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Priya Ganapati | March 06, 2004

Some of India's most talked about companies like oil major ONGC, gas firm GAIL or biotechnology company Biocon are hitting the stock markets with their IPOs.

Market experts say that there is no better time than now for individual investors to get a pie of the stock market action.

For those who are lost in the jargon that surrounds IPOs and wonder how they can apply for an IPO to buy shares, rediff.com presents a quick guide.

Read on to see how you can get a slice of the action on the Indian stock markets now.

What is an IPO?

An IPO, or Initial Public Offering, is the sale of shares by a company to the public for the first time. Colloquially, it is said that a company is 'going public.'

How is then that companies like ONGC and GAIL which are already listed are going for an 'IPO' again?

The government is the majority stockholder in these companies and it is offering a percentage of its stock now to the public. So strictly speaking, public sector companies that are already listed are not having their 'IPO' but they are going for a 'public offering' of their shares. It's a technical distinction and one that should not bother individual investors.

How can I apply for an IPO?

To apply to an IPO you have to fill an IPO application form. These forms are available in stalls outside the stock exchanges and with vendors in various other areas.

You can also get an application form through a share broker or investment consultant, if you have one. Else forms are available at various banks.

A good idea is to check the Web site of Karvy Consultants (www.karvy.com) who are often registrars or lead managers for issues.

The other option is to check the SEBI Website (http://www.sebi.gov.in/) for the prospectus of a particular IPO. The prospectus lists the lead managers for the IPO and you can get a copy of the application form from their centers.

Once you get the form, you have to fill it, remit the amount after calculating the number of shares applied for in the bank that is designated in the form as collecting centre for that IPO.

If you have a demat account, then you can apply for the shares directly through your demat account or there is an option of physical delivery of share certificates.

Some IPOs offer only demat (dematerialised) form of shares, while others offer both demat as well as regular (physical) shares.

SEBI advises investors to get the allotment in demat form as the shares in IPO are tradable only in demat segment in the stock exchanges. Dealing of physical shares (allocated in IPO) is not accepted.

What is primary market and what is secondary market?

When shares are bought in an IPO it is termed primary market. The primary market does not involve the stock exchanges. A company that plans an IPO contacts an investment banker who will in turn called on securities dealers to help sell the new stock issue.

This process of selling the new stock issues to prospective investors in the primary market is called underwriting.

When an investor buys shares from another investor at an agreed prevailing market price, it is called as buying from the secondary market.

The secondary market involves the stock exchanges and it is regulated by a regulatory authority. In India, the secondary and primary markets are governed by the Security and Exchange Board of India (SEBI).

Should I buy in the primary market -- which means apply for an IPO -- or should I wait for the stock to list and then buy in the secondary market?

Currently, IPOs are being heavily oversubscribed and there are many retail investors applying for the same IPO. In such a situation, there is a high risk that even after applying for an IPO an individual investor might not get an allotment of the shares.

Buying in the primary market does not assure an investor of allotment of shares.

There is also a risk that the price of the share may fall within a few days or weeks of the listing. An individual investor needs to take a call on how he thinks the market will behave over the next few months and decide on his/her strategy accordingly.

In a bear run, prices usually fall after the stock lists. Hence it might make more sense to buy in the secondary market. But in a bull run, like the Sensex is experiencing now, prices of the shares are likely to zoom up and so applying during the IPO is the best way to get the share at its cheapest.

If you are in the market for the long-term this question should not bother you as you would not be looking at profit booking within a few months.

What are the factors that I need to keep in mind before deciding to apply to an IPO?

Track record of the promoters: Background and experience of the promoters, the management team and their expertise is one of the main factors that needs to be considered as they will be the ones responsible for the profitability of the company. Studying this point will help investors avoid fly by night promoters and companies.

Financials: The company's balance sheet is a very important document and investors should look at it carefully. Investors should look at not just the current balance sheet but also that of the last three to four years to get an idea of the company's growth and focus.

Prospectus: Read the prospectus for the company carefully. The prospectus called as red-herring prospectus is a document that every company that goes for a public offering has to file with the SEBI.

The prospectus has all the details about the company, the risk factors and the company's financials.

You can get the prospectus for companies going public at the SEBI Website: http://www.sebi.gov.in/Index.jsp?contentDisp=Department&dep_id=1

Issue price: Investors need to decide if the issue is worth investing in at that price. One way of checking the valuation is to look at the Price-Earnings (P/E) multiple.

The P/E multiple is the ratio of the share price to earnings per share (EPS which is listed in the balance sheet). P/E of the issue should be compared with the industry average and the other companies in that sector.

Apart from these three important points other factors like amount to be paid on application, the lead managers for the issue, the stock exchanges that issue plans to list on and the current market sentiment are other factors to watch out for.

What does a price band mean?

Price band comes into play when IPOs are done through a book-building process.

IPOs if they have gone for the book-building route will mention a price band.

For instance, Biocon which has declared a price band of Rs 270 to Rs 315 per equity share of face value Rs 5. Or ONGC which has set a price band of Rs 680-750.

Book-building is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices which are above or equal to the floor price (the minimum price). The final price of the share is determined after the bid closing date, based on certain evaluation criteria.

Individual investors are encouraged to bid at the floor price. When all the bids are received and the final price is decided, those who have got the allotments will have to pay that price, irrespective of the price they had bid on.

So price band indicates the range which the investment bankers think that the share is likely to be priced in.

If I apply for an IPO, am I guaranteed allotment of shares?

No. If the offer is oversubscribed by a few times then the chances of getting an allotment are high.

However, if it is oversubscribed heavily (by over 15 times) then the chances of getting an allotment progressively decrease. SEBI uses a lottery system as well as a proportionate allotment formula.

The key is to remember that there is no guarantee that you will any shares at all if you apply for an IPO.

When and how will I come to know if I have got an allotment?

If you have applied, you can know the status by calling the registrar, whose name will be listed on the prospectus or the application form, after 30 to 40 days from the closing date of the issue.

In a book-building issue, you can know the status by calling the registrar after 20 days from the closing date. If you have got an allotment then the share certificates will be mailed to you.

Karvy Consultants act as registrars to a large number of issues. If they are the registrars you can check the allotment status on their Web site.

If you have got an allotment then the share certificates will be mailed to you.

What happens to my money if I haven't got an allotment?

You will get a refund 40-45 days from the closing date of the issue. In a book-building issue, you will be getting the refund in 30-40 days from the closing date.


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Number of User Comments: 14




Sub: well written

Article has been written very well in simple english.


Posted by Jeyakumar





Sub: really Good

Sir, This is really very informative and very useful,for a beginner like me willing to get into Share market.


Posted by V Girirajan





Sub: information on IPO issues

The article on IPO issues and related articles are timely and very informative for new entrants into the stock market. keep it up.


Posted by K Srinivasan





Sub: IPO Defination

Good points to learn about IPO


Posted by Neeraj





Sub: good article

I found this article to be very informative .Its helpful for people who are not aware as to how the market operates.Similar article in future ...


Posted by pramod




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