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Can I apply for IPO without a Demat Account?

3 Mins 07 Feb 2021 0 COMMENT

Stocks are one of the favourite investments of investors. Long-term and sometimes tactical investments in them are known to give good returns. There are many ways to stay invested in stocks. Directly trading through stock exchanges, mutual funds, derivatives, etc., are common ways to invest in stocks. Besides these, there is another way that catches the fancy of investors to invest in promising stocks at relatively attractive prices. It is Initial Public Offering (IPOs).

Understanding the concept of IPOs

When private companies get into the growth phase, they need funds for growth and expansion or for existing investors to monetize their holdings. So, companies come out with an Initial Public Offer (IPO) for the investing public to raise money from them. After the IPO launch and initial participation from interested investors, the company's shares are listed on the secondary market, also known as the stock exchange, where they can be bought and sold. 

Investing in an IPO can pay off if the company has good management, growth prospects, reasonable IPO price, and sound finances. That’s why some IPOs are much sought after by investors.

 Additional Read: What is IPO & What are the Advantages of IPO?

Why do you need a Demat account?

IPOs are like buying shares. Since physical share certificates are no longer issued, these shares are registered in your name electronically in Demat form.

You can open a Demat account at any depository participant (DP), which could be a big bank subsidiary offering stock trading facilities, stockbrokers, or non-banking financial company (NBFC). To open your account, you need to fill out an account opening form and submit a passport-size photograph and copies of documents to prove your identity and address like an Aadhaar card, PAN card, electricity bill, passport, etc. Refer to the Official Valid Documents (OFV) list before you submit your application to open the Demat account. You can open an account, both online as well as offline.

How does an IPO work?

Technically, through an IPO, a company sells a part/whole of its equity (in the form of shares) to public investors for the first time in exchange for capital. The company decides the number of shares it wants to release in the market. Investment banks work closely with the company and study its financials to determine the price band of the shares, its launch date, allotment date, and other vital details. SEBI regulates the entire IPO process to ensure everything is in order. SEBI approves the Draft Red Herring Prospectus (DRHP) that contains all the company's financials, such as its balance sheet, Net proceeds, Earning Statement, Legal Opinions, Underwriting Document, etc.

 Additional Read: How an initial public offering (IPO) is priced?

Once the IPO is launched, you can apply for it. IPOs can be viewed as an opportunity to earn handsomely, especially if the company has solid fundamentals and reasonably priced shares. But, you must know that there is no guarantee of securing shares in an IPO. An IPO can be over-subscribed or under-subscribed, depending on its popularity among investors. If you apply in an under-subscribed IPO, you will be allotted the applied lot of shares. But, if the IPO is oversubscribed, since the number of shares applied for outnumber the quantum of shares on offer, not every investor is allotted shares. You will be notified about the share allotment status against your IPO application on the allotment day. On the listing day of the IPO, the company gets listed on the stock exchanges. You can then trade the shares of that company freely.

Remember, not every IPO may fetch you profits. As a smart investor, you must study the IPO prospectus and the company financials to decide if the company has the potential to increase your profits or sink your capital.

 Additional Read: How to analyze an IPO?

Applying for an IPO

You can apply for an IPO online at its issue price through internet banking or trading account. Once you apply, the IPO amount you have applied for will be blocked in your account through ASBA (Application Supported by Blocked Amount). What this means is the required amount will be blocked until share allotment.  SEBI has made ASBA mandatory for IPO applications.

Additional Read: All you need to know about the IPO application process

 Additional Read: Should you invest in an IPO for listing gains?

Do I need a Trading account for IPO?

Well, you don’t need a trading account for an IPO. However, if you want to sell the shares you have been allotted through an IPO, you will need to have a trading account. So it’s a good idea to have a trading account before you apply for an IPO. After all, you don’t want to hold the shares you have been allotted in perpetuity.

You can open a trading account either with a stockbroking firm. Few banks or broking firms offer what is known as a 3-in-1 account that combines banking, trading, and Demat facilities. 3-in-1 accounts help streamline your stock market investments under one account, saving you the trouble of opening separate accounts for each facility.

Additional Read: How to Choose Best 3-in-1 Demat & Trading Accounts in India

Stockbroking firms too offer Demat and Trading accounts. Irrespective of where you open your account – whether it is a brokerage firm or a big bank subsidiary offering Demat and trading services; you have to deposit a certain amount to cover the cost of buying shares.

So, if you are interested in investing in IPOs and becoming one of the first public investors in a company, it is best not to delay opening your Demat account

 Additional Read: How to track upcoming initial public offerings (IPOs)

 Additional Read: Can NRI invest in IPO?

Disclaimer: The contents herein mentioned are solely for informational purposes and 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.