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What is an IPO? How can I apply in an IPO with my demat account?

An Initial Public Offering is when a private company offers shares to the public for the first time. Before filing for an IPO, the company must fulfil certain conditions set by the Securities and Exchange Board of India (SEBI).

IPO and the role of investors

Investors, both private and institutional, who believe that the company will grow, buy these shares. The volumes of shares the company sells and the price at which they are sold, determine the company’s new equity value. A private company usually has fewer shareholders, including the founders, their families and friends, and other financiers like venture capitalists who have invested in the company. Though most companies wait till they are reasonably strong and stable, companies with strong fundamentals and a strong profit potential can also qualify for an IPO, provided they meet the listing requirements. When a company goes public, the shares owned by the original investors become worth the public trading price.

The need for a demat account to trade in IPO

IPO investments are done through a process called ASBA (Applications Supported by Blocked Amount) where the amount you want to invest is blocked in your bank account but is not debited from it. To apply for an IPO, you need to fill out a few forms with your personal details, which also includes your demat account number. Many online brokers including ICICIdirect offer facility to apply for an IPO online making the process convenient for investors. Alternately, you may also submit a hard copy of the IPO form to your brokerage provider. Post that, you need to wait for the company to allot the shares, which can take up to 10 days.

Remember that SEBI has suspended physical share certificates. As such, once the shares are allocated, they are credited in the digital or electronic format into your demat account. The amounts you have blocked are debited fully or partially depending on the number of shares that are allotted.

Post IPO – trading the shares in future

After the IPO process is completed, the company gets listed on the secondary market, from where any interested investor can purchase the shares. You can just as easily sell your shares on the stock exchange. However, demat and trading accounts become imperative for such transactions. While it may not be necessary to have a trading account while applying for IPO shares, you will need one if you want to trade i.e. buy or sell those shares in future.

Things to consider before investing in an IPO

Before you decide to invest in an IPO, it is important that you objectively examine the prospectus, as well as the past record and business model of the company that is going public. You must consider the management team, as well as the promoters, before applying for the IPO. This is harder than it sounds because a company going public will invest a lot in promoting itself and this hype can influence your decision. As such, you must carefully study how stocks are sold by similar companies that have fared in the markets earlier. Doing this might highlight interesting perspectives and insights. You also need to have a clear picture of the growth prospects of the company and the products/services offered by it, as well as the risk factors involved. Many broking houses also come up with reports on companies coming up with IPOs with their recommendations. Investors may also refer to such reports to understand the prospects and financials of a company better.

 

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No: 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

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