IPO stands for Initial Public Offering. In an IPO, a company offers its shares to the public for the first time via the primary market. A primary market, also known as a new issue market, is a place where securities are created or issued directly by issuers and made available for trading in the secondary market.

Common reasons for taking a company public

There are 3 main reasons why a company should go public:

1. The owners or investors of the company want to sell a significant stake and make money.
2. The company wants to raise fresh money to expand the business and build new production facilities.
3. The company wants to pay off accumulated debt and clean up its books.

Why does a Company Issues IPO shares?

A company issues an IPO for a number of reasons. Let us look at each of these reasons in detail:

1. Raising Capital

   One of the main reasons for IPO is to raise capital for expansion, growth, debt repayment, and for the future. A company needs capital at every stage of its life cycle. It cannot go public immediately after it is established. A company goes through various financing phases to meet its capital needs before going public.

   Funding stages in a company's life cycle:

   • Self-funding, funding from family and friends.
   • Angel Investors
   • Venture Capitalists
   • Private Equity Investors
   • Bank Loan

   When the above sources of funding have been exhausted, a company chooses an IPO over another source of funding for the following reasons:

   • Angel investors have already exhausted their capacity.
   • Raising more funds from Venture Capitalists or private equity investors would mean losing control over the company with the majority company stake going into their hands.
   • Taking a bank loan would mean an increase in debt for the company with the additional burden of interest and capital repayment.
2. Exit for early investors

   An IPO can be a Fresh issue, an Offer for sale (OFS), or a combination of both. The existing investors or promoters can reduce their stake in the company by selling their shares to the general public through an OFS. This makes it easier for the early investors/promoters to exit the company and seek other opportunities.

3. Business Expansion

   A company needs capital to expand its business and fund other projects. An IPO helps a company raise a lot of money to grow the business.

4. Repayment of loans

   Some companies may have large loans. Taking on more debt to pay off the existing ones would mean an additional interest and repayment burden. The proceeds from the IPO can help a company reduce its debt without having to worry about repaying the principal.

5. Enhanced credibility

   An IPO gives publicity to a company's profile through media coverage. IPO enhances the company's brand image. A listed company is required to be transparent about its business and operations. If the company's performance and prospects are good, this increases the company's credibility and name recognition.

IPO Advantages and Disadvantages

Like every coin has two sides, an IPO has pros and cons for the company and the investors.

1. IPO Advantages to the Company

• An IPO helps a company raise a large amount of funds to finance its growth, expansion, capital expenditures, repayment of loans, and more.
• IPO provides an exit route for the promoters and early investors.
• IPO is a cost-effective way to raise capital because companies do not have to pay interest on the funds raised from the public, nor do they have to return the capital raised.
• Public companies get easy access to finance compared to private companies. The reason is that public companies need to maintain transparency in their business operations which reduces the risk to lenders with all the information available for verification.
• IPO increases visibility and helps build a brand image for the company.
• IPO increases the prestige of employees and builds their confidence in the company. It helps to retain employees and attract new staff.
• IPO enables the correct valuation of the company.
• IPO encourages discipline in the management as the company is answerable to its shareholders for all their actions.
• By going public, a company gets to know the outsider's perspective. It helps them plan their actions for better prospects.

2. IPO Benefits to the Investors

• Zero cost investment , as there are no fees for applying for an IPO, unlike buying shares on the secondary market, where you have to pay brokerage and regulatory fees.
• Applying for an IPO is simple, easy and hassle-free.
• By applying for an IPO, investors get the opportunity to participate in profitable and high-growth companies.
• IPO offers the chance to earn high profits quickly in the case of a premium listing or allows wealth creation in case of long-term investment.
• Strict IPO norms make IPO markets more professional and secure.
• The Red Herring Prospectus (RHP) issued for the IPO contains all the necessary information about the company to help investors make informed decisions.
• In case of a successful allotment, investors will become shareholders of the company. Shareholders can participate in certain corporate actions and elect members of the Board of Directors through voting rights.

3. IPO Disadvantages for the company

• Preparing an IPO requires a lot of time from the promoters, management and employees of the company.
• Although the IPO is a low-cost method of raising capital, it can be expensive because of the fees payable to intermediaries and fund managers.
• The IPO may result in dilution of ownership among various shareholders that were previously limited to a few promoters and investors.
• A company conducting an IPO is required to file regulatory documents on a regular basis with the required disclosures. This increases administrative costs for the company , as it must hire a team to oversee and complete these tasks.
• By going public, the company becomes accountable to its investors and therefore must maintain relationships with investors and meet their expectations.

4. IPO Disadvantages for Investors

• Investors do not have any background information about the company doing the IPO as it is a new company going public for the first time. An investor has to go through the entire RHP to know all the details of the company.
• An investor may suffer losses in a discount listing if it is done with the goal of a quick return (listing profit).
• There is no guaranteed allotment in an IPO in case of oversubscription.

IPO Types (Mainline IPO and SME IPO)

An IPO is classified as either a Mainline IPO or an SME IPO based on the platform used by the issuer company for their IPO.

1. Mainline IPO (Mainboard IPO)

A Mainline IPO, also known as Mainboard IPO, is a regular IPO issued by large companies that have an extensive track record and meet the IPO eligibility criteria set by SEBI.

The minimum paid-up capital of a Mainboard IPO after the issue should be Rs 10 crores.

2. SME IPO

A SME IPO is an initial public offering of small and medium enterprises (SME) or start-ups. The post-issue paid-up capital of SME IPO should not exceed Rs 25 crores.

This chapter covers the IPO norms for Mainboard and SME IPO, their requirements and pre-IPO eligibility criteria.

1. Mainboard IPO Requirements

A Main Board IPO is an initial public offering of large and established companies with a paid-up capital of at least Rs 10 crores. A Main Board IPO is a regular IPO listed and traded on the stock exchange platforms of the NSE/BSE.

The listing standards and eligibility requirements for Mainboard IPOs are set out in the SEBI ICDR Regulations 2018.

1. SEBI IPO Eligibility Criteria

SEBI has prescribed two routes by which a company can qualify as an issuer of IPOs.

1. Profitability Route (Entry Norm I)

The companies must meet all the following conditions in terms of profit standards to be eligible for an IPO through this route:

• The company should have net tangible assets of at least Rs 3 crores in each of the three preceding years.
• For fresh issues (not OFS), of the above Rs 3 crores of tangible assets, not more than 50% should be cash or cash equivalent.
• The company should have an average operating profit (before tax) of at least Rs 15 crore in any of the three years out of the last five years.
• In case of a name change, 50% of the revenue generated in the previous year should be from the business carried on under the new name.
• The issue size should not exceed five times the net worth of the company before the issue (pre-issue).

2. QIB Route (Entry Norm II)

The QIB route is an alternative route developed by SEBI for genuine, capable and legitimate companies that are unable to meet strict profitability parameters. The companies going for IPO through the QIB route have to ensure that:

• IPO through the book-building process.
• Allocate at least 75% of the net offering to qualified institutional buyers .
• Refund of IPO subscription money if the minimum allotment requirement is not met.

SEBI requirements for directors/promoters/founders/investors

• There is no disciplinary action against the company founders/promoters/directors/selling shareholders.
• The promoters/directors/founders/investors/issuing company should not be barred from accessing the capital markets . The company cannot apply for an IPO until the debarment period has expired.
• The promoters/managers/founders/investors should not be affiliated with another company that is excluded from access to capital markets.
• The promoters/directors/founders/investors should not be defaulters.
• The promoters/directors/founders/investors must not be classified as fugitive offenders as defined in the Fugitive Economic Offenders Act 2018.
• The promoters should individually or collectively own at least 20% of the equity after the IPO.

2. NSE IPO Eligibility Criteria

In addition to the IPO guidelines prescribed by SEBI, the NSE requires that the issuing company meet the following eligibility criteria:

• At least one promoter should have at least 3 years of experience in the same industry.
• The issuing company must submit to the NSE the annual reports for the last three fiscal years.
• The company has a positive net worth. (This clause is applicable to companies with an issue size of less than Rs 500 Cr).
• The post-issue paid-up equity of the company should be more than Rs 10 Cr.
• Market capitalization should be more than Rs 25 Cr.
• The company should provide the Exchange with a certificate confirming that:
  • There are no proceedings pending against the issuer under the Insolvency and Bankruptcy Law.
  • The company has not received a winding-up petition from the NCLT (National Company Law Tribunal).

3. BSE IPO Eligibility

Equity and market capitalization requirements are the same for the NSE and the BSE. According to BSE,

• The minimum paid-up capital of the issuing company after the issue should be Rs 10 Cr.
• The minimum issue size should be Rs 10 Cr.
• The minimum market capitalization of the issuing company should be Rs 25 Cr.

You need to follow the BSE Main Board IPO checklists below and submit the required documents and information at each stage.

• In principle Approval Stage
• Issue Opening Stage
• Basis of Allotment Stage
• Listing & Trading Approval Stage

Other IPO Requirements

• The company should obtain prior consent from the BSE to use the name of the BSE in its prospectus or offer-for-sale documents.
• The issuing company should file an application with one or more exchanges and designate one exchange as the Designated Stock Exchange.
• The issuer should have an arrangement with a depository (CDSL and NSDL) to take care of dematerialization before and after the issue.
• The promoter's shares should be in demat form before filing the offer document.
• The partly paid-up shares should either be fully paid up or forfeited before the filing of the offer document.
• The issuer should deposit 1% of the issue amount as a deposit with the designated stock exchange before the commencement of the issue.

2. SME IPO Requirements

SME IPO means an initial public offering of small and medium-sized enterprises (SME). Like any other company, an SME needs capital to drive its business forward. However, since SMEs do not have an extensive track record, it is usually difficult for them to raise funds from financial institutions or conduct a regular IPO.

To give SMEs and startups an equal chance to raise funds from the general public, the NSE and the BSE have established a separate SME IPO platform, NSE Emerge and BSE SME, respectively, for the listing and trading of SMEs.

SEBI relaxes IPO norms for SME IPOs compared to mainboard IPOs. The post-issue paid-up capital of the company issuing SME IPO should not exceed Rs 25 crores. The other eligibility requirements for SME IPO company directors/promoters/investors remain the same as for a regular IPO, where the said persons should not be defaulters, offenders or disqualified from accessing the capital markets.

In addition to the above criteria, SMEs must also meet other eligibility requirements prescribed by the exchanges. The criteria for SME IPO are explained in detail below.

1. BSE SME IPO Eligibility

SMEs must meet the following criteria set by the BSE SME platform for issuing SME IPO.

BSE SME IPO Eligibility Requirements in Detail

• The company should have net worth of at least Rs. 1 crore for 2 preceding full financial years. If the formed company is the result of conversion of partnership firm, proprietorship or LLP, then the previous firm should have the required net worth of Rs 1 crore for 2 preceding financial years.
• The Net Tangible Assets of the company should be Rs. 3 crores in the last preceding financial year.
• The company should have a track record (operations) of at least three years. If not, the project for which IPO is being proposed should be appraised and funded by NABARD, SIDBI, Banks (other than co-operative banks), Financial Institutions.
• The company should have operating profit (i.e. Earnings before Interest, depreciation and tax) for 2 out of 3 latest financial years, of which the latest financial year should be mandatorily profitable. If the IPO project is funded by NABARD, SIDBI, Banks (other than cooperative banks), the company should have positive operating profit in the one last financial year.
• The leverage ratio of the company should not be more than 3:1. Note: The finance companies may get certain relaxation.
• There should not be any regulatory action of suspension of trading against any promoters or companies promoted by promoters.
• The company directors and promoters should not be the promoters or directors (other than independent directors) of the compulsory delisted companies or suspended from trading on account of non-compliance.
• The company director should not be debarred or disqualified by any of the regulatory authorities.
• There should be no pending defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders by the applicant company, promoters/ promoting company(ies), or subsidiary companies.
• In case of name change of the company in the last 1 year, 50% of the revenue for preceding full FY should be earned from the activity indicated by the new name. The revenue calculated should be based on a restated and consolidated basis.
• The company should have a website.
• The company should have an agreement with both Indian depositories CDSL and NSDL.
• The company should facilitate trading in Demat form.
• The list of promoters should not have changed in the preceding year from the date of applying to BSE for listing under the SME segment.
• The company should submit a certificate to BSE stating that the company is currently not under any Board for Industrial and Financial Reconstruction (BIFR) matter nor received any winding up petition against the company.

2. NSE SME IPO Eligibility

NSE Emerge platform lists the following eligibility criteria for a company to issue SME IPO:

• The company should be incorporated under the Companies Act 1956 / 2013 in India.
• The company should have a track record (operations) of at least three years.
• The promoters should individually or jointly hold at least 20% of the share capital after the issue.
• One of the promoters should have at least three years of experience in the same industry.
• The company should have operating profit and positive net worth in at least 2 out of 3 fiscal years .
• There should be no pending Board for Industrial and Financial Reconstruction (BIFR), insolvency or bankruptcy proceedings against the company or promoters.
• The company should not have received any winding-up petition from NCLT/Court.
• No material regulatory or disciplinary action has been taken against the applicant company by any stock exchange or regulatory agency in the last three years.

IPO pricing is one of the critical steps of the IPO process, which must occur before the IPO launch date. If the IPO price is too high, investors may be reluctant to invest in the company as it may result in losses. If the IPO is priced too low, it may cause investors to doubt the performance of the IPO because good things do not come at a low price. Therefore, the right pricing for an IPO is very important for a fair listing.

IPO Pricing Methods

The IPO price is determined by one of the two IPO methods - Book building or Fixed price . The issuing company may use either method, depending on its preference. (Unless the mainboard-eligible company is unable to meet the profitability norms prescribed by SEBI. In such a case, a company will have to go the QIB route, where it is mandatory for the issue to follow the book-building route.

1. Book Building Method

In the book-building method of issuance, the IPO price is not fixed in advance. The issuing company announces an IPO price range (e.g., Rs 75 to Rs 80 per share) within which bids for the IPO are accepted. The IPO price is determined at the end of the bidding period based on the demand for the shares at various price levels.

Book Building Advantages

The book-building method offers the following advantages to the company:

• An efficient mechanism for price discovery.
• The company can assess its credibility based on the demand for the issue.
• A realistic approach to pricing that is based on demand for the shares and not set by management.

Book building Disadvantages

Book building has certain limitations, which are listed below:

• Costly compared to a fixed issue IPO.
• Lengthy process for issuing shares as the price has to be calculated at the end of the bidding process.
• Suitable for large issuance volumes.

Book Building Features

• The IPO is launched without setting the final price of the issue.
• The issuer announces a price range for the issue. According to the regulations, the price range should be announced at least two business days before the opening of the issue for the subscription.
• The issuer can revise the price range for the offering during the life of the offering.
• A book-building issue must be kept open for 3-7 business days , although the period may be extended by three days if the price range is revised.
• BSE and NSE offer a fully automated online bidding system for book-building IPOs.

IPO Price Band Rules

The IPO price band is the range of the offer price within which investors can place their bids. Below are the key facts and features of a price range:

• A price band has a lower price and an upper price (e.g., Rs 75 to Rs 80).
• The lower price of the price range is called the Floor Price or Base Price , and the upper price of the price range is called the Cap Price or Ceiling Price.
• The difference between the lower price and the upper price should not exceed 20%.
• A retail investor can apply at any price within the specified price range or at the Cut-off price .
• The cutoff price is the final price within the price range at which the shares are allocated to investors.
• The cutoff price is known at the end of the bidding process.
• The basis for the price determination is stated in the prospectus.

Book building process explained

The book-building process is mainly carried out by the Lead Managers and the Underwriters. The following steps provide a brief overview of how the book-building process works in India

Book Building Process Steps

1. The lead manager appointed by the issuing company determines the issue size and price range for the IPO in consultation with the issuing company.
2. The lead manager and the issuing company appoint the syndicate members to perform the duties related to the IPO offering.
3. Once the IPO is launched, investors start bidding for the required number of shares at different prices within the price range.
4. At the end of the bid submission window, the lead manager collects the data from all bids and determines the final issue price using the weighted average method.
5. The lead manager must publish the details ( basis of allotment ) of all bids received to ensure transparency of the bidding process and derivation of the minimum price.
6. Once the cut-off price is determined, the investors who submitted their bids at a price higher than the cut-off price or at the cut-off price may receive an allotment. On the other hand, the bids that are below the cut-off price will be rejected and the investors will get back the entire subscription money.

Book Building Types

An issuing company may conduct the IPO in one of the following ways:

1. 100% Book Built Offer
   In this type of offering, the entire 100% of the issue may be offered through the book-building process.
2. 75% Book Building
   In this type of offering, 75% of the net offering can be offered through the book-building process and 25% can be offered at the threshold determined through the book-building process.

Book building example

In a book-building issue, the issuer announces a price range for the IPO instead of a fixed price.

For example, the company may specify a price range of Rs 601 - Rs 650 for its issue of 1 million shares. The lowest price in the price range, say Rs 601, is the minimum price and the highest price Rs 650 is the maximum price. Investors can place bids at any price within the specified price range or at the cut-off price (applicable to retail investors only).

Based on the demand and supply of the issue, the issuer determines the final price using the weighted average method. In this case, the issuer arrives at a final price/cut-off price of Rs 640 according to the procedure described above.

Case 1: Bidding above the cut-off price

The investors who had applied for the IPO at a price above Rs 640 may have a chance to receive an allotment. The investors will get back the amount above the minimum price. Example: If you have placed a bid at Rs 645 for 10 shares, you will get a refund as below:

Case 2: Bidding below the cut-off price

All bids below the cut-off price will be rejected and the entire amount will be refunded.

Case 3: Bidding at the cut-off price

Investors who submitted their bids at the cut-off price may receive an allotment. In the case of a full allotment, no refund will be made; in the case of a partial allotment, the pro rata amount will be refunded to the extent of the shares not allotted.

Note: If the demand for the issue is very high, the maximum price usually becomes the cut-off price.

Book building and reverse book building

Bookbuilding is one of the IPO methods to raise capital from the public, while reverse book-building is used when the company wants to buy back the shares from its shareholders.

Reverse book-building works on the same principle as book-building and is an efficient pricing mechanism. In reverse book-building, the shareholder submits sell orders at different prices. The company then decides on the final price based on supply and demand. Reverse book building is mainly used in the case of a delisting.

2. Fixed price issue method

In a fixed price issue, the offer price is fixed (e.g. Rs 75 per share) that is decided in advance before the IPO opens for the subscription. The SME companies prefer a fixed price issue over the book-building method due to the smaller issue size.

Fixed price issue features

Unlike a book-built issue, a fixed-price issue must be applied at the price set by the issuing company. Below are the key facts and features of a fixed-price IPO:

• The fixed-price IPO prospectus contains all the details about the IPO price and the basis for setting it.
• The issuer must register the fixed-price IPO prospectus with the Registrar of Companies before the issue is opened for subscription.
• At least 50% of the net offering of securities should be made available to retail investors.
• A fixed-price offering should be held open for 3-10 business days.

