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Table of Contents
IPO – Definition, Benefits & New Process to Apply for IPO
What is IPO?
When a privately-owned company first time offers its securities generally ‘common stock’ for sale to the general public is referred to as initial public offering (IPO). In doing so, it undergoes various rules and regulations which are governed by the market regulator Securities & Exchange Board of India (SEBI). By going public, a company benefits from raising capital in the primary market and reach out to a large number of institutional and individual investors while at the same time the retail individual investors also benefit from investing in such IPOs.
Benefits of Investing in IPO
- LISTING GAINS:
- MEET LONG-TERM GOALS: The investors who have the vision of wealth creation and value creation analyze companies based on their valuation, fundamentals, and growth potential and invest in those IPOs that can help to achieve their long-term financial goals.
At the time of the IPO launch, people get the idea of whether the IPO is oversubscribed or not. IPO Oversubscription indicates the huge demand for the IPO. Generally, it has often seen that the ‘issue price’ is relatively lower than the market price. In most cases, traders who seek out opportunities to make quick short-term profits check for the fundamentals and reviews of such companies and invest in those IPOs that can help them make quick short-term profits.
Note: Over subscription and post-listing performance have no direct correlation. The post-listing performance also depends upon other things like brand reputation, valuation, and much more.
New Process to Apply for IPO - for Retail Investors
In a combined effort, the Securities and Exchange Board of India (SEBI) and National Payments Corporation of India (NPCI) have introduced an UPI-based IPO subscription payment process for retail investors. To quicken the IPO application process for bidding shares the market regulator SEBI has made it mandatory for retail individual investors starting from July 01, 2019 to apply for IPOs through UPI mechanism.
From July 1, 2019, the existing process of movement of ASBA bid-cum-application forms from intermediaries to Self-Certified Syndicate Banks (SCSBs) for blocking the funds will be discontinued. And for such IPO applications, only the IPO mechanism would be permissible.
However, only the retail individual investors are allowed to use UPI as a payment mechanism to submit the IPO application, the qualified institutional buyers and high net-worth individuals shall continue to apply as per the existing process.
Reference: SEBI circular SEBI/HO/CFD/DIL2/CIR/P/2019/76
Step-by-Step Guide to UPI - Based IPO Application Process
Steps involved in the new UPI-based IPO application process is as follows:
- PLACE THE ORDER WITH THE BROKER/INTERMEDIARY:
- APPROVE THE BLOCK MANDATE REQUEST IN UPI-ENABLED APP
- ALLOTMENT OF SHARES
If you are planning to invest in an IPO then the very first thing you will have to do is to visit your broker’s online portal, reliancesmartmoney.com and fill the IPO form. Under the new IPO application process, your online IPO application form will have an UPI field. There are around 47 banks that are present on the UPI with the IPO feature. The list can be viewed here. If your bank is already on that list, you can apply online through UPI. For offline retail you can adopt the old ASBA method.
FYI, under the new UPI mechanism, the maximum value that a retail investor can bid for is Rs. 2 lakhs. So, you will have to use your Unified Payment Interface (UPI) ID as a payment option while applying for a new IPO in the IPO market. You can also use your existing UPI ID if your bank has gone live with the IPO feature.
Note: Any IPO application made by retail investors from UPI ID of third party bank account will be liable to rejection.
After the form is processed, you will receive a block mandate request on your UPI-enabled app which allows you to apply for the IPO. When you receive the request, use the UPI PIN and approve the same. Upon accepting the request, the funds will get blocked in your account. The money will get blocked will be equivalent to the value of shares, you have bid on your IPO application form. Make sure you enter the right PIN otherwise, the transaction will be declined and you will have to re-initiate the transaction by approaching your intermediary.
Funds equivalent to the allotted shares will be debited from the bank account. Allotment of shares is subject to finalisation of allotment. The money will be blocked till the finalization of allotment, post which the amount equivalent to allotted shares would be debited and balance amount (in case of partial allotment) will be unblocked.
IPO Terms
- EXCHANGE:
- IPO OPEN DATE / ISSUE CLOSE DATE:
- LOT SIZE:
- ISSUE PRICE:
- ISSUE SIZE:
The stock exchange where the IPO shares are proposed to be listed. Mainline IPO's are listed on BSE and NSE. The SME IPO's are listed on NSE EMERGE or BSE SME platform of the respective exchanges.
The opening and closing date of the IPO bidding process. Investors can apply in an IPO during this time only.
The minimum count of shares an investor can apply for in an IPO. A lot size of ‘400’ means that an investor needs to bid for at least 400 shares.
The price per equity share. There are 2 types of IPO's- Book Building and Fixed Price IPOs. Book Building IPOs will have a price range, say Rs 120-125 and investors need to bid within the price range. Fixed price issue has a specific price to bid.
The total monetary value of the IPO. It is arrived by multiplying the number of shares offered by the company with the issue price per share.
Conclusion:
Initial Public Offering (IPO) gives the opportunity to the privately-owned companies to raise capital or funds to further expand their businesses and the retail investors to buy shares in the primary market, and make profits through listing gains and make investments for long-term by buying shares in the relatively low prices. Recently, the Securities and Exchange Board of India (SEBI) has introduced the UPI payment mechanism as a new medium of applying in the IPO process. This is a step towards digitizing all IPO payments online and increase the participation of retail individual investors. Here, investors can even use their existing UPI IDs to apply for UPI-based IPO application and can receive and accept a ‘block mandate’ request on their UPI app. This new UPI mechanism reduces the gap between the listing of shares and closure of IPO and makes it a seamless and paperless process for retail investors.
Reference: https://www.npci.org.in/upi-live-ipo
The entire process is to bring down the time it takes from the closure of IPO to the listing of shares to 3 working days. The idea of making the UPI-based payment mandatory is to remove the manual intervention from the process of IPO application forms and make it completely paperless process.
