This would remind you of the mass IPO hysteria of Jan 2008 of Reliance Power Ltd. People were very desperate to get their First Demat account, so as to hook any number of shares they could possibly do. The ultimate motive for most of them was to earn a profit, selling these shares when they get listed. But one shouldn’t invest in IPOs just for listing gains. Initial Public Offerings, (commonly understood as IPOs) are issue of the equity shares of company by the company promoters to the common public so as to mobilize more funds for their Capex needs primarily. IPOs are supposedly the one of the options to acquire shares at a best price. As in IPO, shares of the company are rationally priced so as to get full subscriptions for it. Investors are always confused in terms of which IPOs to invest, and which to refrain. When an investor holds equity shares of a company, he earns dividend (share of profits of the company) and capital appreciation from the price movement of the company’s stock. So investing in IPO of selective companies can earn you decent returns.

How to Apply?

The very first thing you require is a Demat account and secondly a PAN no. & available funds. Funds can be applied in following ways,
1) Application via cheque.
2) Funding against equity portfolio.
3) Application Supported by Blocked Amount (ASBA).

The first method is very simple get a IPO application form, fill it duely , attach a cheque for the specific amount, applying for certain shares at certain price shares and submit it to intermeditaries, mostly banks and stock broking houses.

The other way , when u have existing investment in equity shares through your stock broker , he can offer you an option of funding your IPO application against the pledge of the existing shares. The terms and conditions of such arrangement differ from broker to broker, and client to client .Generally a specific rate of interest is charged for the funded amount.

In case of ASBA, investor has to apply for the IPO via specified Banks called as self Certified Syndicate Banks (SCSBs). Applicant has to apply to IPO through separate ASBA forms .The applicant has to give instruction to his bank to block the application money in his account so as to subscribe for the IPO. Bank freezes the said amount and remaining amount can be used by the applicant as normal bank account .The amount which the applicant has to pay on his allotted shares is debited to the account only when the basis of allotment of shares is finalized and application is selected for allotment .Applying through ASBA, you can only bid at cut off price and revision of bids is not possible, though applicant can withdraw from bidding. The main advantage of ASBA is that applicant doesn’t forgo the interest on the block amount.

One should take a note of the following points for investing in IPOs :-

a)Promoters/ management : The foremost important criteria is to inquire about the promoters of the company. The promoters and the management are entrusted the job of managing the affairs of the company. The Experience and qualification of management counts when taking a call on the vital matter of businesses. The management is responsible for extracting profitability and promoting growth to the business.

b) Industry analysis: One should also be aware about the general outlook of the industry to which the company belongs to. For E.g. Textile industry in past were not doing good due to governments unfavorable policies towards the sector. And during this period, most of the textile companies were facing heavy competition in Export market, which in turn reduced sales and profits. Textile Company IPOs during such times wouldn’t be a good investment option. So invest in those sector Companies IPOs which are flourishing and project promising growth in sales and profits.

c) Uniqueness: The uniqueness of the company also matters in order to have a distinguish identity and command a premium over the peer companies in terms of share prices and cliental. For E.g. Infosys Technologies is known for its ethical business practices, Reliance Industries for wealth creation for its shareholders.

d) Need of funds: The Company is offering its common stock to public for getting the required funds. These funds would have numerous applications, as funding capacity expansion, retiring high cost debts, working capital. The detail allocation of the funds to the cost of particular expansion plan or a project should be vetted.

e) Past financial of Company: SEBI (Securities Exchange Board of India) has laid down very strict norms in terms of issue of shares to public. The regulation in terms of drafting of prospectus and filing requirements are very exhaustive. The companies have to include previous years financial statements in the prospectus. This is helps the prospective investor to gauge the business of company in terms of efficiency in use of resources. Investors should ensure that companies have a profitable track record. It should be also seen that the company’s product and services have a long standing demand. This will keep intact earnings per share of the company positive.

f)Justification of the financial projections: The companies have to show a utilization of the funds in the project and depict a projection of the sales and revenue that would be earned. It is not that easy to validate the projections, this is where the role of the Rating agency comes in to picture. Rating agencies perform a thorough assessment of the financial statements and future growth projections of the companies and assign ratings to the companies. Applicant should avoid applying IPOs of lower rated companies.

g)Is the IPO price justified: As mentioned earlier IPO price of the shares are generally rationalized. But its seen when the companies get listed on the Bourses, their price fell below the issue price. For e.g.; Most of the Power sector companies shares are currently trading below their issue price. The best way to ensure that the price per share offered is justified by the earnings of the company, one should compare the its Peer companies operating in the same industry and with similar asset size .The gauge here is the EPS (earning per share) .The earning per share (post issue) should be compared to the peer group companies to get a tentative idea about the issue price.

Its not that you should invest in every IPO and hope to strike lucky with a huge listing gain. Be diligent in selecting the IPOs you apply. IPO route of acquiring shares should be used to get shares of promising companies at a value price. The key to earn returns is to subscribe to underpriced IPO issues and refrain from overpriced ones. Judging this although is a tough task, so one should be receptive in seeking a professional help.