IPO Bidding: Everything You Need to Know

IPO Bidding is the process which helps companies understand market demand for their shares while setting fair prices before IPOs are listed on stock exchanges. The IPO application process involves submission of bids online or offline via stockbrokers or platforms, specifying the types of shares you wish to buy and the price you want to pay. 

What is IPO Bidding?

IPO bidding is the process of submitting bids for shares in an IPO or Initial Public Offering. Investors show their interest in buying the shares of a company when it goes public, making offers to purchase them at a particular price and within a defined range.

How Does IPO Bidding Work?

Several IPO bidding rules come into play throughout the process. It works in the following manner: 

• Price Band & Bidding
  There are two methods, i.e., book building (the company sets a range for the IPO and investors bid within this range) and fixed price (a fixed price is set and investors may only apply at the same price). 
• Bidding Process
  Investors specify the share count and price they wish to pay (per share), placing bids online/offline thereafter. 
• Allotment
  The IPO allotment process involves underwriters determining the cut-off price based on the bids received once the bidding period concludes. Then allocation takes place (bids at/above the cut-off price will be eligible for allotment), based on allotment criteria like investor category, bid size, and subscription status. IPOs may be undersubscribed or oversubscribed, and investors can check their allotment status after the allotment process is complete. 

Types of IPO Investors:

Some of the IPO bidding categories include the following: 

• Retail Individual Investors (RII)
  They can invest up to ₹2 lakh in the IPO, with the minimum allocation usually being 35% of the total shares issued. If there is a case of oversubscription, allotment is done through a lottery system, and not all RIIs are guaranteed a lot.
• Non-Institutional Investors/High Net-Worth Individuals (NIIs or HNIs)
  This category includes institutions or individuals investing more than ₹2 lakh in the IPO. 15% of the IPO offer is usually reserved for NIIs. 
• Qualified Institutional Buyers (QIBs)
  These are financial institutions adhering to SEBI’s specific criteria. This category includes public financial institutions, commercial banks, mutual funds, etc. About 50% of the IPO is usually reserved for QIBs. They are vital for the IPO process, working as anchor investors that secure shares before the IPO opening to the public and helping work out the issue price. 
• Anchor Investors
  They are institutional investors who commit to deploying a sizable amount in the IPO at a fixed price. Anchor investments boost investors' confidence levels and potentially enhance demand for the IPO. Up to 50% of shares meant for QIBs may also be allotted to anchor investors. 

Step-by-Step IPO Bidding Process 

The IPO retail bidding process involves these steps: 

Step 1: Account Setup

• Ensure that you have a PAN Card, a Demat account with a Depository Participant (DP), a trading account linked to the Demat account and a bank account enabled with ASBA.

Step 2: IPO Details

• Analyse the Red Herring Prospectus (RHP) diligently. It includes details such as the company’s financials, price band, lot size, and utilisation of the proceeds, among other important information.

Step 3: Application Method

• You can choose to authorise the payment from your bank account either through Netbanking (via ASBA) or by a UPI mandate. However, you need to ensure that you have sufficient funds in your account for bidding.

Step 4: Placing the Bid

• Choose the number of lots you wish to apply for. Decide on the price within the price band and proceed with the application.

Step 5: Bid Status

• The IPO subscription period is open for three working days, with the bidding window open from 10 a.m. to 5 p.m., during which you can choose to cancel or modify your bid. Investors, at times, are also offered a pre-application window by brokers.

Step 6: IPO Allotment

• The allotment is typically finalised within three working days from the IPO closing date. You can check the allotment status on the registrar’s website or the stock exchanges.

Step 7: Fund Deducted/Released

• In case you have been allotted shares, the blocked amount earlier will be deducted from your bank account, and the allotted shares will be credited to your demat account. However, if there was no allotment, then the amount will be unblocked automatically.

Step 8: Listing

• The shares that have been allotted to you will be listed on the concerned stock exchange within six working days from the IPO closing date.

