How to choose an IPO for investing cover

How to Choose an IPO for Investing? Key Things to Know!

Tips to Choose an IPO for Investing: Do you really want to take part in an IPO but do not know what to look for before investing? Don’t worry we’ve got you covered. In this article, we discuss the important aspects to watch out for before investing in a company. Here, we’ll discuss the key things to look to choose an IPO for investing. Let’s get started. 

What is an IPO? 

What is an IPO? 

An IPO is a process through which a private company can raise funds through the stock market, transforming itself into a public company whose shares are traded in a stock exchange.

This is a preferred means of raising funds as the company is not obligated to pay interest as in the case of loans, The company however is owned by the shareholders post the IPO. There can be a number of reasons why any company offer an IPO. Here are a few of the top ones:

  1. To raise capital (financial benefit)
  2. For funding a new project or expansion plan of the company
  3. For carrying out new research and development works
  4. To fund capital expenditures
  5. To pay off the existing debts or reduce the debt burden
  6. For a new acquisition
  7. To create public awareness of the company
  8. For the group of initial investors desiring to exit the company by selling their stakes to the public.

In addition, IPOs generate lots of publicity for the company and hence helps in creating market exposure, indirect exposure, and brand equity.

ALSO READ

Eligibility Criteria for an IPO: Requirements for a company to Go Public!

Tips to Choose an IPO for Investing – Things to look

At the end of the day taking part in an IPO is just another form of investment. The problem however arises as companies that go for IPO’s are relatively new and there is not a lot of information available about them. In comparison companies that are public have reports, company news, and expert analysis readily available on the internet.

In order to avoid investors falling prey to companies with weak financials, the regulatory authorities have made it compulsory for companies to issue a Red Herring Prospectus (RHP). This prospectus is a summary of the company and provides important details like financial statements, revenue, earnings, risks, etc of the company. It is very important that the prospectus is read carefully before investing 

Following are some important factors to look at before investing in an IPO:

— Growth Prospects and financial strength

The value of the company depends heavily on its growth rate so far and the prospective growth rate it can generate in the future. The prospectus gives a track record of its growth in various aspects and annual reports throughout the years. This will help in predicting what the company may achieve in the coming years and if it is worth investing in.

— Promoter holdings

The prospectus also includes information on whether the company is freshly issuing shares or are they an offer for sale which are shares of existing promoters. According to the law, promoters are required to maintain a minimum holding of 20% post issue. But if the promoters are selling a major portion of their business this could be a red flag. Instead, if the promoters decide to hold a significant portion of shares post the issue then it is a sign that they believe in the future of the company and want to be a part of it. Instead of using the IPO as an escape.

— Allocation of funds raised through IPO

The prospectus also gives us information on what purpose the money raised through an IPO will be used for. A good sign would be the company allocating the funds for future growth. On the other hand, if the main purpose of the IPO is to pay off existing debt or buy out promoters then these should be considered as red flags.

— Comparison with competitors

In order to assess the company’s performance, one should also compare the performance of the company with that of its peers in the same industry. The IPO price also may be compared to other companies in the same industry. Based on its performance and price with its competitors, one can assess it is a company is overvalued or worth investing in.

— Beware of the oversubscription trap

It is also very important for investors to rely on their research and not on market hype. Often IPO’s are oversubscribed. An investor must not get swayed by this information as subscriptions often replicate market trends. This means that there are greater chances of IPO’s being oversubscribed in bullish markets than in bearish. Companies being aware of this are looking for the highest valuations to make use of this.  

IPO Terms to Know Before Investing in an IPO

Following are some important terms that provide vital information for investing in the stock market. Understanding these terms are crucial to choose an IPO and make a sound IPO investment decision:

1. Size: The size generally refers to the offering size. This is the number of shares offered in the IPO multiplied by the price per share. This shows the amount the company is attempting to raise from the IPO. 

2. Fresh Issue: This refers to the new equity shares issued to the public. 

3. OFS: Offer for Sale refers to the dilution of existing promoters’ stake which is given to the shareholders. Here no new shares are issued.

