The What, Why and How of IPO

With blockbuster IPOs on their way, stack up all the knowledge so you don't miss out on golden opportunities.

This is the season of IPOs. Almost 2-3 companies have been going public every month in the last half a year. Most IPOs are opening at a premium and are giving retail investors a good return and a good exit for the initial investors. In the next few months very exciting IPOs like..

Oh, wait. Gone too far ahead without any logical explanation? That’s been the story of the prices of these newly listed companies too :). Alright, alright. Let’s begin from the start where I give you a brief context and understanding about IPO’s, why they are so hot right now, and why you must learn how to apply for an IPO ASAP.

THE WHAT

IPO or Initial Public Offering is the way private companies go public. But why go public at all? It solves two purposes. Primarily, it helps the company raise money. The company gets ‘listed’ on the stock exchange, people buy the company’s shares, hence it helps the company raise money. And the secondary, perhaps even more emphatic reason is to give early investors an ‘exit’. Venture capitalists, family, friends, etc who bet on the company in its early stages and owned the shares when it was a private entity, have the option to sell their shares, exit, and hopefully be rewarded for their belief with a healthy amount. While going public offers the company and its early investors a clear reward, the downside is that company becomes liable to a lot of scrutiny, with their books being open to hundreds and thousands of shareholders. Compliance, regulations all of these are amped us. But this is perhaps a small price to pay for the all money they raise? Perhaps. 

This is what an IPO is. But why all the recent hype you may ask? It has got to do with the overall market condition and public sentiment. It is clearly established that we are in an unprecedented bull run. The market has grown by leaps and bounds in the last 12 months and that has immensely benefited IPOs.

THE WHY

From the outset, it may seem IPOs are a great way to invest in companies you believe in from the word go. Buying their shares as soon as they are listed without any past performance to back them up is quite a token of belief, isn’t it? And that is what the significance of IPOs used to be. However, in the last 12 months, IPOs have become a form of making a quick buck from an investor perspective. Since there is so much demand in the stock market, and everyone is buying almost everything out there, IPOs have been getting listed at a premium i.e. at a price greater than the issue or IPO price. For example, the IPO price range of Burger King was 59-60 Rs. However, the listing price, the price at which it opened on the day it got listed, was a whopping Rs 112.5 and closed at Rs 135, 100% more than the IPO price. This means if you had been allotted the IPO, you would have doubled your money if you had sold on the first day itself. Like I explained, this massive ‘premium’ was a consequence of the huge demand in general in the market, and of course, Burger King being a popular name added to it.

But it doesn’t stop there.

What this chart essentially conveys:

75% of IPOs in the last 12 months gave their investors some gain on Day1 itself.

A staggering 46% IPOs gave more than 20% gain on Day 1.

These percentages have encouraged investors to go all out for IPOs. Investors have had as much probability of making a 20% gain on the first day of an IPO, as you have to get heads or tails on a coin. Let that sink in.

Now obviously, this positive response to IPOs has boosted the confidence of companies too. At the end of the day, the demand is benefitting the companies and helping them accumulate more money. Hence, finally, the biggies have taken the leap and entered the playground. Indian consumer tech giant Zomato’s IPO launch is set to be on 14th July. It is believed other giants like policybazaar, LIC, and even Paytm are going to follow suit. 

“But Ishaan, you’ve given me so much gyan about IPOs but how exactly do I get an allotment? What is the exact process?”

Don’t worry.  Order something from Zomato. Before you receive your delivery, you’ll know how to apply for an IPO.

THE HOW

Step 1: Presence of DEMAT account

This is mandatory. Once the IPO is launched, it is like any other share. Hence, have your DEMAT account in place. I am going to be explaining the process through Zerodha’s KITE. So if you have an account on Zerodha, nothing like it. Even if you don’t, I am sure the process will be very similar. 

Step 2: Log on to Kite & go to Console

When you open up KITE on your laptop, you’ll see a dashboard. Go to the top right corner i.e. your profile, and on the drop-down, go to the console. 

Step 3: Portfolio>IPO

On console you’ll find a new dashboard. Press on Portfolio. Find IPO. Move on.

Step 4: Apply for IPO

This will be your next screen. Now as you can see these are the most recent IPOs. But all of them show ‘closed’ next to their name. That is because the bidding window is over for them. When the IPO is launched, the ‘closed’ will be replaced by ‘BID’ and the application will be open for a couple of days. 

Now stay with me for the next minute and go through the following GIF.

