What is an IPO? | IPO Meaning, Types, Allotment Process

What is an IPO?

Initial Public Offering (IPO) is an official process by which a private company goes public by issuing its stocks in the stock market. Thus, in layman terms, a company raises capital for its functioning from the public in return for shares through IPO. After the launch of an IPO, the company shares are available for trading on the stock exchanges like NSE, BSE.

Why do Companies launch IPO?

Companies launch IPO to:

• Raise capital, expand – As mentioned earlier, the prime purpose of an IPO is to raise capital for its functioning and expansion.
• Exhibit the reputability of the company – Companies listed on the stock market are perceived as trustworthy and reputed.
• Gain publicity – Companies that are listed on stock exchanges through IPOs always stay in news and are regularly tracked by traders, investors. This thus provides free marketing to the company.

Types of IPO

IPOs are generally classified into two types: a) Fixed Price Issue and b) Book Building Issue

a) Fixed Price Issue: In a Fixed Price Issue, the company after evaluation fixes a price for the IPO issue.
b) Book Building Issue: In a Book Building Issue, the price band is considered. Investors bid for the shares between the decided floor price and cap price of the band. This way the book gets built each day of the subscription period. Price is finally fixed after the evaluation of bids.

Allotment Process of IPO

• During IPO, shares are allotted in lots. Lots are allotted as per bids.
• All the available shares are divided into 3 exclusive parts as below.
• In the case of Oversubscription, shares are allotted for each category differently:
  
  a) Institutional Investors: In the case of Oversubscription, each applicant gets lesser shares than demanded in the proportion of the oversubscription.
  For e.g. If an applicant had applied for 3 Crore shares and IPO is oversubscribed 3 times, then only 1 Crore shares are allotted to that applicant.
  b) Non-Institutional HNI Investors: Same rule as above.
  c) Retail Investors: Each applicant gets at least one lot and the rest is allotted according to the bid proportion of each investor, but in the case of oversubscription, allotment is done randomly through computerized draw.

• After the subscription and allotment process, the share is then listed on the stock market for regular trading/investing for all at a specified price
• During this process, there are unofficial transactions carried out between traders predicting the listing price of the IPO and premium or discount accordingly. This is called the Gray (or Grey) Market of IPO.

How to Apply for an IPO in India

• To apply for an  IPO, Retail Investors must have a Demat Account, wherein shares are credited after the allotment. Demat account can be opened online through StockBrokers like AngelBroking, Upstox, Zerodha, etc. completely online by submitting Bank Statement, Pan Card Details, and eVerification of Aadhar Card.
• If you have Demat Account, IPO application can be done online by UPI through the ‘ASBA’ (Application Supported by Blocked Amount) process as below:

1. Login to your stock broker’s portal (website or app) and go to the IPO menu
2. Select the desired IPO and check details
3. Enter no.of lots and the price you want to bid for
4. Provide UPI Id of your bank account. (for e.g. sachintendulkar@xyzokicici). This UPI Id must be of the bank account linked to your Demat and Trading account.
5. Check again all the details and Submit
6. After Submission, you will get a request pop-up in the UPI app. Once you Accept it, an amount equal to your bid size is blocked from your bank account
7. – If the allotment is done to you on the final day, the mentioned amount is debited from your bank account and corresponding Shares are credited to your Demat account.
   – If the allotment is not done due to oversubscription or some other reasons, the blocked amount is released back to your bank account.