4. Opening/Closing Date: It is between these dates that investors are allowed to apply for the IPO.

5. Price Band: This refers to the lower and upper limit of the share price within which the company will offer its shares to the public.

6 Lot Size: In an IPO the total shares offered to the public is divided into lots. In an IPO the investors are not allowed to purchase shares of any quantity. They have to do it in lots. In addition, a minimum and maximum lot size is set beforehand.

For eg. say Company A going public sets a lot size of 10 shares for each lot with a minimum and maximum lot purchase set at 1 and 10 respectively. This basically means that the minimum number of shares an investor can purchase is 10 and the maximum a 100. If an investor wants 65 shares he will not be able to do so. But he can purchase 6 lots which is the closest denomination.

7. Face Value: The face value refers to the original cost of the shares.

ALSO READ

IRFC IPO Review 2021 – IPO Offer Price, Dates & Details!

Closing Thoughts

In this article, we discussed a few of the key aspects to look to choose an IPO for investing. IPO’s are considered to be riskier than other forms of investment as the information available is limited. But the risk can be limited to a great extent if one makes a thorough study of its prospectus. At the same time watching out for the red flags mentioned above. Happy Investing!

INDIGO PAINTS IPO Review 2021

Indigo Paints IPO 2021 – IPO Offer Price, Details & Review!

Indigo Paints IPO Review 2021: The new year has already brought several great news. Two of them being the IPO’s set for next week. This includes the IPO for Indigo Paints. Indigo Paints IPO opens next week between Jan 20-Jan 22, 2021. 

In this article, we look into important information on the Indigo Paints IPO 2021 and find out the possible prospects of the company.

Indigo Paints IPO – About the Company

Indigo Paints IPO

Indigo Paints was incorporated in the year 2000 by IITian Hemant Jalan in Jodhpur. He started the company as he felt that there was a big market for Cement Paints. Jalan faced many hurdles in scaling his business this was because the industry already had strong competitors that already had a place on retail shelves. Advertising too was made impossible when competing with these giants.

This was when Jalan decided to take a different approach towards the market. He introduced differentiated products in the industry. Indigo paints introduced Metallic paints in India which gave a unique look. This product was welcomed by retailers even with the lack of advertisement.

Since then the company has introduced many more products to the market like Floor coat paint which can withstand vehicular traffic, ceiling coat paint, tile coat paint, Dirtproof & Waterproof Exterior Laminate, Floor Coat Emulsions, Exterior, and Interior Acrylic Laminate, and PU Super Gloss Enamel. 

Indigo Paints Promoter

(Hemant Jalan – Promoters)

Due to its differentiated product line, Indigo paints today is one of the fastest-growing paint companies in India. It is the 5th largest company in the decorative paint industry. The sales of their differentiated products have been continuously growing from 26.68% in 2018 increased to 28.62% in fiscal 2020.

Indigo Paints also has a strong distribution network across 27 states and seven union territories. The company also has strategically set manufacturing facilities in Jodhpur (Rajasthan), Kochi (Kerala), and Pudukkottai (Tamil Nadu). Over the years Indigo Paints has been successful in capturing 2% of the paint industry.

Effects of the Pandemic on Indigo Paints

Indigo Paints did not suffer any adverse impacts due to the pandemic. This was because of its negligible exposure the company has to big cities. They only account for 1-2% of their sales. The company predominantly operates in Tier 2-4 cities.

ALSO READ

How to apply for an IPO with Zerodha Account?

Indigo Paints IPO Information

Indigo paints received the nod from SEBI earlier this month and will be open for subscription from January 20 and close on January 22. Kotak Mahindra Capital Company, Edelweiss Financial Services, and ICICI Securities will be the book running lead managers to the public issue. The IPO will include a fresh issue of shares and the sale of existing shareholder stakes. These include Sequoia Capital, SCI Investments, and promoter Hemant Jalan.

