Retail investments in Initial public offerings

There are a variety of instruments traded in the financial markets. Some of them offer fixed returns while some generate capital appreciation and a few others combine fixed returns with capital appreciation.

Setting aside the other financial instruments, let’s take a look at the direct investment prospects of Initial public offerings (IPO) for retail and high net- worth individuals in India.

Definition of an Initial Public offering (IPO)-

An IPO is the first sale of a company’s shares to the public at large. The proceeds are normally used to fund the company’s expansion or to pay up some of the debt incurred by the issuing company.

IPO’s in India are generally issued as either-

a) Fixed price issue- The issue price will be decided by the issuing company. Investors can only bid the quantity of shares they wish to purchase.

b) Book building issue- Here, the issue price will be decided by the market participants. A book building issue normally has a floor price, a price band and a cut- off price. If the IPO is oversubscribed, only investors who have bid at the cut- off price will be eligible for allocation of shares. Since the final issue price is not known in advance, the issuing company only gives out an indicative price band. Investors are therefore advised to go through the red- herring prospectus before arriving at the bid price.

Source: Compositedge- Protrader terminal


Process to apply for an IPO:

Investors looking to invest in IPO’s can do so only through “Application submitted by blocked amount (ASBA).” Once the application for an IPO is submitted, the process will authorize the retail applicant’s bank to block an amount equivalent to the application amount. Although the application amount is not debited from the bank account of the subscriber, it remains blocked until the allotment process is complete. On successful allotment of shares, the application amount will be debited from the bank account of the subscriber and in case of partial or NIL allotment, only the amount which remains utilized will be debited.

Retail Individual Investors (RII) capitalizing in an IPO are permitted to invest a maximum of Rs. 2 lakhs. However, individuals advancing I excess of the above limit towards a single issue can do as but will be considered as high net- worth individuals (HNI) or non- institutional buyers (NIB). According to SEBI, retail investors should be compulsorily allocated 35 percent of the total shares listed in an IPO and non- institutional buyers’, 15 percent.

Retail and HNI participants in an IPO can view all documents of the issuing company such as finances, info related to the promoters, assets, debt, current and future projects, number of shares being issued, how the issuing company proposes to use the funds and all other information which the listing company mandatorily files with the market regulator, SEBI.

In the event of an IPO being oversubscribed, SEBI guidelines mandate the issuing company to allot the minimum application value or lot to retail bidders; usually amounting between Rs. 10k- 15k, However, if there are instances when an issue been over- subscribed by a wide margin, the issuing company will allot shares based on the minimum application value or by drawing lots, leading to a large number of retail investors not receiving even the minimum lot size.

In such an eventuality, retail investors have no other option but to invest in the secondary markets as the when the stock lists on the exchange/s.