Fixed price IPO process

The fixed-price IPO method is comparatively simple compared to the book-building method because there is no price discovery. However, deciding the right price is very important for the issuing company. The following are the steps for a fixed price issue:

1. The lead manager is appointed by the issuer company. They jointly evaluate various factors such as the company's financial position, growth prospects, assets and liabilities, and decide on the size of the issue and the IPO price.
2. The bidding process takes place as soon as the IPO is opened for subscription.
3. Investors submit their bids at the set price.
4. The lead manager assesses the demand for the issue at the close of the bidding period and accordingly works with the company's registrar (RoC) for the allotment.
5. The Registrar completes the allotment, credits the shares to the Demat account and initiates the refund, if any.

Fixed price issue example

The price of an IPO under the fixed-price method is determined in advance.

For example, the issuer may announce a price of Rs 186 for its issue. Investors would place their bids at Rs 186. You do not have the option to bid at any other price or cut-off price. Once the issue is closed, you may or may not receive an allotment depending on demand.

Scenario 1:

You applied for 1000 shares and received a full allotment. In this case, the entire 1000 shares will be credited to your account and there will be no refund.

Scenario 2

You have not received an allotment. In this case, the full amount of Rs 186,000 will be refunded to you.

Scenario 3

You have received a partial allotment of 200 shares. In this case, you would receive a refund of Rs 148,800 (186*800 unallotted shares) and 200 shares would be credited to your account.

The IPO process involves various stages where the prescribed regulations must be followed closely. In this chapter, we will cover the IPO process in detail by explaining it step-by-step.

IPO Process (Step by Step Guide)

A company must follow the IPO procedures set by the exchange(s) on which the company wishes to list its shares after the IPO. The IPO procedure in India is as follows:

1. Merchant Banker (Lead Manager) Appointment

The company appoints a Merchant Banker (Lead Manager) to assist the issuer throughout the IPO process, starting from due diligence to post-listing support. They orchestrate the entire IPO process and coordinate with all parties involved in the IPO from start to end.

The Issuer Company and the merchant banker conduct due diligence and prepare the draft prospectus (DRHP) .

A merchant banker is a SEBI-registered financial institution that assists companies with financial solutions, such as raising funds, providing advisory services, acting as an underwriter, and more.

Note:

• A company can appoint one or more merchant bankers. For large IPOs, multiple lead managers are common.
• Most banks and large non-bank financial institutions are licensed as merchant bankers.

2. DRHP Approval from SEBI

The DRHP document is submitted to SEBI for review. This process takes between 2 to 4 months. SEBI reviews the information in the DRHP and issues the necessary approvals.

Note: SME IPOs don't require approval from SEBI. They must be approved by the stock exchange.

3. IPO Application to Exchanges

Merchant bankers then submit the IPO application and DRHP document to the stock exchanges for approval. The exchange gives the company in principle approval after verifying the IPO application.

4. Price determination

The issuer and the merchant bank determine the IPO pricing method: fixed-price issue or book-building issue.

In a fixed-price offering, the price at which shares are sold and allotted in the fixed-price offering is announced to investors prior to the IPO.

In Book Building Issue, the issuer decides a price range (e.g., Rs 80 to 90) or a 20% price range within which investors can bid for the shares. The final price is determined after the bidding process is completed. Within this price range, both retail and institutional buyers are invited to bid for the IPO.

5. RHP Submission

A Red Herring Prospectus (RHP) is prepared and filed with the Exchange(s).

The RHP is an updated version of the DRHP document. It contains current information about the company, i.e., the most recent financial data. It also contains additional information such as the IPO timeline and pricing details to help investors make an informed decision.

6. Road Show

Together with the PR & advertizing agency, Merchant Bankers advertise the IPO to the public. This process is called an IPO roadshow. They arrange investor meetings in different cities with the promoters of the company. The meetings are also arranged with journalists, analysts and other media representatives.

7. IPO Open for Anchor Investor

The IPO will be open to anchor investors (if any). An anchor investor is a qualified institutional buyer (QIB) who applies for an IPO under the anchor investor section and submits a bid for an amount of at least Rs 10 crore.

The company allots the shares to the anchor investor one day before the issue opens to the public.

8. IPO Open for Public

The IPO is opened to the public to place bids for the shares offered in the IPO. An offering may be open to the public for a minimum of three days and up to ten days. While the offering is open, investors place bids for the available shares. Submitting bids does not guarantee shares, as in most cases shares are allotted through a lottery.

IPO applications are submitted to the stock exchange's IPO platform by investors through a broker or bank. Investors receive a unique IPO application number.

9. IPO Shares Allotment

Once the public offering is closed, the application data is forwarded by the exchanges to the IPO registrar, which handles the allotment.

1. The exchange sends the IPO application file to the banks to confirm that the bank account and the demat account used in the IPO application belong to the same person.
2. The banks confirm whether the account numbers match or not.
3. The registrar rejects all IPO applications that are flagged as "3rd party".
4. The registrar draws a lottery or allocates shares on pro-rata basis to applicants as applicable.
5. The money is withdrawn from the investor's account.
6. The shares are transferred to the investor's account.

10. IPO Listing Date Announcement

The company submits the listing documents to the stock exchange. The company then sends a credit confirmation from the depository, i.e., the shares are transferred to the allottee's account, and the stock exchange issues a listing circular to the market the next day. The circular contains information such as the final price, ISIN, code and symbol.

11. IPO Shares Listing

Trading of IPO shares is set up on the stock exchanges in two steps:

1. Pre-open Session

   The pre-opening session is a pricing mechanism for newly listed shares. It is a special trading session for IPOs on the first day of their listing. The Pre-Open Session lasts 45 minutes (9:00 a.m. to 9:45 a.m.), during which orders can be entered, modified and canceled.

   From 9:45 a.m. to 9:55 a.m., orders placed during the first 45 minutes are matched, the opening price of the IPO is determined and a trading confirmation is sent to traders.

2. Commencement of trading

   Normal trading begins at 10 a.m. on the day of listing. At this time, anyone can buy or sell the shares of the IPO on the market.

12. Post-Listing Documents

After listing, the issuer must submit documents to the stock exchange, including invitations to board meetings, annual reports, shareholding samples, audit reports, corporate governance reports and audit reports.

Mainboard and SME IPO Process Comparison

The overall IPO process for mainboard and SME IPOs is the same except for the minor differences listed below:

• In the case of SME IPO, the IPO documents are reviewed by the stock exchange and not by SEBI, as in the case of the Mainboard IPO.
• Appointment of a Market Maker is mandatory in case of an SME IPO. The market maker is appointed by the issuer company and the merchant banker in joint consultation.
• In case of a fixed-price IPO SME IPO, an RHP document must be filed with the RoC (Registrar of Companies) prior to the opening of the issue. For mainboard IPOs ( Book building Issue ), the RHP can be filed after the closing of the issue.

IPO Process Timeline India

The duration of the IPO process in India ranges from 3 months to a year, depending on various factors such as the type of IPO, the complexity of the transaction, the size of the company, the market situation, etc.

Note: A company should complete an IPO within 12 months of receiving SEBI's comments on the initial filing.

IPO intermediaries provide services to help a company initiate and complete the IPO process and get listed. IPO prospectus documents detail the involvement of all parties in the IPO.

These intermediaries act as a bridge between the company and investors and coordinate with other intermediaries and parties to ensure a smooth IPO process.

1. Issuer Company

The issuer of an IPO is a private company that wishes to go public and issue new shares or sell existing shares to the general public for the first time through an IPO. Generally, an issuer is a company that offers securities to raise capital.

Three categories of issuers can conduct an initial public offering:

1. Large-scale companies (Mainboard)
2. Small and medium enterprises (SME)
3. Startups

2. Stock Exchanges

A stock exchange is a company that provides a trading platform where investors can buy and sell equity shares, bonds, ETFs and other listed securities. Exchanges match buy and sell orders and provide a legal guarantee for transactions.

The Securities and Exchange Board of India (SEBI) regulates the exchanges. SEBI sets the rules and regulations for the exchanges and ensures that the exchanges follow them. BSE and NSE are the two most prominent stock exchanges in India. Check out the list of stock exchanges in India.

Exchanges appoint stock brokers who work as intermediaries between investors and the exchange. An investor (individual or institutional) must have an account with a stock broker to trade on a stock exchange. 

3. SEBI, The Market Regulator

SEBI (Securities and Exchange Board of India) is a regulatory body for the capital market in India. It is a government organization established by Government of India

" ...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected there with or incidental there to".

SEBI's role in IPO

Any company seeking to raise more than Rs 50 lakhs through an IPO has to submit a draft offering document to SEBI for approval. The company must submit its offer within a window of 12 months from the date of SEBI's approval.

Below are some clarifications issued by SEBI on public issues for investors and issuers:

• Merchant Bankers are responsible for conducting due diligence* and certifying that the information provided in the offering documents is in compliance with SEBI's Investor Protection Guidelines.
• SEBI does not take any responsibility for the financial soundness of any project for which funds are raised through the Issue.
• SEBI makes no representation regarding investments in securities..
• Investors should review the material contents and disclosures in an offering document before making an investment decision.
• SEBI does not propose or recommend any issues.
• Issuers have the freedom to choose or set the issue price of their securities without interference from regulators.

*IPO Due Diligence is the gathering and reviewing of information about a company or business. It is obtained from all parties assisting the company in the IPO process.

4. Merchant Banker (Lead manager)

Merchant bankers are independent financial institutions registered with SEBI. They assist companies in their IPO from start to end. They are also called Lead Managers or Book-running Lead Managers(BRLM). An IPO can have one or more lead managers.

A merchant banker assists a company throughout the IPO process, from due diligence and determining if the company is eligible for an IPO, to applying for an IPO with the exchanges, to preparing a prospectus, IPO advertising, road shows, marketing, and the post-listing process.

Merchant Banker Role in IPO

A lead manager's role in an IPO can be segregated into two categories as Pre-Issue and Post-Issue.

Pre-Issue Responsibilities of a Merchant Banker as lead manager

• Due diligence (gathering and verifying the issuer's details).
• Checking the eligibility criteria of the company as per stock exchanges and SEBI.
• Underwriting agreement (If acting as a manager or underwriter).
• Determining the fees for an IPO.
• Structuring the issue/offering details.
• Preparing the draft prospectus (DRHP).
• Completing the IPO application form.
• Submission of IPO Application and DRHP to SEBI and BSE.
• Roadshow and Advertisement of Issue.
• Red herring prospectus (RHP) drafting and submission.
• Resolving observations received from SEBI.

Post-Issue responsibilities of a Merchant banker as lead manager

• Submission of post-issue monitoring reports.
• Assist in the allotment process.
• Publish post-issue advertisements related to over subscriptions, the basis of allotment, details of applications received, date of completion of despatch of refund orders, and date of filing of listing application.
• Certificates, true copies of refunds, orders, underwriting commissions, and dispatch reports are submitted.
• Post-issue promotion of securities.
• Management of escrow accounts.
• Ensure share allocation and refund to unsuccessful applicants.

5. Bankers to an Issue

The issuer company appoints banker/s to help them manage the funds collected in the IPO process and transfer them to the Escrow Account, Allotment Account or Refund account as the case may be. A company can appoint one or more bankers to the issue that are registered with SEBI. Check out for the list of SEBI registered Bankers to an Issue.

The responsibilities of the bankers to an Issue include the below:

• Transfer all the funds collected in the Escrow account.
• Transfer funds to Allotment account and thereafter to Company account on receipt of instructions from Lead Manager.
• Transfer surplus funds to Refund account.
• Transfer funds to investor account from refund account in case of non-allotment on receipt of instructions from Registrar and Lead Manager.
• Provide updated bank statement for each of the above accounts to Registrar, Lead Manager and Company at regular frequency or as demanded.
• Closure of all accounts once there is Nil balance in all the above accounts.
• Address investor complaints relating to refunds.

6. Self-Certified Syndicate Banks (SCSB)

Self-Certified Syndicate Banks commonly referred to as SCSBs are the SEBI registered banks that provide ASBA services to the investors. With ASBA mandatory for IPO application, investors can apply for an IPO provided they have an account with any of the bank that offers the facility of ASBA.

The investors can apply online by using the Netbanking services of the SCSB or offline by submitting the form to the nearest branch. The main responsibilities of the SCSB include the following:

• Accepting the applications.
• Blocking the funds.
• Co-ordinating with brokers to confirm the fund blocking that allows broker to upload bid to exchange.
• Co-ordinating with the banker of issue for required transfer of funds.
• Co-ordinating with depositories and refund and ensure smooth execution of allotment and refund process.

7. Registrar to the Issue (RTI)

The IPO registrar is an entity that assists the issuer in the allotment of IPO shares and maintains records of the company's shareholding.

Registrar of IPO

The IPO Registrar is responsible for the final allotment of shares in consultation with the issuer company and the stock exchanges after preparing a list of valid and invalid IPO applications. Here you can find the list of IPO registrars in India.

Registrar's roles and responsibilities

• Collecting IPO application data from stock exchanges and banks.
• Preparing a list of valid applications in cooperation with depositories and banks.
• Preparing the basis of allotment in consultation with stock exchange/s.
• Processing the allotment of shares.
• Processing and dispatching allotment letters.
• Initiation of the refund procedure for non-allotment recipients.

Registrar as a Transfer Agent

Once the shares are listed, the Registrar also maintains a list of registered shareholders for the listed companies. For this task, they are called 'Share Transfer Agents'. They maintain information such as the shareholder's name, contact information, and dividend information (if any).

The RTA's job is to keep proper records of the shares and make changes as needed to reflect true ownership of the securities by making name changes, endorsements, etc.

8. IPO Underwriter

An IPO underwriter is an intermediary that undertakes the risk of purchasing the shares in case of the IPO under subscription.

IPO underwriting is a process wherein the underwriter and the issuer company get into an agreement wherein the underwriter agrees to purchase the unsold shares of an IPO in return for an underwriting commission.

The underwriting commission is a fee charged by the merchant banker in its capacity as underwriter for entering into the underwriting agreement. It is the fee charged by an investment banker for underwriting an issue of securities.

For example, if it was agreed between the underwriter and the issuer that the underwriter would be responsible for selling 3% of the shares offered, and the underwriter is unable to sell all of the shares, the underwriter would be responsible for the unsold shares and would have to purchase them from the issuer.

Underwriter roles and responsibilities in an IPO

• Compliance with Underwriting Agreement clauses.
• In charge of selling the predetermined number of shares.
• Responsible for purchasing the remaining shares or unsold shares.
• IPO Roadshow, promotion and marketing.
• Help the issuer in determining share valuation**, whether the shares are overvalued or undervalued.
• Consulting and advising the issuer for the IPO process.

**Share valuation means determining the value of a company's shares in an IPO by the issuer company. IPO shares can be overvalued or undervalued. Overvalued securities are those that are trading above their market value. Undervalued securities are those that are traded below their market value.

IPO Underwriting Process

In SME IPOs, underwriting is mandatory. In most cases, the merchant banker acts as an underwriter for SME IPOs. At least 15% of the shares offered in an SME IPO should be underwritten by the underwriter.

In the case of a mainboard IPO, underwriting is optional.

IPO Underwriting Process Steps

• Issuer appoints an underwriter.
• The underwriter and the issuer enter into an underwriting agreement, which includes details of the underwriting percentage, fees, etc.
• In the case of under subscription, the underwriter purchases the shares from the issuer for the agreed percentage and at the agreed price.

9. Market Maker

Market makers are licensed stockbrokers (NSE list | BSE list) who buy or sell stocks in the stock market at specific prices to improve liquidity and price discovery. They provide liquidity in thinly traded stocks. They also monitor the trading in the script and report to the exchange when irregularities occur.

Market-making is mandatory for SME IPOs and voluntary for main board IPOs. Most SME stocks face liquidity issues that could make it difficult for investors to exit. Market makers are here to help.The market makers helps with this.

Market makers are paid by the issuing company for the risk they take. The risk includes a market maker buying shares from a seller in the market and the share price begins to fall and the market maker not being able to find another buyer because of the price fluctuation, so the market maker takes a loss on the unsold shares.

Market makers are also allowed to place 2-way orders (buy and sell) simultaneously. For example, they can place an order in the range of Rs.98-100. They will buy shares at 98 and sell them at 100.

The lead manager introduces the market makers to the issuing company. They provide the market makers' details in the DRHP document. The issuer company pays a fee to the market makers.

Market Maker Role

As per exchange (NSE and BSE) guidelines, a market maker:

• Should provide a 2-way quote for 75% of the time in a day.
• Guarantee the execution of the order at the quoted price and quantity for the quotes they provide.
• Shall provide quotes from the date of listing of the particular security and shall be subject to the market-making guidelines set by the Exchange.

Points to Note

• A market maker should have sufficient inventory on the date of allotment.
• A market maker should not buy shares from promoters during the market making period.
• An issue cannot have more than five market makers.
• A market maker must serve in this capacity for three years.
• Market makers must decide the time period with a merchant banker.
• A market maker can deregister by giving one month's notice to the exchange.
• Market makers can compete with other market makers for better price discovery.

10. Depositories

Depositories are the financial institutions that hold the shares in electronic form. In India, there are two depositories, NSDL and CDSL.

The issuer company enters into a tripartite agreement with both the depositories individually and Registrar. Depositories play an important role in smooth execution of managing of IPO shares. The main responsibilities of the depositories include the below :

• Dematerialization of physical shares held by the issuer company.
• Credit the IPO shares to the beneficiary account of the allottee once allotment is finalized.
• Trading and settlement of IPO shares on listing.
• Maintain records of shareholders to account for any corporate action benefits post listing.
• Ensure security of the shares held in the electronic form with no fear of theft.

An IPO investor is a person or organization that purchases shares offered in an initial public offering of a company. Investors make this purchase with the expectation of making a profit. The process of buying IPO shares is very different from buying shares on the stock market. The company allot the shares within 7 days after the IPO closes.

IPO Investor Category

Each type of IPO investor has its own rules for IPO application, reserve ratio, and share allocation mechanism. Let us understand the types of IPO investors in detail.

1. Retail Individual Investors (RII)

Indian resident individuals, NRIs and HUFs who participate in an IPO with less than Rs. 2 lakhs fall under the retail investor (RII) category.

Investors in the RII category are allowed to bid at the cut-off price. They can also withdraw their bids while the issue is still open.

Allotment Basis for Retail Category

• If the IPO in the RII category is not oversubscribed, a full allocation will be made to all applicants.
• If the IPO in this category is oversubscribed, the allocation will be made by lottery and applicants will receive at least one lot regardless of how many lots they have applied for.

Example

1. An IPO A, the retail category is oversubscribed twice (by number of applications). 1 out of 2 applicants will receive 1 lot, regardless of how many shares they applied for.
2. In IPO X, investor A has applied for Rs 2 lakh (15 lots), investor B has applied for Rs 15,000 (1 lot) and investor C has applied for Rs 1 lakh (7 lots). If the IPO is subscribed three times in the retail investor category (based on the number of applications), the allocation will be done by lottery. Only one out of three applicants will be allotted a lot. It does not matter how many shares they have applied for. They will receive a maximum of 1 lot.

IPO Retail investor limit

A retail investor can invest maximum up to Rs 2 lakhs in an IPO. A retail individual investor could choose the NII category for an IPO application of more than Rs 2 lakhs.

Retail investor lock-in period

There is no lock-in period for retail investors in an IPO. Retail investors can sell their IPO shares as soon as they are listed for trading on the exchange(s).

