How to Sell IPO Shares: When and How Investors Can Exit IPO & SME IPO Shares?

Retail investors are often focused entirely on securing an allotment in an Initial Public Offering (IPO). However, they fail to formulate an exit strategy that lets them effectively capitalise on their investment. As a result, they may miss booking profits or cutting losses.

A common point of confusion arises around the timing and method of selling these newly acquired shares. In this article, we will be looking extensively at how to sell IPO shares from both the mainboard and SME segments. With the information in this guide, you can make informed investment decisions that align with your objectives.  

When Can We Sell IPO Shares?

Understanding the precise moment you can liquidate the shares obtained through an IPO is crucial for planning your cash flow. You cannot trade these securities the moment you receive the shares in your demat account. Instead, IPO shares can be sold only after listing. This essentially means that you must wait until the shares are listed on the stock exchanges to sell your holdings.

Furthermore, selling is not allowed before shares are credited. For instance, some investors attempt to sell their holdings as soon as they receive the allotment message, without waiting for the shares to be credited to their demat account. However, such attempts will often be rejected by the system simply because you cannot sell what is not in your account. You must wait until the Registrar and Transfer Agent (RTA) credits the allotted shares to your demat account before initiating a sell order. 

Timeline from Allotment to Listing 

According to the rules notified by the SEBI, the allotment of shares in an IPO must be completed by 9 PM on T+1 day, with T being the day of closing the subscription for the public issue. Once the allotment is decided, the shares must be credited to the respective investors before 6 PM on the T+2 day. The listing and eventual trading of the IPO shares commence on the T+3 day.    

How to Sell IPO Shares After Allotment: A Step-by-Step Guide

Now that you know the answer to the question “when can we sell IPO shares?”, let us look at a comprehensive guide that tells us how to sell them. 

• Step 1: Check IPO Allotment Status

Visit the website of the RTA or the stock exchanges to check for the IPO allotment status. This confirmation ensures you know the exact quantity allocated to you. 

• Step 2: Shares are Credited to the Demat Account

Verify if the shares are visible in your demat holdings. Log in to your trading app and navigate to the 'Portfolio' or 'Holdings' section to see if the company name and the number of shares appear. 

• Step 3: Wait for the Listing Day

IPO shares cannot be sold until they are listed on the stock exchanges. Therefore, it is important to be patient until the listing date announced by the company.

• Step 4: Place a Sell Order through your Trading Account

On the listing day, log in to your trading account and navigate to the ‘Portfolio’ or ‘Holdings’ section. Select the 'Sell' option to open the order entry window and enter the quantity you wish to sell. 

• Step 5: Choose Market or Limit Order

The next step involves deciding on the type of order you wish to place. A market order executes immediately at the current prevailing price. A limit order allows you to set a specific price at which you want to sell. 

• Step 6: Order Execution

Once you have entered all the details, place the order on the platform. The stockbroker forwards your sell order to the exchange, which matches it with a buyer. If there is a match, the order will be executed. The funds from the sale will be credited to your trading account, which you can then withdraw to your bank account.

How to Sell IPO Shares on Listing Day?

The above guide should have given you a good idea of how to sell IPO shares. Now, in this section, we will deal with a few factors you should keep in mind when attempting to sell IPO shares on the listing day. 

• What Happens on the Listing Day?

Unlike regular stocks, IPO shares begin trading on the stock exchange only at 10:00 AM on the listing day. However, the price discovery happens during a special pre-open session. 

• Role of the Pre-Open Session

The pre-open session for IPO shares is from 9:00 AM to 9:45 AM on the listing day. During this time, you can place buy and sell orders. The system collects all orders to calculate an equilibrium price. This equilibrium price becomes the opening price for normal trading at 10:00 AM.

• Price Volatility Risk 

The price can fluctuate wildly in the first hour of trade as thousands of investors try to exit simultaneously. Such high volatility carries risk as your sell order might execute at a price much lower than you expected if you are not careful.

• Market Order vs. Limit Order 

A market order might get filled at an unfavourable price if the stock dips suddenly due to the increased volatility. A limit order, meanwhile, ensures you do not sell below a certain threshold. It protects your profit margin during volatile swings.

When is the Best Time to Sell IPO Shares?

Determining when we can sell IPO shares depends entirely on your financial goals and risk appetite. There is no single rule that applies to every investor or every company. 

• Selling on the Listing Day 

This strategy could suit you if you are looking for quick profits. Many retail investors apply for IPOs solely to capture the difference between the offer price and listing price, known as the listing gains. If the stock lists at a premium, you can sell immediately and book the profits.

• Holding for Short-Term Gains

Sometimes IPO stocks rally further after a strong debut. You can choose to hold for a few weeks or months if you believe the momentum will continue. However, this strategy requires active tracking of the stock performance to exit at a higher peak.

• Holding for Long-Term Investment 

If the company has strong fundamentals, you should consider holding the shares over the long term. By ignoring daily noise and listing day volatility, you can aim for wealth creation through the company's business growth over time.

• Factors Affecting Your Decisions

Three major factors influence your decisions - valuation, market sentiment and fundamentals. 

