If you’re planning to join the IPO bandwagon...

Vijay C Roy

THE Initial Public Offer (IPO) market had a dream run in 2023. The year saw a total of 60 IPOs offered by companies in a range of sectors, from finance to pharmaceuticals to cables. The number of IPOs for 2023 was the second highest in the past decade, second only to 2021, which witnessed 65 IPOs.

According to analysts, the last quarter of 2023 saw 23 IPOs — the highest number for the October-to-December quarter in a decade. Further, in December last year, the Indian stock market experienced a significant burst in investments, with 42 lakh new demat accounts being opened. This surging interest in equities is likely due to increased financial literacy, digitisation, user-friendly trading platforms and the FOMO (fear of missing out) factor.

The growing number of demat accounts may foretell a promising future for fostering investment growth in India.

“The average number of retail applications per IPO was 6.13 lakh in FY19 and 6.88 lakh in FY20. This increased to 12.73 lakh in FY21 and further to 15.68 lakh in the first seven months of FY22. That shows the build-up in retail traction in IPO applications. The retail base has significantly increased post-Covid and has supported the volume of the market heavily. New investors are coming from different parts of the country, including small towns. Opening these accounts will further strengthen the retail volume and participation,” says Mahavir Lunawat, managing director, Pantomath Capital Advisors Pvt Ltd.

Investment in IPOs has the potential to generate significant capital gains on listing or over the years, and that’s the reason it’s gaining traction from retail investors. However, popular IPOs are frequently oversubscribed, indicating that the demand for their shares vastly exceeds the supply.

The IPO allotment works based on the subscription. If an IPO is undersubscribed, all investors with valid applications will receive a full allotment. In the event of oversubscription, shares are allocated through a lottery system or proportionately based on the investor category. Here are some strategies than an investor should adopt to increase his or her IPO allotment….

Multiple Demat Accounts

An investor can apply only once and multiple applications are liable to be rejected. To navigate through this, investors can put one lot in the name of each member of their family, which will help them get optimum allocation in the event of oversubscription. According to analysts, it is quite possible to improve allotment prospects. The investor must encourage family and friends to submit several applications for the same IPO.

Consequently, multiple demat accounts can boost his or her chances of receiving at least one. Since large applications are rejected, one can submit multiple applications from separate demat accounts for the same amount. These demat accounts must be linked to different PAN accounts.

Bidding at Cut-off Price

Normally, the companies to be listed use a book-building procedure to find the appropriate stock price. They establish a range, and investors must submit bids within that range. The term ‘cut-off price’ indicates that the investor is willing to pay whatever price the company decides after the book-building process.

For retail quota specifically, investors should place a bid at the cut-off. By doing this, they avoid the possibility of losing their allocation simply because their bid price was lower than the price that was later discovered. Let’s say, the pricing range for an IPO is between Rs 100 and Rs 150. Then the cut-off price is Rs 150. The investor must bid at the cut-off price to enhance the chances of receiving an IPO allocation. If the IPO is oversubscribed, it means that all bids were submitted at the cut-off price. On the other hand, if investors quote a lower price, there will be no chance of IPO allocation.

Shareholder Quota

In order to improve prospects of IPO allotment, investors should also look at shareholder quotas. For this, the investor can purchase a share of the parent company, making them a part of the shareholder ecosystem. “Since there is less competition for the shareholder quota, the likelihood of allocation is fairly high,” says Lunawat.

Don’t delay application

With the newly reformed timeline, an IPO is open for three days. To maximise your IPO allotment chances, apply during the first two days. Investors should keep in mind that while the exchanges accept the IPO bids till 5 pm on the last day, brokers might stop accepting applications in the afternoon. Ideally, investors should always invest in IPOs in the first two days and avoid the last-minute rush.

Often, many people apply for the IPO on the last day. This is because they want to see the response to the IPO across different categories — retail, HNI (High Net-Worth Individual) and others. However, one should apply for an IPO if the investor is confident about the company, irrespective of its IPO demand.

Applying In many Categories

Individuals cannot apply in the HNI and retail categories simultaneously because each application requires a distinct PAN number, hence doing so is a reason for rejection. More significantly, if a retail investor applies for more than Rs 2 lakh worth of shares in an IPO, the offer is categorised as an HNI offer under the NII (Non-Institutional Investor) category. When looking at the retail category, it reserves at least 35 per cent of the overall IPO offer and permits bids at cut-off pricing.

Investors in Retail Individual Investors (RII) category may also cancel their bids up until the allotment day. The allotment in an IPO with an oversubscribed offering shall be the minimum bid lot. In the absence of an oversubscription, allocation will be made in its entirety.

Leveraging Brokers

Applying in an IPO through different brokers will result in the complete rejection of the application. All applications are rejected if the investor has applied for IPO using the same name, demat account, or PAN number. The only way to navigate through this is to apply under the name of each member of the family. However, once more, all eligible family members need to have a PAN number and a demat account.

Paying through UPI

While the transaction limit for IPO applications with UPI has been increased to Rs 5 lakh, only one application is allowed through UPI as a payment gateway. An additional payment mode, Application Supported by Blocked Amount (ASBA), has been introduced by market regulator SEBI with a view to make the public issue process more efficient. Only a select few banks such as SBI, Bank of Baroda, RBL and Axis currently offer this for up to five applications, each with own demat and PAN numbers.

Approve the Mandate Request

Ideally, most investors who apply for the IPO through brokers believe the task is complete upon applying. Upon applying, the applicant receives a mandate request. The application is likely to be declined unless the request is approved by the investors or account holders using the banking app or website. Thus, one should make sure to accept this mandate and not miss out on the allocation opportunity.

The anticipated trend in 2024

According to market experts, a surge in the number of IPOs is foreseen over the next two months, with a temporary hiatus expected due to the impending General Election.

At present, the Securities and Exchange Board of India (SEBI) is actively processing 25 draft offer documents submitted by companies from different sectors. More than two dozen companies have already secured regulatory approval, signaling their intent to raise funds exceeding Rs 30,000 crore. Concurrently, another 40 companies have submitted their Draft Red Herring Prospectuses (DRHPs) for regulatory consideration.

What is an Initial Public Offer (IPO)

An Initial Public Offer (IPO) is a method of offering fresh shares of stock to the public for the first time by a private firm. A company can raise capital in the form of equity from the general public through an IPO. Since there is often a share premium for present private investors, the transition from a private to a public firm can be a crucial period for private investors to completely realise gains from their investment. Additionally, it enables public investors to take part in the offering.