Tips for Retail Investors in an IPO

• Always apply at the cut-off price in the retail category.
• If the IPO is oversubscribed, apply for only 1 lot per IPO application.
• To maximize allocation, apply for multiple accounts in your family member's name.

2. Non-Institutional Investors (NII)

The NII category is for Indian resident individuals, NRIs, HUFs, companies, corporations, academic institutions, societies and trusts. Their bidding for IPO shares has to be worth more than Rs 2 lakhs. Unlike QIB bidders, the non-institutional investor category does not require SEBI registration.

Any IPO individual investor bidding more than Rs 2 lakhs in the NII category is called a high net-worth individual (HNI). The NII category is also referred to as the IPO HNI category.

Non-institutional investors include HNI, HUF, Liability Partnership (LLP), Private Limited Company, Limited Company, Trusts etc.

NII Subcategory

NII or HNI category has two subcategories:

1. Small NII (bids below Rs 10L)

   NII investors who place bids for shares worth Rs 2 to 10 lakhs are called Small NII (sHNI or sNII). One-third of the shares in the NII category are reserved for sNII.

2. Large NII (bids above Rs 10L)

   NII investors who bid for shares worth more than Rs 10 lakhs are referred to as Big NII (bNII or bHNI). 2/3rd of the shares in the NII category are reserved for bNII.

IPO NII Allotment Process

1. sNII or sHNI Allotment Process
   • sNII IPO not fully subscribed: If the IPO in subcategory sNII is not fully subscribed (<1x), a full allocation will be made to all applicants.
   • sNII IPO oversubscribed: If the IPO is oversubscribed in the sNII sub-category (>1x), the allotment to each investor shall not be less than the minimum application size (~Rs 2 lakhs), subject to availability of equity shares in the sNII portion. In this case, a lottery will be conducted.

   This is similar to the allocation in the RII category. Instead of one lot, the sNII investor will receive shares worth the NII minimum application size. The NII minimum application size is just above Rs 2 lakhs.

   Example: If the IPO in the sNII sub-category is subscribed twice (in terms of applications), one out of two applicants will receive the sHNI minimum application. This is worth approximately Rs 2 lakhs, irrespective of how many shares they have applied for. Applicants will be selected through a lottery process.

2. bNII or bHNI Allotment Process
   • bNII IPO not fully subscribed: If the IPO in bNII sub-category is not fully subscribed, a full allocation will be made to all applicants.
   • bNII IPO oversubscribed: If the IPO in bNII sub-category is oversubscribed, the allotment to each investor shall not be less than the minimum NII application amount. This amount is worth approximately Rs 2 lakhs. It is subject to availability of equity shares in the bNII portion.
     
     This is similar to the allotment in the RII category. Instead of a lot, the bNII investor will receive shares worth the minimum application amount. The minimum application amount is approximately Rs 2 lakhs.
   • The investment amount limit for Big HNI is at least Rs 10 lakhs. But, in this case, the investors will receive shares worth Rs 2 lakhs on a lottery basis (same as small HNI).

NII Locking Period

There is no lock-in period for HNI and NII; they can freely sell their allocated IPO shares on the day of listing.

3. Qualified Institutional Buyer (QIB)

Qualified institutional buyers include

• Mutual funds,
• Commercial banks,
• Public financial institutions and
• Foreign portfolio investors.

QIB stands for a qualified institutional buyer registered with SEBI to invest in IPOs in the QIB category.

Most QIBs represent small investors who invest through mutual funds, ULIP schemes of insurance companies and pension schemes. QIB invests in large amounts in IPOs.

QIBs cannot withdraw their bids once made. For this reason, QIBs invest in an IPO on the last day of the subscription period.

Qualified institutional buyers include investors like LIC, Nippon India Mutual Fund, Goldman Sachs, Kuber India Fund, Elara India Opportunities Fund and BNP Paribas Arbitrage.

QIB Holding Period

There is no holding or lock-up period for IPO shares issued under the QIB category. QIB investors can sell them as soon as trading in the IPO shares begins on the stock exchanges.

However, there is a lock-in period for QIB investors who qualify as anchor investors .

4. Eligible Employees

The issuing company may reserve a portion of the public offering exclusively for its eligible employees. The eligibility criteria are explained in the prospectus document.

In most cases, the following employees are eligible to apply under the reserved employee category:

• Permanent or full-time employees of the Company, its holding company or a subsidiary working in India or abroad.
• Employees who are closely related to the full-time or part-time director.
• Employees who are closely related to the entity whose financial statements are consolidated with the issuer's financial statements.

IPO Employee Quota

The IPO prospectus document details the employee reservation quota and the discount (if any) offered to employees.

Under the regulations, the employee reservation quota for an IPO offering may not exceed 5% of the company's post-issue paid-up capital.

There is no specific investment limit for employees. However, to avail the employee discount (if any), the investment amount should not exceed Rs 2 lakhs.

Example: SBI Card IPO Employee Quota Explained

IPO Employee Benefits

An IPO issue benefits the employees of the issuing company in the following ways.

• Employees are given the opportunity to buy the stock at a discounted price. This can help them earn higher profits. Note: The discounted price should not exceed 10% of the price offered to other categories of investors.
• Employees feel motivated and proud to be part of the company going public. This happens as listed companies gain awareness and become a brand.

IPO Employee Lock-up

There is no lock-in period for shares purchased under the employee reserved category. Like retail investors, employees can sell their shares as soon as the IPO is listed on the stock exchange(s).

IPO Employee Discount

The IPO employee discount is a discount on the share price offered to eligible employees of the issuing company. To qualify for this discount, the employee must apply for the IPO under the employee reservation quota. The definition of eligible employees, the amount of the discount, and the rules vary by IPO and are explained in the RHP document.

5. Eligible shareholders

Some IPOs have a special reservation quota for eligible shareholders of the parent company. The IPO Prospectus Document contains detailed information on eligibility, bid limits, allocation criteria and other shareholder reservation rules.

In most cases, individuals and HUF shareholders holding the share on a given day are eligible for the shareholder reserve quota.

Read SBI Cards IPO Shareholders Application for more details.

Note: Bids under the shareholder reserve category are subject to the rules set by the issuing company. These are explained in the IPO prospectus document. These may vary depending on the IPO.

Advantages of the shareholder preference category in an IPO

• It increases the chance of allocation.
• Companies can provide an additional discount in this category.
• A shareholder can invest upto the total number of shares offered in the shareholders reserved category.
• Applicants in the shareholder quota are also eligible to apply in other categories such as retail and employee.
• The bid at the cut-off price is available for applications up to Rs 2 lakh.

Shareholder Quota Limits

A shareholder can invest up to the total shares offered in the shareholder reserved category. Some companies provide a discount on share prices for IPO applications up to Rs 2 lakh.

Lock-in period for shareholders

There is no lock-in period for shares purchased under the shareholder category. Like retail investors, shareholders can sell their shares as soon as the IPO is listed on the stock exchange(s).

6. Anchor Investors

Anchor investors are financial institutions that are allocated shares at a fixed price before the IPO is opened to the public. An IPO anchor investor must invest at least Rs 10 crore in a mainboard IPO and at least Rs 1 crore in a SME IPO. They have a lock-in period of 30 to 90 days from the date of allotment.

Rules for Anchor Investors

• Bidding for anchor investors begins one day before the start of the issue.
• Anchor investors cannot withdraw or modify their bids once placed.
• Anchor investors should pay the total bid amount at the time of application.
• Allocation to anchor investors will be completed on the same date of bid submission by anchor investors.
• Neither promoters/promoter group/trade bankers nor any person related to them can apply in the anchor investor category.

Role of the anchor investor in the IPO

• Higher subscription and higher number of applicants in the anchor investor category indicates greater confidence of institutional investors in the IPO.
• The presence of anchor investors confirms the authenticity of the IPO.
• Improves price discovery.

Anchor Investor IPO limit

• The minimum amount for IPO application by an anchor investor should be Rs 10 crores in Mainbaord IPO and Rs 2 Crore in SME IPO.
• 60% of QIB share can be allotted to anchor investors, with one-third of the share reserved for domestic mutual funds.
• An anchor investor may apply up to the total number of shares offered in the category reserved for anchor investors.

IPO Anchor Investor Lock-in Period

Shares purchased by anchor investors in the reserved anchor category are subject to a lock-in period of 30 days for 50% of the shares and 90 days for the remaining 50% of the shares from the allotment date.

IPO Date for Anchor Investors

The IPO offering for anchor investors begins and ends one day prior to the opening of the IPO to the public. Anchor investors have only one day to submit their bids. Allocation for anchor investors will also take place on the same day in the evening

An IPO prospectus is a legal document that introduces the company to the public. The prospectus contains a lot of decision-making information that an investor can use to decide whether or not to invest in the company.

In Indian IPOs, the issuers have to file the DRHP (Draft Red Herring Prospectus) when they apply for the IPO. Once the company receives SEBI/Exchange approval, the issuer files the prospectus or RHP (Red Herring Prospectus). All prospectuses should be drafted or prepared based on SEBI guidelines.

IPO Prospectus Meaning

The IPO prospectus is an offering document that provides potential investors with details about the company and helps them decide whether or not to invest in the company.

The IPO prospectus is not an agreement for an initial public offering. It is an invitation to the public to buy the shares. Investors may or may not invest in an IPO based on their analysis. The IPO prospectus is prepared by the lead manager and the issuer which helps investors make an informed decision. It contains all the necessary information about the company including the financials.

IPO Prospectus Types

There are different types of offer documents based on the stage of the IPO.

1. Draft Red Herring Prospectus (DRHP)

DRHP stands for Draft Red Herring Prospectus. The DRHP is also known as a draft offer document.

DRHP Meaning

The DRHP document is the preliminary prospectus that the issuer submits to initiate the IPO process. The DRHP is required to be approved by SEBI/stock exchanges based on where it is a mainboard IPO or SME IPO.

The DRHP contains information on the company overview, IPO structure, details of the offering (new issue or offer for sale), management and promoters, shareholder structure, related risks, use of proceeds, financial statements of the company and other information.

It does not contain detailed information about the size of the offering, the price or the number of shares offered.

The DRHP will be posted on the websites of the issuing company, SEBI, the stock exchanges and merchant bankers for the public to review and provide feedback or comments.

After evaluating the DRHP, the Merchant Banker makes the necessary adjustments and submits the final offer to SEBI, the Registrar of Companies (ROC) and the Stock Exchanges.

DRHP Validity

For mainboard IPOs, SEBI provides an observation report on the draft offer documents within 30 days from the date of receipt of the draft offer documents. The observation letter issued by SEBI is valid for 12 months. The issuing company has to clear the comments, make clarifications and initiate the IPO within 12 months from the date of the SEBI observation letter.

SEBI requires 15 days to issue an observation report on the clarifications/responses received from the commercial banks on the original observation letter.

DRHP Filing process

The DRHP application process is conducted by the issuer and a merchant banker. Below are some guidelines and standards for filing the offering document:

• No company can issue an IPO without filing a draft offer document with SEBI/Exchange through a merchant banker (lead manager).
• The issuer company or the lead manager should make the changes in the draft document based on the observations made by SEBI/Exchange before filing the prospectus with the Registrar of Companies (RoC).
• If SEBI has sought clarifications from a regulator or other agencies or authorities, the amendments or observations (if any) may depend on the comments or responses of the regulator/agency.
• SEBI issues observations or specifies changes on the draft offer document only after receipt of a copy of in-principle approval from the exchange/s where the issuer intends to list the proposed issue.

2. Red Herring Prospectus (RHP)

RHP stands for Red Herring Prospectus and is an improved/altered version of DRHP issued in case of book-building issues.

Red Herring Prospectus Meaning

An RHP is filed with SEBI, exchanges and RoC once the IPO application has been approved. The RHP contains all the latest and updated financial statements. All changes to the offering structure and corporate information and all other updates and modifications to the DRHP are included in the RHP. The RHP contains all details except the price or number of shares of the issue.

3. IPO Final Prospectus

The IPO prospectus is the final and definitive offering document that contains all relevant information. This includes the offering price, the number of shares offered and the size of the net offering.

In the case of a fixed-price issue, this document is registered with the Company Register prior to the opening of the issue. In the case of a book building issue (price discovery), it shall be registered with the Registrar of Companies after the closing of the issue.

Information contained in a final prospectus together with all other information:

• Final Issue Price
• The total number of shares offered.

4. Abridged Prospectus

An abridged prospectus is a mini/summary version of the offering document issued together with the application form. An abridged prospectus contains a summary of the offer document with all relevant information. Under the Companies Act, an abridged prospectus must accompany each application form.

An abridged prospectus saves investors time and ensures they do not miss important details by providing them with the key information and features of the full prospectus at a glance.

An abridged prospectus contains information such as promoter details, price range, minimum bid lot and provisional deadlines, BRLM details, names of intermediaries, business overview and strategy, board details, the object of the issue, financial statements, a summary of claims and regulatory actions, etc.

For investors looking to understand the IPO quickly, the following sections are pertinent:

1. Terms & Conditions.
2. Pricing related details.
3. Application process and deadlines.
4. Market Outlook and,
5. Any litigations on the company or any of its directors.

IPO Prospectus Requirements

An IPO prospectus is a legal document that must contain all the information as per the guidelines laid down by SEBI.

The DRHP format, the RHP format and the prospectus format all remain the same. The RHP is an updated version of the DRHP and the final prospectus is an updated version of the RHP with all the latest changes and pricing information.

IPO Prospectus Guidelines

• The front cover page of the offer document should be white with no patterns or pictures printed on it.
• The cover page should be of adequate thickness (preferably a minimum of 100 gcm. quality).
• The offer document should contain the following details.
  • Name, Address and Contact Details of the issuer company, lead managers, and Registrar to the issue.
  • Issue Details.
  • Risk Factors.
  • Industry and Business Overview.
  • Purpose of the Issue.
  • Regulatory and Statutory Disclosures.

IPO Prospectus Template

Refer to the below-extracted IPO Prospectus sample that gives an idea of the information an offer document needs to include.

IPO Prospectus Contents

In this section, let us take a detailed look at the contents of an IPO prospectus:

1. Definitions and Abbreviations

   This section contains a complete list of definitions and abbreviations used in the offer Document with their meanings/full forms.

2. IPO Prospectus Summary

   This section contains a general summary of the terms of the offer, including information about the company's primary business, the industry in which it operates, the names of the Promoters, the size of the Offering, the objectives of the Offering, the shareholdings of the Promoters, the Promoter Group and the Selling Shareholders, and risk factors and financing arrangements.

3. Risk Factor

   IPO prospectus risk factors section includes all risks that could potentially impact the Company. These include business risks, information about lawsuits filed against the company, product information, development-related costs and expenses, and positive and negative facts about the company's sales performance.

4. Introduction

   The introduction section is divided into different parts that include a summary of information about the offering, a summary of financial information, and the capital structure of the company.

   • The Offer

     This section contains information about the offer structure, including issue size, fresh issue size, offer for sale, face value, IPO price, investor allocation portion or percentage, net issue, employee reservation, market maker portion, and employee discount information.

   • Summary Financial Information

     This section contains details on the consolidated or standalone balance sheet, profit and loss, cash flow statements and financial ratios like the PE Ratio, debt-to-equity ratio, and return on equity ratio, among others.

   • Capital Structure

     The capital structure includes details on the authorized share capital, issued/subscribed/paid-up capital before and after the issue, and details of the share premium account.

5. Offer details

   This section provides details on how the Company intends to use the net proceeds and the basis of the Offer Price.

   • Objects of the offer

     The company specifies the purpose of the offer in this section and how the company intends to utilise the funds raised. An investor should analyse this section to understand whether the funds raised are used to repay the debt or for expansion purposes.

   • Basis of Offer Price

     This section includes the qualitative factors, quantitative factors and comparison of accounting ratios with listed industry peers that form the basis for deriving the offer price.

6. Details about the company

   This section provides an overview of the industry, operations, management and promoter details.

   • Industry Overview

     The Industry Overview section contains information on the Indian economy, including India's Gross Domestic Product (GDP), per capita income, a macroeconomic overview of India, and market information related to the industry to which the issuing company belongs.

   • Business Overview

     The business overview section includes information on the core business, competitive strengths, opportunities, subsidiaries, business models, expansion plans, and detailed information on the company's products and services.

   • Management

     This section contains information about the Board of Directors, the relationships between the directors, the biographies of the directors, the terms of appointment of the directors, their compensation, their ownership stakes in the Company, changes in the Board of Directors, and other management-related data.

   • Promoters

     This section contains information about individual promoters and promoter groups, including their names, shareholdings, personal details, information about the promoters' trust company, promoters' experience with the Company's business, changes in control of the Company.

   • Group subsidiaries

     This section contains information about the issuer's affiliates, including regulatory violations, business interests, related business transactions, financial information and other relevant data.

7. Financial Information

   This section contains information on the company's restated standalone and consolidated financial statements, including balance sheets, income statements and cash flows, as well as any financial-related information.

8. Legal and other information.

   This section contains information about legal actions taken against the Company, its directors, its promoters and its subsidiaries, including any criminal proceedings, legal or regulatory actions and tax claims.

9. Offer-related Information

   The offering-related information includes the terms of the offer such as market lots, trading lots, ranking of shares, offering structures, allocation tables for investors, payment terms, bidding information, and details of the IPO process (fixed or book-build).

10. Provisions of the Articles of Association (AoA)

    The provisions of the Articles of Association contain information on the provisions of the Company's Articles of Association, the calling of shares, the transfer of shares, information on the issuance of bonds, the transfer of shares, repurchases, general meetings and the forfeiture of shares.

11. Other Information

    This section includes all other matters such as material contracts and documents relating to the Offer. This is followed by a statement from the management confirming that all the information contained in the Offer Document is true and correct and complies with the SEBI Guidelines and the provisions of the Companies Act 2013.

Key Takeaways

The prospectus is one of the most important factors in applying for an IPO. It introduces the issuer to investors and allows them to learn about the company's operations, related risk factors, capital structure, offering details, management details, share ownership, financial statements, and intermediary information. Investors can evaluate all aspects before deciding whether or not to invest in the company. DRHP and RHP contain all the information about the company and the offering structure, while the final prospectus contains the IPO price, total number of shares and net proceeds.

The IPO valuation is one of the critical steps in the IPO process that helps determine the price of an IPO. An IPO valuation is a complicated task that requires expertise and in-depth knowledge of financial concepts and the market / industry as a whole. A merchant banker assists the issuing company in the valuation process.

IPO Valuation meaning

IPO valuation is a process to determine an appropriate valuation of the company to help determine the correct IPO price.

There are several factors that affect the valuation of a company. The merchant banker must analyse all of these factors in detail. This data is then submitted to SEBI in the draft IPO prospectus, which explains the basis for determining the price. SEBI thoroughly evaluates and analyses the data to ensure that investors' money is in safe hands.

It is very important to price the stock correctly because an overvalued stock may not attract many investors and an undervalued stock may create doubts amongst investors.

Factors impacting IPO valuation

The valuation of an IPO is the result of the health and performance of the company. Additionally, there are several other components like industry scenarios and market conditions that affect the valuation. The following are the factors that influence IPO valuation:

1. Demand

   Generally the higher the demand for a stock, the higher is its price. This is because investors are willing to pay a heavy price if they really want to be invested in the company.

