Whenever the IPO list comes out, it attracts lots of investors, and every one of them wants a chunk of the Initial Public Offering. Using the new IPO, a privately held company becomes a public company, and the investors who participated in the IPO become partial owners of the company.
The process of IPO is not simple, which is why it takes a significant amount of time for a company to enlist itself and conduct a new IPO. Normally, a company contacts an investment bank when they decide to opt for an Initial Public offering. The investment bank's role here is to conduct thorough research and due diligence, maintain the regulations, and check the company financials before they prepare a prospectus for the company (which is submitted to the stock exchange platforms as well as SEBI).
After SEBI checks the prospectus and verifies it with the company data, the regulatory body provides the green light to the company to go ahead with the IPO and lets them mention it in the IPO list. A lot of organizational investors also participate in IPOs, this may include major banks, mutual funds, hedge funds, etc.
Who is eligible to invest in an IPO?
According to the regulations of the Securities and Exchange Board of India or SEBI, a total of four types of investors are allowed to invest in an Initial Public Offering. Furthermore, these individuals or organizations can also partake in the bidding process for any upcoming IPOs.
- Qualified institutional investors (QII): The entities under the Qualified institutional investor's tag are major financial institutions, asset management companies, foreign investors registered with SEBI, etc. A lot of these underwriters look for the opportunity to offload their equities instantly after purchasing them in upcoming IPOs. To prevent this kind of volatile situation, SEBI has made it compulsory for institutional investors to sign up a 90 day lock-up contract before they can receive the allotted shares from the IPO.
- High-net-worth individuals (HNIs) or non-institutional investors (NIIs): High-net-worth individuals are investors who can invest more than Rs. 2 lakhs in IPOs. However, unlike the QII, the HNIs and NIIs don’t have to register with the SEBI to participate in the IPO.
- Retail investors: These types of investors have the capacity to invest no more than Rs. 2 lakhs in an IPO. As per SEBI, only 35% of equities are reserved for retail investors who are applying for the upcoming IPOs. Furthermore, SEBI has also ensured that if the IPO offer becomes over-subscribed, every retail investor should be allocated at least one lot of shares by the company. In this case, if the company thinks that allocating one lot of shares to every retail investor is not a practical option, then they can use a lottery system to figure out the investors who will receive the shares from the offer.
- Anchor investors: The QII whose worth is more than ten crores are known as anchor investors. Due to their massive portfolio and investment capacity, they are eligible to purchase around 60% of the equities released in the IPO.
If you are a retail investor or have greater capacity as an investor, then you can certainly invest in the upcoming IPOs. However, you need to remember that IPOs bear certain risks, and that is, you should properly research the company that is offering the new IPO before making your investment decision.