The process of going through an IPO is key for any private companies looking to raise funds and get listed on the stock markets. The IPO process is sometimes referred to as the IPO cycle. However, the IPO cycle is very complex and includes many processes that involve different regulations, financial disclosures, and compliance. Understanding the IPO cycle is a necessity not only for companies but also for potential investors when making investment decisions. 

    This blog provides an extensive overview of the IPO cycle, its stages, advantages, and potential drawbacks.

    What is an IPO?

    IPO, short for Initial Public Offering, refers to the process by which a private company issues or offers shares to the public and consequently becomes an entity listed on the stock exchange. The main reasons why companies go public include raising more capital that can be used for expansion, debt repayment, research, and development. By launching an IPO, a firm offers the general public an opportunity to become shareholders and become part of the future growth of the company in exchange for their investment. On the other hand, an IPO also gives early investors the chance to get their investments back.

    The process of an initial public offering consists of many sub-processes with clearly defined responsibilities of the company, underwriters, regulators, and stock exchanges. The company seeking to launch an IPO must disclose its financials, business operations, and risks in the form of a prospectus, which is reviewed and approved by regulatory authorities, ensuring compliance with applicable standards. This public disclosure would offer potential investors insights into a company’s operations, thus ensuring that they make informed investment decisions.

    What is the IPO cycle?

    The IPO cycle consists of all the stages ranging from when the firm first considers going public to getting listed on a stock exchange. Stages of the cycle include preparation of prospectus, regulatory filing, pricing, and listing. All of these stages are very important and must be undertaken in compliance with the regulatory standards.

    A well-structured IPO cycle ensures that it meets regulatory requirements and provides transparent disclosures to those investors who want to invest in it, establishing credibility and market value for the company before its shares hit the stock markets.

    Different Stages of IPO Cycle

    The IPO cycle consists of various stages, and all these stages are essential for a successful IPO. Let’s understand each stage in detail.

    Pre-IPO Stage or Preparation

    • Financial Data: The company assesses its financials to ensure that it meets all the accounting standards and is in good financial health to pass the regulatory tests. In this stage, auditor appointments and amendments in financial practices for transparency have been observed.
    • Restructuring: The company may restructure its business model by reducing debt, settling legal disputes, focusing on productive segments, or starting new ventures that would increase its attractiveness to investors before IPO.
    • Hiring of Underwriters: Underwriters can be investment banking companies. Underwriters are hired by the companies to look after the processes of an IPO. They take responsibility for determining company value, setting the IPO price, and getting investors to participate in the IPO.

    Regulatory Filing and Review: Draft Red Herring Prospectus or DRHP

    • Preparation of DRHP: The company prepares, in consultation with underwriters and legal counsel, a draft red herring prospectus or DRHP. A DRHP is a document consisting of information about the business, financial information, management, risks, and other important information.

    The DRHP document is submitted to the regulatory authority for approval. The regulator ensures that the information in the document complies with all the relevant regulations. In India, once the DRHP is approved by SEBI, it is finalized into the Red Herring Prospectus (RHP). RHP serves as an important document for investors when making decisions about whether to invest in an IPO or not. 

    Roadshow and Marketing

    • Roadshow Events: A roadshow is a series of presentations and meetings during which company representatives and underwriters pitch the opportunity to invest in the IPO to potential investors. This stage is important in building investor interest and garnering feedback.
    • Building Interest: This stage helps the company determine investor sentiment and adjust its IPO strategy if needed. Investor demand can significantly affect the IPO price and the number of shares to be issued.

    Pricing and Allocation

    • Determination of IPO Price: After the roadshow, the company and the underwriters determine a price for the shares issued in an IPO. The price is determined by the investor demand, market sentiment, and future growth potential of the company. Determining the optimal IPO price is, therefore, crucial because it affects the capital-raising activities of a company.
    • Allocation of the Shares: There are different categories of investors, each with a reserved quota in the IPO. If the IPO is not fully subscribed, each investor gets the number of shares one has applied for. On the other hand, if the IPO is oversubscribed, investors are allocated shares by lottery method. However, the minimum shares allotted and lock-in period vary across different investor categories.

