Benefits of investing in IPOs

Using an initial public offering (IPO), private companies can go public and raise funds. Investors can purchase the shares sold through an IPO and make returns
 

IPOs are popular among investors and for a good reason. From qualified institutional buyers (QIBs) to non-institutional investors (NIIs) and retail investors, everyone has an eye out for IPOs. IPOs offer investors an opportunity to buy a newly listed company's share at a reasonable price and make handsome returns. Read on to know more about IPOs, their types, and how to invest in them.

What is an IPO?
 

IPO stands for initial public offering. It is the procedure through which private unlisted companies raise capital in the stock market as listed companies. An unlisted company can float an IPO and raise funds by offering its shares in the primary market.

An IPO can be seen as an opportunity for investors to invest in a company at its nascent stage and earn high returns over the long term. However, investing in the IPO does not necessitate returns every time.

What are the types of IPO?
 

India has two common types of IPOs: a fixed price offering and a book-building offering. Let us understand these two terms in detail.

• A fixed price offering is characterised by the fixed price of the company's initial share sale. It means that the company and its underwriters decide the price of the initial share sale. As the name suggests, the price of the IPO is fixed in this type of IPO, and it remains unaffected by market demand.
• On the other hand, a book-building offering does not fix the price of the initial share sale but decides on a price band or a price range, depending on the prevailing market conditions. In a book-building offering, the lowest price is called the floor price and the highest price is called the cap price.

What are the eligibility criteria for companies to float an IPO?
 

To float an IPO, a company must fulfil certain basic eligibility criteria. Three regulators – SEBI (Securities and Exchange Board of India), the National Stock Exchange of India (NSE), and the Bombay Stock Exchange (BSE) – have laid out the eligibility criteria to float an IPO in India. Here are the rules laid down by SEBI.

• The company must have net tangible assets worth at least ₹ 3 crores in the past three years.
• 50% of the company's net assets must be in cash or cash equivalents.
• The company must have a net worth of at least ₹ 1 crore for the past 3 years.
• The company's total issue size must not be over five times the company's net worth.
• The company must have at least ₹ 15 crores in average operating profits in three out of the previous five years.

The NSE and the BSE have defined the following pre-requisites for IPOs.

• The company's paid-up equity share capital must be ₹ 10 crores or higher.
• The company's capitalisation of equities must be at least ₹ 25 crores.
• Companies must submit all financial records for the past three years to the NSE.
• The company must not have a negative net worth.
• The company should never have been referred to the National Company Law Appellate Tribunal (NCLAT) or National Company Law Tribunal (NCLT).

What are the benefits of investing in an IPO?
 

The following are the benefits of investing in IPOs.

Reasonable share prices
 

A company's share price is reasonable at the time of an IPO. Hence, investing in an IPO helps you purchase the company's share at a discounted price.

Listing gains
 

Investing in an IPO allows you to benefit from listing gains, which improves your overall portfolio.

Transparency
 

Regulators ensure companies provide every detail about their organisation when floating an IPO. It helps you make informed decisions.

Advantage for retail investors
 

Retail investors, too, can participate in the primary market by investing in an IPO. SEBI ensures that a portion of an IPO is allocated to retail investors.

How can a retail investor invest in an IPO?
 

A retail investor can invest in IPOs online or through a broker. These are the steps to be followed to apply for an IPO through internet banking.

• Log in to internet banking. Click here if you have an IDFC FIRST Bank account.
• Go to the 'Investments' section and locate the 'IPO' option.
• Enter the name of the depository and bank details.
• Select the name of the IPO in which you want to invest.
• Enter your bid price and the number of lots.

To invest through a broker, follow these steps.

• Log in to your brokerage's app or web portal.
• Locate the 'IPO' section and select your preferred IPO from the list.
• Enter the lot size and the bid price.
• Enter your UPI ID and approve the transaction on your bank's app.
• Click on 'Submit'.

Eligibility criteria for retail investors looking to invest in an IPO
 

Retail investors looking to invest in an IPO must meet the following requirements.

• They should be above 18 years of age.
• They must have a PAN (Permanent Account Number) card.
• They must have a Demat account and a brokerage account.
• Their Demat account must be linked to their bank account and have a sufficient balance.

If you do not have a Demat account, you can open one instantly with IDFC FIRST Bank and pay zero account opening charges. The procedure is online, paperless, and does not attract account maintenance charges for the first year.

Disclaimer

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