What is an IPO and how it works?

Introduction

The Initial Public Offering (IPO) is a process through which a private company or corporation raises investment capital by offering its stock or share to the public for the first time. After an IPO, the issuing company becomes a publically listed company on a recognized stock exchange. In India, there are two leading stock exchanges, NSE & BSE, and these are regulated by SEBI.

In simple words, it is a process through which the stake of a privately owned company is transferred to the public, and a privately held company becomes a publically listed company. Effectively, the owners sell shares of the company, and in return public offers money.

A very high level steps are as follows:

1. An individual, a trust, or a group of partners invest money and time to build a company once the company is mature enough and has started generating income and also qualifies the rules essential for listing (public offering) in the stock exchanges like NSE and BSE.
2. The owner of the company usually hires an investment bank to handle the IPO. The investment bank and the company work out the financial details of the IPO in the underwriting agreement. Later, they submit with the regulator. In India, SEBI is a regulator. It scrutinizes the request submitted by the company and, after verification, allots a date to announce the IPO.
3. The public can be Retail Individual Investor (RII), Non-institutional bidders (NII)/High net-worth individuals (HNI), Qualified Institutional Bidders, and Anchor investors.
4. The company publishes statistics of the last few years’ earnings with the SEBI along with the Application, which will be published in the public domain once SEBI approves it. If the public feels that the company can grow further, they participate and invest money through IPO.
5. The process is entirely transparent and handled by Stock Exchange, and regulated by SEBI.
6. A participant application is submitted via a process called Application Supported by Blocked Amount (ASBA). It is a process developed by India’s Stock Market Regulator (SEBI) for applying to IPO. The significant advantage of the ASBA process is that amount will be debited from the Bank account only after the allotment of shares (always in lots).
7. The Banks which provide ASBA facility must be a Self Certified Syndicate Bank (SCSB), a condition laid by SEBI. 
8. These SCSB complaint banks accept the participant application, verify the application, block the fund to the extent of the bid payment amount, upload the details in the web-based bidding system of NSE, unblock once the basis of allotment is finalized, and transfer the amount for allotted shares to the issuer (owner of the company). 
9. The shares allotted to the participant will be reflected in the Demat account of the participant, which was provided with the Application of IPO. However, actual share details will be stored with the Depositor. These depositors are NSDL and CSDL. There are two central depositories in India: National Securities Depository Ltd. (NSDL) and Central Depository Securities Ltd. (CDSL), and both are regulated by SEBI. 
10. Once the offering period is completed, the company is listed on the Stock Exchange.
11. The general public can buy or sell the company’s shares using their Demat account provided by an agent (Depositor Individual) of the Stock Exchanges (also called Depositors).
12. Individual agents like Zerodha, Finvasia, Groww, ShareKhan, etc., facilitate us to buy and sell our shares on the stock market.
13. These depositors (NSDL & CDSL) identify us using our Permanent Account Number (PAN) and other information and map the shares with a particular Demat account and the agent. As a PAN is a unique identity for an individual, only one application from a PAN is allowed. However, the applicant can apply for multiple lots. Each lot has approximately fifteen thousand rupees shares. Moreover, the number of shares in a particular lot depends on the offer price per share.

It is a very high-level intuitive picture. However, in actual things may be different. After an IPO, the issuing company becomes a publically listed company on a recognized stock exchange. Thus, an IPO is also commonly known as “going public.” However, If a company already listed (has its shares for buying and selling on the stock exchange) is coming out with a new issue of shares, it is called the new issue.

Important Keywords

When we are going to register for IPO, there is a standard process and which we need to follow.  To understand the standard process, we need to familer with new individuals and their roles.

Depository

A depository holds securities which include, shares, debentures, bonds, Government Securities, units, etc., of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities.

There are two central depositories in India: National Securities Depository Ltd. (NSDL) and Central Depository Securities Ltd. (CDSL), and both are regulated by SEBI. 

These depositories can be compared as financial Banks, where the Banks manage our money, and these depositories manage our securities. For example, a particular bank has many branches at various locations and these are managed by Bank itself. However, these depositories have multiple agents, and these agents are usually called Depositor Participants (DP). 

Depository Participant (DP)

A Depository Participant is the registered agent of the depository. Thesedepository participant can be Banks, financial institutions and stock brokers, etc., after obtaining the required approval from SEBI and complying with other statutory requirements.

As an investor, we need create demat account with a DP, and the DP manages all transactions on our Demat account and provides an ebroking ID or client ID to identify our relationship with the DP.

Example of DPs are, Zerodha, Paytm Money, etc.

Depository Participant ID (DP ID)

This is the Depository Participant ID with whom our Demat account is maintained. It is 8-character starting with ‘IN’. This is applicable for NSDL only. Whereas, in case of CDSL, our DP provides 16-digit demat account number.

Applications Supported by Blocked Amount (ASBA)

Applications Supported by Blocked Amount is a process developed by the India’s Stock Market Regulator SEBI for applying to IPO. In ASBA, an IPO applicant’s account doesn’t get debited until shares are allotted to them

Self certified Syndicate Bank (SCSB)

Self Certified Syndicate Bank (SCSB) is a bank which offers the facility of applying through the ASBA process. ASBA can be accepted only by SCSBs, whose names appear in the list of SCSBs displayed in SEBI”s website at www.sebi.gov.in

References

• https://retail.onlinesbi.com/sbijava/osbi_ipo_faq.html
• https://en.wikipedia.org/wiki/ASBA

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