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What is IPO? – Grey Market IPO, IPO Process and Upcoming IPOs

Author Clarice Mendonsa | Posted April 1, 2021

What is IPO? Listen to What is IPO Summary here

While flipping through the pages of a daily newspaper or while passing by a national highway, you may come across large advertisement for an upcoming IPO.

Grey Market IPO

What is IPO? this question might have crossed your mind if you are not familiar with the capital markets. This guide will help you learn everything about IPO investments in India.

In this article you will learn:

  1. What is IPO?
  2. IPO Process
  3. List of Upcoming IPOs
  4. What is Grey Market IPO
  5. What is Grey Market Premium?
  6. What is IPO Kostak Rate?
  7. Investing in an IPO
  8. Why does a company offer an IPO
  9. Are IPO investments risky?
  10. Performance of recent IPOs
  11. FAQs

What is IPO?

The full form of IPO is Initial Public Offering.

IPO is issued when a private company decides to go public. It is a process where the shares of a company are made available to the general public for the first time. After issue, these shares are listed on the stock exchange – NSE  or BSE or both.

Ongoing IPOs

IPO Name Offer Price Face Value Open Date Close Date Min Application Amount  Review
Zomato Ltd 72 1 14 Jul 2021 16 Jul 2021 195

Upcoming IPOs in 2021

Tatva Chintan Pharma Chem Ltd Aadhar Housing Finance Ltd KIMS Hospitals ESAF Small Finance Bank Ltd
Star Health Insurance Ltd Grofers Pavan Hans AnandRathi Wealth Management Ltd
Muthoot Microfin Ltd Bajaj Energy Ltd HDB Financial Services Ltd Flipkart Ltd
SBI Mutual Fund Ltd Nykaa Ltd Mobikwik Ltd

IPO Process 

Once a private company decides to go public, it begins with the process of IPO.

The IPO process usually takes nine months to a year. The following steps should give you a good idea of how the IPOs are listed on the stock exchanges.

Step 1: Selecting an Investment Bank

The main motive of issuing an IPO is to raise the highest possible capital. The company approaches an investment bank which also acts as an underwriter.

Who is an underwriter?

Underwriter helps in the process of issuing shares in an IPO. During this IPO process, investment bank gives suggestions to the company for a fee.

The investment banker understands the financial situation of the company and suggests how much issue they will have to raise to meet their future plans.

The underwriter can make two types of commitments with the company.

Firm commitment is where the company guarantees a certain minimum amount would be raised and buys the shares for that amount and tries to sell them via trading.

Best effort agreement is where the underwriter sells the securities for the company and but does not guarantee any amount to be raised.

Both parties sign an underwriting agreement. This contract has all the details about the deal and the amount that will be raised by issuing shares.

In case of large issues multiple investment banks are involved in the process.

Step 2: Registration with the Securities Exchange Board of India

During this phase, the company and the team of underwriters submit a draft to SEBI.

This draft clarifies the reason why the company wants to raise money from the public.

SEBI scrutinizes this report and does a background check on the company. If the data is compliant with the guidelines of SEBI, the draft is approved or else rejected.

Step 3: Red Herring Prospectus is Prepared

While awaiting approval from SEBI, a preliminary draft is prepared by the underwriters.

It consists details about the company like,

  • Financial statements
  • Management background
  • Legal issues of the company
  • Insider holdings
  • Proposed ticker symbol that the company will use at the stock exchange.

This prospectus is very useful for investors who want to invest in the company. This draft is submitted to SEBI and the cooling off period is introduced. Here, the regulatory body verifies that all the material information about the company has been duly submitted. Once this draft is approved, the company is free to come up with an IPO.

Step 4: Go on a Road Show

Before the IPO goes public, the executives of the company promote the IPO. They travel all around the country and spread the word about upcoming IPO to potential investors, mostly qualified institutional buyer (QIB). The promotions that company do before IPO is known as road show.

Step 5: Type and Price of IPO is Decided

What is IPO

After the SEBI approves the Red herring prospectus, the company and the underwriters decide on the price band of the shares and the type of issue.

There are five types of IPOs for a company to choose from.

1. Fixed Price Offering

As the name suggests, in a fixed price offering the prices of the issue is fixed by the company. The issue price is disclosed to the investors well in advance. Investors pay a fixed amount when the shares are allotted.