Important Indigo Paints IPO details

ParticularDetails
IPO SizeRs. 1176 Crores
Fresh IssueRs. 300 Crores
Offer For Sale(OFS)Upto 58,40,000 shares
Opening DateJan 20, 2021
Closing DateJan 22, 2021
Face Value Rs. 10 per Equity Share
Price BandRs. 1480 to Rs. 1500 per Equity Share
Minimum Lot Size10 shares (Rs.15,000)
Maximum Lot Size130 shares (Rs. 195000)
Listing Date:Feb 02, 2021

Indigo Paints IPO – Purpose of the IPO

The proceeds from the IPO will be used for the following purposes

  1. The company intends to open one more manufacturing facility in Tamil Nadu. Here it will be adding capacities to manufacture water-based paints to cater to the growing demand for these paints. The manufacturing unit in Tamil Nadu will have a capacity of 50,000 KLPA and is expected to be operational during FY2023.
  2. The proceeds will also be used to purchase tinting machines and gyroshakers.
  3. To repay borrowings
  4. For other corporate purposes.

Indigo Paints IPO – Competitors in the Industry

(Market Share – Paint Industry)

A few of the biggest competitors of Indigo Paints in the Paint Industry are Asian Paints, Berger Paints, Kansai Nerolac Paints, Akzo Nobel India Ltd aka Delux Paints, British Paints India Ltd, Nippon Paint India, Shalimar Paints Ltd.

CompanyMarket CapPE Ratio TTM
Akzo Nobel India Ltd.10757.7660.7646
Asian Paints Ltd.259415.04114.991
Berger Paints India Ltd.77344.22128.3189
Kansai Nerolac Paints Ltd.33898.0585.7375
Shalimar Paints Ltd.576.67--

(Paint Industry Stocks India – Source: Trade Brains Portal)

Closing Thoughts

Indigo Paints has come a long way especially considering the number of large players and moats present. But do you think the company will be to replicate the success of large brands like Asian Paints now that it is competing in the big leagues? Let us know what you think about Indigo Paints IPO by commenting below. Happy Investing.

What is the Process of IPO Share Allotment to Retail Investors cover stocks

What is the Process of IPO Share Allotment to Retail Investors?

Understanding the process of IPO share allotment to retail investors:  The year 2020 was a mixed year for the Indian IPO’s. As many as 14 popular IPOs hit the market last year. A few of the big names that offered their initial public offering last year were Burger King, Happiest Minds, CAMS, Angel Broking, SBI cards, and more. (You can read the Indian IPOs performance for 2020 here).

Now, the seasoned investors may already know what is an IPO and how its allotment process works. However, for the newbie investors, many a time allotment process may look like a mystery, especially when they are not allotted any shares even if applying for multiple IPOs.

In this post, we are going to discuss the process of IPO share allotment to retail investors i.e. the common investors. Let’s get started.

Introduction to IPO Details

Let us first understand the IPO details with the help of an example. Here are the issue details of the Burger King IPO that closed last year.

  • IPO Dates: Dec 2 – Dec 4, 2020
  • Type of Issue: Book Built Issue IPO
  • Issue Size: 135,000,000 Eq Shares of ₹10 (aggregating up to ₹810.00 Cr)
  • Face Value: Rs 10 Per Equity Share
  • IPO Price Band: ₹59 to ₹60 per equity share
  • Market Lot: 250 Shares
  • Minimum Order Quantity: 250 Shares
  • Listing At: BSE, NSE

Although most of the points mentioned above can be understood logically, let me explain a few of the important ones in the IPO issue in detail.

From the term IPO date (or Issue date), you can understand that you have to apply for that IPO between those time periods to be eligible for getting the shares.

Next, the minimum order quantity is 250 shares, which is the same as the market lot. This means that you cannot apply for less than 250 shares for this IPO. If you apply for 30 shares, then your application will be rejected. Further, you can buy the shares only in a lot of 250. This means that you can buy the shares in the numbers of 250, 500, 750, 1,000… which is basically 1 lot, 2 lot, 3 lot, 4 lot… etc.