   However, investors should be aware that this factor alone is not enough to judge the IPO. It can sometimes be an inaccurate indicator. For example, Paytm and LIC IPO, were in high demand. Both were expected to go public at a premium, but both stocks got listed at a discount of 8-9%, causing investors to suffer losses.

2. Past Financial Performance

   A company's financial track record plays an important role in its valuation. Quantitative financial factors that form the basis for pricing an IPO include the company's:

   • Assets,
   • Liabilities,
   • Ability to generate revenue,
   • Income, Earnings per share (EPS),
   • Price-to-earnings ratio (PE),
   • Return on net worth, and
   • Net asset value per share.
3. Peer Comparison

   The valuation of an IPO company is usually aligned with companies in the same industry. Therefore, an issuing company reviews the valuations and current market price of stocks in the same industry. If the valuations differ too much, investors tend to hesitate to invest in the company.

4. Potential Growth Rate

   Investors are attracted to companies that have good future prospects. For example, a company that intends to raise funds for business growth may be valued higher than a company whose goal is to pay down debt.

5. IPO Timing and Market Trend

   Market trends and timing also affect a company's valuation. If the market is in a downtrend, a higher valuation will not attract investors.

6. Products and Services

   The products offered by the company can also affect the company's pricing. If a company offers products and services that improve the lives of an average person or are considered under necessities, the IPO may attract a higher price.

7. Company management and values

   Companies with experienced management, strong promoters, and a good corporate history, attract a higher valuation and the IPO prices may be higher.

IPO Valuation Process

Given the wide range of factors, IPO valuation is an extremely complex process performed by trained merchant bankers. Merchant bankers have the expertise and knowledge to understand and analyse all factors impacting the IPO valuation.

To derive the valuation of a company, a merchant banker has to:

1. Gather all previous data and details of the company, including its financials.
2. Analyse the data.
3. Get the data audited.
4. Map the competitive valuations.
5. Analyse all factors that affect the valuation.
6. Adopt one or more IPO valuation techniques to derive the valuation.
7. Include the information in the draft document.
8. Submit the data to SEBI for analysis and approval.

IPO Valuation Methods

There are various valuation methods available for IPO valuation calculation. A merchant banker could use any one or a combination of one or more valuation methods to arrive at an appropriate valuation. Some IPO valuation calculations are purely mathematical calculations, while others are based on relative approaches, experience and assumptions. Let us take a look at some of the main methods used by companies to determine their stock price.

1. Relative Valuation Method

Relative valuation is also known as the comparable valuation method or IPO valuation using multiples. In this method, merchant bankers compare key ratios of similar publicly traded companies in the industry to get an idea of the value investors are willing to pay for those companies. These comparisons include ratios pertaining to :

• Revenue,
• Earnings, and
• Market capitalization.

Based on these comparisons, the merchant banker determines the valuation of the issuing company.

Steps in relative valuation method

The relative valuation method is a simple 4-step process that requires solid analytical skills and market knowledge.

• Look for similar companies in the industry.
• Determine IPO valuation multiples for comparison. These include price-to-earnings ratio (PE), enterprise value (EV), earnings per share (EPS), earnings before interest, taxes (EBIT) and much more.
• Compare the above values of all similar companies.
• Determine the value of the issuing company after adjusting certain factors such as strength, risks and growth potential, which may be different for each company.

Let us take a simple example to understand the above concept of relative valuation using the Price to Earnings multiple valuation that will assess rough valuation of the business based on its earnings after interest, tax and depreciation (EBIT).

Example : You want to assess the valuation of your business that is in the IT sector. As a first step, check for the PE ratio of the IT services industry from eqvista OR Getmoneyrich.com. Say the PE ratio of IT sector is 24%.

Let us assume the EBIT for your business is Rs 15.75 crores. Considering your business is new, it is better to take half of the IT PE ratio or less than that and check for a range of PE to get a fair idea of valuation of your business. We will take a PE ratio in the range of 15-20% and get a rough valuation figure for the business using the below formula.

PE Multiple Valuation = PE Multiple * EBIT

Note: Use our Business Valuation Calculator for more details.

Considering the above formula, we see that the valuation of the company ranges anywhere around Rs. 240 crores to Rs. 315 crores.

2. Absolute Valuation Method

The absolute valuation method considers future cash flows to determine the current value of the company. The absolute valuation method is performed in a standalone mode. This means that it focuses only on the characteristics of the company. It does not compare the characteristics or value of other companies in the same sector.

Absolute valuation helps in the mathematical calculation of the intrinsic value of the company. These are based on certain assumptions like, future cash flows get projected and discounted to determine the current value of the company. The projected cash flows can be in the form of profits, free cash flows, dividend income, etc. This approach relies on the time value of money.

The absolute valuation approach is challenging because it relies on long-term forecasts and assumptions that can change due to unforeseen factors.

Steps to value a business using Absolute Valuation approach:

• Define a period and complete the cash flow projection for the period.
• Derive the weighted average cost of capital (WACC). This denotes an investor's expected rate of return. The WACC is taken as the discount rate.
• Calculate the present values of the cash flows for each year by dividing the projected cash flow by 1 plus the discount rate raised to the power of the year i..e 1 for Year 1 , 2 for year 2 and so on.
  For instance, Projected Cash Flow for the first Year is 1/(1+ Discount rate)¹
• Add all the projected cash flows derived as per above formula for each year.
• Derive the terminal value.
• Add the terminal value to the discounted cash flow of all years to arrive at the present value of the business.

The absolute value of the business for 5 years will look like below:

Absolute value of a business assuming cash flows for 5 years = Cash Flow for Year 1/(1+WACC)¹ + Cash flow for Year 2/ (1+ WACC)²+ Cash Flow for Year 3/(1+WACC)³+………………+ Cash flow for Year 5/(1+WACC)⁵+ Terminal Value /(1+WACC) ^{last year of projection}

The lead managers also have the choice of ready-made IPO valuation model excel templates for quicker and easier calculation. However, the lead manager still has to ensure projecting the right values and setting the right multiples/factors. This requires a lot of effort in examining minute details of the company and analysing the growth path of a company.

Let us take a simple example to understand the derivation of absolute valuation based on projected and discounted cash flows.

Assumptions:

• Projected growth in revenue: 20%
• Discounting Rate: 15%
• Terminal Value: 5%
• Operational expenses (OPEX): 15% of the revenue
• Tax Rate: 25%

Derivation of valuation considering projected growth rate for 5 years.

Note: Business Valuation Calculator (DCF Calculator) for more detail.

*Terminal Value = (PAT of last forecasted year*(1+Terminal Value %))/ (Discounting Factor-Terminal Value%) *Discounted Cash Flow of last forecasted year)

3. Economic Valuation Method

The economic valuation method is a purely mathematical, formula-based method of determining the value of a company based on the company's debt, market capitalization, income, assets, and other economic factors.

In this method, there are no comparisons or assumptions as in the relative and absolute valuation methods.

Below is the IPO valuation formula to determine the enterprise value using the economic valuation approach:

Enterprise value + Cash and Cash Equivalent- Value of debt and other liabilities

All three of the above methods have their own advantages and disadvantages. The merchant banker decides on the best approach based on his experience, expertise, business objectives and market conditions.

For example, during a recession, the relative method may not be the best option. The overall market would be affected, and a comparison with other companies would not yield the highest valuation. Also, you may not be able to find appropriate comparables for your company. In such a situation, • Merchant bankers would generally go for the economic valuation or absolute valuation. In certain cases, predicting future earnings may be difficult. In such a case, other valuation methods may be used.

These techniques require apt skills and knowledge. The issuing company and merchant banker generally take the help of a third party valuer who professionally manage the valuation process with their expertise. They charge a fee of Rs 3 lakhs to Rs 8 lakhs depending on the issue size and the complexities involved in the business.

Apart from the above methods, the issuing company also determines the valuation of their company based on the rounds of earlier fund raising. For example, if the issuing company got Rs 5 lakhs against 10% equity, the valuation of the company would be determined to be Rs 50 lakhs. (Derivation: If 10% is Rs 5 lakhs, then 100% would be the valuation of the company). This method of self-assessment by the issuer company or the merchant banker is free and gives a fair idea about the company valuation to the issuer.

Valuation of IPO in India

IPO valuation in India is done by qualified merchant bankers. The merchant banker reviews and analyses every little detail of the company. This includes internal business metrics, key performance indicators, previous financings, market situation and data from other companies. These help the merchant banker decide on the best valuation approach for the company. The merchant banker is responsible for having the data reviewed and for disclosing all information considered in pricing the IPO in the offering documents under the section titled "Basis for Offer Price/Issue Price".

SEBI shall analyse the information and in case of any queries, may issue an opinion or approve the implementation of the IPO.

IPO Pricing and Valuation

Often the terms IPO pricing and IPO valuation are used interchangeably. There is a difference between these two terms.

IPO valuation is one of the factors that form the basis for pricing an IPO. IPO valuation is a process that helps determine the IPO price as seen in the IPO pricing chapter.

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Page Glossary

1. Terminal Value

Terminal value is the estimated value of business beyond the projected timeline . It is very difficult to make right predictions for a longer period beyond 5 years and hence is the importance of terminal value.

Terminal value can be derived based on either of the two approaches.

Approach 1: It is expected that the business will be sold based on certain multiples.

Approach 2: The business will continue till eternity with a certain perpetual growth rate.

2. Intrinsic Value

The intrinsic value is the actual value or the real worth of the stock/company that is derived based on fundamental and technical analysis of the company.

The intrinsic value is different from the market value. The market value is the value of the stock/company the investors are willing to pay. Whereas the intrinsic value is the actual value based on its assets, risks, projected cash flows, financials, etc.

When the market value is more than the intrinsic value, the stock is said to be overpriced, whereas when the market value is less than the intrinsic value, it is said to be under priced.

3. Weighted Average Cost of Capital

Weighted Average Cost of Capital is commonly referred to as WACC.

WACC is the cost a company is required to pay to raise capital through debt or Equity.

If a company raises funds in the form of debt, the interest portion becomes the cost of debt. If a company raises funds by issuing Equity, the return expected by shareholders becomes the cost of equity.

To derive WACC, a company needs to proportionately calculate the costs based on the mode of raising capital.

4. Undervalued Stock

An undervalued stock is a stock with a lower market price /value compared to its true worth.

A stock is said to be undervalued, when it is priced much below its potential. The undervalued stocks are believed to give assured profits, but it may take time to show their real value. Thus, only long term investors invest in undervalued stocks after extensive research and analysis.

For example : When the estimated valuation of ABC shares is believed to be Rs 1500 per share, but the stock is trading at Rs 950 per share, then such shares are said to be undervalued.

There are various reasons and factors that can lead to undervaluation. One of the major causes of undervaluation is an overall downward market trend.

5. Overvalued Stock

An overvalued stock is a stock with a higher market price /value compared to its true worth.

A stock is said to be overvalued, when it gets priced higher than its potential. The overvalued stocks can churn profits in the short term. Investing in overvalued stock makes timely exit important. An overvalued stock will return to its intrinsic value/true worth leading to heavy losses. Thus, only experienced investors invest in overvalued stocks as they know how to make the entry and exit at the right time.

For example: When the estimated valuation of ABC shares is believed to be Rs 1000 per share, but the stock is trading at Rs 1500 per share, then such shares are said to be overvalued.

An IPO application is a way to submit bids for an initial public offering. Investors who wish to invest in an IPO must submit their bids as soon as the issue is open and before it is closed for subscription. The process of applying for an IPO is also known as the IPO bidding process.

In India, you can submit bids for an IPO in two ways:

1. Online IPO application
2. Offline IPO application (Paper form)

Online IPO applications can be submitted through the online facility offered by banks (netbanking, mobile banking apps) and stock brokers. UPI or ASBA is used as the payment option.

Offline IPO applications can be made by submitting the physical IPO application form to the broker or the nearest bank branches that accept IPO applications.

IPO Application Process

The IPO application process can be carried out through brokers, exchanges, and self-certified syndicate banks (SCSBs) using UPI and ASBA facilities.

Investors may submit only one IPO application per PAN number. If more than one application is submitted under the same PAN number, all applications under that PAN number will be rejected. This rule may or may not apply to IPO applications in the employee and shareholder categories.

IPO Application Procedure

1. Login to online IPO application offered by a broker or bank.
2. Select the issuing company.
3. Fill in the data in the IPO application form.
4. Review it.
5. Submit the form.
6. Complete the payment either through UPI, ASBA Net Banking or by entering the account details in the physical form.

As per regulations, there should be one application per PAN. Thus, an investor cannot bid in multiple categories. An individual investor can bid either as an RII, or sNII or bNII. If the investor applies across multiple categories as per below, their application would get rejected

• RII + sNII - Not allowed
• RII + bNII - Not allowed
• sNII + bNII - Not allowed

However, if an IPO has additional reserved categories like Employee and Shareholder, an investor can bid across multiple categories and such applications will not be accounted as multiple bids. Let us have a look at all such scenarios and combinations in which an investor can apply and the respective limits.

Note: In certain cases, employees are given discount if bidding amount is up to Rs 2 lakhs. Check the details in offer document before applying.

IPO Application Time

An IPO remains open for a minimum of 3 days and a maximum of 10 days. Stock exchanges accept subscription applications between 10:00 a.m. and 5:00 p.m. on days when the IPO is open for subscription, except on stock exchange holidays.

Most banks and stock brokers allow investors to submit IPO application any time (24 hours) when the IPO is open for bidding. Although the application may be submitted at any time, it will not be forwarded to the exchange until 10:00 a.m. the next day.

The deadline for submitting the IPO application on the last day varies by bank or broker, as they need buffer time to send applications to the exchange before 5:00 p.m. The online application ASBA IPO closes for retail investors at 2 p.m. at SBI Bank, 3 p.m. at ICICI Bank, 3 p.m. at HDFC Bank Net Banking, 3 p.m. at Axis Bank and 2 p.m. at Kotak Bank.

Timing for IPO application

• IPO application opening time: 10 AM (Issue Opening Date)
• IPO application cut-off time: 5 PM (Issue Closure date)

Check cut-off time for ASBA IPO Application (on Last Day) by the banks.

IPO Application Charges

The bank or stockbroker doesn't charge investors for participating in an IPO. They receive a commission from the issuing company for processing the IPO application.

The stockbroker also charges a brokerage fee if the customer sells the IPO shares allotted to him. Some stock brokers, such as Zerodha , offer stock delivery trading with no brokerage fees, so investing in an IPO is completely free.

IPO Application Form

An IPO application form is a two-page document that contains information about the applicant, offer, and counterparty on the first page and instructions on the second page. It is only required if an investor wishes to make their offers offline. In the case of online IPO applications, the application data is transmitted by the broker/bank to the exchange via an API.

Each application form has a unique application number and space for the stamp/code/serial number of the intermediary where the form is submitted.

The IPO application forms can be downloaded by investors in PDF format from the BSE and NSE websites.

IPO Application Number

The IPO application number is a unique reference number assigned to each transaction of the IPO application. The IPO application number helps investors verify the status of their application and the allotment status.

For online bids, the IPO application number is generated as soon as the application is submitted to the exchange by the bank/broker (between 10:00 am and 5:00 pm).

For paper forms submitted, the IPO application number is pre-printed as Bid cum Application form No. on the IPO application form.

IPO Application Rules

• Only one application per PAN is allowed.
• Payment for an IPO should be made from the investor's own bank account to avoid rejection. In some cases , individuals receive allotment for third-party IPO applications also.
• Applications are not processed and considered valid by the exchanges until the amount is debited or a lien is placed.
• The UPI facility is only available to retail investors.
• The ASBA Facility is available to all types of investors, i.e., retail investors, non-institutional investors, and qualified institutional buyers who are not anchor investors.
• Only retail investors can apply for an IPO at a cut-off price .

IPO Application Status

The investor can check the status of his IPO application once the bank/broker has submitted the bids to the exchange.

If the bid was submitted online through the broker, you can check the IPO bid status through the broker's website/mobile app in their IPO section. There is a tab there that reflects the status of your application.

If the bid was submitted offline, you will need to check the status with the respective broker/bank.

The status of your application can be either of the following:

• IPO application under process.
• IPO application executed.
• UPI Mandate request pending/approved.
• Payment received by sponsored bank.
• Bid submitted.

You can also verify the status of your bid on the NSE or BSE website.

1. IPO Application Status NSE

The NSE provides an IPO application verification tool that allows investors to verify IPO application details uploaded on the exchange and also check the allotment status once available. Investors must register once with their PAN information and can then view IPO application details for registered PAN.

If the investor wishes to amend his offer details, he should contact the bank/broker through which he has submitted his application before the closing of the issue. The IPO application details on the NSE website is available until 6 days after the closing of the offering.

2. IPO Application BSE

The BSE also offers investors the ability to check the status of their applications online. Access the BSE IPO application check link and enter the name of the issue, application number or PAN number. Confirm that you are not a robot, and submit the application.

ASBA stands for Application Supported by Blocked Amount. It was introduced in 2008. The ASBA facility is used by all types of investors, including retail investors, non-institutional investors (NII) and qualified institutional buyers (QIB).

ASBA IPO Meaning

ASBA is a method of applying for shares in an IPO. ASBA gives the Self-Certified Syndicate Bank (SCSB) permission to block funds in the applicant's bank account in exchange for subscribing to the offering.

When an investor applies in an IPO through ASBA, his/her application funds are blocked in the bank account. If the investor receives the allotment, the funds will be deducted from the account. If there is no allotment of shares, the money will be released from the investor's bank account on the day of the final allotment.

The ASBA route is the easiest, fastest and most convenient way to apply or bid for an IPO. One of the biggest advantages to investors is that they continue to receive interest on the blocked amount.

ASBA Features

• Investors can apply for an IPO under ASBA either through online or offline mode.
• The application amount is not debited at the time of application.
• The SCSB simply blocks the respective amount from the investor's bank account.
• Investors continue to receive interest on the blocked amount until it is debited in case of an allotment.
• In case of a non-allotment/partial allotment, the lien on the amount will be lifted after the allotment is announced.
• Unlike UPI, no mandate approval is required.

ASBA IPO Application Process

ASBA has simplified and accelerated the IPO process by blocking funds as soon as investors confirm the payment. This eliminates the need to pay money via cheques and demand drafts.

Investors can apply for an IPO with ASBA in either online or offline mode. The ASBA online IPO process is much easier than the offline ASBA process.

1. ASBA IPO Online

The online ASBA IPO application can be submitted through the net banking services of the bank providing ASBA facility.

Steps for ASBA IPO online application:

• Log in to the Net banking account that offers ASBA services.
• Go to the Investments section and look for the IPO menu.
• Select the desired IPO for the application.
• Fill in details like applicant name, PAN number, and Demat Details.
• Enter the bid details such as quantity and price.
• Submit the IPO application.

Note:

• Generally, entering applicant details such as name, PAN, and DP is a one-time registration process. The investors have to register these details the first time when they submit an IPO application through the Netbanking ASBA facility. Once registered, investors will only need to enter the bid details the next time.
• Some banks require investors to enter the OTP to authenticate the process.

The process mentioned in the above ASBA IPO application is a general process. Investors need to contact their bank to know the more specific details of the process.

2. ASBA IPO Application Offline

Investors can apply for an offline IPO by submitting the duly completed Physical IPO Application Form/ASBA forms at the nearest Self Certified Syndicate Bank (SCSB) branch.

