The funds raised by launching an IPO are utilized for various purposes by the company, such as expansion, for Research and Development purposes or the funds can be used to pay off higher-interest loans as well. IPO funds are majorly used to grow and expand the business.
To invest in an IPO, a demat account is a must, an investor cannot invest in an IPO if he/she doesn’t have a demat account. A Demat account is a holding account for your securities. Once the shares are allotted they are transferred to a demat account.
All You Need To Know About IPO
IPO Meaning –
Initial Public Offering (IPO) is a process used by a company to raise fresh funds from the primary/secondary market. In return for money, the company provides shareholding, and the investors who buy shares become the shareholders of the company. Shareholders have voting rights in the company and act as owners of the company.
IPO investment has three categories – Retail, High Net Worth (HNI), and Institutional Investors. Retail investors fall in the category of investing up to Rs.2 Lakh. Retail Investors are given more preference as SEBI ensures that more and more shares are allotted to the retail investors.
While for HNIs allotment is done proportionately and for Institutional Investors the allotment is discretionary.
Use Of ASBA
Applications Supported By Blocked Amounts (ASBA) have been facilitated by SEBI so that the investor does not pay any money till the time allotment is made. ASBA function allows the banks to hold the funds in the ASBA account and the funds are debited from the account only if the allotment is made. In case shares are not allotted, the invested amount is released from the hold back into your account.
For instance, if you have applied for shares worth Rs.2 Lakh and shares worth Rs.1 Lakh are only allotted to you, then Rs.1 Lakh is debited from the account and the hold is removed on the remaining Rs.1 Lakh.
IPO investing is one of the easiest ways to make money in the stock market. The price of the share after subscription depends on the basics of demand and supply. The fundamentally strong companies usually have high demand in the secondary market and thus, open at a premium.
There are two categories of investors in the IPO market:, retail investors, and second, are high net worth investors (HNI). Both of these investors are categorized based on their investing power. The profit generation is low when the investing power is low. To maximize profit generation investors need to invest a large sum of money.
This is where investors (usually HNI) take advantage of IPO financing. IPO financing means borrowing extra funds from the lender to invest in an IPO of the company. The majority of the time, it is HNIs who pay a small margin amount and apply for a huge number of lots. Usually, an IPO financing facility is available for HNI clients by this method, they increase the possibility of getting an allotment. HNIs also increase their profit generation capacity by investing the funds by borrowing.
IPO Financing Process
In the majority of cases, HNIs have dedicated relationship managers who help their clients with the entire procedure.
- A funding account has to be opened with the lender/broker.
- The lender has to have the demat account details of the borrowers. Sometimes, lenders make it compulsory for the borrower to open a demat account with them. Borrowers can also provide Power Of Attorney (POA) on the existing demat account to the lender.
- For the first time, an IPO funding form has to be filled by the borrower.
- The security amount has to be paid to the lender. This security amount is called margin.
- After depositing the margin, funds are released from the lender to your demat/bank account within 24 hours.
- The lender then applies for the IPO on behalf of the borrower.
- The amount is blocked till the allotment is under the procedure. Once the shares are allotted, the amount is withdrawn from the bank account.
- Once the stock gets listed in the secondary market, the borrower sells those shares.
- After shares are sold in the secondary market, the profit/loss is settled with the lender.