For example, if Orange Ltd comes up with a fixed price offering and you apply for 100 shares of Rs 100 each. At the time of allotment Rs 10,000 would be blocked in your account.

2. Book Building Offering

In a book building issue, the company offers a price band to the investors. Here, the investors are free to bid on a particular price at which they want to buy the share.

The lowest price in the price band is referred to as the floor price and the highest price in the band is referred to as cap price. The difference between the floor price and the cap price is not more than 20%.

If Orange Ltd comes up with an issue with a price range between Rs 100 and Rs 120. You can place your bids at any price withing this range. If you apply at cut off price, then chances of allotment are higher.

3. Green Shoe Option

Green shoe option is an over-allotment option. In this option, the underwriter is under a provision and can issue 15% more shares at the same price. This happens when there is high demand for the share in the market.

4. Dutch Auction

In a Dutch auction, the investors are free to bid for the required amount of shares and the price they are willing to pay. Here, all the bids are arranged in a descending order. Later, a cut-off price is decided. Shares are issued to everyone who bid at or above the cut-off price. Rest of the bids are rejected.

5. Hybrid Option 

The hybrid option is a mix of two or more of the above strategies.

The most common one among the five types is the Book Building offering.

Step 6: Shares are Made Available to the Public

On the specified date, the company makes shares available to the public. These application process is kept open for three to five working days. Investors can fill out the IPO applications using the ASBA Process (Application supported by a blocked amount). They can specify the price at which they wish to make the purchase and submit the application.

If the application is a book building issue, then the retail investor can apply at cut off price.

Step 7: Issue Price is Decided & Share are Allotted

The underwriters wait till the subscription period is over. Later they discuss with the company and decide the price at which shares are to be allotted.

This price would be determined by the demand of share and the price quoted by the applicants.

Once the IPO allotment price is finalized, shares are allotted to investors.

Step 8: Listing and Unblocking of Funds

The last step is the listing of shares on the Stock Exchanges . The investors who had subscribed to the IPO get the allotment of shares in their Demat account and equivalent amount is debited from their bank accounts.

If the issue is oversubscribed, then shares are not allotted to all the applicants. The funds of investors are unblocked who do not receive an allotment.

Ringing the Bell ceremony is held on listing day. This ceremony is conducted by the promoters of the company. It is a symbol which declares that the company is available for trading on the secondary markets.

what is IPO

Upcoming IPOs in 2021

Dodla Dairy Ltd Aadhar Housing Finance Ltd KIMS Hospitals ESAF Small Finance Bank Ltd
Star Health Insurance Ltd Grofers Pavan Hans AnandRathi Wealth Management Ltd
Muthoot Microfin Ltd Bajaj Energy Ltd HDB Financial Services Ltd Zomato Ltd
SBI Mutual Fund Ltd Nykaa Ltd Mobikwik Ltd Flipkart Ltd

Grey Market IPO 

Grey market is an unofficial or dabba market. Here, individuals buy and sell IPO shares before they are listed on the stock exchange. Grey market trading is done by a small set of individuals. It is an over the counter market and the transactions are settled on a cash basis.

Trading in the grey market is risky and illegal. We strongly recommend investors to avoid trading in the grey market.

Usually, investors test the demand of shares through the grey market for upcoming IPOs. Many investors refer to the grey market to analyse what could be the listing price of an upcoming IPO.

The two most popular terms used in the IPO grey market are Grey Market Premium (GMP) and Kostak rates.

Let us understand this in detail.

What is Grey Market Premium?

Grey market premium is the price over and above the issue price at which the shares are traded in the grey market.

Scenario 1: Positive Grey Market Premium

Suppose there is an upcoming IPO of BlueCherry Mobiles. Let’s assume the issue price for stock is Rs 200.

If the grey market premium of BlueCherry is Rs 100, it means that people are ready to buy the shares of the company by giving Rs 100 more than the issue price.

So the value of shares in the grey market is Rs 300 (100+200). This means grey market participants expect the stock to list at 300 on the exchanges.

Scenario 2: Negative Grey Market Premium

Suppose the grey market premium of BlueCherry Mobiles is Rs -50. The issue price of the share is Rs 200. Now since the grey market price is negative, it means that the sellers are ready to sell the shares at a discount.

The Grey market premium keeps fluctuating with change in demand and supply factors and overall market sentiments.

What is IPO Kostak Rate?

