3 Easy Steps to Invest in IPO in India (with How to Book Listing Profit)

You must have clarity about your investment horizon whether you are investing in the IPO to make a quick listing profit or you want to hold the shares for a long time.

In quick listing profit, you hope to sell your shares at a higher price once the shares are listed on the stock exchange.

The short-term strategy highly depends on current market sentiments that you need to take care of. 

Whereas, for long-term investment, you have to analyze the business fundamentals as we do in regular stock picking.

Let’s go through all the nitty-gritty of how to invest in an IPO in the Indian stock market.

How to Invest in IPO in India 

#1. Do Your Research Before Investing in IPO

A. Analyse the Red Herring Prospectus

The companies list their shares on the stock market to invite the general public for the first-time investment called IPOs (Initial Public Offering). The companies raise the money from the IPO listing to utilize it for their different business purposes.   

A company submits its detailed report called Red Herring Prospectus (RHP) to SEBI (Securities and Exchange Board of India) to seek approval from SEBI for IPO launching. After SEBI’s approval, the IPO launch process started.

The RH prospectus contains important information about the company’s business, financials, risks, and how the company is going to utilize the money raised.

Though the RHP could be a total jargon to you if you are a beginner in investing. 

But what you can do is just focus on price analysis in the “Basis on Offer Price” chapter and see how they have justified the price. 

You can also compare it to other competitor’s stock prices in the industry and see if the price is justifiable or not. 

Check the Glenmark Life Sciences Ltd. competitors price comparison as shown below –

Glenmark peer price comparison

You can analyze the NAV column to know about other Peer’s prices. 

B. Utilization of the IPO Money

You must check how the company will utilize the money raised from the IPO that would ensure the profitability of that IPO in the future. 

For example, if a company is going to repay debt from the money collected, it’s not going to be a profitable deal for an investor.

On the other hand, if the company is going to expand its business operations with that money that would eventually enhance the company’s overall profitability, that could be a good choice to invest in.

You can search whether the raised IPO money is used in the business itself or the companies use the term “general corporate purpose”, then be cautious to explore more about the company’s business operations because companies mostly divert the money using the term general corporate purpose.

Because using a general term they can keep their strategies more private and provide flexibility of utilizing funds later on, but lack transparency from an investor’s point of view.

Glenmark general corporate purposes

In the above Glenmark Life Sciences snapshot, the company is going to pay 800 crores to parent company Glenmark Pharmaceuticals, 152.7 crores for its own capital expenditure, and the rest of the IPO money for general corporate purposes. 

That means a major chunk is paid to the parent company “Glenmark Pharma” and the rest of the amount is not clear where they are going to utilize, so there’s a doubt if the company’s share price will rise much in the future.

And you can see the share price has been in decline since inception.

Glenmark LS share price

C. Understand the Nature of Business

If the business activities are not clear to you, it’s better to stay away from that IPO.

Only invest in an IPO that business you understand despite how lucrative the IPO seems to be.

If you have no understanding of that business, you won’t be able to understand in which direction business is going.

And whether the money you are investing in that business would give you some return or not.

To understand a business model, you should know about that company’s products or services, the target customer, and the industry in which it operates. 

D. Company’s Management & Mission

#1. Management Team

You must know who is running the company, its managers and the promoters. They play a crucial role in that company’s business operations, they make strategic decisions key to estimating future success and profit-making. 

You can understand that company’s work culture by checking the length of tenure of the team which means how long top-management people have been serving in that company. 

You should check 2 things while analyzing the management of a company –

I. Professional experience

The top management team should be professional and have decent experience in that business line.  

For example, Venu Srinivasan, Tata’s TVS automobile company’s Chairman and Director in parent company Tata Sons, is a mechanical engineer and has a Master’s in Management. 

TVS Chairmann Venu

You, being an investor, would trust such management more as they have education & professional experience in the relevant field. 

Secondly, he has been in TVS for more than 30 years since he completed his education.

II. Trust and Moral

You must know how trustworthy the management is. You can check if they have any court case, fraud case, or any inquiry related to “non-compliance of regulations” is going on.

