Every company needs funds to grow and expand. To raise money, the company either borrows from financial institutions or issues shares. If the company decides to issue shares, it must invite the general public to buy its shares. This will be its first public invitation in the stock market. This is known as the Initial Public Offering (IPO).
IPO Full Form & Meaning
IPO stands for Initial Public Offering. In an IPO a privately owned company lists its shares on a stock exchange to make them available for purchase by the general public. This can be achieved by selling its securities in the primary market where securities are issued for the first time. After the company is listed on the stock exchange, it becomes a publicly traded company. In short, shares of the company can be traded freely in the open market.
Purpose of IPOs
The purpose of an IPO is essentially to raise capital to pay off debts, to fund expansion initiatives or to allow company insiders to diversify their holdings or to create liquidity.
How do IPOs work in India?
Generally, going public as a private company is a time-consuming process.While planning an IPO a company faces an increased risk of public scrutiny, not only that, it also has to file a lot of paperwork and financial disclosures to meet the requirements of the securities market regulator.
In India, the Securities and Exchange Board of India (SEBI) regulates the whole process of investment via an IPO.
- The first step is to hire an underwriter or investment bank. The underwriters act as intermediaries between the company and its investors. The expert will go through the important financial details and sign an underwriting agreement.
- A company wanting to issue shares through an IPO has to register with SEBI first. SEBI scrutinizes the documents submitted and then gives its approval.
- While awaiting the approval, the company will prepare its prospectus. In the prospectus the company has to mention that SEBI approval is pending.
- Once SEBI approves the IPO, the company must decide the type of IPO issue-
- Fixed price- In a fixed price issue, the share prices are decided in advance.
- Book building- The company gives a range of prices. The bid needs to be made within this range.
- After the type of issue is decided, the company makes its shares available to the general public.
- Investors submit applications to showcase their interest in buying the shares. When the company gets subscriptions from the public, it proceeds with the allotment of shares.
- The final step in this process is to list the shares on the stock market. After these shares are issued to the investors in the primary market, they get listed in the secondary market (stock exchanges). Trade in these shares happens everyday.
IPO Investment: Key Points to Remember
- The investors must do their own research and understand how the IPO process works in India before jumping into the market to purchase securities.
- The investors must thoroughly go through the prospectus issued by the company as it includes the details related to the financial information of the company.
- The prospectus also outlines the purposes for which the company intends to use the IPO money.
All this information would help the investor in making an informed decision.
- As the company issues its shares for the first time, the investors become one of the first shareholders of the company.
- Hence, investors can often get those shares at lower prices. If the company flourishes, its share prices would also rise.
- Thus, the investors could get a good deal.
- Investing in an IPO arguably carries more risks than buying shares of public companies as unlisted companies are not obligated to publish their financial reports, so it becomes difficult to track their past performance.
- The prospectus of the company provides a track record of its performance. Therefore, it is imperative that the investors carry out their due diligence to figure out the risks associated with that particular IPO.
The year 2021 has seen a boom in the number of IPOs. In total, 72 IPOs have hit the Indian stock market during the January to September period. The market has witnessed a boom in tech start-ups that cater to the internet market. SEBI has also made it easier for such firms to list their shares in the domestic market.
In the first and second weeks of December, four companies will float their IPOs. These are:
- CE Info Systems
- RateGain Travel Technologies
- Shriram properties
- Metro Brands.
If investors are looking to invest in some new IPOs, these could be looked at.
However, the most notable IPOs in the last two months have been the FSN ecommerce Ventures Limited IPO (Nykaa IPO) and the One 97 Communications Limited IPO (Paytm IPO).
Key Points of Nykaa and Paytm IPOs
Nykaa IPO Overview
Let us learn more about NYKAA IPO
Reasons why NYKAA IPO became successful:
- Nykaa is at the top of its game.None of its direct market competitors come close to its size and they are nowhere near their stock market debut.
- Nykaa sticks to digital marketing only and has made its presence felt in the digital space. It has many influencers creating videos, promoting the platform and educating consumers.
Paytm IPO Overview
Let us learn more about PAYTM IPO
Reasons why PAYTM IPO was not successful:
- Paytm has struggled with stiff competition, especially after the launch of Unified Payments Interface (UPI) in 2016.
- International companies like Google and Whatsapp have also made successful digital payment available.
The bottom line is that all investments including an IPO have their own risks and rewards.
Therefore, as an investor it is important to do your due diligence and not invest blindly. Special focus should be on going through the company prospectus to get an idea about the company’s potential.
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