Offline IPO application is a somewhat lengthy, manual and time-consuming process.

Steps for offline IPO application via ASBA:

1. Investors can procure the IPO application form from their broker or download it from the NSE or BSE website.
2. Fill in the personal details like Name, Address, Contact No., Demat Account, and PAN.
3. Enter the bid details like quantity, price and select the investor category and status.
4. Enter payment details by providing either ASBA bank account number or UPI ID.
5. Sign the form.
6. Submit the form to the nearest SCSB.
7. Investors must collect and save the counterfoil given as an acknowledgment for the submitted form. This serves as the IPO application proof.

Resident Indians, i.e., resident individuals, QIBs, NIIs, and eligible NRIs (applying on non-repatriation basis) should use the white application form. FPIs applying on repatriation basis should use the blue application form (applies when a physical copy is requested).

ASBA IPO Application Form

The ASBA application form can be downloaded from the NSE/BSE website or obtained from one's broker/lead manager. These ASBA forms can then be submitted to apply for an IPO in offline mode.

Originally, there were only physical paper forms. Since July 2010, ASBA forms were also made available online.

ASBA IPO e-Form

The online ASBA IPO forms can be downloaded from either the NSE or BSE websites.

Links for ASBA IPO application form download :

• ASBA IPO form BSE
• ASBA IPO form NSE

Using the ASBA BSE forms, investors can download only blank forms (new/revised). However, the ASBA NSE website provides the option to download either a blank ASBA IPO form or a pre-filled form with personal information (new/revised form).

The ASBA NSE IPO form allows investors the advantage of entering their details only once by registering and creating a user id. During registration, investors need to enter their personal information such as name, PAN, DP and bank details correctly. After registration, the data will be saved in their profile and only prints are needed of the pre-filled form. This saves the hassles of manually entering the bid data and amount in the form.

Another advantage of the ASBA NSE is the possibility to fill in all the details on the screen before printing the bidding form without registration.

Refer to the ASBA NSE IPO forms user guide for more details.

ASBA Charges

There are no charges to apply using the ASBA facility.

ASBA IPO Timing

• ASBA IPO apply time: 10 AM on the issue opening date.
• ASBA cut off time: 5 PM on the issue closing date (many banks allow only until 2 to 3 PM on the last day).

Refer to the bank-wise cut-off time for ASBA IPO application (on last day).

ASBA IPO Limit

• Investors can submit up to 3 bids for an IPO.
• Only one application can be submitted from a bank account.
• QIBs and NIIs cannot withdraw their bids once submitted.
• QIBs and NIIs cannot submit their bids at the cut-off price.
• Many banks have their own cut-off times for ASBA IPO applications on the last day.

ASBA Rules for IPO

• Investors must have an account at one of the ASBA-supported banks.
• For ASBA online application, investors must have an active Net banking access to the relevant ASBA bank account.
• PAN Number and Demat accounts are mandatory for any IPO application.

3rd party ASBA IPO application

Third-party IPO application was an option granted by a few banks in India. This allowed investors to submit multiple IPO applications (up to 5 applications) for an IPO from one bank account through a Net banking facility.

However, from May 1, 2022, this facility is no longer available. No bank in India offers the facility to submit IPO applications through third parties.

ASBA and UPI

ASBA and UPI are the modes of IPO applications. Investors can use any of these ways to apply online or offline.

ASBA was introduced in 2008 and has been made mandatory for all IPO applications since 2016. In 2019, SEBI introduced UPI as the payment mechanism for IPO applications. The goal was to drive the digitization of offline processes in the application process.

ASBA and the UPI IPO application work on a similar fundamental mechanism. This means that the investor's bank account is blocked with the application amount after the UPI mandate is approved. Therefore, UPI is sometimes referred to as the UPI ASBA process.

Investors can apply for an IPO via UPI either online or offline. The online UPI IPO application process is much simpler, easier and convenient compared to the offline IPO application using UPI. An UPI ID is mandatory to apply for an IPO using the UPI route. In the offline IPO application, investors need to get the IPO application form, fill all the details manually and then submit the form. On the other hand, an online IPO application is just a few clicks.

On November 1, 2018, SEBI announced the launch of the Unified Payment Interface (UPI) as a new payment method for IPOs. The UPI based IPO application process is very convenient and simple. It only takes a few minutes to pay for an IPO application via UPI and submit IPO bids online.

UPI mechanism for IPO application

UPI IPO means applying for an IPO through the UPI payment gateway. UPI stands for Unified Payments Interface. It is an instant payment system developed by the National Payment Corporation of India (NPCI) (an RBI-regulated entity) through which investors can transfer money from one bank to another instantly or in real time. It is similar to IMPS (Immediate Payment Service) fund transfer. To apply for an IPO, investors should have a UPI ID.

NPCI has partnered with several banks and digital wallet platforms that allow IPO applications through UPI. Some of the UPI handles are only supported on Android, while others work on both Android and iOS systems. For details, see the list of IPO UPI Apps.

IPO UPI Process

The UPI IPO process is a step towards digitizing the entire IPO process with the aim of increasing efficiency and reducing the listing timeline for public issues.

1. Online IPO Application UPI

Investors can apply for an IPO online using their UPI ID anytime and anywhere through their broker, provided the broker offers an online IPO application facility.

Online IPO Application Process Through UPI:

1. Download Google Pay, BHIM or Paytm App.
2. Create an UPI ID and set the PIN.
3. Open Demat and trading account with a broker.
4. Login to the broker's trading platform.
5. Look for the IPO section in the app/website.
6. Fill in the IPO bid details.
7. Enter the UPI ID and submit the form.
8. Investors will receive a payment approval request in the UPI App.
9. Investors need to approve the UPI mandate request.

2. Offline IPO Application UPI

To apply for an IPO offline using UPI ID, investors need to fill in the UPI ID under the payment option in the IPO application form. Regardless of whether the application is submitted online or offline, approval of the UPI mandate is mandatory to complete the application process.

Offline IPO application process through UPI:

Procure the IPO application form from the nearest broker/bank branch. OR Download the form from the exchange website.

1. Fill in the applicant name, address, contact details, PAN, and DP details.
2. Select the investor category as Retail Investor or Non-Institutional Investor as the case may be and the Investor Status as Individual.
3. Enter the bid details.
4. Enter the UPI ID.
5. Sign the form.
6. Submit the form to the nearest intermediary.
7. Approve the UPI mandate request

IPO UPI ID

The IPO application through UPI requires individual investors to have a UPI ID.

A UPI ID is a user's unique virtual payment address (VPA), similar to an email address. The UPI ID for IPO application can be created by registering with one of the UPI-enabled mobile applications (app) using the investor's bank account information.

The UPI ID for the IPO application has the format xxxxxx@bank/payment application. The first part of the UPI ID is either the user's cell phone number, a partial email ID or the first name. The second part is the name of the bank or the name of the payment application. For example, if Aarav Updhyay created a UPI ID with his name and linked it to his ICICI bank account, his UPI ID would look like aarav@icici. In some cases, a specific prefix/suffix can be added to the second part.

UPI IPO Limit

The UPI payment method to apply for an IPO is available only for individual investors.

The IPO UPI limit has been raised to Rs.5 lakhs from the earlier limit of Rs.2 lakhs. However, the limit for retail individual investors continues to remain at Rs.2 lakhs.

Individuals who wish to apply under the Non-institutional category for an IPO amount up to Rs.5 lakhs can apply using UPI.

UPI IPO Time

Once investors submit an IPO application, the application is not considered complete until the UPI mandate request is approved. According to recent changes in the IPO process, only those bids are considered valid and uploaded to the exchange where funds are blocked. Therefore, it is important for investors to approve the mandate requests within the cut-off period of IPO UPI to avoid rejection of their bids.

IPO UPI Payment Time Limit: Before 5 PM on issue closure date.

The cut off time for the IPO UPI payment is 5 p.m. on the issue closure date. However, brokers usually keep a buffer of half an hour or more to avoid last minute tech glitches. Investors must check with their broker for the last time to complete the IPO UPI payment. The above IPO UPI mandate accept time is also applicable for modification or cancellation of the bid.

IPO UPI Rules

• The UPI payment gateway is available only for individual investors.
• Investors can apply for an IPO up to Rs. 5 lakhs using UPI payment mode.
• An UPI ID is mandatory to use UPI gateway.
• UPI IPO approval of mandate request is a must to complete the IPO application process.
• The offline IPO application form with UPI as payment mode cannot be submitted to SCSB. It can be submitted either to a Syndicate member, registered stock broker, Registrar, or Depository.

IPO UPI Mandate

It is necessary to approve the IPO UPI mandate request when investors apply for an IPO through UPI. If the mandate request is not approved within the cut-off, the investor's bid is not considered valid and does not get uploaded to the exchange.

Investors may come across various scenarios/statuses in respect to the mandate requests. Let us understand each of them as stated below:

1. IPO UPI Mandate expired

   Each UPI mandate request has a validity period as set by the applicant/bank. Investors can check the IPO UPI mandate validity in the UPI app under the "Mandate" section. If the mandate request has expired, investors will need to re-initiate the transaction. According to the new rules of UPI IPO, the UPI mandate request should be approved before 5 pm of the issue closure date.

2. IPO UPI request not received

   If the IPO UPI mandate request is not received within an hour, delete the earlier IPO application and submit a new one.

3. IPO UPI mandate failed

   Sometimes, the IPO UPI payment gets failed or the authorisation gets failed due to technical issues at the bank's end or with the UPI app. In such cases, cancel the original request and submit the new IPO application request.

4. IPO UPI mandate revoked

   If an applicant wishes to withdraw or cancel their offer after the application has been submitted, they may do so by cancelling/withdrawing the offer and then cancelling the mandate application. An applicant may revoke (cancel/withdraw) the mandate by contacting the intermediary through which the offer was submitted. Once the mandate request is revoked, the money will be released from the account immediately.

UPI IPO Application Status

The applicant can check the status of his/her UPI IPO application through the broker/bank through which the application was submitted. If the application was submitted offline, you can check and verify the bids on the website of the Stock Exchange (NSE/BSE) using the bid number provided on the IPO application form.

Steps to check the IPO UPI confirmation status for bids submitted online:

1. Login to the broker platform or Net banking website.
2. Go to the IPO/Investment section from where you submitted the bid.
3. Go to the Bid history or the click on the applied IPO.
4. Investors will see the status of their application as any of the below:
   • IPO UPI confirmation status pending.
   • Bid submitted successfully.
   • UPI Mandate Request pending approval/ IPO UPI mandate pending.
   • Bid uploaded to exchange.
   • Bid rejected.

Note: The nomenclature of status may differ slightly for each broker/bank.

The applicant can also check the UPI IPO allotment status as described above. However, not many brokers/banks maintain the live Allotment Status. You can visit IPO allotment status page or the Registrar's website to check the allotment status of the applied IPO.

In case of successful allotment, the shares will be credited to your demat account. However, in case of no allotment or only partial allotment, you will receive the UPI IPO refund as per the scheduled refund timelines of the issue.

IPO UPI Complaint

If an investor faces any issues in respect to blocking or unblocking of funds or IPO application status, the investor should first approach the respective intermediary.

The investor may also contact the bank/SCSB or the registrar.

In case of any problem related to the UPI transaction, the investor can also file a complaint on the UPI Dispute Redressal Mechanism portal. The investor shall select the desired option depending on the nature of the complaint, i.e. whether the complaint is related to the transaction, PIN, account, registration, login or other issues, and provide the details of UPI ID and the nature of the transaction and its details.

If the investor is not satisfied with any of the above ways, he/she can file a complaint with SEBI.

All complaints related to UPI addressed to the intermediaries should have the below details:

• Name of the Applicant.
• Address of the Applicant.
• Number of Equity shares applied for.
• Amount paid on application
• The designated branch of the SCSB where the application form was submitted by the applicant.

The estimated average time taken by the registrar or the SCSBs for resolving the investor grievances ranges between 7-10 business days from the date of receipt of the complaint.

Bhim UPI IPO

Bhim is a payment app that makes it easy to transfer money via UPI. Bhim stands for Bharat Interface for Money. With the Bhim UPI app, you can easily submit IPO applications.

Once investors submit an IPO application through UPI ID, they will receive a notification and SMS from their Bhim app informing them about the status of their mandate.

Steps to approve the Bhim UPI IPO mandate request:

• Login to the Bhim UPI.
• Go to IPO section.
• Look for Pending IPO requests.
• Ensure the IPO request has a Verified Merchant mark to ensure authenticity.
• Approve the request.
• Enter the PIN to approve the request.

If the Bhim UPI IPO mandate is not received within one hour, re-initiate the transaction or contact the intermediary (if you submitted a physical application) to verify that the intermediary submitted the application

Sometimes investors may receive the message 'Bhim UPI IPO failed transaction' because the payment could not be processed successfully. There are various reasons as listed below that can lead to payment failure.

• Incorrect PIN.
• Issue with Bank's server.
• Change in mobile number and not updated with bank.

In case of any issues with respect to the IPO transactions processed through Bhim UPI app, first reach out to the intermediary/bank through whom the request was raised or re-initiate the transaction.

Investors can also raise complaints on the BhimUPI IPO complaint portal and enter the issue details choosing the correct option. Investors can also dial in the toll-free Bhim UPI customer care number 18001201740 for any generic issues.

Gpay UPI IPO

Google Pay, commonly known as Gpay, is a payment app from Google that lets investors transfer money directly from your bank account. Investors can also apply for an IPO via UPI using Google Pay.

Once investors apply for an IPO with their Gpay UPI ID, they will receive a UPI mandate notification in their Gpay app.

Steps to approve the UPI mandate for ipo gpay:

• Open the Gpay App.
• Click on your profile on the right hand corner of the screen.
• Look for the Mandates option.
• Click on the Pending tab under Mandates.
• Click on the mandate to be approved.
• Enter the UPI PIN to authorize the mandate.

In case UPI mandate fails, re-initiate the transaction or reach out to the intermediary through whom the IPO application was processed.

Page Glossary

1. IMPS

Immediate Payment Service (IMPS) is an electronic funds transfer system for instant payments between banks in India.

Using IMPS as a fund transfer system, you can transfer money 24/7 throughout the year, even on holidays.

2. NPCI

The National Payments Corporation of India (NPCI), an umbrella organization for the operation of retail payments and settlement systems in India, is an initiative of the Reserve Bank of India (RBI) and the Indian Banks' Association ( IBA) under the provisions of the Payment and Settlement Systems Act, 2007, to create a robust payment and settlement infrastructure in India.

The National Payments Corporation of India is a coordinating body that supports services such as UPI Payment, Bharat Bill Pay, RuPay Card, FASTag, and NACH.

3. UPI PIN

UPI PIN is a 4-digit PIN, required to approve a payment request in the UPI app.

UPI PIN is set by the user and is a one-time process. It is sensitive information that should not be shared. You can change your PIN at any time through the UPI app. The UPI PIN is different for each UPI ID /bank account.

Once an investor has applied for an IPO, there may be scenarios when the investor may want to change the bid quantity or bid price to increase their chances of allotment based on the IPO demand. Sometimes, it may also happen so that the investor may think that the IPO is not right and would like to cancel and withdraw their bid.

The IPO cancellation and modification facility helps investors to make these desired changes.

However, there are certain rules and restrictions for cancellation and modification of the IPO.

Rules for IPO application cancellation and modification requests

• Only retail investors are allowed to cancel IPO bid.
• QIBs and NIIs cannot cancel their bids once placed.
• Retail investors may modify their bids to reduce or increase the size of their application.
• QIBs and NIIs cannot reduce the size of their bid. They can only increase their bid.
• Modifications and cancellations can be made at any time while the IPO is open for subscription.
• Post issue modification period in IPO - No post-issuance changes are allowed in an IPO. Bid changes are only allowed during the bid submission window.

Note: Investors can check with their broker/bank in advance for the cancellation/modification time on the last day.

Note: The above cancellations and modifications are permitted anytime while the IPO is open for subscription.

1. IPO Application Cancellation

Investors can cancel/delete the IPO application online/offline. Online cancellation is much faster than offline cancellation. However, the option to cancel/withdraw/delete the IPO request is available only after the order has been submitted to the Exchange.

Steps for online withdrawal of IPO application

1. Log in to the broker platform/Net banking from where investors have applied for the IPO.
2. Go to the IPO tab.
3. Open the IPO applied for that needs to be cancelled.
4. Click on 'Cancel/Delete/Withdraw Bid/Application'.
5. Confirm the transaction.
6. Revoke the UPI mandate (if required).

Note: In case of UPI IPO application, sometimes it is required to revoke the mandate. In some cases, the bank will refund the amount after the UPI mandate expires. Investors must check with the bank for the UPI-specific procedure in advance.

The broker submits the cancellation request to the Exchange between 10 am and 5 pm. The broker updates the status of the cancellation request as soon as it receives confirmation from the exchange. Investors receive an email notification when the request is cancelled.

Note: The above is a generic process and will differ a bit for every broker/bank.

Steps for offline IPO order cancellation

1. Prepare a cancellation letter with below details:
   • IPO application No.
   • Applicant Name and Application Details.
   • PAN No.
2. Sign the letter.
3. Submit the letter to the intermediary through whom the application was submitted.

IPO Application Cancellation Time

Investors can withdraw from an IPO anytime while the IPO is open for subscription. The exchange IPO bidding window is open from 10 AM of the issue open date to 5 PM of the issue closure date. Investors can cancel an IPO anytime during this bidding window.

Some brokers may have set a specific time for cancellation. On the last day, many banks and brokers have a specific deadline for submitting cancellation requests to avoid last-minute problems. Therefore, it is important for investors to check with their broker/bank in advance for the exact deadlines for canceling the IPO applications.

Important note: The online "Cancel/Withdraw" option is only visible if the IPO application has been successfully submitted. If the investors do not see the cancellation option online, contact the bank or broker through whom the application for the IPO was submitted.

IPO withdrawal time: 10 AM of IPO open date to 5 PM of IPO closure date.

Investors can cancel an IPO at any time during this window.

Note:

1. On the last date, not all banks/brokers may allow cancellation till 5PM. They could close the window a little earlier to process the requests.
2. Some brokers have specific time allotted for cancellation and modification requests.

There are no cancellation fees charged by a bank or broker for withdrawing a bid either online or offline from an IPO.

For eg: Zerodha allows to place cancellation and modification requests between 10 AM to 4.30 PM when the IPO is open for subscription.

2. IPO Application Modification

An investor has the option to amend their IPO bid if they wish to change the bid amount or quantity. Retail investors may adjust their bids by either upsizing or downsizing their bids.QIBs and NIIs are allowed only to upsize their bids i.e. they can only change to increase the bid quantity or bid price.

Like cancellation, investors can modify the IPO requests anytime while the IPO is open for subscription. Though the IPO window is open from 10 AM of the issue open date to 5 PM of issue close date, the investors should check with their broker/ bank for any specific timings for modification request submissions; especially for the last day as not all banks/brokers allow modification till 5 PM.

You can modify IPO bids either online or offline. The option to modify online is visible once the bid is submitted to exchange.

Steps to modify IPO bid online:

1. Login to the broker platform or Net banking account.
2. Go to the IPO section.
3. Select the applied IPO.
4. Click on Modify Bid.
5. Modify the Bid quantity or bid price.
6. Click on Confirm/Update.
7. Approve the revised UPI mandate. In case of ASBA application, the additional amount gets blocked in case of upward revision. In case of a downward revision, the amount gets unblocked post allotment.