You can check information from news, CIBIL reports, RBI defaulter list, MCA (corporate affairs) to know about their morals and trustworthiness.

You have heard about many big businessmen like Mehul Choksi of Gitanjali Jewellers, Nirav Modi ( remember Shoppers stop), Rana Kapoor (Previous head of Yes Bank) who have taken investor’s hard-earned money, fled out of the country, and are now wanted by CBI. 

Such people are wealth destroyers and trust breakers because losing money to such Conmen breaks trust in big reputed companies and creates fear of losing again in stocks.

#2. Mission Statement

You can also analyze the mission statement to know about the vision of that company. A clear vision sets realistic goals for management, employees, and partners.

A mission statement just filled with corporate jargon lacks a clear vision which may be a sign of poor management.

You can check out the mission statement of any company in 2 ways –

  • On its website’s “About-us” page or 
  • Annual report of that company.

E. Financial Health

Whether a company will survive, in the long run, or not, is very difficult to gauge. Many companies like Sujlon, DLF who seemed strong on paper eventually failed.

At the time of IPO listing, if your primary goal is to make short-term listing profits, then the company’s financial health should be the least concern because no company is going to fail within 1 year. 

The reason is many experts such as the company’s executive team, leading bankers, SEBI, promoters all have analyzed that a company’s financial stats reflect the accurate current performance of the company. But no one can predict for the long term.

For long-term gains, you should calculate the intrinsic value of the IPO as we do in the regular stock picking.

F. Risk Factors

You can read RHP to analyze the risks associated with the company you are going to invest in. 

2 types of risk factors –

I. External factors

External factors are global news, GDP, industry performance, such factors impact all the companies in the industry so no need to focus on that while applying for an IPO.

What you must focus on are internal factors which we’ll discuss in the next section.

II. Internal factors

You can check out contingent liabilities or any litigation going on which can be a threat to the company’s future business plans. 

Important risk factors are –

  • Big debt
  • Legal cases on promoters
  • Tax cases against companies
  • Regulatory license issues

Every company discloses in the RHP, what rules and regulations it is in compliance with and what consequences it may face if regulations are not followed. 

For example, you can see the internal risk factors mentioned by Glenmark Life Sciences in its RHP.

Risk factors

They have clearly mentioned that case of non-compliance with rules and regulations, may result in withholding of new product approvals that could lower the future profits. 

You can now google if they are having any current issues with guidelines because warning letters issued by authorities also have an impact on the future share price.

For example, in November 2015, Dr. Reddy’s lab share price dropped almost 15% in one day after a warning letter issued by FDA, USA.

dr reddy price fall

Once you have done your research, now it’s time to open a demat account if you don’t have one already.

Also read – How mutual funds work in India 

#2. Require a Demat/Trading Account

You need a demat account to apply for an IPO, without a demat account, you can’t apply for an IPO. Because if your IPO application approves, you would need a demat account to receive your shares in digital form.

Ideally, you don’t need a trading account while applying for IPO but a trading account comes into play when you have to sell your shares purchased during IPO listing.

Secondly, most of the companies in India open a combined demat and trading account, so you need not do double efforts for something which can be done in one go.

If you don’t have a demat account you can open with any leading stockbrokers like Zerodha, Upstox, or 5paisa.

For example, you can go through this video tutorial to understand Zerodha demat account opening process.

Zerodha will open the account within 2 working days after document verification. So open your demat account earlier before the IPO listing date.

#3. Applying for IPO

You can apply for IPO through any broker like Zerodha or Upstox. But before applying for IPO, you must understand some common terms used in IPO.

I. Lot Size

One IPO Lot is the smallest number of shares you can apply for. If you want to bid for more shares, then you have to bid in multiples of that lot size.

For example, if the lot size for an IPO is 100 shares, you can’t bid for less than 100 shares. If you want to apply for more shares, it must be in multiples of 100s, like 200, 300, or 400 shares.

II. Price Band 

The price band is the range within which an investor can bid for IPO shares. The lower limit of the price band is called floor price.

