When a company makes an initial public offering (IPO) of shares, it keeps aside a fixed quota of shares for retail investors as well as institutional investors. However, retail investors get an extra day to decide whether they want to go for the IPO or not. According to Securities and Exchange Board of India guidelines, retail investors can buy shares worth up to Rs2 lakh each.
How it works
Say, the last day for subscription in a certain IPO is 26 July. This would mean that while retail investors can fill in their bid forms till 26 July, institutional investors will have to make their bid by 25 July.
Since institutional investors can make bids till the penultimate day only, retail investors can access the statistics of the investment by institutional investors on the morning of the closing day.
Institutional investors usually have the means to gauge the financial health of the company and they undertake research about a company before investing. So more often than not, their expectations match the performance of the company after listing. Retail investors, who usually do not have access to such details, can rely on the direction taken by institutional investors.
If institutional investors oversubscribe their quota, especially by many times, then it is a good indication for retailers that the company is expected to do well. On the other hand, if institutional investors do not seem very interested, it is an indication that the business proposition is not very attractive. However, a little bit of research on your own is always advisable.
Also, if institutional investors have made bids at the higher price band, retail investors will get an idea about the price per share at the time of allotment of shares.
Last day rush
Since a majority of retail investors wait till the last day to get a sense of how the IPO is shaping up, there is huge rush on the closing day. However, given the benefits, it’s worth the wait. To sail smoothly through the rush, you can fill the form in advance and just fill the number of shares and amount on the last day.