SEBI initially introduced Demat accounts for National Stock Exchange (NSE) transactions in 1996. It was in 2019 that regulations were established for dematerialising shares and debentures of listed companies, and Demat trading became the norm. Demat accounts allowed investors to hold shares digitally instead of carrying physical certificates.

In the article, we will explore why Demat accounts are a necessity when you apply for an IPO.

How Do IPOs Work?

An IPO is the process through which a private company offers its shares to public investors for the first time. The company decides how many shares it wants to offer, the price band, issue dates, allotment date, and other details.

Before the IPO is launched, the company prepares a Draft Red Herring Prospectus (DRHP) containing important information about its business, financials, and the proposed issue. The IPO process is regulated by SEBI.

Once the IPO opens, interested investors can submit their applications through available channels, such as internet banking or a broker’s online trading platform. The application amount is blocked through ASBA (Application Supported by Blocked Amount) until the allotment is completed.

The number of shares allotted depends on the demand for the IPO.

• Oversubscribed IPO: When applications exceed the number of shares available, chances of allotment are reduced.
• Undersubscribed IPO: When demand is lower than the number of shares offered, investors have better chances of receiving the shares they applied for.

After allotment, the company is listed on a stock exchange, and investors can buy and sell its shares.

Understanding Demat Accounts

A Demat account is short for Dematerialised account. It holds securities in electronic form. It allows investors to keep shares digitally instead of holding physical share certificates.

When you receive shares through an IPO, they are credited to your Demat account in your name. You can then hold them as an investment or sell them after the company’s shares are listed on the stock exchange.

You can open a Demat account with a Depository Participant (DP), such as a stockbroker, a bank subsidiary offering stock market services, or an NBFC.

The account opening process involves completing an application and submitting documents to verify your identity and address. These may include your PAN card, Aadhaar card, passport, or other documents listed as Official Valid Documents.

Can You Apply for an IPO Without a Demat Account?

It has been possible to apply for an IPO without a Demat account through certain offline application methods. For example, investors could submit physical ASBA application forms through their bank accounts.

However, online IPO applications have largely moved towards digital platforms. These applications generally require investors to provide their Demat account details so that any allotted shares can be credited electronically.

So, if you plan to apply for an IPO through a broker’s online trading platform or another online application channel, you should have an active Demat account.

Even if an application method allows you to apply without one, you will need a Demat account to receive and hold the shares allotted to you.

Why Do You Need a Demat Account?

A Demat account is important for IPO investments because shares are issued and held in electronic form. Here are the main reasons you need one:

• Receive IPO Shares: Shares allotted to you are credited directly to your Demat account.
• Hold Shares Electronically: You can keep your investments in digital form without physical share certificates.
• Maintain Investment Records: Your account provides an electronic record of the shares you hold.
• Manage Your Investments: Once the shares are credited, you can hold them for the long term or sell them after listing, subject to having a trading account.

A Demat account also makes it easier to manage IPO shares alongside other stock market investments.

Do You Need a Trading Account for an IPO?

No, a trading account is not mandatory to apply for an IPO. However, you need a Demat account to receive the shares allotted to you.

A trading account is required if you want to buy or sell shares on the stock exchange. If you receive an IPO allotment and want to sell those shares after listing, you will need a trading account.

You can open a trading account with a stockbroking firm. Some banks and brokers also offer 3-in-1 accounts that combine banking, Demat, and trading facilities.

Having both Demat and trading accounts can make it easier to apply for IPOs, receive shares, and manage your investments through one platform.

Wrapping Up

When applying for IPOs, make sure to review the company’s finances and performance to ensure the right investment decisions. Once you have been allotted the shares you have applied for, you will receive them in your Demat account.