    Listing on the Stock Exchange

    • Going Public: On the scheduled listing day, shares issued by the company are listed on the stock exchange, and the trading commences. Investors who didn’t get an allotment can buy shares or sell their allotted shares on this day, which can cause price fluctuations.
    • Post-IPO Stabilization: The lock-in period for anchor investors ensures the stock price gets some stability during the initial post-listing phase.

    Benefits of an IPO to a Company

    The benefits of launching an IPO for a company are:

    • Capital Raising: Companies, through an IPO, raise significant amounts of capital to expand the business, settle debts, or conduct research and development.
    • Public Profile and Credibility Increases: The IPO enhances the company’s profile and credibility, which helps attract talent, build customer trust, and create partnerships.
    • Liquidity to Early Investors: The IPO enables early investors to sell their shares in the open market. 
    • Expansion: Companies can acquire other businesses by using the funds raised from IPO and hence expand their market share.

    Drawbacks of Going Through an IPO Cycle

    The various disadvantages of going through an IPO cycle are:

    • Significant Costs: The process of launching an IPO is very expensive as it costs money to hire underwriters and legal consultants.
    • Regulatory Compliance/Restrictions: Public companies are required to follow strict regulations and report financials at regular intervals, which requires a dedicated accounting and compliance team, thus increasing operational costs.
    • Short-term Focus: Shareholders seek continual quarterly performance, thus creating short-term pressures and it may inhibit the long-term objectives of the company.
    • Loss of Control: Owners may lose some control over the decisions of the firm due to the influence of other shareholders.
    • Market Volatility: Stock prices can experience market fluctuations, which impacts the company’s market capitalization and investor sentiment.

    Conclusion

    The IPO cycle is a complex but very rewarding process by which companies raise money from the general public and get listed on the stock exchange. However, the process is cumbersome and involves many sub-processes, ranging from the decision to launch an IPO to seeing its share trading on the stock exchange. It can take anywhere between 3 months to 12 months to get through the IPO cycle, based on company preparedness, regulatory processes, and market conditions. Companies should thoroughly compare the benefits and challenges involved in the IPO cycle before going through the IPO cycle.

    Frequently Asked Questions (FAQs)

    1. What is an IPO cycle?

      The IPO cycle is the step-by-step procedure a private company has to adopt to become a publicly listed company. The IPO cycle involves the preparation of documents, regulatory filing, pricing and listing.

    2. Why do companies go through the IPO cycle?

      Companies opt for an IPO to raise funds, gain more visibility and ensure liquidity for their early investors. The funds can support future growth and expansion in the days to come.

    3. Is a Demat account required to invest in IPOs?

      Investors need to have a Demat account to invest in an IPO, as it will store the shares allotted to the investors.

    4. What are the main phases of the IPO cycle?

      The primary phases of an IPO cycle include pre-IPO preparation, regulatory filing, road show, pricing, and listing on the stock exchange.

    5. Are there any disadvantages of going through an IPO cycle?

      Launching an IPO can be expensive due to the costs involved in hiring underwriters, preparing marketing materials, and meeting higher regulatory requirements.

  • What is Face Value in an IPO?

    What is Face Value in an IPO?

    Investment in an IPO has been extremely popular among new investors entering into the stock market. In order to make good investment decisions and make consistent returns in the market, it is quintessential to know key terms associated with an IPO, such as “face value.” In an IPO, face value defines the original nominal value of each share. It is also known as par value.

    In this blog, we will explain face value in an IPO, how shares are sold at face value, and how to calculate face value, which will help you clearly understand the importance of face value while investing in an IPO.

    What is an IPO?

    An Initial Public Offering, or IPO, is the process through which a private company offers its shares to the public for the first time. Companies go public for one or more of these reasons: to raise funds to further grow the business, pay off some debt, or for other strategic purposes. The investors attempt to become partial owners of the company and have a chance to profit if the company continues performing well.

    The IPO shares are traded on the stock exchanges and, hence, accessible to the general public. To invest in an IPO, the investors would need a Demat account, which is an electronic account that lets investors hold and manage securities. For the companies, the process involves seeking regulatory approval and determining the issue price and the face value of shares with the help of investment banks.

    What is the Face Value of an IPO?

    Face value refers to the fixed base price assigned to every share of the company. Unlike the market price, which changes continuously after the IPO, face value is constant and reflects the base accounting value of a share.