IPO Kostak rate is the profit a seller makes by selling his IPO application in the grey market before listing of shares. This is usually done by investors who want to secure their profits before the listing day.

The seller gets a fixed amount irrespective of getting an allotment. Let’s say someone applies for 1 lot (70 shares) of Bluecherry Mobiles and sells it to a buyer in grey market.

The Kostak rate mutually agreed by them was Rs 750 per lot. The seller will get Rs 750 from the buyer irrespective of allotment.

If shares are allotted then the seller keeps Rs 750 plus his original investment amount of Rs 14,000 (200 *70). The buyer will keep the profits or bear the losses that may arise depending on where the stock lists.

Investing in an IPO

What is IPO

Before you invest in IPO you need to ensure that you are following the right path.

Here are few steps that investors need to consider before applying:

1. Decision

IPOs are gaining lot of traction from retail investors. As everyone is rushing to apply for all the upcoming IPOs. Should you do the same? Are all IPOs worth investing?

Let me tell you. IPOs are not always successful. There are many reputed companies which had failed IPOs such as Cafe Coffee Day, Adlabs Entertainment, Reliance Power, etc.

Hence, before investing in any upcoming IPO you can read the Red Herring Prospectus (RHP)which has all the information. However, the RHP could run in to 300-400 pages. You may not have so much time to review it.

You must not worry since our research analysts review every upcoming IPO. You can subscribe to our YouTube Channel so you don’t miss out on any of their reviews.

Our research analysts give a clear-cut view on subscribing or avoiding a company. I am sure your journey of investing in IPO will be much smoother if you follow us.

2. Arranging Funds

To apply for an IPO online, you need to have sufficient balance in your bank account. Once you ensure there are adequate funds in your account you can apply for the IPO.

3. Open a Demat and Trading Account

Investors who do not have a demat account cannot apply for an IPO online. A demat account will help you store shares after allotment and a trading account will help you buy and sell shares with ease.

By opening an account with Samco you get to apply for an IPO online in less than 2 minutes.

4. Applying for an IPO with ASBA

Once your trading and Demat account is opened, you can quickly apply for an IPO through the ASBA process. ASBA stands for Application Supported by Blocked Account. The amount is temporarily blocked in your bank account. It is debited only if the shares are allotted to you. If you are not allotted shares, then the amount is unblocked.

Learn more about how to apply for an IPO using ASBA through different banks by clicking on the respective links.

How to apply for Online IPO through ASBA using HDFC Bank?

How to apply for Online IPO through ASBA using ICICI Bank?

How to apply for IPO through ASBA using Kotak Bank?

How to Apply For Online IPO through ASBA using SBI?

5. Applying for an IPO with UPI

Previously, applying for an IPO was a cumbersome process. You either had to fill an offline form or you had to fill an online form.

But, at Samco you can simply apply for an IPO your UPI ID in less than 2 minutes.

To know the process of subscribing to an IPO through UPI – Click here.

6. Bidding Process

While applying for an IPO, you need to bid for the specific number of shares you wish to avail. It is done according to the lot size mentioned in the company’s prospectus. A Lot size is the minimum number of shares that an investor must apply. He can even apply for more share but only in multiples of lot size.

Please note: While you bid for a IPO consider bidding at the cut-off price or the highest bid price. It will increase your chances of IPO allotment.

7. IPO Allotment 

After the bids are received, the company assigns the shares to the applicants. Getting an allotment in an oversubscribed IPO is a matter of luck. If the shares are allotted to you, they will be credited into your Demat account.

But many a time investors are not fortunate enough to get an allotment. Hence, Our Chief Markets Editor Apurva Sheth has brought a simple yet effective way to make money from upcoming IPOs without an allotment.

To know the strategy, check out our video below:

8. Listing of Stock

The shares are listed within 6-7 days of bidding process on the stock exchanges. You are free to buy and sell the shares of the company in the secondary market. A lot of people apply in IPO’s only for ‘listing gains’.

Why Does a Company Offer an IPO?

Let’s understand this with a simple example.

Suppose you have recently started a company with a unique idea by introducing electric cycles and named it ‘Electro Racer Cycles’.

To set up initial stores of Electro Racer Cycles, you decide to borrow money from banks. You must pay a pre-decided fixed interest on a monthly basis.

