Guide to investing in IPOs

After spending much time trying to understand IPOs, we’ve finally reached the main crux of this module. In this chapter, we’ll not only learn how to invest in an IPO, but also take a look at the evaluation process that you need to conduct as an investor. Let’s jump right into the chapter.   

What should you do before investing in IPOs?

Investing in an IPO is the easy part. Trying to assess whether an IPO is worth investing in is what is hard. But don’t worry. We’re here to help you out with that. Assume that you wish to invest in the IPO of IRCTC. Before you start mobilising your funds for investing in it, there are some key things that you need to do. 

Read through the prospectus 

The very first thing that you should do when an IPO comes out is read through the entire prospectus from cover to cover. This little booklet contains almost everything you need to know about the company. Right from the details of the IPO issue down to the company’s financials, every important piece of information is included. 

For instance, let’s take up IRCTC’s red herring prospectus to quickly analyse its contents. Here’s a brief look at some of the information about the issue that you’re likely to find on the opening page of the prospectus.  

The rest of the prospectus goes into detail about the company, the risk factors involved, financial information, legal information, terms and structure of the offer, and other information. 

Examine the financials of the company 

Once you’ve made a preliminary read of the prospectus, the next step is to take an in-depth look at the attached financial statements of the company. This will throw some light on the performance of the company and help you take a call on whether to invest in the IPO or not. 

In the case of IRCTC, you can find all the important financial details under Section V of its prospectus. Under this section, the company has listed its balance sheet, profit and loss statement, cash flow statement, and the notes accompanying the financial statements for the three consecutive years leading up to the IPO. This is done to make calculation of financial ratios and comparisons easier for the investor. 

This section is generally very comprehensive and requires quite a bit of time and effort on your part. Remember our coverage of fundamental analysis in an earlier module and how we analysed the financials by calculating the various key ratios? You can put them to good use here, since it can put things in perspective and give you a fair idea of the financial performance of the company. You can even go a step further and compare the key ratios of IRCTC with those of similar companies to get a better sense of its performance.  

Do a valuation exercise 

Okay so now you’ve extensively analysed the fundamentals of the company and have decided to invest in the IPO. But has the IPO been priced fairly? To find that out, we move on to valuation. In the case of IRCTC, the pricing of the issue has been set at Rs. 320 per share. 

However, is that the right price to pay for the company’s shares? Or, is it set too high? A simple analysis using the discounted cash flow (DCF) method or any other valuation method will give you the answer to these questions. 

Read through analyst reports 

You thought analysts give reports only on companies that are already trading on the exchanges? Turns out that they also compile research reports on upcoming IPO issues as well. You can make full use of analyst reports to support your decision to invest in the company’s IPO. 

In the case of IRCTC’s IPO, you can find a ton of research analysts’ reports online. A word of caution here. While analyst reports can be a great way to gain information about a company that you might have missed during your own analysis, it is not a good idea to rely entirely on those reports to base your investment decision. 

This is simply because there always tends to be a bias in these reports. So, the right way to go about it is to conduct your own thorough analysis and compare the results with those of the analysts’. This way, you can eliminate the bias and arrive at fairly accurate results. 

How to invest in IPOs?

As you already know by now, a demat account is mandatory for purchasing or selling shares of companies. Similarly, before you can invest in an IPO, you need to first make sure that you possess a demat account. Once your demat account is active, you can proceed to invest in IPOs by using one of two ways - through a bank account or through your trading account.  

Investing in IPOs through a bank account

Also known as the ASBA process, you can quickly and easily apply for an IPO using just your bank’s internet banking facility. The term ‘ASBA’ stands for Application Supported by Blocked Amount. It is a process developed by SEBI to enable regular investors to purchase shares via an IPO. Unlike applying through a trading account, in the ASBA process, the total application amount doesn’t get debited from your account till the bank receives confirmation of share allotment. 

However, the amount gets blocked in your account and becomes temporarily unusable. Once the shares are allotted to you, the requisite blocked amount is debited. In the event of non-allotment of shares, the blocked amount is released back to you. This facility helps circumvent the time consuming refund process, which typically takes days to complete. Almost all the banks in India, both in the private sector as well as the public sector, offer the ASBA facility through their internet banking portals. 