So what exactly happened here?

Let’s break it down. 

We pressed on the ‘Place Bid’ button and opened our application. Now you can see a number of words on the left side and the process going on the right. I’ll explain what you need to primarily know.

1. Issue open-Issue end: It is the duration for which the bidding process is open. In this example, from 6th Aug 2019 to 8th Aug 2019. Hence you will only be able to apply on these 3 days between 10 am to 4 pm. After that, your application won’t be accepted. 

2. Issue Price: We have already talked about the issue price. It is the price at which the company owners want to sell their shares. It is decided after thorough analysis and valuation by analysts. The band indicates the upper and lower limit come up by the analysts who have valued the company.

3. Market Lot and Minimum Order Quantity: This is probably the most important aspect. Unlike listed shares where you can buy as low as 1 share, you need to compulsorily buy a certain quantity of an IPO. In this case, it is 19. That is our Minimum Order quantity. The market lot of 19 implies you have to buy the shares in multiples of 19. So you cannot buy 20 shares even though it’s more than 19. You have to buy in multiples of 19. Hence you must have figured out you can only apply for 19, 38, 57 so on and so forth. 19 shares make up one lot. Hence 38:2, 57:3 etc.

This was an explanation of the important terms. Now, what’s happening on the right it is not complicated at all.  The first input is that of the UPI id. This is a wonderful thing about IPO allotments. You just need to enter your UPI Id which I am assuming everyone has. So you go to your UPI payment platform GPay, PhonePe, Paytm, whatever it may be, and get the UPI Id linked to your bank account with which you’ve created your DEMAT account.

Next up, you have to fill in the quantity and price. The quantity I already explained has to start from the base of 19 and be in its multiples. And the price can be anything in the price band i.e.775-780. But why the three blanks you would ask? The IPO allotment is like a lottery. I’ll elaborate more on that in a bit.  But basically, it gives you an option to put in different quantities and prices to increase your chances. Is it very helpful? Not in my opinion. Fill in the upper limit, and the maximum quantity you can afford in the first input itself. That ensures you’ve given yourself the best chance. Click the button down there, and you have submitted your application. 

One last step awaits us.

Step 5: UPI Mandate

The application has been submitted, now a mandate approval from your UPI platform is needed for the withdrawal of funds from your account. Where do you find this now?

Open Gpay. On the top right, you’ll find your profile-yes the I in this case.

Once you press on your profile, you will see a mandates section-

P.S Currently it shows no pending requests but once you’ve applied, and you get the request, which could take a couple of hours, it will flash 1 request pending. You go and accept it. 

I recently applied for an IPO. This is how it looks like once you’ve accepted it. The funds are therefore blocked, If you get the IPO, the funds are withdrawn and you get your shares in your DEMAT account. If you don’t, the funds are unblocked, i.e you get your refund. And that’s that. Oh wait. I forgot. There’s one last final step left. The final frontier.

Step 6: Sit and Pray for allotment.

This is definitely the most important step. 

“But wait, why do I have to pray? Doesn’t everyone who applies get an allotment?”

I know this has been a long one. I’ll wrap it up with this final paragraph. I hope the delivery isn’t here yet!

To answer the question. No. More often than not everyone doesn’t get an allotment. This is mainly because of the humongous demand. Burger King was subscribed 157 times. That means if x shares of burger king were available, 157x was the demand. It is obvious then that a lot of people didn’t end up getting the shares.

“ What happens then? How do I increase my chance?”

Believe it or not, it’s a lucky draw. You can just go and apply from a couple of more accounts the way you buy 2 lottery tickets to increase your chances. But that’s about it. There is no other method to the madness. But I guess that is the fairest way in a country as massive as ours. So yes, after going through the whole process, sit and pray is definitely an important step ;)

The final question then. Is Zomato’s IPO worth applying to? Nobody can give you a definite answer, as nobody can give you a definite answer about anything in the stock market. It is for you to analyze (as always). There certainly are massive pros. It’s the first big startup getting listed. Because of its brand name, the hype is immense. It is also in a unique space, and there is a possibility it becomes a massive company in the coming future. The downsides are that it isn’t profitable yet, and seems to be overvalued, at least on paper. These facts are out there. What’s going to be your decision? Let me know in the comments! And if you want to talk about anything regarding the allotment process, you can always hit me up!

See you soon(p.s I am planning on beginning a new exciting series. So stay tuned and share with all those friends of yours who you think could benefit from this newsletter !)