After a few years, the idea of electric cycles becomes popular in major metro cities of India like Mumbai and Delhi. Hence, you decide to expand your business.

But taking a loan will lead to more debt on your balance sheet.

Hence, you approach professional investors and ask them to invest in your company. With rising pollution, the government also starts to promote electric vehicles.

These investors find the idea unique and profitable and hence they decide to invest in your business. In return, they own a part of your company. These investors are known as Angel Investors or Venture Capitalists.

This is how early-stage companies raise funds to grow their businesses.

Before an IPO, a company is considered private. Raising money privately is helpful in the initial stages of the business. The company does not publicly disclose information. The management has tight control. It does not worry about market volatility. But this shield comes at a cost for its investors.

It’s hard for angel investors and venture capitalists to exit from the company. IPO’s offers these investors an exit route.

With an IPO a company goes public and a portion of its shares becomes available for trade on stock exchanges. The general public participates in the IPO’s and even trade in stocks once they are listed.

From the story above we understand that companies issue IPOs for:

1. Raising Cheaper Capital for Business

Raising capital is the primary motive of a company issuing an IPO. As we just saw, when a company raises capital from a bank it must pay interest on the amount borrowed. The general public become partial owners after listing. So they don’t receive any interests.

Only profits are shared among the shareholders in the proportion of shares held by them. When profits are distributed to them it is known as dividends.

[Recommended Watch: Best Dividend Stocks for 2021]

There are 2 ways in which shareholders benefit if a company makes profits.

  • Dividend Payout
  • Capital Appreciation (Rise in the share price)

2. Reduction in Cost of Capital for the Company

When the company is private, it raises funds by borrowing from a bank or by other private investors. But as the company goes public, a much higher amount can be raised and the company is not obliged to pay interests. This reduces borrowing cost for companies.

Further as the company is now in the public eye and is constantly inspected and has regulations to follow. This translates into improved credit rating and lower interest rates on any debts the company may issue.

3. Liquidity Increases

Coming up with an IPO provides an exit route to initial investors. IPO’s enable them to exit and book profits on their investments. After the listing on stock exchanges these share can be bought and sold with ease since liquidity increases.

4. Branding & Visibility

With an IPO, the company’s gets lot of free publicity in the press and media. Investors and general public gets to know about the company and its business.

5. Expansion

The funds accumulated by issuing an IPO can help the company expand its business.

Are IPO Investments Risky?

As we had discussed in the earlier example of an electro racer cycle, every company in its initial stage raises capital from venture capitalists and angel investors.

They invest with the motive of making money when the business flourishes in the future. So IPO’s are a great way to liquidate a part of their holding and books profits.

But generally it is observed that there is a significant decline in prices for two to three months after listing.

This usually happens because IPO’s are generally priced at hefty valuations. Remember the job of investment banker is to raise as much capital as possible.

Apart from this shares also see selling pressure once the lock in period expires. A lock in period is the duration for which the employees and the officials are not permitted to sell their shares.

At the end of the lock in period these associates try to book profits by selling shares of the company. This leads to more supply and decline in stock prices.

Investors who did not get the right opportunity to invest in the company can invest at this stage for the long term.

So if you wish to invest in the company, it’s often best to wait before buying a company’s share that has recently gone public.

Doing that gives time for the market to settle down. It also gives investors the benefit of seeing a few quarters of results.

So if you are willing to take risk then you could invest in IPO’s for listing gains. But if you want to invest for the long term then we recommend to wait for a dip.