    For instance, if there are 1,00,000 shares outstanding and the equity share capital of the company is INR 10,00,000, then the face value of the shares is calculated by dividing the equity share capital by the total number of outstanding shares. The face value of shares in the above example is equal to INR 10.

    Face value is different from the trading price of the share at a stock exchange. The trading price depends on market demand and the performance of a company; however, face value is a constant number used for accounting purposes and even for ascertaining dividends.

    How Shares are Sold at Face Value?

    In an IPO, the face value for the shares issued by the company is fixed at values such as INR 1, INR 10, etc. The price of the shares credited to the Demat account of the investors includes a premium over the face value, which is calculated by the underwriters based on the expected market demand, current market sentiment and the company’s past financial performance.

    Example of Face Value and Premium Pricing

    If the company has determined the face value of the share is fixed at INR 10 and the IPO price at INR 100. In this case, the difference between the face value, which is INR 10, and the IPO price, which is INR 100, is called the premium. The premium here is INR 90, which is decided by the company in collaboration with its advisors based on the demand for the company and valuation.

    This premium over face value will enable companies to raise adequate capital through the IPO. It is important for investors to understand that the face value itself is purely nominal, but the premium reflects market interest and the company’s expected growth potential.

    How to Find Face Value in an IPO?

    Even though the face value is pre-established by the company, the steps to calculate it are below. Investors can also readily access this information.

    • Check Prospectus: To issue shares through an IPO, the company must publish a prospectus. This prospectus includes all the critical financial information. It also contains information regarding the face value of shares, issue price, and so on.

    The face value can be obtained by dividing the total equity capital of a particular company by the outstanding shares.

    For Example: If equity capital is 100 crores and outstanding shares are 10 crores, then the face value would be INR 10 (100 crore/10 crore).

    • Financial Platforms and Stock Exchanges: Most financial platforms and stock exchanges publish the face value of IPO shares. 
    • Brokerage Websites: Most of the time, the details of the IPO, including the face value of the shares, are available on brokerage websites.

    Why does Face Value matter in an IPO?

    It is important for investors to understand the meaning of the face value of shares in an IPO due to the following reasons:

    • Dividend Calculation: Generally, dividends are declared based on the face value of the shares. For example, if a company declares a 10% dividend on a share with a face value of INR 10, then every share will get INR 1 as a dividend.
    • Stock Splits: In a stock split, companies divide the face value of its shares to make them affordable for more investors as the share price decreases. It also increases the number of shares available for trading in the market. For example, a company splits a share with a face value of INR 10 into two shares with a face value of INR 5 each. Suppose the current market price was INR 300. Then, after the stock split, the shares of the company will trade at INR 150.
    • Accounting Records: The face value is of much importance in accounting and is employed in the financial statement of a company to signify the original contribution of shareholders.

    How to Invest in an IPO with Knowledge of Face Value

    Investing in an IPO requires investors to have knowledge of face value when judging the pricing of the IPO. The face value can be used to evaluate the premium at which the IPO price is set. Favorable market sentiments could be reflected by a high premium, but the investors should ascertain if such a premium is justified by the strong financials and future growth prospects of the company.

    Read Also: What is DRHP (Draft Red Herring Prospectus)?

    Conclusion

    The face value of shares in an IPO is one of the most critical data that investors must understand. By understanding what is face value in an IPO, an individual can better assess dividends, stock splits, and financial statements. Even though the face value doesn’t influence the market price, it helps gain insight into the pricing of the company’s IPO. Armed with this knowledge, investors are better equipped to make informed investing decisions.

    Frequently Asked Questions

    1. What is the face value of an IPO?

      Face value is the nominal accounting value assigned by the issuing company to each share.

    2. Why is face value important in an IPO?

      Face value is important for judging the pricing of the IPO, calculation of dividends, and stock splits.

    3. Are shares sold at face value in an IPO?

      Usually, IPO shares are issued at a price that is more than their face value. The price of the shares issued in an IPO consists of a premium above the face value, reflecting market demand and future growth prospects of the company.

    4. What is the difference between face value and market value?

      The face value is fixed, while the market price fluctuates based on factors like market demand, the company’s financial performance, and market sentiment.

    5. How do I find the face value of a share in an IPO?

      Generally, you can get the face value from the company’s IPO prospectus, stock exchange platforms, or through the IPO details given on brokerage platforms.

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