What Are IPOs? How Can You Invest in Them?

What are IPOs?

Ever since Zomato launched its IPO, the internet has been buzzing with everything it has to say about it. Glenmark’s IPO too is trending in the news. Investments in IPOs by banks and financial institutions is at a 4-year high. The investments amount to ₹870 crores this year as compared to ₹461 crores in 2019.

So what are IPOs?

If you are new to investing in the stock market and don’t know what are IPOs are and how you can invest in them, then this article is for you.

What are IPOs?

IPO or Initial Public Offering is when a private organisation issues its share on the stock exchange for the public to invest in. This is the first time its stocks get issues and listed. This process is regulated by the Securities Exchange Board of India (SEBI).

How to Invest?

  • First you need to get a demat account. IPOs are open to all retail investors.
  • Then you need to ‘bid’ for an IPO when the window is open (usually for three days from 10:30am to 4pm).
  • There is a minimum quantity of shares (1 lot) specified for each IPO listing.
  • Sometimes, a lot of people bid on an IPO and it gets oversubscribed. In such cases, the allotment of shares is random.
  • Once the shares are allotted, the ‘AutoPay’ instruction to debit the money (usually around ₹15000) gets activated.
  • In a few days, the shares are listed and appear in your demat account. These can then be traded.

How Does It Work?

Many private companies (even those that are already backed by investors) feel the need to raise funds for capital, to expand, to add credibility to their name, for financial leverage, etc. 

There are some eligibility criteria that the companies have to follow before getting listed for an IPO.

  • The company must have net tangible assets of at least 3 crore rupees in the last three years. This does not include any virtual assets.
  • The company should have an operating profit of 15 crores for the last 3 years. This has to be in the five years before the company files for an IPO.
  • The size or valuation of the IPO cannot be more than five times the company’s worth in the market.

However, the process we highlighted above is for the fixed price IPO route. There is another route called the book-building route where a private company can apply for IPO approval and 75% of its stock has to be sold to QII (Quantified Institutional Investors). There is a long-drawn process set out by the SEBI for a company to follow when it intends to go public.

Now you know what are IPOs. That is how the process of IPO works. If you are planning to invest in an IPO, invest wisely, do your research. Don’t rush into it. Many have reported massive gains, while some have also reported losses. All the best!

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