For example, if the price band has been set at a range of Rs.500-550 per share, you can’t bid less than Rs.500 or more than Rs.550. Now Rs. 500 is the floor price of that IPO.

III. Cut-off Price

Cut-off price is the issue price at which shares are allotted to the investor after the application process. 

You get the option to select the cut-off price as your bidding price and you don’t need to mention any amount in the specific column. 

Your bid will be considered on the cut-off price that would eventually be finalized during the IPO process by the company with the help of book-running lead managers.

For example, the price range for an IPO is Rs.100 to Rs. 110.

If you bid for shares at Rs. 105 and the final issued price (cut-off) is Rs. 100; then you will receive allotment at Rs. 100 since you had already subscribed for a higher amount.

But if the final issued price (cut-off price) is Rs. 110, you will not receive the IPO allotment.

In case you select cut-off while applying, you are eligible for allotment at any discovered IPO price.

IV. Listing Date

The date on which an IPO is listed on the stock exchange for further stock trading. In other words, IPO is now considered as a share that can be traded as other listed stocks on the stock exchange.

V. Investor Type

You may get two options in investor type selection during the IPO application process –

  • Individual – Means you are first time applying for that company’s IPO
  • Shareholder – Sometimes a company may set a certain percentage quota (say 5%) to parent company shareholders in IPO bidding to give them privilege that increases the chances of IPO allotment. 

Since you have learned about important terminologies of IPO, it’s time to understand how to apply for an IPO through any broker’s mobile app.

For example, let’s understand the IPO application process through the Zerodha mobile app. 

Step 1: Log in to Zerodha’s Kite mobile app using 6-digit IPIN

Step 2: Tap on the “Profile” section in the bottom-right corner.

Kite IPO-1

Step 3: You can see the “Console” section and now tap on “IPO”

Kite IPO-2

Step 4: You can see the list of the latest available IPOs as well as upcoming IPOs. Tap on the IPO you want to invest in.

Kite IPO-3

Step 5: You can see UPI, investor type, and 3 bidding options. But before going ahead, click on “Show details” on the top-right corner to get details of that IPO.

Kite IPO-4

Here, you can check out the following details –

  • IPO opening and closing dates
  • IPO issue price
  • Minimum quantity required to apply 
  • Timings to apply 
Kite IPO-5

Step 5: Now enter your UPI ID details and investor type. You can select the investor type as “Individual” normally. 

Kite IPO-55

Step 6: As mentioned at the start, you must enter the bid price in the specified range and the amount that you feel comfortable with. 

Kite IPO-6

You also enter the number of lots you want to buy. As you see the details below.

Step 7: Once finalized the details. Click on “Submit”.

You will get a message that your IPO has been successfully submitted as shown above. 

Now open your UPI application from which you have to pay the IPO amount (just like any regular UPI payment). 

You’ll see a notification banner regarding the pending payment of the IPO. Pay the money using your UPI pin and that’s done.

Booking the Listing Profit from IPO

When an IPO is well advertised or has got a lot of attention, that increases the chances of getting immediate price hike once it is listed on the stock exchange on the listing date.

In the 2020-21 financial year, around 12 POs gained above 50% of issue price on the listing day that made huge profits to the investors. (See the snapshot)

IPO listing profit

If you are interested in listing profit, make sure you have to opt for a good reputed IPO that is well advertised and people are going crazy for it. For example, Zomato IPO was oversubscribed and provided 66% listing profit.

Since the shares are allotted to you around 7 days before the listing date, you can easily decide the amount of profit you want to earn depending on the hype of that IPO.

Suppose you want to earn atleast 50% profit, now what you have to wait is for the price to cross 50% above the issue price and you can sell the shares.

You can also keep a range in which you want to book the profit. It could be 45% to 50% or 50% to 60%. Sell the shares immediately once your stock reaches your estimated price.

Final Thoughts

I hope you have got enough clarity about how to invest in an IPO and what things you should keep in mind before finalizing your investment decision. 

Be clear about your goal of investment whether you are interested in booking listing profit or long-term gains. Plan your IPO investment accordingly to avoid any losses.

If you still have questions, let me know in the comments section.

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