Steps to modify IPO bid offline:

1. Procure the IPO modification/revision form from the nearest broker/bank or download it from the exchange website.
2. Fill the form with personal details like Name, Address, Contact Details, Email, PAN, and DP details.
3. Enter the old bid data and the updated bid data.
4. Enter the ASBA account number/ UPI ID.
5. Sign the form.
6. Submit the form to the intermediary through whom the original application was made.

IPO Modification Form

Investors can download the IPO revision form from the BSE or NSE website.

The NSE offers investors the option of downloading either a blank revision form or a pre-filled form. For more details on the IPO application form, please refer to the IPO Application process Chapter.

3. IPO Application Rejection Reasons

While submitting an IPO application, investors must follow certain points for the application to be valid, failing which the application may get rejected. There are several reasons why an IPO application may be rejected. The rejection can be on account of error by the applicant, bank or another intermediary, or due to technical problems.

The following are some of the most common reasons for the rejection of an IPO application:

• Application by an incompetent applicant under the terms and conditions of the company or under the Indian Contract Act 1872.
• The bid price is outside the price band.
• Incorrect ASBA account number / UPI ID / UPI handle.
• Application from another person’s bank account.
• Incorrect PAN or DP details.
• Mismatch in applicant name, name on DP account, and bank account or PAN.
• Bidding for an amount lower than the minimum bid size.
• Multiple applications using the same PAN in the same investor category.
• Bidding at cut-off price by NII or QIB.
• Insufficient funds in the bank account.
• Errors on part of the intermediaries.

IPO application rejected but amount blocked

Investors receive the blocked amount if their request is rejected after the mandate date.

Some banks may not refund until the mandate expires. In such cases, investors can ask the bank or intermediary whether the funds will be released after the allotment date.

Page Glossary:

1. UPI handle

UPI handle is the bank name or the payment application name that processes the UPI payment. It is the virtual payment address used for making payment via the UPI gateway.

UPI handle starts with @ and is different for every UPI mobile application. For example if the UPI payment is used making the Paytm app, the UPI handle for the said app is @paytm. Refer to the list of mobile applications for making UPI payment with the details of their UPI handle.

2. DP ID:

DP ID stands for "Depository Participant Identification". A Depository Participant, such as a bank, financial institution or brokerage firm, is assigned a DP ID number by NSDL and CDSL. DP ID varies depending on the depository institution where you have your account. The investor's demat account number is composed of the customer number ID and the Depository participant number DP ID.

IPO subscription indicates demand for an IPO. The IPO subscription data shows the number of shares applied for by all investors during the IPO subscription period. This data is tracked across all investor categories and is available in real time.

The IPO subscription period is 3-10 business days, depending on the type of IPO. The live IPO subscription status is available , BSE and NSE websites.

IPO subscription reflects the total number of public subscriptions in an IPO. It shows the demand for an IPO in terms of the number of shares based on applications received. The IPO subscription number changes throughout the IPO window and is finalized after the IPO bidding period closes.

How IPO subscription data helps investors?

• Check the total demand for the IPO shares. Higher demand may indicate a good IPO and vice versa.
• This is one of the most important factors in making an IPO investment decision. It helps to build an IPO investment strategy.
• Live IPO subscription data help investors choose the reserved category (i.e. retail, NII, employee, shareholder) in an IPO to maximise profits.
• Plays a role in the development of the IPO grey market price.
• Helps decide whether to borrow for an IPO investment.
• Subscription data helps investors select an IPO where there is a higher chance of allocation. The higher the subscription, the lower the chance of allotment.

IPO Subscription Process

The IPO subscription process is a way for investors to place bids for IPO shares. The following parties are involved in the IPO bidding process:

1. Investors (Individual investors, QIB)
2. Brokers/banks (e.g. Zerodha, ICICI Bank)
3. Stock Exchanges (BSE, NSE)
4. Registrar or RTA (e.g. Link Intime, Karvy)

Steps of IPO Bidding Process

The IPO bid is made online on the platform provided by the stock exchanges (i.e. BSE, NSE) via stock broker or banks. The subscription process for the IPO begins on the opening day of the IPO and continues until the closing day of the IPO. While an investor can submit the online offer for shares at any time (24 hours), the broker/bank send it to the Exchange between 10:00 am and 05:00 pm. The following are the key steps involved in making a bid for IPO share offer:

1. Investors submit the bid for the IPO shares to a stock broker or bank.
2. The broker/bank consolidates all applications received and forwards them to the stock exchange on a regular basis.
3. The IPO bidding platform of the exchange collects the applications and publishes the demand (subscription) in real time between 10 am and 5 pm.
4. Once the issue is closed for subscription, the Exchange forwards this data to the registrar for the issue (RTA).
5. The IPO Registrar allocates shares based on SEBI regulations and the information in the RHP document.
6. The registrar publishes the allotment status on its website and sends an allotment email.
7. The registrar instructs banks to release unused blocked funds.
8. The allocated IPO shares are transferred to investors one day before the IPO share is listed at stock exchange.

IPO Subscription Timing

The investor may submit the bid for the IPO shares to the stockbroker or the bank at any time as long as the public issue is open for bidding. The IPO bidding platform of the stock exchange is open from 10 am to 5 pm. Even if the bank/broker accepts the bids for 24 hours, the bids will only be submitted to the stock exchanges between 10 a.m. on the opening day of the IPO and 5 p.m. on the closing day of the IPO.

Time to submit the bid for IPO shares:

• Investor to broker/bank: Anytime time while IPO is open (24 hours)
• Bank to Stock Exchanges: Between 10 AM of the IPO open date to 5 PM of the IPO close date

Note:

• The UPI mandate has to be approved first and then bank/broker will upload bid to exchange.
• The banks/brokers close IPO subscription window on the last day around 2:00 to 3:00 pm. They need a time buffer to process the applications and send them to the exchange before 5pm.

IPO Subscription Charges

The service of placing bids for IPO shares is offered free of charge by stockbrokers and banks. When shares are allotted in an IPO, the broker may charge a brokerage fee and taxes when the investor sells the shares on the exchange.

Stock brokers/banks receive a small amount from the issuing company for processing the IPO application.

IPO Bidding Category

IPO investors are classified in three broad categories. Depending on the type of investor and the amount of investment, the investor can participate in an IPO through one of the below categories.

1. Retail individual investors (RII)
2. Non-institutional investors (NII)
3. Qualified institutional investors (QIB)
4. Employee
5. Shareholders
6. Anchor Investors

Note:

• Individual investors who participate in an IPO with less than Rs. 2 lakhs fall under the retail investor (RII) category.
• NIIs are divided into Small NIIs (bids below Rs 10L) and Big NIIs (bids above Rs 10L) based on their investment amounts.
• Anchor investors, investing more than Rs 10 crores in an issue, are part of the QIB category.
• In a few IPOs, there is a special reservation for employees or other reserved categories such as shareholders as defined in the RHP.

IPO Subscription Calculator

The IPO Subscription calculator helps you know the number of times an issue has been subscribed. To determine the IPO subscription rate, investors need the details of the shares offered per category and the bid numbers. Investors can find this information on the stock exchange's website.

Investors can also refer to IPO Subscription Live Figures

Generally, investors do not calculate these numbers, as IPO subscription times can be easily found on the above websites. The calculation example below is used to understand the derivation of the IPO subscription rate.

Points to Note:

• IPO subscription times are calculated by dividing the number of shares for which bids have been received by the number of shares offered.
• The number of shares offered is readily available in the RHP for a fixed-price offering. For book-built issues, these numbers must be derived based on the allotment ratio stated in the offering documents, which is generally 35% for RII, 15% for NII, and 50% for QIB.
• Data on bids received is available on the NSE and BSE websites.
• In certain cases, the investor category may also include a reserved category for employees. These details can be found in the bidding documents.
• The total number of shares offered to the public does not include the market maker portion in SME IPOs and the anchor investor portion in Main Board IPOs.

IPO Subscription Types

IPO subscription times indicate the demand for an IPO. IPO subscription type is based on the number of subscriptions to an IPO. If the IPO subscription time is greater than 1, the issue is considered oversubscribed; If it is less than 1, the issue is undersubscribed.

An IPO is divided into two main types:

1. Oversubscribed IPO

   An IPO in which the number of bids received in the form of shares is greater than the size of the issue is called oversubscribed. In other words, the demand for shares is greater than the supply of shares. In the above subscription table for the IPO of Sula Vineyards, the IPO is oversubscribed a total of 2.33 times.

   The benefits of oversubscribed IPOs are as below

   • Opportunity for companies to raise more capital by offering more shares to meet demand.
   • Possibility of premium listing.
   • Good sign for the company.
2. Undersubscribed IPO

   An undersubscribed IPO is an IPO in which the number of shares applied is less than the number of shares offered. An under subscription is when the demand is less than the supply.

   For example, a company offers to issue 10 lakhs shares at Rs 90. However, the public applications received are for only 8 lakhs shares, the issue is said to be undersubscribed.

IPO Subscription and listing price

Subscription numbers for IPO shares help predict the share price once trading begins on exchanges after the IPO shares are listed. An oversubscribed IPO indicates higher demand for IPO shares, leading to a listing at a premium. However, in addition to demand, there are many other factors that influence the share price (see below):

• Market Sentiments.
• Grey Market Premium.
• Future Prospects of the company.
• Promoter offload of shares.
• Change in policy/economic factors related to the industry.

Refer to the data on IPO Subscription vs Listing gain to get more idea on their relation.

IPO Subscription and GMP

Some IPO stocks are traded over-the-counter (unofficially) before they get listed on the stock exchanges. The premium at which they trade is called the grey market premium (GMP). The GMP indicates the premium over the issue price that investors are willing to pay for the IPO shares.

A higher GMP indicates higher demand for IPO shares, which leads to higher IPO subscription. Conversely, a lower GMP indicates low demand, leading to lower IPO subscription.

IPO Subscription Historic Data

• Mainboard IPO Subscription Status Live
• SME IPO Subscription Status Live
• NCD Subscription Status Live
• Most Subscribed IPO in India (All Time)
• Most Subscribed IPOs (Yearly)
• Top 10 Mainboard IPO by Subscription (Yearly)
• Top 10 SME IPO by Subscription (Yearly)
• IPO Subscription vs Listing Gain

IPO allotment is the allocation or distribution of shares to the investors in an IPO. The allocation is determined by the Registrar in consultation with the Exchange. IPO allotment announcement is done by the registrar 3-4 days after the IPO bidding period gets over. Investor could visit registrar's website to check the allotment status.

IPO allotment depends on the demand of IPO shares. If the IPO is oversubscribed (received more bids then the shares offered), not all investors may receive an allocation. If the IPO is not fully subscribed, all investors will receive allotment.

IPO Allotment Rules

• The IPO allotment is made by the Registrar in consultation with the designated stock exchange.
• The IPO allotment depends on the number of shares offered and the bids received from investor in the particular investor category (i.e. Retail, NII, QIB).
• The rules for IPO allotment vary by investor category (i.e. Retail, NII, QIB).
• Only valid applications are considered for allocation. Invalid applications (i.e. application with wrong Demat account number, multiple applications with same PAN, etc) are rejected.
• Only the applications received at or above the cut-off price are considered for allocation.
• An under-subscription in one category (other than the QIB category) may be offset with oversubscription from another category in consultation with the Lead Manager, the Registrar, the Exchange and the issuer.
• Unsubscribed shares in the QIB category are not available for subscription in other categories.
• The registrar prepares and publish the Basis of Allotment document that provides detail about the allotment.

IPO Allotment Method

The IPO allotment mechanism depends on the investor category and the IPO subscription levels.

Note:

• If an IPO is Undersubscribed across each investor category, all investors with valid applications will receive a full allotment. The IPO must receive a minimum total subscription of 90% to succeed.
• If the IPO is over-subscribed for one category and under-subscribed for another, the oversubscription may be adjusted with the under-subscribed portion of the other category, except for QIB.
• In case of oversubscription, the issuer will allocate shares based on a lottery system or proportionately based on the investor category. Let us take a look at the IPO allocation criteria for each investor category.

IPO Allotment by Investor Category

1. IPO Allotment to Retail Investors (RII)

Each retail individual investor (RII) gets allocated at least one lot; provided there are those many shares reserved for RII in the IPO and the number of RII applicants. IPO shares are allocated in a bunch known as lot. A lot includes x number of shares worth around Rs 15,000 in Mainboard IPO and Rs 1,00,000 in SME IPO. The number of shares in lot (lot size) is declared by the issuer company along with the issue price.

The number of maximum retail investors who could get allotment in an IPO is derived by dividing the total number of shares offered in RII reserved category by the lot size.

Maximum RII Allotees = (Total shares offered to RII) / (IPO lot size)

For example; In ideaForge Technology IPO, 842,865 shares were reserved for retail. The lot size of the IPO was 22 shares. Maximum Retail Allotees = 8,42,865 / 22 = 38,312 investors.

For example, if a company offers 5 lakhs shares to RII in an IPO with a minimum lot size of 250 shares. In this case, the maximum RII investors to whom the allotment can be made is (500,000/250) 2,000 investors.

Scenario 1: If 1,950 investors apply for 495,000 shares, all investors receive the full allotment because the RII category is not fully subscribed.

Scenario 2: If 2,500 investors apply for 650,000 shares, it is not possible to allocate at least one lot to each investor because there are only 500,000 shares for RII. In this case, the allocation is made by a computerized lottery system.

Scenario 3: If 1,975 investors apply for 525,000 shares, each investor will initially be allocated at least one lot, i.e. 250 shares. Of the remaining [500,000-(1,975*250)] 6,250 shares, the allotment is then made on a proportionate basis.

2. IPO allotment in NII category

Each NII investor will be allotted a minimum bid lot as applicable to that category, subject to availability of shares. The minimum bid lot will be equal to the minimum application size for more than Rs 2 lakhs. In case any shares are left after allotment of minimum bid lot, the same will be allotted on a pro-rata basis.

In case of under subscription, all investors will receive the full allotment. The unsubscribed portion of the NII may be used to meet any excess demand from other categories.

Note:

• The allotment method for small and Big NII is the same.
• Even though the Big NII category has a minimum subscription amount of Rs 10 lakhs, in case of oversubscription, shares worth Rs 2 lakhs will be allotted (the minimum NII bid amount). This is similar to the allocation for the Small NII sub-category.
• There is no segregation of Big NII and Small NII in SME IPO.

3. IPO allotment in QIB category

The allotment to QIB investors will be made on a proportionate basis in case of oversubscription. In case of an under-subscription, all QIB investors will receive the full allotment. However, the under-subscribed portion in the QIB category cannot be allotted to other investor categories.

The mutual funds in the QIB category will be allotted up to 5% of the QIB category. If the demand for the mutual funds exceeds 5% of the QIB category, the allocation shall be made proportionally up to 5%. However, if mutual fund demand is less than 5% of the QIB category, all mutual funds will receive the full allotment. The remaining unsubscribed portion may be used to meet the demand of other QIB investors on a pro-rata basis for up to 95% of the QIB category.

4. IPO Allotment to Anchor Investors

In mainboard bookbuilding IPOs, anchor investors are offered shares up to 60% of the QIB category. Of the 60%, one-third of the anchor investors' share is reserved for domestic mutual funds.

The issuer decides on the selection of the anchor investors and their allocation in consultation with the lead manager. The registrar maintains a physical book to record the applications received from Anchor Investors. If the offer price is higher than the Anchor Investor offer price, the anchor investors are sent revised confirmation of allocation note (CAN) for payment of differential amount.

5. IPO Allotment to Employees

The allocation to employees will be made on a pro rata basis in the event of oversubscription.

The maximum value of allocation to eligible employees shall not exceed Rs 200,000 unless the Employee Reservation Portion is undersubscribed. If the employee quota is not fully subscribed, the unsubscribed portion gets allocated on a proportionate basis to Eligible Employees for value exceeding Rs. 200,000 up to Rs. 500,000.

6. IPO Allotment to Shareholders

The allocation to shareholders will be made on proportionate basis in the event of oversubscription.

If an investor has placed a bid in the shareholder category for an amount exceeding Rs 200,000 and also in any other category, then the bid will be considered as multiple bids and will get rejected.

If an investor bids in the shareholder category up to an amount of Rs 200,000, he may also bid in the Employee category (if applicable) up to Rs 200,000 and any other category. Such bids will not be counted as multiple bids and will have a chance to get allotment in respective category as per the criteria explained above for each category.

IPO Allotment Process

The registrar of the IPO is responsible for the allotment process. The basis for allotment is finalized by the registrar in consultation with the designated exchanges. The following are the general steps taken by the Registrar to complete the IPO allotment process.

1. Receive IPO application data from the stock exchange as soon as the issue is completed.
2. Validation of IPO applications that don't meet eligibility criteria.
3. Validation of IPO application data with depositories and banks to identify 3^rd party IPO applications.
4. Rejection of invalid applications with technical errors.
5. Valid applications at or above cut-off price are grouped at the lot size level to determine the total demand for shares in each category.
6. Finalize the basis of allotment (BOA) in consultation with designated exchanges.
7. Sending the allotment advice via email/SMS to inform investors of the allotment status.
8. Notifying banks and depositories and coordinating with them to ensure that the investor's bank account is debited on the scheduled allotment date and the shares are credited to the investor's demat account.

IPO Allotment Date

IPO allotment date is the date on which the IPO allotment is announced by the Registrar to the issue. Investors can check the status of their IPO applications on IPO allotment date. The IPO allotment is a key event that investors follow in over-subscribed IPOs where the allotment is made by lottery.

The registrar of the issue uploads the allotment results on its website, where investors can check the status of their allotment by entering the PAN number, IPO application number or demat account number.

The IPO allotment should be completed within five business days of the closing of the offering.

IPO Allotment Status Check

The IPO allotment status check is to determine whether the investor has received the shares or allotment in an IPO. An investor needs either a PAN number, an application number, or a demat account number to check the allotment status. The allotment status is made available online by the Registrar to the Issue on the date of the IPO allotment.

Steps to check IPO allotment status

1. Visit IPO Allotment Status Page
2. Select the desired IPO.
3. Go to the Allotment tab and click on the IPO allotment status button.
4. Users will be redirected to the Registrar's website.
5. Select the IPO from the dropdown.
6. Enter PAN number, application number or DP Client ID.
7. Submit and check the allotment status.

If investors have received the allotment, the allotment status page on the website will display the number of shares allotted, and if no allotment has been made, the page will be blank.

IPO Allotment Chances

There is no fixed IPO allotment formula or IPO allotment chances calculator that can guarantee investors an allotment in an IPO. The allotment depends on the level of subscription in the IPO and the category in which the investor has applied.

In most IPOs, the allotment is made by lottery because they are oversubscribed. Your chances of receiving an allocation are the same as other applicants.

Although there is no rule of thumb that can guarantee investors an allotment in an IPO, investors can always follow some good practices to increase their chances of allotment as mentioned below:

• In the Retail category, apply for 1 lot of shares from multiple family accounts.
• If you must choose between the Retail, sHNI, and bHNI categories, wait until the last day to see the response and find out where you have the best chance of allotment.
• Do not apply at the last minute. Try to apply before 1 p.m. on the issue closing day.
• Make sure you fill out all the information correctly.
• Be sure to approve the UPI mandate by the deadline.
• Check the basis of allotment document to determine your eligibility for allotment. If you feel you should be allotted IPO shares but haven't received them, contact the Registrar for a response.
• Study some old Basis of Allotment documents to understand how allotments are made.

