The Indian stock market has seen a surge of interest from retail investors in recent years. With a growing economy and increasing consumer demand, many new companies are launching initial public offerings (IPOs) to raise capital and expand their businesses. As an investor, IPOs present an excellent opportunity to invest in high-growth companies at an early stage. However, the IPO subscription process can be confusing for amateur investors.
The two most common ways to apply for an IPO are – via your bank account or a demat account. This article will compare these two methods and highlight the key differences investors should consider.
What is an IPO?
An initial public offering (IPO) is when a private company opens itself up to the general public for the first time to buy its shares through the stock exchange. The shares sold here will be used by the company for business expansion, working capital needs, debt repayment, or any other necessary means.
As an investor, one can apply to buy shares at an IPO price before the company is officially listed in the stock market. Simply put, IPOs allow investors to purchase shares early in a growing company before all the hype after the listing drives prices up.
How to Apply for an IPO?
When a company decides to launch an IPO, it appoints investment bankers known as book-running lead managers (BRLMs) to manage the IPO process. The BRLMs gauge investor demand and arrive at an appropriate price band for the IPO. There are two ways retail investors can bid for shares in an IPO:
Key Differences in the IPO Application Process
While both methods ultimately achieve the purpose of subscribing to an IPO, there are some notable differences between applying via a bank ASBA facility and applying using a UPI ID-linked demat account.
Convenience
Applying via a demat account and UPI ID is more convenient than submitting physical ASBA forms at bank branches. IPO applications via demat only require you to accept the UPI mandate request and enter your UPI PIN to complete the application process. Demat applications can also be tracked easily through the depository participant interface.
Eligibility
All types of investors can apply via the ASBA process irrespective of whether they have a demat account or not. However, having an active demat account is compulsory in order to apply through the UPI route. First-time investors without demat accounts can open an account but need to complete the documentation verification process before applying to IPO via UPI.
Timing & Modification Flexibility
Demat applications allow modification of submitted applications at any time before issue closure by simply cancelling the UPI bid and reapplying. However, ASBA applications, once submitted at bank branches, generally cannot be modified. Timing is also critical for ASBA applications to reach bank branches during working hours before the IPO closure date. However, demat applications, being online, allow flexibility to submit bids at any time until closure.
Tracking Applications
Tracking the status of your IPO application is easier with the UPI process. Depository portals provide timely application status updates. Banks normally only update once the funds are unblocked. To check the latest application status for ASBA, investors have to personally visit bank branches, which may not always be feasible.
Withdrawal & Relaxation in Share Allotment
In partial share allotments in IPO due to oversubscription, investors can withdraw their bids without penalty if applied through demat. This prevents the locking up of surplus funds. No such relaxation option is available for ASBA investors who get a partial allotment of shares. They have to make additional payments, as applicable, to release excess blocked funds.
Availability
Almost all brokers provide IPO application interfaces, making the demat application process universally available to all demat account holders. However, ASBA requires investors to have bank accounts in designated banks that become official bidding centres. This restricts ASBA applications only to such approved banks.
Cost Benefit Analysis
Applying for an IPO via demat allows investors to pay application amounts using funds in the inked bank, demat cash balances, or liquid mutual funds. This allows users to save on opportunity costs that arise from keeping large fixed deposits. Additional transaction charges, if any, are also lower for demat-based applications.
Which Option Should Investors Choose?
Investors should assess all pros, cons, and individual preferences before applying via bank ASBA or depository-based routes. It is recommended that investors go for the demat/ UPI route when applying to upcoming IPOs as it emerges as the more efficient process compared to ASBA applications via banks. However, first-time investors who have yet to open demat accounts can apply through ASBA until they complete the account opening formalities.
Also, during occasional technical issues in UPI systems, the ASBA route proves beneficial. Applying for IPOs via a linked UPI ID in a demat account undoubtedly facilitates a smoother, more investor-friendly application experience. Investors preferring offline modes can continue with the bank ASBA application system.
Conclusion
IPOs provide lucrative opportunities for wealth creation through early-stage investments. The application process via demat accounts leveraging UPI promises a superior experience for investors owing to convenience and flexibility. Investors are advised to actively consider the pros and cons of both methods and make informed decisions while subscribing to the IPO issues that meet their investment criteria. An efficient application mechanism enhances the overall investing experience for participating in initial public offers.