Chapter 12:IPO FAQs

By now, you know the reasons a company launches an IPO, the different types of IPOs, how to apply for an IPO and so on. But there is a likelihood that there are a few questions you may still have. So, let’s look at some of the most common questions people have once they understand the nitty-gritty of IPOs.

Q1: Do you need a trading account to apply for an IPO?

A: A trading account enables you to buy and sell securities on the stock market. If you wish to trade in IPO shares—or even in regular stocks—you need to have a trading account.

The process of getting a trading account is similar to applying for a regular savings bank account. Here is an overview of the main steps:

• Step 1: Identify the right trading account for you

  Start by short-listing a few reputed stock brokers or stock-broking firms. Compare their brokerage rates and check for available discounts. It may be tempting to choose the broker that charges the lowest fee. But you should prioritize service over cost.

  Pick a broker that will respond to your trading orders in a timely manner. When investing in IPOs, you need to invest quickly. Otherwise, you could miss the IPO boat.

• Step 2: Submit your trading account application

  Contact the broker or brokerage firm. They will provide you with an account opening form and a Know-Your-Customer (KYC) form. Fill in the forms with the correct details and provide proofs of identity and address.

• Step 3: Step 3: Complete the verification

The broker or brokerage firm will contact you for verification. It may happen in person or via the telephone. You may have to provide specific personal details to complete the verification process.

Soon after, the broker will hand you the details of your new trading account. You are now ready to make your first IPO investment.

Q2: Do you need a demat account for investing in an IPO?

A: The short answer is: Yes, you can invest in an IPO without a demat account.

But the long answer is a bit different.

Whether or not you need a demat account to invest in an IPO depends on two factors:

• Whether you wish to sell the shares you buy in an IPO
  Theoretically, you do not need a demat account to invest in an IPO, for you could apply for shares in the physical form. But the physical shares that you receive cannot be traded on the stock exchange. You will be tied to the shares until you convert them into the demat form.
• The issue size of the IPO you plan to invest in
  If the issue size is Rs 10 crore or more, it is mandatory for investors to have a demat account.

You can open a demat account with a bank or a brokerage firm. Just check whether it is an authorized agent of either of the two main depositories in the country (NSDL and CDSL).

Tip: If you go through a bank, you could get a trading account, a demat account, and a savings bank account in a bunch.

Q3: What is a lot size?

A: A lot size is a collection of shares. 

Another term which is very important to understand is the minimum order quantity. As name suggests, it is the minimum number of shares an investor needs to apply for while bidding for an IPO.

If an investor wants to bid for more shares, he/she can do so in multiples of lot size.

Q4: Why many investors fail to get shares allotted in an IPO?

A: Many IPOs are oversubscribed. What this means is that the demand for shares is much higher than the shares available for sale. In such a situation, it is no surprise that many investors fail to get any shares allotted to them.

This is why it is advisable to apply for IPO shares on the last day of bidding. This way, one can have a good estimate on how large the subscription will be. Also, in that case, one should bid for just one lot and not unnecessarily lock up their capital.

Q5: Where to check IPO application and allotment status?

A: Investors and traders are generally curious and anxious to know the results of the application as soon as possible. To ease the anxiety, both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have come up with dedicated pages and links which investors can use.

NSE

The NSE has an IPO bid verification module. It can be used to verify the IPO application details uploaded on the exchange bidding system by your member/bank. The data of the bid details uploaded by the member/bank would be available on T+1 day (where T would be date receipt of bid on NSE platform).

In addition, the data would be available until six days after the issue closure date. This gives the investor enough time to verify the data and instruct the member/bank to make any changes, if required.

Exchange will also provide allotment information as provided by the registrar to the issue.

An investor can avail this facility by registering using his/her PAN details. After registration, the investor will receive an email notification from NSE on the registered email address. That email will provide the login details.

The following link can be used for the same:

https://www.nseindia.com/products/dynaContent/equities/ipos/ipo_login.jsp

BSE

The BSE has also come up with a similar platform.

This unique facility allows investors to verify the status of their application submitted to a Trading Member or a SCSB (Self-Certified Schedule Banks). 

The investor can check his application status/information on the website until one week after issue close. 

The following link can be used by investors:

https://www.bseindia.com/investors/appli_check.aspx

Q6: Where to find the IPO prospectus?