Things to Know Before Bidding

There are a few vital things to keep you informed before bidding in an IPO, such as - 

• The RHP (Red Herring Prospectus)
  The RHP is a document that companies are required to file with the SEBI (Securities and Exchange Board of India). The RHP contains all key information about the IPO, company financial statements, prospects, management information, and more. Reviewing the RHP will keep you informed about the company’s business objectives.
• Utilisation of Funds
  Understanding the company’s purpose for an IPO is crucial. It could be to grow or expand their businesses, settle existing debts/liabilities, or even to give their promoters a way to exit their shareholdings. Not every reason can be beneficial for you as an investor. Hence, it is important to assess the reason behind the IPO.
• The Company’s Strengths & Weaknesses
  Every company has its own unique strengths and weaknesses. Prior to investing in an IPO, check for potential future vulnerabilities of the entity and its strengths. Conduct a SWOT analysis based on the RHP, checking reports, news updates, and future growth prospects. 
• Company Valuation
  Valuation is a key aspect to check while evaluating any IPO. Companies can either be undervalued (if the IPO price is lower than the intrinsic value of their shares) or overvalued (if the IPO price is higher than the intrinsic value of the company shares). The latter scenario means that in case of any price correction in the future, the stock prices of the company may fall. In case of the former, it may indicate future growth potential when the price corrects to sync with the true value of the entity. 
• Company’s Performance Against Industry
  You should also understand how the company compares with its competitors. Check whether the company's performance is in sync with the industry average, whether it is better, worse, and so on. It will help you evaluate whether you should invest in the IPO, making use of various metrics like the debt-to-equity ratio, price-to-earnings ratio, earnings per share, profit margins, return on equity ratio, etc. 

How is IPO Allotment Done After Bidding?

Once the IPO bidding process is complete, allotment is determined by the registrar in tandem with stock exchanges. In case demand surpasses available shares, allotment happens via a lottery system, and this enables fair distribution. In case the demand is lower than available shares, all applicants may receive full allotment. The basis of allotment is published by the registrar, detailing the demand for the IPO. 

• Step 1: Subscription Period Closure
  The IPO bidding period closes, after which the applications are then verified by the Registrar
• Step 2: Demand Assessment
  Depending on whether the IPO is a book-built IPO or a fixed price IPO, the final issue price is determined.
• Step 3: Basis of Allotment by the Registrar
  The basis of allotment of the shares is prepared in consultation with the concerned exchanges where retail investors are allotted a minimum of 35% of the total IPO size. However, if the total number of bids exceeds the number of shares available, then a random draw is conducted through a computerised lottery system.
• Step 4: Pro-Rata Allotment
  If any shares remain after the minimum lot allotment, they are allocated on a pro rata basis.
• Step 5: Basis of Allotment Publication
  The basis of allotment is published by the registrar, detailing the demand for the stock in question. 
• Step 6: Checking Allotment Status
  You can check the allotment status on the website of the Registrar or the NSE/BSE platform.
• Step 7: Release of Blocked Funds
  In case you were not allotted any funds, the blocked amount authorised through ASBA or UPI mandate will be released into your account.

Mistakes to Avoid During IPO Bidding

Here are some errors to avoid during the IPO bidding process: 

• Investing for Listing Gains
  Many investors go ahead due to the lure of earning quick returns on listing day. While stock prices may rise, there are plenty of examples where they have fallen in value on the listing day as well. Stock prices spike and correct multiple times on the listing day, and hence, it is all about luck and timing for investors. 
• Not Doing Ample Research
  Identifying an IPO worth investing in depends a lot on the homework you do. You should evaluate the company’s business model, offerings, target markets, reason for the IPO, competition, growth prospects, financial health, and management. Checking the risk factors is also important in this case.
• Deciding Based on Subscription Data
  Do not fall for the subscription hype, which often emerges when news breaks about big-ticket funds expressing interest in the issue or an investment by a marquee investor. It’s hard to know whether any of them did it, or the price at which they bought shares, and even their intentions.
• Understanding Grey Market Bias
  The grey market is the unofficial market where investors trade shares of unlisted companies. It helps investors estimate investor interest and also the IPO listing price in some scenarios. Note that these are unregulated markets with no rules and possibilities of manipulation.