Further, from the IPO price band, you can understand that you have to place the bid between Rs 59 to 60, for each share. The upper level of the issue price is called the cut-off price (here Rs 60). To increase the chances of getting allotted to the shares, it is recommended to bid at the cut-off price of the IPO.

All these points you can easily understand just by reading the IPO details. But what about the allotment? What is the process of IPO share allotment to retail investors? Why some people receive allotment and others don’t? How exactly are the stocks allotted to the retail investors? This is what we are going to next in this article.

Nevertheless, before we learn the process of IPO share allotment to retail investors, there are a few more things that you need to understand first.

What does the Over-Subscription of an IPO mean?

The over-subscription of an IPO means that the demand for the IPO exceeds the total number of shares offered by the company.

For example, Burger King IPO (which is discussed above), evoked a huge oversubscription of 157 times. Burger King IPO received over 1,100 crore bids for its shares compared with 7.45 crore shares on the offer, data compiled by the National Stock Exchange showed.

As the Subscribers for Burger King IPO consisted of Retail investors, qualified institutional buyers, and non-institutional investors, the subscription differed for each segment. The retail individual investor’s segment of the IPO was subscribed over 68 times while the portion meant for qualified institutional buyers (QIBs) was subscribed close to 87 times and non-institutional investors 354 times.

If you’re a common investor, you’ve to look into the retail segment over-subscription, which in the case of Burger King’s IPO was 68 times. The higher the over-subscription, the lower are the chances for getting allotted to the shares of that IPO.

Who can apply for the IPOs?

The IPO applications are divided into three categories:

  1. Institutional or qualified institutional buyers (QIB)
  2. Non- Institutional Investors (NII) or High net worth investors (HNI)
  3. Retail institutional investors (RII)

Each category has a fixed division of share allocation. For example, Burger King IPO is a public issue of 7,44,91,524 equity shares. The issue offers 1,36,27,118 (18.29%) shares to retail individual investors, 4,04,23,729 (54.26%) shares to qualified institutional buyers, 2,04,40,677 (27.45%) shares to non-institutional investors.

This means that 54.26% of the total share was reserved for the QIB, 27.45% of the total share was reserved for NII, and 18.29% of the total share was reserved for the RII. This ISSUE STRUCTURE can change for different IPOs. However, the company has to specify the issue allocation in the IPO details.

initial public offering offer retail investors

IPO Share Allotment Process

1. The Process of IPO Share Allotment to QIB

For QIBs, the discretion of IPO shares allotment is done by merchant bankers. Further, in the case of over-subscription, the shares are allotted proportionately to the QIBs. For example, if a QIB applied for 10 lakh shares and the IPO got 5 times over-subscribed, then it will get only 2 lakh shares.

2. The process of IPO Share Allotment to Retail Investors

For the IPO application, retail investors are allowed to apply with a smaller worth between Rs 12-18k to Rs 2 lakhs. For example, in the case of Burge King IPO

  • Issue Price: Rs 59-60
  • Minimum order quantity: 250.

Therefore, if a retail investor wanted to apply for the Burger King shares at a bid of Rs 60 (Cut-off price), then the total application amount will be= Rs 60 * 250 = Rs 15,000. Further, he/she can apply for a maximum of Rs 2 lakhs. This means that for Burger King IPO, the RII can get a maximum of 13 lots (Each lot of 250 shares).

Now, let us understand how the process of IPO share allotment to retails investors actually happens. First of all, the host calculates the total number of demands. After calculating the demands, here are the two possible scenarios:

1. Demand is less than or equal to the shares offered

If demand is less than or equal to the offered retail proportion of the IPO shares, then full allotment will be made to the RII’s for all the valid bids.

2. Demand is more than the shares offered

If demand is greater than the allocation to the retail proportion of shares offered, then the maximum number of RII’s will be allotted a minimum bid lot. These are called maximum RII allottees and is calculated by dividing the total number of equity share available for the allotment to RII by the minimum bid lot.

