Investing In IPO What Is The Checklist

In India where majority of investments are made into traditionally safe products such as Fixed Deposits, Insurance, NSCs, KVPs, etc., there are also takers for equity investments, a rather risky yet high-yielding product. A person can use different ways to invest in equity directly, one of them is the Initial Public Offering (IPO). Moreover, the success of some IPOs has generated such a widespread interest that investing in IPOs has become a trend. Now, let us take the case of Tarun, a novice equity investor.

Tarun has no experience of investing in equities but he wants to invest in an IPO just to make big money like other retail investors. But the point is he does not have much idea about what an IPO is and what is to be done to invest in it.

Let us make this simple for Tarun by explaining IPO and various factors associated with it.

Understanding IPO
If a new or existing company wants to raise capital from the capital markets to support its growth and capital expenditure, it sells its stocks or shares to the public. The process is known as 'Public Issue of Shares'. However if the sale takes place for the first time, it is called as the Initial Public Offering (IPO). It is also referred to as 'going public'. In an IPO, the prices are discovered by the book building process where a group of institutional investors put their competitive bids and based upon their demand and supply, a cut-off price of the share is decided.

Prerequisites to invest in an IPO

There are tighter norms and money regulations with regard to the IPO investing. As per these norms, a person who wants to trade in shares or invest in IPOs must have a 'Demat Account'. The reason is that a company issues shares in dematerialised form – which means the shares exist in the electronic form and credited to the investor's account with Depository Participant (DP). To put it in simple words, one does not get a paper share certificate.

How should Tarun go about it?

• Firstly, Tarun needs to open a demat account with a DP. Generally, all broking firms act as DP. A DP can be decided based on the standard of its service, charges and reputation. To open a demat account, he will require a copy of Identity Proof like Passport/Voter's ID Card/Driving Licence/PAN Card and Address Proof which includes Electricity Bills/Ration Card/Voter's ID Card/Driving Licence/Bank Passbook/Rent Agreement, etc., as defined in the form and some initial joining fees.
• Once he is done with the demat account, he needs to get the IPO application form which is available at a broker's office or can be downloaded online. These forms are absolutely free.
• A company's prospects must be taken into account while selecting an IPO. Generally, IPOs are advertised heavily in accordance with the SEBI requirements and companies also want maximum publicity so that an issue gets full subscription. So it is important for Tarun to read the prospectus carefully and assess the fundamentals of the company before investing in it.
• Tarun can fill up the form as per the directions given in the form. Since the form is lengthy and cumbersome to read, he can ask for his broker's help. The cheque amount can be decided based on the number of shares he wants to purchase. Currently, in India, a retail investor can buy shares for a maximum amount of Rs 1 lakh. The cut-off price, which generally is a range, must be decided based on the market perceptions. If the market's perception of the company is good, Tarun can select the maximum price of the IPO, else remain with the lower band of the range.
• Tarun can submit the form to the collecting bankers (a list is given in the form) or even the merchant bankers of the issue and get a receipt of the same. He can also submit the application online. Currently, almost all DPs provide online facility to buy an IPO whereby the amount is deducted from the bank instantly.

The bottom line
One must be cautious about selecting an IPO. Many times, bullish sentiments in the market prompt companies to raise capital from the capital markets. Sometimes, issues are overpriced based on these sentiments. So it is better to buy them in secondary market at lower prices. The message is clear, "Do your homework before investing in IPO". Investors must examine the objective of an IPO, current market conditions, and fundamental outlook for the business involved.