Basis of Allotment Explained

The basis of allotment is the process that decides the allocation of shares in an IPO to the investors who have applied for it. The basis of allotment is included in the offer documents and is finalized by the registrar, company and lead manager in consultation with the Designated exchanges.

The allotment shall be made according to the pro-rata or lottery system based on the investor category and demand for the IPO.

The Basis of Allotment (BOA) is a document published by the registrar in the leading daily newspaper once the allotment is finalized in consultation with the Designated Exchange/s. The BOA document contains the below details:

• Total Number of applications received per Investor Category.
• Total number of shares applied per Investor Category. 
• Subscription Rate per Investor Category.
• Categorization of RII and NII based on the number of shares applied for in each category.
• Details for each of the above grouped categories, segregated based on the number of shares applied, are provided below:
  • Number of applications received.
  • % of applications received per group to total applications.
  • Total number of shares applied.
  • % of shares applied per group to total number of shares applied.
  • Number of Shares allotted per bidder.
  • Ratio of bidders allotted shares to total bidders in each group.
  • Total no. of shares allotted per group.

1. RII Allotment Explanation

Allotment Rule for Retail Category

• Each RII investor gets allotted atleast one lot subject to availability of shares and number of RII applicants.
• If the number of RII applicants is less than the number of allottees, the allotment will be made on proportionate basis.
• If the number of RII applicants is more than the number of allottees, the allotment will be made by drawing of lots in combination with pro rata basis.

In above example:

• Maximum number of RII allottees: 4434 (1,020,000/230)
• Total number of applications received: 138,971
• Allotment Mechanism: Pro rata + Lottery. (The pro-rata determines which bidder category receives an allocation and lottery determines the allottees to whom allotment will be made).
• Calculation for Allotment of Shares:
  • The 230 bidder category accounts for 91.54% of the total applications. Hence, calculate 91.54% of 4434 = 4058.88. In the below BOA we can see that 4060 applicants have been allocated 230 shares giving a total of 933,800 shares.
  • The 460 bidder category accounts for 4.75% of total applications. Hence, calculate 4.75% of 4434 = 210.62. In the below BOA we can see that 211 applicants have been allocated 230 shares giving a total of 48,530 shares.
  • The 690 bidder category accounts for 1.28% of total applications. Hence, calculate 1.28% of 4434 = 56.7552. In the below BOA we can see that 57 applicants have been allocated 230 shares giving a total of 13,110 shares.
  • So and so forth, the calculations are done for each category to know the allotment of shares per category.
  • After allocating the minimum number of shares to each RII per category, 180 shares remain to be allocated randomly to 374 applicants from bidders who applied for 460 shares (Sr. No. 2) to 2990 shares (Sr.13).

Points to Note:

• The above is a generic logic used for allotment (applicable in case of oversubscription).
• The calculations may sometimes differ based on the below
  • Rounding applied.
  • Allocation can be done in terms of % of shares applied.
  • Final discretion of registrar and designated exchanges.

The above quoted example is of a Mainboard IPO. In an SME IPO, the basis of allotment for RII is much simpler and easier. There is generally one category of shares in which RIIs apply due to the higher minimum lot size application.

When an investor applies for an IPO, the funds in the bank account are blocked or a lien is marked in the bank account. On the day of the allotment, the funds required for the allotment of shares are debited and the balance is released.

The release of funds in an IPO is the process by which some or all of the amount blocked for the IPO application is released, depending on the allocation status. Once the funds are released, the investor can use the amount as desired.

As per the rule, IPO refunds must be initiated within 4 working days of the close of the public offer. If the money is not refunded/released within the specified timeframe, the issuer must pay a penalty. The issuer has to return the money to the bidders with interest.

In this chapter, we look at the various aspects of refunding and releasing money in IPOs.

Reasons for returning IPO funds (unblocking funds)

The issuing company is obliged to release the blocked money in the following cases:

1. Non-Allotment

   If an investor does not receive an allotment or receives only partial allotment, the registrar or the bank must unblock all or the partial amount.

2. Non-receipt of minimum subscription

   If the issuer does not receive the minimum subscription of 90% of the net offering, the issuer must refund the money/release the subscription amount.

3. Failure to obtain listing approval

   In some cases, the issuing company does not receive permission to trade from the specified stock exchanges where the securities are to be listed. In such cases, the issuer has to refund/release the IPO application money to the investors.

4. Failure to allot to minimum number of Allottees

   If the prospective allottees of the company is less than 1,000, the issuer must refund/unblock the IPO subscription money to the bidders.

5. Failure to allot 75% of offer to QIB under mandatory book building process

   In case of an issue through QIB route, if the issuing company fails to allot at least 75% of the offer to QIB, the entire subscription money must be returned to the investors.

Thus, the date of the initiation of IPO refund is generally four business days after the closing date of the issue. It varies for each IPO and is specified in the Red Herring Prospectus (RHP) for that IPO. Investors can also check for the IPO initiation refund dates/IPO funds unblocking dates and other details about each IPO on the

Initiation of IPO Refund Process

The registrar of the IPO initiates the refund of IPO funds. It is the responsibility of the Registrar to coordinate with the banks/self-certified syndicate banks (SCSB) to unblock the bank accounts and process IPO refunds.

Steps involved in initiation of refunds in IPO

1. The registrar in consultation with the stock exchange and lead manager finalize the allotment.
2. The registrar notifies the banks to release the funds in case of non/partial allotment.
3. SCSB lifts lien on funds blocked for applications submitted through ASBA or UPI.

IPO Funds not Unblocked

It often happens that amounts do not get unblocked after an IPO or investors do not receive the credit within the period specified in the offering document. In such cases, investors may do the following:

• As a first step, investors should check with their bank to see if they have received the refund/unblocking instruction.
• If there is no problem with the bank, contact the Registrar.
• Contact the Registrar online by sending an email OR visit the nearest branch of the Registrar.
• If no resolution is found, contact SEBI as a last resort.
• File an IPO refund complaint with SEBI on the SCORES website or send a physical application/complaint request to SEBI.
• Contact SEBI's Toll-free Helpline desk for Investors on 1800 266 7575 or 1800 22 7575 for any guidance/status update/queries.

The Issuer may pay an interest at the rate of 15% p.a. if the refund is not processed or amounts are not unblocked within the specified time limits.

Page Glossary

• NACH (National Automated Clearing House)

  The National Payments Corporation of India (NPCI) has launched NACH for banks, financial institutions, corporates, and government agencies to facilitate high-volume, regularly recurring interbank electronic transactions.

  National Automated Clearing House (NACH) is a centralized system introduced with the objective of consolidating multiple ECS (Electronic Clearance Services) systems operating across the country.

  The NACH system allows member banks to develop their own products. It also addresses the specific needs of banks and businesses, including a refined Mandate Management System (MMS) and an online Dispute Management System (DMS) combined with strong information sharing and customized features MIS.

• NEFT (National Electronic Fund Transfer)

  NEFT is a nationwide payment platform used by many banks. NEFT makes it easy and hassle-free to transfer money from one bank account to another bank account. You no longer have to go to the bank to transfer money, you can transfer the money from home.

  There is no minimum or maximum amount for transactions. However, generally the maximum amount per transaction is Rs.50,000 for newly added beneficiaries.

• RTGS (Real Time Gross Settlement)

  RTGS is a system for high-value transactions where money transfers are settled in real-time, one at a time and on a transaction basis (without netting).

  The minimum amount that can be transferred through RTGS is Rs 2,00,000, with no upper or maximum limit.

• Direct Credit

  Direct Credit is an electronic transfer of funds through the ACH (Automated Clearing House) system.

  The payment is initiated by the payer, who transfers the funds directly to the payee's bank account. Settlement takes place within one to two business days.

• QIB route

  In the QIB route, the IPO must follow the book-building process, and QIBs (Qualified Institutional Buyers) should receive at least 75% of the issue volume.

  The QIB route is an alternative route for an IPO if the issuing company does not meet the profitability standards to be eligible for an IPO. The QIB route is also known as a mandatory issue in a book-building process.

  A qualified institutional buyer (QIB) is an institutional investor who has the necessary expertise and financial background to carefully evaluate capital markets and invest strategically.

IPO listing is a process by which the shares of a private company are listed on the stock exchange so that they can be publicly traded. After listing, any stock market investor can buy or sell these shares through a stock broker.

IPO listing is the final step in the IPO process. It occurs after the IPO shares have been allocated and credited to the investor's demat account. The issuing company decides on which stock exchange to list the IPO shares. A mainboard IPO can be listed on one or both stock exchanges, i.e., the NSE and the BSE, while a SME IPO can be listed on only one stock exchange.

An IPO is an offering on the primary market. However, once the issuing company's shares are listed on the exchange(s), they become part of the secondary market.

IPO Listing Date

IPO Listing Date is the date on which a company's shares are admitted to trading on a recognized stock exchange. It is the first day on which investors can buy/sell shares of that company on the stock exchanges.

The IPO listing date is tentatively scheduled for six* business days after the closing date of the IPO. Once the Company determines the final listing date, it is announced through a notice on the Exchange's website. An investor can find the IPO listing date and details at

* Note: Effective December 1, 2023, the listing timeline for all public issues will be reduced to three working days post the issue closure.

IPO Listing Process in India

The IPO listing is a process through which shares of a company get onboard on stock exchanges for public trading. Listing occurs toward the end of the IPO process.

An issuing company must go through several steps (known as IPO process ) before it is listed on the stock exchange.

1. The issuing company appoints one or more merchant bankers (lead managers).
2. Merchant bankers evaluate IPO listing eligibility criteria and IPO listing requirements.
3. Merchant bankers obtain in-principle approval from the stock exchanges for an IPO.
4. Merchant bankers prepare and submit draft offering documents to SEBI/Exchanges. SEBI/Exchanges approve them.
5. Merchant bankers hire other intermediaries.
6. Company does publicity for the initial public offering through public relations(PR) and advertising agencies.
7. Launch of IPO for bidding by investors.
8. Completion of allotment in consultation with exchange(s).
9. Initiation of procedure for refund and credit of shares to demat accounts of allottees.
10. Listing of the shares on the selected stock exchange platform(s).

IPO Listing Time

The listing day begins with an IPO listing ceremony. The listing of the IPO takes place with the opening of the market at 9:00 a.m. on the listing day. The trading session on the listing day is divided into two parts, Pre-Open Session and Regular Session.

1. Pre-Open Trading Session

For better price discovery, exchanges conduct a special pre-open session for IPO shares on the day of listing (first trading day only). The duration of the Pre-Open Session is one hour from 9:00 am to 10:00 am. The Pre-Open Session is conducted in three parts:

1. The pre-open order placement session lasts 45 minutes (9:00 a.m. to 9:45 a.m.), during which orders may be entered, modified, and cancelled. No orders will be executed during this time.
2. The pre-opening order matching and execution session takes place between 9:45 am and 9:55 am. This is the time when the Exchange determines the equilibrium price (listing price) based on the demand and supply of IPO shares in the first 45 minutes. The orders that meet the price criteria are executed, the remaining orders are moved to regular trading session.
3. Stock exchanges use the time between 9:55 a.m. and 10 a.m. to prepare IPO shares for regular trading.

Equilibrium price

IPO Shares Pre-Open Session Equilibrium price is the price at which total demand equals total supply.

To handle the difference in equilibrium price at BSE and NSE for an IPO share, exchanges take common equilibrium price (CEP) to derive the Listing Price. For example, If BSE's equilibrium price is at ₹120 each for 300 shares and the NSE's is at ₹100 each for 500 shares, the CEP will be the average of the two. [(120*300+100*500)/800 = ₹107.50].

Further, the lower and upper price band on both exchanges would be 5 per cent around the CEP (₹107.50). So, the CEP would be the volume-weighted average of equilibrium prices on individual exchanges as determined by the call auction.

Steps to buy/sell IPO shares in pre-open market on the day of listing

1. Place the order with the price at which you want to buy or sell.
2. If listing price is equal to or in your favour than the price at which you have placed your pre-open buy/sell order, the order will be executed at the listing price.
3. The unexecuted orders will be moved to regular trading.

Let us take a simple example to understand the pre-market order execution if the lPO gets listed at Rs 510.

Note: The above is a simple example to clarify the limit order execution based on price. The extent of order execution depends on the demand and supply of shares.

Pre-Open IPO shares trading rules

• The deadline for entering, modifying, and cancelling orders in the Pre-Open Session is 9:45 AM. Orders in the Pre-Open Session are executed between 9:45 a.m. and 9:55 a.m.
• There are no price bands in the Pre-Open Session.
• Only limit orders are accepted in the Pre-Open Session. Market orders will not be accepted.
• All unexecuted orders will be moved to the regular trading session.

2. Regular session

The regular session is the normal trading session in which IPO shares are traded like any other stock. Based on the stock's listing price, the stock exchange sets an upper and lower price range

IPO Listing Price

The IPO listing price is the opening price of the IPO share on the day of listing. The listing price determination takes place in the Pre-Open Session within the 10-minute window from 9:45 a.m. to 9:55 a.m. Although there are no circuit limits in the Pre-Open Session to facilitate price discovery, there is generally a 25% floor and a 75% ceiling (based on some recent IPOs). However, it can be more than that.

IPO Listing Day Circuit Limit

Stock exchanges set a circuit limit (upper and lower limits) for IPO stocks on the day of listing to control sudden price movements. The circuit limit is a percentage of the listing price set by the exchange in the pre-opening session. Below are the rules for setting a price limit for IPO shares:

1. For issue size up to Rs 250 crores, the price band is 5% +/-
2. For issue size more than Rs 250 crores, the price band is 20% +/-

IPO shares listing groups

When listing an IPO, stock exchanges also specify the listing group of the stock along with other listing details such as ISIN, BSE and NSE codes. The listing group of the stock determines the mode of settlement and also whether intra-day trading is allowed for these stocks or not.

The newly listed companies are categorized according to their issue volume. Both the NSE and the BSE have their own group codes or series to identify the listing group of the stock.

The investment trusts viz. REIT (Real Estate Investment Trust) and InvIT (Infrastructure Investment Trust) get listed in 'IF' group.

Points to note:

• As per SEBI Circular CIR/MRD/DP/02/2012 on Trading Controls in IPOs, trading in IPOs with issue size of up to Rs 250 crores will take place in the TFT segment for the first 10 days after listing. Thereafter, the shares are transferred to the rolling segment of the respective stock exchange.
• The stock exchanges conduct a regular review of the listing groups. Shares may move from one listing group to another based on their trading volume, liquidity, risks and certain other factors. The stock exchanges inform investors of the group change by means of notifications and circulars.

Comparisons

3. IPO listing price vs opening price

The IPO listing price is the price set by the exchange based on orders in pre-open trading session for an IPO. Trading in the IPO shares begins at 10 a.m. on the day of listing at the listing price. The listing price is also referred to as the opening price of an IPO share on the day of listing.

IPO Grey market is an unofficial and informal market where the IPO shares are traded before they are officially listed on the stock exchange. IPO Grey Market is an unregulated and operated market, but its presence is important for every IPO as it gives potential investors an idea of the share market sentiment and demand for the IPO.

The premium price which an investor is willing to pay over and above the IPO issue price in the grey market is known as the Grey Market Premium. Kostak Rate or Subject to Sauda are the price at which IPO applications/lots are sold in Grey Market.

In this chapter, we will understand the basic concept of grey market trading and basic terms and strategies used in its dealing.

IPO Grey Market Premium Meaning

Grey Market Premium, commonly known as GMP, is the difference between the price at which IPO shares are traded in the grey market and the IPO issue price. For example, if the IPO issue price is Rs 850 and an investor is willing to pay an additional Rs 300 to get the IPO share. This means that the GMP of the IPO is Rs 300 per share.

IPO GMP helps predict listing prices. In the example above, investors anticipate a listing price of Rs 1,150 (IPO issue price plus GMP i.e 850 + 300). Although there is no guarantee that the IPO listing price will exactly match the GMP, the GMP is one of the most important indicators that generally help investors predict the IPO price and make an investment decision accordingly.

IPO Grey Market Dealers

Grey market traders are unauthorized individuals who buy/sell IPO shares on an unofficial market (over-the-counter market). In certain cases, the grey market dealers are also required to underwrite a certain % of the IPO.

Since the IPO grey market is an unregulated and unofficial market, you cannot find registered traders. You need to check with local dealers to see if they operate in the grey market and can help you find buyers/sellers for your transactions. You can also try posting a message on the to check for any buyer/seller or any discussion.

Trading in Grey Market

Trading in the IPO grey market begins with the announcement of the IPO issue price until the shares are listed on the exchange. The following are some of the key features of IPO grey market trading:

• Unofficial and unregulated market.
• Trading in the grey market takes place usually via telephone calls.
• Settlement of trade happens only in cash, generally using services of Angadia.
• Transactions in the grey market are based on mutual trust.
• Round the clock market that works 24*7.
• No regulatory body governs IPO grey market trading.
• No official or registered dealers are involved.
• No formal contracts are issued for transactions conducted in the grey market.

Grey market trading usually involves three parties: the buyer, the seller, and the dealer. Grey market trading takes place either through the trading of IPO shares or IPO applications.

To trade in the grey market, as a very first step, an investor needs to find a grey market dealer. Since the grey market dealing happens solely on trust, the dealer builds clientele through references. Thus, an investor can start trading in the grey market when he is referred to a dealer through a good and reliable contact.

Once an investor finds the dealer, he can place the order over phone call. The trading in the grey market starts as soon as there is any news of an IPO in the market till the previous day of listing. The settlement happens on the listing day at 9.45 am. Once the listing takes place, the grey market window for the said IPO gets closed. There is also a 90 day expiry period for the grey market trades. If an IPO does not take place within 90 days from the grey market transaction date, the deal gets cancelled.

On the listing date, the dealers punch in their buy/sell order as per their net delivery position at equilibrium price.

The accounting of the trades is done using excel sheets or simple Tally tools. On the settlement day, the angadia goes door-to-door to recover/deliver cash as the case may be.

In case of any default by either of the counterparty, there is nothing anyone can do. Thus, trading in grey market is risky.

IPO Grey Market Rate Types

1. IPO Grey Market Premium (GMP)

The IPO GMP price can be positive or negative.

• If the GMP value is positive or very high, this indicates that the IPO may perform better on listing or bumper listing. Example: If the IPO issue price is Rs 500 and the GMP is Rs 150, the listing is likely to be at Rs 650 (30% gain).
• If the premium is low or negative, investors may be uncertain whether the stock will be successful after the listing and expect the listing to be at a discount. Example: If the IPO issue price is Rs 500 and the GMP is Rs - 200, the listing is expected at Rs 300.

Example of GMP with listing gain

If the IPO issue price is Rs 500 and the GMP is Rs 300. It means that buyer A in the grey market is willing to purchase the share at Rs 800.

Suppose an IPO applicant i.e. seller B of IPO shares in the Grey market has 15 shares. He has submitted an application of Rs 7,500 (15*500).

