After CIL success, IPO space may see a lot of action. Here are useful tips on investing.
The recent success of the Coal India issue, which was subscribed over 15 times, is likely to renew the interest of retail investors in initial public offerings (IPOs). With some government-owned companies such as Steel Authority of India, Power Grid, ONGC and Indian Oil Corporation planning to enter the markets in the next few months, one can expect a lot of action.
But before you decide to hop on to the IPO or the follow-on offering bandwagon, here are a few things you should know:
Book building
This process helps discover the price of an IPO. The company sets a floor price (the lowest price in the band) and a ceiling price (or cap). “The actual price is determined depending on how many bids came at what price,” says Jagannadham Thunuguntla, strategist and head (research), SMC Global Securities.
Allotment of shares
In cases of book-built issues, the basis of allotment is finalised by lead managers or investment bankers within two weeks from the date of closure. In a situation where a company is divesting more than 25 per cent under a proportionate allotment system, three classes of investors can bid for the shares:
Qualified institutional buyers (QIBs): These include mutual funds and foreign institutional investors. At least 50 per cent shares are reserved for this category.
Retail investors: The bidding limit for this category was raised to Rs 2 lakh (in the Securities and Exchange Board of India’s latest order). At least 35 per cent is reserved for this category.
High net-worth individuals (HNIs) and companies: The balance bids are offered to HNIs or non-institutional investors (NIIs) and corporates. At least 15 per cent is reserved for this category.
“If the promoters are diluting less than 25 per cent stake in an IPO, QIBs get 60 per cent reservation, retail 30 per cent and NIIs 10 per cent,” adds Thunuguntla.
Subscription
Retail investors and HNIs are allotted shares on a proportional basis. For example, the Coal India IPO was subscribed two times in the retail category (if you have applied for 200 shares, you will qualify for 100 shares, 200/2). Similarly, an HNI will get eight shares, as the category was subscribed 24 times.
Sometimes, if the subscription is huge or the price is too high, the allotments are made by lottery. Say, you apply for five shares and the category is subscribed 10 times. In this case, you are entitled to half a share. Since it’s not possible, the company may allot shares to one out of every two investors.
Grading and valuation
Equities are graded on a scale of one to five. The higher the rating, the better is the issue. But experts say grading is only for fundamentals and does not cover the issue price/valuation. “A good rating means it is a good company from a long-term perspective. But it may not give listing gains,” says Mukesh Dedhia of Ghalla Bhansali Stock Brokers.
The basic rule of thumb to determine the valuation is by calculating the price-to-earnings (PE) ratio. This is done by dividing the issue price by the earnings per share (EPS) of the company. Say, the issue price is Rs 100 and EPS Rs 5, the issue price is 20 times (PE multiple) of EPS. Typically, the lower the PE, the better priced is the issue.
Asba
In applications supported by blocked amount (Asba), the bid amount is blocked in your bank account till the allotment. For instance, you apply for shares worth Rs 2 lakh. This amount gets blocked in your account. On allotment, shares worth Rs 50,000 will be credited to your demat account and the remaining amount, Rs 1,50,000, unblocked by your bank.
