An Initial Public Offering (IPO) is one of the most popular ways for a private company to raise funds and become publicly listed. With several companies lining up IPOs every year, it is natural for investors to ponder if they need a Demat account to invest in these upcoming IPOs. In this comprehensive guide, we will discuss the IPO process in India and the demat account opening required or not for IPOs.
What is an IPO?
An Initial Public Offering or IPO refers to the first time a private company offers its shares to the public through the stock market. The company floats a portion of its shares, usually around 25%, for public trading on the exchanges. This allows the company to raise capital for business purposes while offering investors a chance to gain ownership and trading rights. Investors can apply for shares in an IPO before officially getting listed on the stock market.
Why Do Companies Conduct IPOs?
An IPO is the first time a privately held company offers its shares to the public to raise capital. Companies go public for various reasons, such as expansion, debt repayment, or providing existing shareholders with an exit strategy.
When a company decides to go public, it collaborates with investment banks to underwrite the offering. These underwriters help determine the IPO price and promote the shares to potential investors. Investors can then subscribe to the IPO by submitting their applications and funds to purchase the company’s shares.
The primary reasons for companies to conduct an IPO are:
- Raise funds for business expansion, working capital, debt repayment or other capital needs.
- Create a public market for its shares and enable exit for existing shareholders.
- Enhance brand visibility, public profile and credibility
- Meet listing requirements to unlock future fundraising options like follow-on offers.
- Offer incentives such as share-based compensation to employees.
- Allow founders, owners and investors to monetize their holdings.
The IPO Process
If a company meets regulatory requirements, it can file for an IPO through an investment bank that helps determine the share price band and manages the public offer process. Once the prospectus is filed, the IPO opens for investor applications. After share allotment, the newly issued shares get listed on the stock exchanges for trading. Applicants can check allotment status and await credit of shares in their Demat account.
Do You Need a Demat Account for IPO Application?
This is the key question facing investors. The answer is NO – having a Demat account is not mandatory to apply for shares in an IPO. Investors can submit IPO applications without a Demat account. The application process only requires filling up application forms and making payments towards shares applied.
However, not having a Demat account can complicate the share allotment process.
Here’s how the Issues Without Demat Account
Physical Share Certificates: For applicants without Demat account, shares will be allotted in physical certificate form. Holding physical certificates comes with risks like theft, forgery, damage etc. They also attract higher stamp duty for transfer.
No Trading Option: Investors cannot freely trade the shares represented by physical certificates. They would need to open a Demat account later and dematerialize the share certificates, incurring further costs.
Delayed Listing: Dematerialization of physical certificates into a Demat account may take 1-2 weeks. Hence, investors can miss out on trading the IPO shares on listing day when the price often slips.
Additional Charges: Opening a demat account later on and dematerializing physical share certificates involves additional charges and procedures.
Demat accounts offer tons of solutions for your investment issue. To know which is the best demat account, you need to select a stock broker according to your investment goal.
Benefits of Demat Account for IPOs
Electronic Share Allotment: Shares allotted in an IPO get credited electronically to your Demat account on listing day. It’s fast and convenient.
Immediate Liquidity: You can immediately trade the IPO shares on the listing day for gains or further allocation. No dematerialization delays.
Reduced Paperwork: Electronic transfer through a Demat account smooths the post-IPO process without physical share certificates.
Cost-effective: Pay only your brokerage charges for trading instead of fees for opening late demat accounts, dematerialization, etc. if applying without demat.
Ease of Monitoring: You can quickly review the IPO credit and track the subsequent value of your stock holding. A demat account also eases periodic tracking of your portfolio value.
Overall, having a Demat account can simplify investing in IPOs. But it is not mandatory. If you don’t have a demat account, you can still apply for IPOs and receive share allotments in physical form. Just ensure you dematerialize them post-allotment for convenience and traceability. You can open a demat account from a reliable online stock trading app.
How to Prepare Your Demat Account for IPOs?
If you already have a Demat account, here are some tips to prepare for investing in IPOs:
Review your account balance to ensure sufficient funds for applying to your desired IPOs.
Keep required documents like PAN, Aadhaar, passport size photos, etc. for timely KYC verification.
- Connect your savings bank account to your Demat account for smooth online payments when applying.
- Keep account login details and passwords handy to help you take quick action when an IPO opens.
- Ensure your Demat account details are up-to-date in your IPO application forms to enable direct share credit.
- Please consult your broker on the process details, forms required, and their accompanying services for upcoming IPOs.
An active, KYC compliant Demat account can make your participation in IPOs a smooth, convenient process. While demat account is not compulsory, it can be highly beneficial. Evaluate your specific needs and scenario to decide if you should open a demat account before investing in that hot upcoming IPO through a stock broker.