Sunday, May 22, 2022

What is IPO, things to keep in mind before investing in IPO

What is Initial Public Offering (IPO)?

Initial Public Offering is a process in which a company offers its shares to the public for the first time in the stock market, to raise funds.

In an  IPO, both institutions, as well as retail investors, can participate and for this reason, investments in initial public offerings are viewed with great enthusiasm by investors.

The stock price is determined by the issue sale during the IPO, which can go up or down depending on the investor’s interest in the company’s stock.

During the year 2021, various companies in India raised a record amount of Rs 1.2 lakh crore from investors in the stock market through IPOs. Which is the largest amount raised in an IPO in India in a single calendar year so far. According to the Bombay Stock Exchange (BSE) data, in the year 2021, a total of 115 companies had submitted their documents to SEBI for approval. Of these, 63 Indian companies had launched IPOs in the stock market in the year 2021.

Key Terms Used in IPO 

Below are the terms used in initial public offerings that are often used when we discuss or analyze an IPO:

  • Abridged prospectus  – This is the summary of the IPO prospectus which includes all the salient features of the primary prospectus.
  • Draft Red Herring Prospectus,  Draft Red Herring Prospectus (DRHP)  – This document should be submitted by the company to the Securities & Exchange Board of India (SEBI), 21 days before the IPO.
  • Application Supported by Blocked Amount (ASBA)  – In this, the money paid by the investors for the shares remains in the account of the investors. The amount remains blocked until the shares are allotted by the company to the investors.
  • Red Herring Prospectus – This document contains all the information that investors need to know about the company, such as the company’s business account, management qualifications, the future approach of the business, IPO price band, etc.
  • Listing date, date of listing – This is the day on which the trading of IPO shares starts on the stock exchange.
  • Lot Size  – The minimum number of shares for which bids can be made in the IPO. If you wish to bid for more shares, you can bid in multiples.
  • Offer date – This is the starting date from which investors can start bidding for shares in the IPO.
  • Minimum Subscription – This is the minimum distribution of IPO shares that retail investors should subscribe to for an IPO, which is currently 90%.
  • Oversubscribe – This occurs when investors bid more than the number of shares offered by the company.
  • Price Band – This is the price limit within which investors can bid for IPO shares.
  • Book Building Process – This is the process of deciding the issue price for the IPO which is based on the prices bidding by the investors.
  • Floor Price – This is the lowest price per share when applying for IPO. Issue Price- This is the price at which the shares are allotted to the investors when they are listed on the exchange.
  • Cut-off Price – This is the lowest issue price at which the shares are allotted.
  • Underwriters  – They are the investment bankers who manage the initial public offering and book building process of the company.

Before investing in an IPO, check some of the key points given below.

  1. Read the red herring prospectus:

Draft red herring prospectus is submitted by a company to SEBI when it wants to raise money by selling its shares to the public.

This document explains how the company intends to use the public money it raises, and what the possible risks are for investors. In DRHP, everything is written about the company that an investor should know about the company. Such as financial history, strength of the company, risk, whether any legal process is going on against the company, etc. Hence, investors should read this document before investing in any IPO.

  1. Reasons behind raising funds:

Note that it is necessary to examine how the funds raised from the IPO will be used by the company.

It should also be checked whether the company wants to repay its debt or if the company is planning to raise funds to expand the business or use the funds for a corporate cause.

Offer for sale is also a way to raise money from the stock market. The money raised will go to the promoters who are selling their shares.

  1. Understanding the business model:

Before investing in an initial public offering, investors should understand the type of business model the company has.

Once they understand the kind of business the company is in, the next step is to identify new opportunities in the market.

This will indicate whether the company will be able to invest in capacity expansion when the big opportunity arises and generate enough money to pass on the profit share to its investors. This will happen only if the company has the ability to capture the market share.

If the business activity(s) of the company is not clear to the investors, then they should stay away from the IPO of that company.

  1. Do background checks on management and promoters.
  2. Know the strengths and weaknesses of the company through DRHP
  3. Check the valuation of the company.

From this, it will be known whether the offer price is undervalued or overvalued in comparison to the sector in which the company is.

  1. Check the financial health of the company:
  2. It should also be clear for how long you want to invest
  3. Compare the financials and valuations of the IPO issuer with other companies that are in that business as per DRHP.
  4. Check what is the potential of the company in the market.
Latest news
- Advertisement -
Related news
- Advertisement -