 Now that you’re aware of the process flow framework, let’s take a step-by-step look at how you can apply for an IPO through a bank account. 

• Log into your bank’s internet banking portal using your user ID and password.
• Search for the ‘IPO’ tab and click on it. You can typically find this option under the ‘Investments’ or ‘Demat’ tab in your internet banking portal. 
• The portal will most probably redirect you to a dedicated IPO section. 
• Once you’re there, click on the IPO that you wish to invest in and enter all the relevant details such as the number of shares and the price of your choice.
• Enter the details of your demat account such as the depository in which you hold the account, your name as specified in your demat account, and the account number.
• Upon entering all the relevant details, click on submit. 
• As soon as you submit your application, the requisite amount gets blocked in your bank account and becomes temporarily unusable. Also, you can view the application you submitted through the IPO order book option.  

A word of caution. This process flow is merely representative and may change slightly depending on your bank.  

Investing in IPOs through a trading account 

If you’re an investor who possesses a trading account with a stock broker, you can apply for an IPO through your trading terminal itself. At Angel Broking, we’ve made the entire IPO application process extremely simple. Applying for an IPO through your trading account is so simple that it hardly takes more than 5 minutes to complete the process.

Let’s take a quick look at how you can apply for an IPO through the trading account you have with us. 

• Log into your trading account using your user ID and password through a web browser of your choice. 
• Select the ‘More’ tab that’s located on the top of your trading platform.
• Click on the ‘IPO’ option that’s located below the ‘More’ tab. 
• Choose the IPO issue that you wish to invest in and click on ‘Apply.’
• A new window pops up with the relevant details of the IPO issue such as the price band and the lot size. Select the number of lots you wish to purchase and enter the price of your choice. The system automatically calculates the amount of money that you’re required to pay. 
• Once you’ve done that, you need to enter your Virtual Payment Address (VPA) associated with your UPI. 
• Next, accept the terms and conditions and click on ‘Apply.’
• Another window pops up with a confirmation of the submission of your IPO application. You can now check the status of your application through the IPO order book, modify your application, or even cancel it.    
• Once you receive this notification, you need to log into your UPI app and make the payment. 
• That’s it. You’ve successfully applied for the IPO. 

As with the ASBA process, this process flow is also merely representative and may change depending on your stockbroker’s trading platform. If you’ve successfully applied for the IPO and the bidding window has closed, the allocation process takes place next. 

Wrapping up

And with this, the chapter is officially complete. That was quite fascinating wasn’t it? In the upcoming chapters, we’ll be moving away from IPOs and be taking a look at some of the other mechanisms through which a company can raise money through the stock market. Head to the next chapter to find out more.

A quick recap

• Before investing in IPOs, there are some key things that you need to do. 

1. 1. Read through the prospectus
   2. Examine the financials of the company
   3. Do a valuation exercise
   4. Read through the analyst reports

• The prospectus contains almost everything you need to know about the company. Right from the details of the IPO issue down to the company’s financials, every important piece of information is included.
• The prospectus also goes into detail about the company, the risk factors involved, financial information, legal information, terms and structure of the offer, and other information.
• Once you’ve made a preliminary read of the prospectus, the next step is to take an in-depth look at the attached financial statements of the company. 
• Analysts also compile research reports on upcoming IPO issues as well, which you can use to support your decision to invest in the company’s IPO.
• While analyst reports can be a great way to gain information about a company that you might have missed during your own analysis, it is not a good idea to rely entirely on those reports to base your investment decision. 
• Conduct your own thorough analysis and compare the results with those of the analysts’. This way, you can arrive at fairly accurate results.
• Before you can invest in an IPO, you need to first make sure that you possess a demat account.
• You can invest in IPOs either through a bank account or through a trading account.
• The term ‘ASBA’ stands for Application Supported by Blocked Amount. It is a process developed by SEBI to enable regular investors to purchase shares via an IPO. 
• In the ASBA process, the total application amount doesn’t get debited from your account till the bank receives confirmation of share allotment.
• The ASBA facility helps circumvent the time consuming refund process, which typically takes days to complete.
• Once you’ve successfully completed the IPO application process and upon the closure of the bidding window, the share allocation process takes place.