Setting up a brand involves a lot of things, of which trust is the most important of all. It should attract the right investor, trustworthy sales and marketing heads, candidates with the right skill set, strong distribution channel etc. However, running a brand is another thing. If successful and trusted by consumers, it allows the brand owner to venture into other businesses, and this is when he needs you to invest your interest and monies in him the most. Which is where Initial Public Offering comes into the picture.
What is an IPO?
If a new company or an existing one, with no shares listed on the stock exchange, decides to invite the public to buy its shares, it is called an Initial Public Offering (IPO). The capital gained from the sale of those shares is then put to purchase new machinery, land or to repay debts/loans by the company. Individuals who invest in the company by buying its shares get rewarded (as dividends) by the company, or sell the shares as and when the share price is favorable for trading.
You can buy the shares of a company that’s already listed through brokers. This is called buying stocks from the secondary market. Buying from the primary market means that you can buy shares directly from the company when it comes out with its IPO in India. This is more fruitful than buying from the secondary market, because when companies issue their shares cheaply and when these shares are listed, they feature at a premium. And selling them can fetch you capital.
IPO in India
After a long hiatus, the primary market gained prominence again in 2015. Money to the tune of INR 60 + crore was raised through public equity market in 2015, and it has only been rising. The year-on-year spike has been drastic when you consider the money raised through IPO in India – an increase in 844% over 2014! Market pundits feel that the upward trend will continue with increased collections in 2016. It is quite natural to feel so if we go by the numbers: 20 companies are waiting to raise to the tune of 7000+ crore, while another 11 are waiting to raise to the tune of 5000+ crore post SEBI’s approval.
While the numbers make things exciting, it is necessary that you keep certain pointers in mind before investing in an IPO in India.
What to keep in mind before investing in IPOs in India?
Know the company well: Before applying for an IPO in India, don’t forget to read the prospectus for the issue. This document contains ample information on the company’s financials, its record in the market, and the objective of issuing the IPO in India. You can find the prospectus on the company’s website or the SEBI website. Also, check if the there are material litigation's against the promoter or the company. Avoid habitual offenders at all costs.
Finish paper work well before time: The application form for applying for an IPO in India can be found at any broker’s office. Fill up the form, and issue a cheque for the amount you want to apply for before the deadline. And then you can submit it to the collecting bankers or agents for the merchant bankers.
Watch out for over subscription: Every IPO comes with a pre-defined, limited set of shares, proportionately allocated to each category of investors. If the demand for a particular IPO in India is high, the applications for the IPO may be more than the number of shares listed. Which means, the allotment of shares is done proportionately, and you may end up with fewer shares than you applied for.
Shift your focus from listing gains: While listing gains is lucrative, if the business is fundamentally sound and short-term, then the share price will continue to gain long after the company’s IPO in India.
Look at the valuation: This is by far the most important pointer to keep in mind, and also the hardest to determine for retail investors. Highly technical, this process is a little biased as investment bankers judge the quality of management and earnings before arriving at the final offer price. To make things easier, compare the valuation of the IPO in India with a listed peer in the secondary market. If the IPO is that of a new business, then judge using techniques like price to earnings ratio, price to book ratio and return on equity.
Few myths surrounding IPOs in India
Investing in an IPO is an opportunity to get in on the ground floor: By the time you invest in a company, other parties have already invested earlier
If everyone’s excited about an IPO in India, it must be a good investment
If a company is going public, it must be strong financially: A lot of companies go for IPO when they shouldn’t
So keep the above pointers and myths in mind before applying for an IPO in India, and you will stand to gain profits in the long run.