Curious about subscribing to an IPO, but confused about how to bid for one? Here is a simple “How to” for a first-time IPO investor. Bidding online is one of the most efficient ways to subscribe to an IPO provided you have the paperwork in place! Here are some fundamental tips on the bidding process.
One hears about subscribing and bidding for an IPO. First-time IPO investors are often confused about how to apply for one. Fortunately, the rules for subscribing to an IPO are now significantly simplified. However, it is still essential that you know the basics.
Are all IPOs the same?
There are three classes or grades of IPOs: retail, high net worth individual (HNI), and Institutional categories. The retail category is open to the investing public; investments up to Rs. 2 lakhs in an IPO are classified as retail. This quota is designed by SEBI to ensure that as many retail investors as possible get allotment. In the HNI and Institutional categories, the allocation is proportionate or discretionary.
There are two types of IPO pricing: Fixed Price IPOs and Book Built IPOs.
- In a Book Built IPO, the company provides a price range. The bid price has to fall in this range. The highest price is known as the cap price, while the lowest price is called the floor price. The Issue Price of the IPO comes during the bidding and book building process – this is called the Cut-off Price. It is decided based on the bids received. Only bidders who quoted higher than or equal to this price can get an allotment of shares. If you started too low or high, you can revise the bid price during an IPO, but there must be sufficient blocked funds during the bidding.
- In a Fixed Price IPO, you can only apply at a fixed price set by the company in advance — usually, the sum of the par value and the premium.
How to Bid for IPO: The Basics
To start with, any investor interested in subscribing and bidding in an IPO, must have a few items in place. The choice of an IPO, of course, should be based on sound research and homework, or alternatively, sound advice from the broking firm or bank, or other expert sources.
- A designated bank account, and a demat account-cum-trading account with a Depository Participant (DP), which could be a bank or a broking firm
- Your PAN card, attested address proofs, and other documentation as specified by your DP.
- An ASBA Form filled out and signed. The ASBA facility is mandatory, as it authorises banks to block money in your bank account for this purpose. Depending on your funds and the IPO share price, you decide to apply for a certain number or “lot”‘ of shares. With ASBA, the amount of money, to the extent of your application, is blocked from your designated bank account. At the time of allotment, only the amount used is debited, based on the extent of the shares allotted, while the remaining amount is unblocked. The advantage of ASBA is that you do not have to issue a cheque for the IPO until the allotment is made, and the blocked amount earns interest.
ASBA is available in hard copy and Demat form. To get an ASFA, you have to furnish your KYC details and bidding details for the IPO. Once the ASBA is completed, you can begin bidding.
The Bidding Process
How much to Bid?
Each IPO puts out the minimum number of shares an investor needs to buy to subscribe. This is called a Lot Size. When applying for an IPO, you need to furnish your bidding details as per the lot size mentioned in the prospectus. You must make sure your account has sufficient funds. The maximum subscription amount for retail investors is 2 lakh.
Where to Bid?
You bid for an IPO online through your Demat and online trading account. Most leading broking firms, such as Angel One, offer this facility. An online IPO application is an easy and convenient way of applying for an IPO being listed at a stock exchange. You can also subscribe to an IPO offline – in person by visiting a local office of their broking firm and furnishing the required document, but online applications are now the preferred mode.
What price to bid at?
You can invest at the cut-off price or make bids, but note, that only retail investors can bid at the cut-off price. If you bid at a lower price and the issue/ cut-off price comes in higher, your chances of getting charges are reduced. For instance, if the price band is 90-100, you bid at 93 and the cut-off comes at 96, you are unlikely to get any shares. To increase the chances of allotment, especially in an offer that might be oversubscribed, you need to bid at the cut-off price. But since the cut-off price is not the time of bidding, the application goes through at the Cap Price. The price difference between the application and cut-off price is refunded after allotment if the application price is higher.
How to Bid Online?
All online trading sites and broking firms have an IPO page. This helps you choose which IPO you want to apply to. Enter the number of shares you choose to bid for, along with the bid price along. You can make a maximum of three bids. Once you submit your application, you receive an IPO application number and other transaction details.
Getting the Shares
Often in a successful IPO, demand outstrips the actual number of shares issued in the market. As a result, you can get fewer shares than you had bid for. Sometimes, you might not get allotted any. In such cases, the bank releases your blocked bid money in part or full.
If you are fortunate enough to get your full allotment, then you receive a Confirmatory Allotment Note (CAN) within six working days after the IPO process is closed.
Once the shares are allotted, they are credited to your Demat account. The next step is to wait for the listing of shares on stock exchanges, which is typically done within seven days. After that you may choose to hold the shares or trade with them. But your IPO subscription is complete!