Performance of Recent IPOs

IPO Name Offer price Face value Open date Close date Listing day(Gain/loss) Review
Clean Science & Technology Ltd 880 1 07 Jul 2021 09 Jul 2021
GR Infraprojects Ltd 828 5 07 Jul 2021 09 Jul 2021 YouTube Icon
Dodla Dairy Limited 428 10 16 Jun 2021 18 Jun 2021 42.31% NA
Krishna Institute of Medical Sciences Limited 825 10 16 Jun 2021 18 Jun 2021 20.72% YouTube Icon
Shyam Metalics and Energy Limited 306 10 14 Jun 2021 16 Jun 2021 22.83% NA
Sona BLW Precision Forgings Limited 291 10 14 Jun 2021 16 Jun 2021 24.69% YouTube Icon
Powergrid Infrastructure Investment Trust 100 100 29 Apr 2021 03 May 2021 2.98% NA
Macrotech Developers Ltd. 486 10 7th April 2021 9th April 2021 -4.7% YouTube Icon
Barbeque-Nation Hospitality Ltd 498 5 24 Mar 2021 26 Mar 2021 18.08% YouTube Icon
Nazara Technologies Ltd 1101 4 17 Mar 2021 19 Mar 2021 81% YouTube Icon
Suryoday Small Finance Bank Ltd 305 10 17 Mar 2021 19 Mar 2021 -9.44% YouTube Icon
Kalyan Jewellers India Ltd 87 10 16 Mar 2021 18 Mar 2021 -13.45% YouTube Icon
Anupam Rasayan India Ltd 555 10 12 Mar 2021 16 Mar 2021 -5.24% YouTube Icon
Easy Trip Planners Ltd 187 2 08 Mar 2021 10 Mar 2021 11.39% NA
MTAR Technologies Ltd 575 10 03 Mar 2021 05 Mar 2021 88.22% YouTube Icon
Heranba Industries Ltd 627 10 23 Feb 2021 25 Feb 2021 29.55% YouTube Icon
Railtel Corporation Of India Ltd 94 10 16 Feb 2021 18 Feb 2021 29.15% YouTube Icon
Nureca Ltd 400 10 15 Feb 2021 17 Feb 2021 66.66%

 

NA
Stove Kraft Ltd 385 10 25 Jan 2021 28 Jan 2021 15.83% NA
Indigo Paints Ltd 1490 10 20 Jan 2021 22 Jan 2021 109.31% YouTube Icon
Indian Railway Finance Corporation Ltd 26 10 18 Jan 2021 20 Jan 2021 -4.42% YouTube Icon

To conclude, IPO’s can bring lot of opportunities for retail investors. But there can be pitfalls too.

You must do a thorough research before applying. If you don’t have time for it then you could simply follow our views and recommendations on upcoming IPO’s. Just subscribe to our YouTube channel and look out for IPO Reviews Playlist. You will find all our IPO reviews there.

At Samco you can even apply for an IPO via UPI or ASBA with ease. You can open a 3-in-1 account with Samco and apply for Upcoming IPOs in less than 2 minutes.

FAQs

Where can I Check the Status of Upcoming IPOs?

You can check all the upcoming IPOs on our Samco Upcoming IPO page by clicking here.

How can I check IPO allotments?

You can check your IPO allotment through NSE and BSE websites.

To check from BSE website – Click here

To check from NSE website – Click here

To check from KFinTech website – Click here 

To check from Linkin Time website – Click here

What is Follow on Public Offering or FPO?

Investors often get confused between IPOs and FPOs. As we already know, IPO is when a company raises money for the first time.

FPO (Follow on Public offer) is the method to raise additional capital by issuing more shares of the company in the secondary market.

Read more about FPOs here.

What is the Difference Between RII, NII, QIB and Anchor Investor category?

RII stands for Retail Individual Investor. RII are the investors who apply for less than 2 Lakhs in an IPO. This application is made in Retail category and they are allowed to bid at cut off prices.

NII (Non-institutional Investors) and HNI (High net worth investors) are the ones who apply for more than 2 lakhs in an IPO.

Qualified Institutional Bidders (QIB’s) are banks, mutual funds and foreign portfolio investors who can bid under QIB category.

Anchor investors make an application of more than 10 Crores.

All the categories except RIIs are not allowed to bid at cut off prices.

Read more about each category here.

Can I Apply for Multiple Applications Under the Same Name?

No, one person cannot apply multiple times through the same PAN details for an IPO. If you would like to place order for multiple applications, you can place it through your family member’s Demat account.

By Clarice Mendonsa

The author has done a Bachelors in Banking and Insurance (BBI). She is a budding financial content writer. Her strength lies in simplifying financial jargons. Her goal is to help readers make better investment decisions.

6 comments

  1. I have read many articles on Initial Public Offering (IPO) but this is the best article on IPOs! You have covered everything from what is IPO, IPO process to upcoming IPOs. Kudos! Also it was great to learn about grey market IPOs. I look forward to your views on upcoming IPOs.

  2. I have read many articles on Initial Public Offering (IPO) but this is the best article on IPOs! You have covered everything from what is IPO, IPO process to upcoming IPOs. Kudos! Also it was great to learn about grey market IPOs. I look forward to your views on upcoming IPOs.

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