The grey market buyer A will pay Rs 12,000 (15 * 800) against the IPO application value of Rs 7,500 (15 * 500).

Now let us say if the listing happens at Rs 1,200, the buyer and seller will earn below profits:

• Profit for seller B of the IPO shares: Rs 4,500 (12,000-7,500)
• Profit for buyer A of the IPO shares: Rs 6,000 (18,000 - 12,000)

Example of GMP with listing loss

Continuing the above example, if the listing happens at Rs 600, the profit/loss for both parties will be as below :

 As per the listing price of Rs 600, the application amount for 15 bids will be 15*600 = Rs 9,000.

Profit for seller B of the IPO shares: Rs 4,500 (12,000 - 7,500)

Loss for buyer A of the IPO shares: Rs 3,000 (9,000 - 12,000)

The amount of profit for the seller remains the same. However, the buyer incurs a loss of Rs 3,000 because the listing was below the GMP.

2. Kostak Rate

The IPO Kostak price is an agreed-upon price at which IPO applications are sold and purchased, regardless of their allotment status. The Kostak Price is the fixed price paid by the buyer of the IPO Application to the seller of the IPO Application.

The Kostak rate is the price for the entire IPO application and not per share. It is a price mutually agreed between the buyer and seller.

For example, an investor has applied for 15 shares at Rs 500 in an IPO amounting to Rs 7500. Now there is another investor who is bullish about this upcoming IPO and agrees to pay Rs 1,000 as the premium to purchase the entire IPO application. In this case, the seller of the IPO application secures a fixed profit of Rs 1,000 irrespective of whether he secures an allotment or not.

If the seller receives allotment and the listing happens at a premium, the seller is required to pass the listing gains to the buyer or credit the shares to the purchaser against Rs 8,500 (7,500 +1,000).

If the seller does not receive the allotment, still the buyer of the IPO application needs to pay Rs 1,000 to the seller of the IPO application.

3. Subject to sauda

Subject to Sauda price is an extension to the IPO Kostak rate. In subject to sauda, the buyer of the application agrees to pay a fixed price against the IPO application only if the seller of the IPO application receives allotment in the IPO. The subject-to-Sauda rates are generally higher than the Kostak rates.

Considering the above example, the buyer of the applicant agrees to pay an additional Rs 4,000 for the entire application provided the IPO applicant receives the allotment.

In this case, if the applicant secures no allotment, the deal gets cancelled. However, if the IPO applicant receives the allotment the buyer of the IPO application pays Rs 4,000 as the premium. The seller of the applicant either passes the listing gains to the seller or shares to the buyer of the IPO application for Rs 11,500 (7,500 + 4,000).

Note: Rs 7,500 is the amount for 15 shares bought at Rs 500. Rs 4000 is the premium buyer paid for the entire application.

Grey Market Trading Pros and Cons

Advantages

• Increases the chances of making a profit from the IPO.
• Availability of IPO shares for trading even before listing or subscription.
• Ability to purchase IPO shares even after the IPO subscription window closes.
• No limit on the number of IPO applications for trading.

Disadvantages

• A high amount of risk is involved as the market is unregulated.
• No grievance forum in case of any fraud or issues.
• Chances of losses in case of listing at a discount.
• No written or official agreement to buy or sell; hence no proof to serve.

Grey market premium is good or bad

Grey Market is beneficial if used in the right way. It is one of the indicators that help to predict the listing price. Grey Market can be used as an effective hedging tool and not for gambling. GMP is based on market sentiment and demand and supply of IPO shares and gives a fair idea of IPO listing.

Although the GMP is not always accurate, investors should keep an eye on the GMP as it can help them evaluate their investment decisions and the performance of an IPO on listing.

You can have a look at the IPO GMP live data or the IPO GMP performance tracker on under the GMP tab of every IPO.

Page Glossary

Note: Angadia is an age-old traditional form of courier service that deals in transfer of valuable items like cash, jewellery, etc. Generally angadias are used for money transfer services. They are the informal intermediaries who deal in cash. Angadias play a very important role in Grey Market which operates on a cash basis. It is a very risky service and is based purely on trust. Angadias offer door step delivery for cash pickup or delivery.

Unlisted shares are the shares of the company that are not listed on stock exchanges. These shares are traded over-the-counter between two people who know each other or through a broker who deals in unlisted securities.

The unlisted shares include the following:

• Pre-IPO Shares - Shares provided by companies seeking an IPO.
• Delisted Shares - Shares delisted by the exchanges or the companies delisted voluntarily.
• Shares issued in private placements.
• ESOP Shares - Shares issued under employee stock options.
• Shares held by group shareholders of private companies.

Unlisted Shares Advantages

• Opportunity to invest in the company at an early stage.
• No feeling of insecurity for allotment once the company announces an IPO.
• Possibility of better returns.
• Helps diversify the investment.
• Unlisted shares are traded in dematerialised form and are held in demat account.

Unlisted shares Disadvantages

• Risky transaction as its not backed by the stock exchanges.
• Longer transaction time.
• Lack of liquidity.
• Higher investment amount as the minimum lot size required to purchase is higher.
• Only a few dealers available for transactions.
• The investment in unlisted shares is beneficial when done for a long-term period.

Unlisted Securities Trading

The purchase of unlisted shares can be made through brokers, dealers, or direct sellers who specialise in sourcing and placing unlisted shares and can facilitate trades. Intermediaries buy shares from employees, such as under employee stock options (ESOPs), from existing investors and offer shares to new investors who wish to invest.

You could also invest in unlisted shares using methods like:

1. Invest in Startups and intermediaries.
2. Buy ESOPs directly from employees.
3. Buy stocks from promoters.
4. Invest in PMS (Portfolio Management Service) and AIF (Alternative Investment Fund) schemes that pick up unlisted shares.

Unlisted shares brokers

There are a few brokers who deal in unlisted shares in India. You can place an order online over the phone call or by email to the broker for the shares you want to buy or sell. Trading in unlisted shares is done in Demat form.

Unlisted Shares Exit Strategies

You can make an exit from the unlisted shares at any time, provided you find the buyer. Note that liquidity in unlisted shares is a challenge and it may take a few weeks to exit. Some of the ways you can exit unlisted shares are listed below:

• Selling privately to someone
• Selling through a unlisted dealer
• Buyback by the company
• Acquisition of the company by a listed company

Unlisted shares lock in period

There is no lock-up period for the unlisted shares expect for the Pre-IPO shares. You can sell the shares at any time after you have bought them if you have found the right seller.

There is a lock-in period of six months if you have the shares of a company that announces an IPO and is getting listed on the stock exchange. You cannot sell such shares for six months from the date of listing. Such shares are known as Pre-IPO shares.

Unlisted shares Taxation

The unlisted shares holding period decides the capital gains tax rate.

1. If the unlisted shares are sold within 24 months, the gain realised is taxed as a short-term term capital gain. The unlisted shares short term capital gain is taxed according to the tax slab of the person concerned.
2. If the unlisted shares are held for more than 24 months prior to sale, the gains are taxed as long-term capital gains. Long-term capital gains on unlisted shares are taxed at a rate of 20%, subject to indexation.

Page Glossary

• PMS (Portfolio Management Service)
  PMS is a service provided by financial institutions to professionally manage the investment of investors as per their risk tolerance and financial goals.

  The PMS are provided against a fee. The investments are diversified across various asset categories like Equities, Mutual funds, bonds that may take of growth and income of investors. One such investment category that many PMS provide is access to unlisted shares.

• AIF (Alternative Investment Fund)
  AIF is a funds managed by professional fund managers wherein the money is pooled from investors and invested in real estate, commodities, hedge funds, unlisted shares etc.

  AIF deploy funds in investment categories beyond Equities and debt. AIF involve high risk return strategy.

KPIs stand for Key Performance Indicators. KPIs are quantitative measures of a company that provide information about the course of business and performance over a certain period of time. KPIs are very important for the company as well as for investors and other stakeholders.

KPIs help the company to recognise its strengths and work on areas of improvement. KPIs help investors to make investment decisions. There are different types of KPIs that provide information about a company's profitability, efficiency, liquidity and operational performance. It is important to know that no single KPI can tell you whether a company is doing well or not. One should know what each KPI means and analyze each KPI to better understand the company.

Let us take a look at some of the common key performance indicators of a company:

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1. Revenue from operations

Revenue from operations is the income that a company generates from its primary business activity. It is the amount that a company earns from the sale of its products or services. Revenue from operations excludes other sources of income such as interest, investments, or one-time gains.

This key figure provides information about a company's sales performance. Revenue from operations is also known as the company's top line.

It is a starting point for any analysis, as it is directly related to turnover. A company is considered successful if its turnover is growing. Therefore, one should track the percentage growth of revenue to assess the company’s revenue growth.

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2. Profit After Tax

Profit after tax (PAT) is the net profit/income remaining to the company after all expenses and taxes have been paid. PAT is an important indicator that reflects the financial health of a company. It is the bottom line in a company’s profit and loss statement. The higher the PAT, the better the company can manage its expenses and is said to have a good profitability position.

PAT is calculated by subtracting tax expenses and all other expenses from total income (i.e. income from operations plus other income)

A positive PAT indicates that a company is making profits, while a negative PAT means that the company is making losses.

Points to Note:

• Increase in PAT – Very Good sign.
• Consistent PAT- Good sign.
• Decrease in PAT - Caution.
• Sudden increase/decrease in PAT in between- Can be one-time. Look for the reason

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3. Profit After Tax Margin (PAT Margin)

PAT Margin is the percentage of PAT compared to a company's revenue from operations i.e. sales. PAT Margin shows the company’s ability as to how much of the company sales are actually converting into profits. The higher PAT margin reflects that the company can manage the costs and taxes very well and is a positive indicator of the firm's financial health check.

Points to Note:

• Higher the PAT Margin – Very Good sign.
• Lower PAT Margin- Good sign.
• Negative PAT Margin - Caution.
• Sudden increase/decrease in PAT in between- Can be one-time. Look for the reason.

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4. Return on Capital Employed (RoCE)

The return on capital employed is a profitability indicator that assesses a company's performance.

The ROCE ratio provides information about a company’s ability to generate profits on the employed capital. It is an important indicator for assessing the return on total invested capital. It is a benchmark for calculating the target return for investors. ROCE is particularly important for issuers of IPOs as it provides information on how effectively the company uses its capital to generate profits.

An investor would prefer to invest in a company that generates a higher return on invested capital compared to others. ROCE is calculated by dividing the operating profit by the capital employed i.e. total assets less current liabilities.

ROCE helps to assess the competition between two companies in the same industry and to choose the better company. If there are two companies A and B with capital employed of Rs 17.5 lakhs and 33 lakhs respectively and operating profit of Rs 4 lakhs and Rs 6 lakhs respectively, the ROCE for both is (4/17.5)*100= 22.8% and (6/33)*100= 18.18% respectively. So of the two companies, Company A has a higher ROCE even though it has a lower profit and is therefore a better choice for an investment.

In general, the higher the RoCE, the better. Generally, companies with a ROCE of at least 15-20% are considered good. However, ROCE varies from sector to sector.

Points to Note:

• Increasing RoCE – Very Good sign.
• Consistent RoCE- Good sign.
• Decreasing RoCE - Caution.
• Sudden increase/decrease in PAT in between- Can be one-time. Look for the reason.

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5. Return on Equity (RoE)

The return on equity is also a profitability indicator used to evaluate the company's performance. It provides information on the company’s ability to generate profits with its equity. The difference between RoE and RoCE is that RoCE is based on total capital including debt, while RoE is based only on equity.

RoE is calculated by dividing the company’s net profit by the shareholder’s equity.

RoE also helps with investment decisions. In general, a return on equity of 15% or more is considered good. However, this again depends on the industry. Therefore, one should check the return on equity of similar companies in the industry to get a better idea.

The higher the return on equity, the better. But one should also consider other factors. Example: Company A has earned a net profit of Rs 15 lakhs and has an equity of Rs 50 lakhs, so the return on equity would be 1500000/5000000 = 30%. However, there is a similar company which has also earned a net profit of Rs 15 lakhs and has raised capital of Rs 30 lakhs through equity and Rs 20 lakhs through debt, so its return on equity is 1500000/3000000=50%. Though the return on equity of Company B is higher, it has also increased its debt burden. Therefore, it is important to evaluate other factors apart from return on equity and check whether the equity is not decreasing, whether the high debt of the company is okay or not, and whether it has experience in the industry as new companies may take time to earn returns, whether the decreasing net profit is due to one-time high investment etc.

Points to Note

• Increasing RoE – Very Good sign.
• Consistent RoE- Good sign.
• Decreasing RoE - Caution.
• Sudden increase/decrease in RoE in between- Can be one-time. Look for the reason.
• Check for debt components as well.

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6. Return on Net Worth (RONW%)

The return on net worth (RONW) for an IPO issuer is a financial ratio that measures the company's profitability in relation to its net assets, which include equity and reserves. It indicates how effectively the company is generating profits based on the total value of its assets and liabilities.

To calculate your net worth, you subtract your total liabilities from your total assets.

Return on Net Worth is calculated by dividing the Net Income of the company by the shareholders' equity.

Point to Note:

• Increasing RoNW – Very Good sign.
• Consistent RoNW- Good sign.
• Decreasing RoNW - Caution.
• Sudden increase/decrease in RoNWin between- Can be one-time. Look for the reason.

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7. Debt Equity Ratio

The debt equity ratio provides information about a company's capital structure. In simple terms, it shows how much a company relies on debt and how much on equity to cover its financing requirements.

A high debt-equity ratio is considered risky as it indicates that the company relies on more debt than equity, which can lead to pressure in meeting its debt obligations. Although an ideal leverage ratio is between 1 and 1.5-2, it depends on the industry. A capital-intensive industry such as finance or manufacturing may have a leverage ratio of more than 2, which is normal for their business. In some cases, a high debt equity ratio also indicates that a company has a good credit rating and is therefore able to raise debt capital.

The debt to equity ratio is calculated by dividing the company’s total borrowings/debt by its total equity.

Points to Note:

• Debt of Equity ratio of 1-1.5 is good.
• Some industries like finance, and manufacturing have high Debt to Equity ratios. Thus an ideal ratio will depend on the company’s sector.
• A decreasing trend in debt to equity ratio is a good sign.
• An increasing trend in debt-to-equity ratio is a sign of caution.

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8. Earnings per share (EPS)

Earnings per share (EPS) is an important profitability indicator that shows how much profit a company generates per share. It is an important metric used by investors to evaluate a company's performance. It indicates the proportion of a company's profit allocated to each outstanding share.

EPS is calculated by dividing net profit, i.e. profit after tax, by the total number of shares outstanding.

There are two EPS calculated in each offer document. One is the diluted EPS and the other is the basic EPS. The main difference between basic and diluted EPS is the change in the denominator, i.e. the number of shares in the EPS calculation. In the case of diluted EPS, the number of shares increases by the conversion of convertible securities into shares. On the other hand, basic EPS does not take into account the effects of potentially dilutive securities. Diluted EPS is more conservative than basic EPS.

Points to Note:

• Increasing EPS = Very Good.
• Consistent EPS = Good
• Decreasing EPS = Caution

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9. Price to Earning Ratio (PE Ratio)

The P/E ratio of a company is an important indicator used by investors and analysts to determine the valuation of a company. The P/E ratio helps to recognise whether a share is undervalued or overvalued.

The P/E ratio is calculated by dividing the current share price by the earnings per share (EPS). It indicates how much an investor is willing to pay for each Re.1 of a company’s earnings. For example, if a company's P/E ratio is 15, it means that the investor is willing to pay Rs. 15 for every Re.1 that the company earns.

Analysts derive the forward P/E taking into account the estimated earnings based on their research and input from management. In some cases, the forward PE is also calculated based on annualized earnings to have a fair idea.

An ideal P/E ratio depends on the company's industry. Generally, an average P/E ratio is between 20-25. The lower the P/E ratio, the better it is considered. If the P/E ratio is very high, the stock is considered overvalued. Although this is the general norm, a higher P/E ratio can also mean that the company's future is promising, so investors do not mind paying a high price today. Therefore, one should check the P/E ratio of the industry and also compare the P/E ratio of the peer companies.

For example, if there are two companies in the same industry with similar characteristics and the P/E ratio of Company 1 is 35 and Company 2 is 29, it makes sense to invest in Company 2.

Points to Note :

• Lower PE Ratio - The stock is considered reasonably priced.
• Higher PE Ratio - The stock is considered over priced.

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10. EBITDA Margin

The EBITDA margin is a profitability ratio that provides information on the percentage of earnings a company can generate at the operating level. EBITDA is earnings before interest, taxes, depreciation and amortization. The EBITDA margin gives an indication of the company’s efficiency in managing expenses at an operational level.

To calculate the EBITDA margin, we must first calculate EBITDA. EBITDA is calculated by adding finance costs, tax expense and depreciation and amortization expense to profit after tax for the period. The EBITDA margin is the percentage of EBITDA compared to the company's revenue from operations.

If the company’s EBITDA margin is 15%, it means that from sales of Rs. 100, the company has spent Rs. 85 (100-15) towards expenses and earned Rs. 15 from operations.

Generally, a company with an EBITDA margin of 10% and above is considered good.

Points to Note:

• Increasing trend in EBITDA - Good sign
• Decreasing trend in EBITDA - Caution

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11. Price to Book Value

The price- to-book ratio (P/B ratio) is a valuation ratio, commonly known as PB or P/BV ratio, that helps to assess whether a share is undervalued or overvalued. The price-to-book ratio shows the relationship between the book value of assets/equity in the balance sheet and the market value of equity.

The PB ratio is calculated per share and is calculated by dividing the market price of the share by the net asset value per share. The net asset value (NAV) is the difference between the total assets and the total liabilities. The NAV is then divided by the number of shares outstanding to arrive at the NAV per share. The NAV is generally stated in the offer documents/IPO advertisements in newspapers.

The PB ratio shows what the actual value of the assets is as against what the market perceives it as. A higher PB ratio indicates that a share is overvalued. In general, stocks with a PB ratio of 1-3 are considered undervalued. However, the interpretation of an ideal PB depends on the company's industry.

Mukka Proteins PB ratio : 4.78 (based on Mar’23 NAV)

Points to Note:

• Generally, the latest year NAV is given, thus one cannot track the trend PB ratio. Investors can assess the valuation based on the latest NAV and offer price.
• PB Ratio of 1-3 - Undervalued stocks
• PB Ratio of 3-15 - Fairly Priced stock
• PB ratio of more than 15 is an overvalued stock
• The above is a generic view and one should compare the P/BV of competitors and the industry.

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KPI Analysis

To understand the above metrics, we have taken the example of Mukka Protein's KPI. Let us see what the above KPIs tell us about Mukka Proteins. Click here to compare the Mukka Proteins KPIs with its industry peers.

Thus, based on the analysis of financial KPIs, it is good to apply for Mukka Proteins. However, one must also check other factors like the company review, sector growth, object of the issue, management, merchant banker to make an informed decision of investment or not.

Key Takeaways

KPIs help you to evaluate a company's performance and determine its profitability and efficiency. Key Performance Indicators help investors decide whether or not to invest in an IPO. In order to analyze a company, it is important to note that none of the key figures can be used in isolation. One should examine all the metrics, study their trend and compare them with their industry peers to get a true picture.