• Valuation: You should check if the listing price makes the stock expensive or overvalued compared to its peers.
• Market Sentiment: You must assess if the broader market is bullish or bearish, as this impacts stock performance in the short term.
• Fundamentals: You need to evaluate the company's earnings, debt levels and future growth prospects before deciding to hold or sell.

How to Sell SME IPO Shares?

You must understand how to sell SME IPO shares specifically because the trading rules regarding lot sizes create a barrier for exit. Here are five things you need to keep in mind when you deal with Small and Medium Enterprises (SME).

• Listing Platforms: SMEs do not list on the main exchanges of NSE or BSE. Instead, they list on dedicated SME platforms designed for smaller companies.
• Mandatory Market Maker Presence: SMEs often suffer from low trading volumes. To solve this, the exchange appoints a 'Market Maker' to provide liquidity. This entity is required to provide two-way quotes (buy and sell orders) for a specified period. They ensure there is at least some liquidity available for you to sell.
• Lower liquidity compared to mainboard IPOs: The trading volume is significantly lower than that of mainboard stocks. This illiquidity might make it hard to sell your shares instantly at your desired price. 
• Lot Size Restrictions: You cannot sell single shares of an SME company. You must trade in specific 'lots'. If the lot size is 1,000 shares, you must sell all 1,000 shares at once.
• Price Movement Differences: SME stocks often have different circuit limits compared to mainboard stocks, as they can be more volatile and prone to sharp movements. 

When Can We Sell SME IPO Shares?

Just like mainboard issues, you must wait for the listing day before you can place your sell order. Furthermore, promoters and anchor investors have a strict lock-in period for SME IPO shares during which they cannot sell. This ensures stability in the stock price immediately after listing.

One key point to note is the lack of liquidity in the SME market segment. This essentially means that your sell order might not find a match immediately. You must be patient and adjust your price to match the buyer's bid. 

Key Differences Between Mainboard IPO & SME IPO Selling

Knowing how to sell SME IPO shares is not enough. You also need to be aware of the differences between the mainboard and SME IPO selling.

Common Mistakes Investors Make While Selling IPO Shares

While understanding how to sell IPO shares is important, it is equally crucial to be aware of common mistakes that many investors make. 

• Selling Before Understanding Listing Price Behaviour

The price of IPO shares often settles after the initial volatility. You should observe the price action for at least an hour before making a decision. 

• Using Market Orders

Placing a market order on a volatile listing day is risky. You should always use limit orders to define the minimum price you are willing to accept.

• Ignoring SME Liquidity 

Investors often forget that they must sell SME IPO shares in lots. You need to check the lot size requirements and prevailing liquidity before placing the order to avoid rejection.

• Panic Selling 

Seeing a stock list at a discount often triggers panic. Sometimes stocks that list poorly recover and perform well over a few months. Therefore, it is advisable to base decisions on analysis rather than emotion.

• Expecting Guaranteed Listing Gains 

Not every IPO will list at a premium. You should always have a strategy for a negative listing scenario, as it prepares you to either hold or cut losses systematically.

Tax Implications of Selling IPO Shares

Now that you know how to sell IPO shares, let us focus on the taxation part. The profit from selling IPO shares is subject to capital gains tax. 

• Short-Term vs. Long-Term Capital Gains

If you sell the shares within 12 months of listing, the profit falls under Short Term Capital Gains (STCG). If you hold the shares for more than 12 months, the profit qualifies as Long Term Capital Gains (LTCG). The tax rates differ significantly between the two.

• Holding Period Rules

The holding period starts from the date of allotment and not the date of application. You should count the days carefully to see if you cross the 12-month threshold when calculating capital gains tax.   

Note: The tax rules remain the same whether you sell a mainboard IPO or an SME IPO.

FAQs 

• Can I sell IPO shares on the listing day? 

Yes, you can sell your allotted shares immediately once trading commences on the listing day at 10:00 AM.

• Why can’t I sell IPO shares before listing? 

You cannot sell them because the shares are not yet available for trading on the public stock exchanges.

• Can IPO shares be sold immediately after allotment? 

No, you must wait for the shares to be credited to your demat account and for the official listing date to arrive.

• Are SME IPO shares harder to sell? 

Yes, they are generally harder to sell due to lower liquidity and the requirement to trade in large lot sizes.

• Should I sell IPO shares on the listing day or hold? 

The decision to hold or sell IPO shares must be made based on your financial objectives, investment horizon and risk tolerance. For example, you can consider selling on listing day if you are looking for immediate gains. Meanwhile, you can consider holding if you believe in the company's long-term growth.

• What happens if I don’t sell IPO shares? 

The shares continue to remain in your demat account like any other stock. You can choose to sell them whenever you wish in the future.

Conclusion

Knowing how to sell IPO shares is as important as knowing which public issue to apply for. You should always approach the selling decision with a clear strategy. Avoid the temptation to follow the herd or panic during initial volatility. By understanding the tax implications and the right time to exit, you can transform your IPO allotments into effective wealth-creation tools.