5 things to know while applying for an IPO

By Aryan Bharti

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5 things to know while applying for an IPO makes sense only when we delve into the performance of the economy and the markets.

If you come to think of it, the only great news at the time of lockdown is the increasing growth in the share markets. The markets reaching their all-time high which can undoubtedly be viewed by the growing numbers in NIFTY and SENSEX.

But also, with the high numbers of IPO announcements. So, far we have seen great offerings and the buzz around IPO’s. Mostly because of big brands entering the market. Such an example is Burger King. The Burger King India IPO was subscribed 156.65 times. Its share surged up 265% in just 4 days, 2 Burger King IPO lots now worth over 1 lakh Rs. In a time span of only 4 days, we can’t find a better deal. And there are many more to come in future.

IPO’s are a great investment opportunity. By nature, IPOs are a big risk big reward. Generally, investors have relatively limited access to information and financial history with which to evaluate new listings. So before investing in an IPO, here are 5 key things you should know while applying for an IPO.

1. What is an IPO?

• A business needs funds to operate.
• When private companies decide to go public by offering holdings in a company to raise funds. It is known as GOING PUBLIC.
• An initial public offering (IPO) refers to the act of offering shares of a private corporation to the public in a new stock issuance.
• Generally, the funds gained from the IPO are used to fund the company’s existing projects, expansion plans, or improve the existing infrastructure.
• Companies hire various investment firms to set the price, date, and many more.
• A company may issue thousands of shares at a time.
• An IPO is a big step for both the company and its investors as it opens huge opportunities.

2. How to invest in an IPO?

Let us learn about the basics which shape up the 5 things to know while applying for an IPO.

• There are two types of IPOs – Fixed price IPO and Book building Issue.
• As the name suggests in Fixed price IPOs the company fixes the price of it’s shares in advance. No investor can get the shares for a price higher or lower price than the allocated amount.
• In the book building issue, the company will give you a range of prices. You must bid within that range.
• Nowadays, most of the IPOs are predominantly operating through the book building route.
• There are 4 different classes in an IPO – RII, NII, QIB, and Anchor Investor.
Retail Individual Investor (RII)– are investors who apply for less than ₹2 lakhs in an IPO. More than 35% of the Offer is reserved for the RII.
Non-institutional bidders (NII)– are investors who apply for more than ₹2 lakhs of IPO shares. More than 15% of the Offer is reserved for the NII.
Qualified Institutional Bidders (QIB’s)-Public financial institutions, commercial banks, mutual funds can apply as QIBs. 50% of the lot is reserved for QIB’s.
Anchor Investors apply for more than ₹10 crores through the book-building process. 60% of the IPO allotment can be allocated to Anchor Investors.
Anchor investors attract investors to the public market to boost their confidence.
The process of an IPO subscription has become simpler in the last years. This has empowered retail investors across the country.

3. Advantages and Disadvantages

·    Advantages

  1. The funds generated by an IPO is significant and can modify the growth trajectory of a corporation.
  2. An IPO can provide exposure as it thrusts a company into public spotlight.
  3. The sooner you buy shares of a good company, the better.
  4. An IPO allows you to be one of the first investors to unfasten the company’s shares. This means that you get to buy shares at cheaper rates.
  5. Burger king’s IPO success has led other big organizations such as KFC and Pizza Hut to launch their IPO creating more opportunities.

·    Disadvantages

  1. An IPO is expensive for a company. But also for the retail investor as you have to buy a certain limit set by the company.
  2. The risk that expected funding won’t be raised if the market does not accept the IPO price or the buzz for the IPO is feeble.
  3. Inconsistency in a company’s share price can be a diversion for management. And the company’s valuation is based on stock performance rather than real financial returns.
  4. IPO is expensive. Exceeding the recurring expenses of a public company, the IPO transaction process comes at a substantial cost.
  5. The transaction costs will be even higher if a corporation chooses to hire a financial reporting advisor.

4. Research To Do While Picking An IPO

  • Always read the business brochure. This will specify all aspects of the IPO – the company, its finances, the amount of capital it expects to raise, the number of shares on offer. This is the best way to track the financial performance of the company.
  • Check the valuation and grade of an IPO. The SEBI rating is given on a five-point scale, the higher the score, the better the IPO.
  • Opt for a company that is backed by a strong underwriter.
  • An underwriter is an investment bank that is hired by the company to manage the IPO. Besides, if the IPO is under-subscribed, the underwriter purchases the remaining shares.
  • Since IPOs are launched by a private company, there is not a great deal of data available in the public domain. So, a prospectus can be beneficial here.
  • Check Demand and buzz for Subscription, just keep an eye on the overall demand the IPO issue has generated in the market.

Don’ts :

  • Do not purchase an IPO because of media excitation or good word of mouth. Choose a business with a strong foundation.
  • Don’t fall prey to the cuts that some IPOs offer. Discounts should be treated as add ons.
  • Never invest blindly into a public offering.

5.  What Are The Risks Amongst The 5 things to know While Applying For An IPO?      
                                                                         

  • IPOs are generally advertised by new companies that are not yet established or expanding. If the company does not succeed in taking off as promised after the IPO issue, its stocks may tank and you may lose your money.
  • Only 38% of IPOs have shown more reliable returns than the broader market.
  • Over the past decade, major IPOs have progressively worsened at keeping pace with market returns.
  • Only Healthcare and Technology IPOs have outperformed by a comparatively small margin.
  • Second, unlisted corporations do not have to publish their financial performance quarterly.

    This means that it will be more difficult to track past corporate performance before registration. Nevertheless, a firm that applies for listing has to present reports of its earlier financial performance. This will be included in the company’s prospectus.
  • IPOs being filed by unprofitable companiesBurger king’s net profit is also negative, meaning the company is at loss.

Concluding Remarks

An IPO symbiotically aids in funding expansion plans for a company and creates opportunities for the public to make conscious investments. Thorough research followed by structured risk assessment should help you diligently decide which IPO to proceed with.

It is now your turn to follow all 5 things while applying for an IPO and maximise your gains while cutting short losses.

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This article is authored by Aryan Bharti. He is an active blogger and writes about topics such as financial planning, investments and wealth management.

If you want to understand the stock market better, read another interesting article – Understand stocks by industry in India.

Post Author: Fintox_India