A: Draft Red Herring Prospectus, Red Herring Prospectus and Final Offer Document can all be found on SEBI’s website under Filings > Public Issue (https://www.sebi.gov.in/filings/public-issues.html).

Draft RHP: https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=3&ssid=15&smid=10

RHP: https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=3&ssid=15&smid=11

Final Offer Document: https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=3&ssid=15&smid=12

Q7: Can IPO be purchased on margin?

A: You may not have the money to invest at the right moment. That’s not an issue anymore. Some NBFCs are willing to finance this investment. Therefore, you can purchase IPO on margin — unless you are a retail investor.

That’s because retail investors have no guarantee that they would be allocated shares when an IPO closes.

On the other hand, high net-worth individuals (HNIs) are allocated shares on a proportionate basis in case of oversubscription. This means they are guaranteed to be allocated shares.

That’s why NBFC arms of broking firms offer loans to HNIs for applying in primary stock market. This practice is called IPO funding or IPO financing.

Here, the investor has to pay only a small margin amount and the remaining is funded by the lender.

Remember that it is up to the investor to apply for IPO under the HNI or retail investor categories. Any investor who is applying for shares worth more than Rs 2 lakh is considered a HNI investor. Therefore, if an investor can arrange for the up-front payment, s/he can apply for IPO funding.

But do remember that loan providers will have their own criteria as well.

While IPO funding is on the up due to recent successes of IPOs, it remains a high risk - high reward situation.

That’s because if the issue is not subscribed as expected or is listed below the IPO price, you can suffer heavy losses.

Therefore, take on IPO funding only if you have a good understanding of the company valuation and risks involved.

Q8: When to sell IPO shares?

A: There is no master strategy that works in every situation. But here’s a table that can be a good indicator.

Any losses on the listing day affords you two choices: either wait it our or suffer losses.

You should wait it out if you feel that the company has the potential to bounce back in the long run.

If you think the company can’t rebound, then selling it off would be better than to wait for the stock prices to drop even further.

This was about what you should do after IPO shares have been allotted. But to maximize your returns, you have to ensure that you invest in the right IPO.

Q9: How are IPO investments taxed?

A: IPOs, as such, do not have any taxes. You are taxed only when you decide to sell the IPO shares.

Any monetary profit you make while selling the IPO shares is referred to as ‘capital gains’.

Capital gains tax is charged depending on how long you held the shares for. If you owned the shares for less than 12 months, it is considered as short-term capital gains and if it is over 12 months, it is referred as long-term capital gains.

Tax on short-term capital gains is 15%. It is 10% for equity gains in the long run (over 12 months). Do remember that you are taxed if the equity proceeds exceeds Rs 1 lakh.

Q10: What is the difference between IPO cut-off price and floor price?

A: Beginners sometimes confuse IPO floor price with cut-off price.

To understand the difference, let us take a look at how the issue price is decided in the case of book building issue.

Once the bidding window is closed, the issuer arranges all the bids in the decreasing order of bid price.

The highest bid price — the price at which all the shares issued are sold out — is set as the cut-off price. This price will be treated as the issue price and all the bids with lower bid price will be rejected.

Therefore, the IPO cut-off price is the lowest bid price that is considered for IPO allotment. IPO floor price, meanwhile, is the lowest bid price that is acceptable during the bidding phase. The concept of floor price will be clearer once you go through the next question.

Q11: What is an IPO price band?

A: In a book building issue, companies launching an IPO offer a 20% range, within which investors can bid for shares. The final price is decided only after the bidding is closed. This 20% range is called an IPO price band. Both retail and institutional buyers are called to submit their bids within this price range.

No bid price can be less than the IPO floor price, which is the lower bound of the band. Neither can it be higher than the IPO cap price, the upper bound of the band.

The book is normally open for three days, and the bidders can revise their bids as long as the book is open.

Issuers prefer book building issue over fixed price issue as the process gives them the opportunity to discover the price and demand.

Q12: What are the charges you need to pay while applying for an IPO?

A: It depends. It depends on a lot of factors like the face value of a single share, the number of shares you want to purchase, premiums, etc.

Let’s say the face value of every share in the company you want to invest in is Rs 30. In addition to the face value, the owners of the company will charge you a premium on each share (Let’s say Rs 12 in this case). So, the net cost of each share becomes Rs 42, which is known as issue price.

What next

The following chapter gives you a step-by-step guide to investing in IPOs.