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An initial public offering (IPO) is a method of offering fresh shares of stock to the public for the first time in 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.
Factors impacting allotment:
IPO allotment is purely system driven/drawal or lot-led approach, if the IPO is oversubscribed. During an oversubscribed IPO, the priority is to ensure that all applicants get at least one lot of the allotment in IPO.
Multiple demat accounts: Based on investor’s desk research, they tend to overlook the multiple demat account factor, which is a ground for rejection. To navigate through this, investors can put one lot in the name of each of their family members which will help them get optimum allocation in the event of oversubscription. An investor can apply once. Multiple applications are liable to be rejected.
Bidding at cut-off: For retail quota specifically, investors should place a bid at cut-off rather than naming a price. 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. The discovered price is accepted when a cut-off bid is made.
Share-holder quota: In order to improve their prospects, 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.
Applying in the eleventh hour: With the newly reformed IPO timeline from T+6 to T+3, 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.
Applying In multiple categories: Individuals cannot apply in the high networth individual (HNI) and retail categories 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 Lakhs worth of shares in an IPO, the offer is categorised as an HNI offer under the non-institutional investor (NII) category.
Note that the total reserve of NII is 15% (as against 35% for retail category) of the overall IPO offer. The cutoff price is not open to this category of investor bids. Additionally, unlike retail investors, they are unable to change their bid before the allocation.
Leveraging multiple 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 different family members’ names. 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 as payment mode has been increased to Rs. 5 Lakhs, only one application is allowed to use UPI as a payment gateway. Application Supported by Blocked Amount (ASBA) accounts are required for numerous applications. Only a select few banks, including SBI, Bank of Baroda, RBL, and Axis, currently offer this for up to five applications, each with their own demat and PAN numbers.
In general, it is crucial for investors to comprehend the current IPO mandates. Mandates for IPOs today are often ASBA and UPI mandates. This indicates that the request for a mandate must be approved by people/investors. Investors frequently file for the IPO but fail to approve the mandate request afterward. The IPO application is likely to be declined unless the request is approved by the investors or account holders using the banking app or website.
IPOs generally attract quite a lot of media attention, some of which is done on purpose by the firm going public. Investors should ultimately evaluate each IPO in light of their financial situation and risk appetite, as well as the prospectus of the company that is going public.
(The writer is Managing Director, Pantomath Capital Advisors Pvt. Ltd)