How we look at an IPO: apply, for what, or avoid

In an initial public offering (IPO) a company sells shares to the public for the first time and lists them on NSE, BSE or both. The money goes to the company when the shares are newly created (a fresh issue), or to existing shareholders who sell part of their holding (an offer for sale). Many issues are a mix, and the offer document says how much of each.

Before the issue the company files a draft red herring prospectus (DRHP) with SEBI, then a red herring prospectus (RHP) with the dates, the price band and the lot size. The RHP is long, but its sections on the business, the risk factors, the financial statements and the objects of the issue are the ones an investor reads.

Issues on the main board and on the SME platforms of NSE and BSE follow different rules: SME issues have larger minimum applications and thinner trading after listing. An IPO call names the board for each issue.

• Price band: the lowest and highest price the company asks. The final issue price is fixed after the issue closes, usually at the upper end when demand is strong.
• Lot: the minimum number of shares in one application. Larger applications are whole multiples of it.
• Cut-off price: applying "at cut-off" means you accept whatever final price is fixed within the band. Retail applications are usually made this way.
• Categories: retail individual investors (applications up to ₹2 lakh), non-institutional investors above that, and qualified institutional buyers. Each has its own reserved share of the issue, and anchor investors take part of the institutional share one working day before the issue opens.

1. 1Apply through your bank's net banking (ASBA) or through your broker's app with UPI, within the issue dates. One application per PAN: a second application in the same name is liable to be rejected.
2. 2The amount is blocked in your bank account, not debited. With UPI you approve a mandate for the blocked amount; approve it before the deadline on the closing day, or the application is not counted.
3. 3On allotment the money for the shares you receive is debited and the rest is released. If you receive nothing, the whole block is released.
4. 4Allotment is finalised and the shares list on a fixed timeline: since December 2023, listing is on the third working day after the issue closes (T+3), with allotment and the release of blocked money in between.

When the retail portion is oversubscribed, allotment is by lottery: each successful applicant gets at least one lot, and applying for more lots does not improve your chance of being drawn. An application that is not allotted has cost you nothing but the days the money was blocked.

An Investology IPO call is published for selected issues only, before the issue closes, and it rests on the same four things for every issue:

• Business: what the company does, where it stands in its industry and who it depends on.
• Financials: revenue, profit, margins, debt and cash flows over the years shown in the RHP, and whether the most recent period looks like the earlier ones.
• Valuation: what the price band asks against earnings and against listed peers.
• Risks: what could go wrong in the business, in the structure of the issue (how much is an offer for sale, what the money is for) and in the market around the listing.

The view is one of four, and the IPO call names it. A listing view: the issue looks priced to list above the band, and the view ends on listing day whatever the price does afterwards. A long-term view: the business looks worth holding beyond listing, and the call continues as a long-term call after it lists. Both together. Or avoid: the price, the business or the structure does not make the case, and no application is suggested.

What the view is not: it is not a prediction of the listing price, and it is not a statement about demand. The subscription figures published during the issue say how many people applied; they do not say what the shares will trade at. The unofficial "grey market premium" quoted on some websites is not regulated, not verifiable and not used in forming a view.

Every IPO call carries the same declaration as a trading call: whether the analyst or its associates hold or have applied for the issue, and any other material conflict.

• Allotment day: check the registrar's website or your demat account. If you were not allotted, the block is released and nothing else needs doing.
• Listing day: the opening price is found in a pre-open session on the exchange. A listing can be above or below the issue price, and the first hour often moves fast. A listing view says what the view was before the price was known, not what to do at the open.
• A long-term view: once listed, the call is tracked like any other long-term call, with its stop-loss basis and its updates on the call page.
• Lock-ins: shares held by promoters and anchor investors are locked in for set periods after listing, and the day a lock-in ends can bring more shares to the market. The RHP gives the dates.

• Oversubscription is not a view on value. An issue can be heavily applied for and still list below its price.
• Borrowing to apply adds interest cost to money that may come back unallotted.
• SME shares trade in lots after listing as well, with fewer buyers and sellers, so an exit can take longer and cost more than on the main board.
• Decide what you will do on listing day before it comes: hold to a plan, or sell at the open, and in what quantity. Position sizing applies to an IPO as it does to any other trade.

• Position sizing and risk per trade
• Intraday, swing, positional and long-termWhere a long-term IPO view fits