Initial Public Offerings (IPOs) mark a pivotal moment in a company’s journey as they transition from private to public ownership. For investors, IPOs present a unique opportunity to become early stakeholders in promising ventures poised for growth. This comprehensive guide navigates the intricate landscape of IPO investments, offering insights into the process, potential risks, rewards, and key considerations. Whether you’re a seasoned investor seeking to diversify your portfolio or a newcomer looking to grasp the fundamentals, this guide equips you with the knowledge needed to make informed decisions in the dynamic world of IPOs.
What Exactly is an Initial Public Offering (IPO)?
An IPO allows a company to raise funds for various purposes. It also marks the transformation of a private company into a public company. When a company goes public, it is obligated to issue its shares in an IPO. It will also be the first instance of the company issuing shares to the public. A company wishing to turn public must seek permission from the Securities and Exchange Board of India (SEBI). After the IPO process, the company can launch its IPO and attract investors. Here are the reasons companies launch an IPO in India:
- Since investors buy shares in an IPO, the company will get funds.
- The top corporate players are listed in the stock market. Many private companies take a step further and become trusted brands by launching an IPO.
- Public companies are more trusted in the market by investors. It happens because their operations are transparent. It is why public companies usually have higher credit ratings.
- Many companies bring an IPO for purposes like expansion, debt repayment, or growth strategies.
The Process of Launching an IPO
Are you waiting for a new upcoming IPO? Here is the process for a company to launch its IPO:
- A company must meet some conditions decided by SEBI to launch an IPO. Upon meeting the criteria, a company can apply for an IPO.
- The company must hire an investment bank to decide the offer price for the IPO and other ins and out of the IPO. Financial experts conduct research and due diligence to decide the right price for shares.
- Companies are required to submit a Draft Red Herring Prospectus (DRHP) to SEBI. It is a formal document containing all details of the IPO, like the reason for funding, earnings statement, balance sheet, and current stockholders.
- SEBI reviews the DRHP and makes the final decisions. Upon confirmation from SEBI, a final prospectus is prepared.
- The company informs the investors about the IPO launch date and other details in advance.
- The issuer allots shares to different investors after the IPO closure date.
How to Apply for an Initial Public Offering in India?
Investors are allowed to apply for an IPO online via a trading platform. One can also choose to apply for an IPO offline. Investors can do so by collecting the IPO application from a bank or broker. You can submit the IPO application and pay through Demand Draft (DD) or cheque. Many banks allow investors to choose the Application Supported by Blocked Amount (ASBA) method for payment. However, applying for an IPO online is comparatively easy. Here’s the step-by-step process:
- Open a Demat and trading account with a broker. The trading account will allow the purchase of shares, whereas the Demat account can hold stocks.
- Use a trading platform to browse new upcoming IPOs. Choose an IPO you wish to apply in.
- Submit your IPO application with the necessary details like UPI ID and bidding price.
- Wait till the IPO closure date. Allotment starts only after the IPO closure date.
- When the issuer decides to allot shares, you receive a confirmation message.
- After allotment, you will receive the shares, and the amount will be deducted from your account.
In a Nutshell
IPOs can allow investors to get shares in new public companies. These companies might improve their financial performance with time, and you might reap good returns. A trading platform can help find the current and upcoming IPOs in India. You can submit the IPO application online and wait for allotment. Choose an IPO and apply now!