Let us understand this with the help of a simple example:

Suppose there are 10 lakh shares offered to the retail investors and the minimum lot size is 50. Then, the maximum retail investors will receive the minimum bid lot = 10 lakhs/50 = 20,000. This means that 20,000 participants will receive at least 1 lot.

Quick Note: In the case of over-subscription, allocation lower than a minimum lot is not possible. If the minimum lot size is 50, you will not be allotted 30 shares. Anyone who is allotted the share will receive at least 50 shares.

In the case of over-subscription, again there are two possibilities:

A) In the case of a small over-subscription, the minimum lot is distributed among all participants. Then, the rest available shares in the retail portion will be distributed proportionately to the RIIs, who have bid for more than 1 lot.

Let’s say for the above example, 18,000 people applied for the allotment. However, among all the applicants, 5000 people applied for 2 lots (1 lot consists of 50 shares).

Hence, total no of shares applied = (13,000* 1lot) + (5,000* 2lot) = (13,000* 50) + (5,000* 100) = 11.5 lakhs

Here, we have oversubscription as the total shares offered to the retail investors is 10 lakhs. In such scenarios, the first 1 lot of 50 shares will be allotted to all 18,000 applicants. Then the remaining 1 lakh shares are allotted proportionately to all those who have applied for more than 1 lot.

Also read: Is it worth investing in IPOs?

B) In case the RII applications are greater than the maximum RII allottees (big over-subscription), then the allotted bid lot shall be determined on the basis of the draw of the lot i.e lottery.

Let’s say for the same example discussed above, 1 lakh people applied for the allotment. In such a scenario, who will get the allotment will be decided by the lottery. Nevertheless, the draw of lots is computerized and hence, there is no provision for cheating or partiality. Everyone has an equal chance to get the allotment.

Overall, in the case of oversubscription, the allotment totally depends on your luck.

3. Process of IPO Share Allotment to HNI

High net worth investors are those people who invest a large amount of money (greater than 2 lakhs) in an IPO. In case of oversubscription, HNIs are also allotted the shares proportionately. Further, many a time, the financial institutions provide funding to HNIs in order to invest it in IPOs.

That’s all. This is the process of IPO share allotment to retail investors, QIBs, and HNIs.

BONUS: How to maximize the chances of getting an IPO?

How to maximize the chances of getting an IPO

Many a time, the IPO you’ll be applying for will be over-subscribed. In such cases, even if you applied for a full quota of Rs 2 lakhs, still, there’s no guarantee that you’ll get even a single lot. Even in the same example of Burger King discussed above, it got over-subscribed 157 times.

Then what to do in such cases? Here are two basic pieces of advice to maximize the chance of IPO share allotment to retail investors. First, fill the application correctly, and second, apply at the cutoff price.

That’s all. I hope this post about the process of IPO share allotment to retail investors, QIBs, and HNIs is useful to you. If you have any questions regarding the allotment process, please comment below. I’ll be happy to help you out. Happy Investing.

IPO Performance 2020 cover

IPO Performance 2020: IPOs launched in 2020 & Top performing IPOs!

List of IPO Performance 2020: The year 2020 has been a very bizarre year for humanity. Even when we look back at the year being plagued by  COVID-19 it still confuses many even from a financial perspective. The Indian GDP hitting all-time lows, unemployment at an all-time high, companies struggling to function normally, yet despite all this, the stock markets have touched an all-time high. The cherry on top being the successful IPO’s of 2020. Today we look back at the IPO’s of 2020 and their performance in the market.

When the severity of the pandemic was first realized governments all around the world began to go into damage control. The measures started off with flight restrictions being imposed and eventually harsh complete lockdown. This set of panic selling in the market with many investors being caught off guard. Equity markets in the US, Europe, and Asia plunged to their lowest in over a decade. The BSE Sensex Index which tracks the 30 largest and most actively traded stocks listed on its exchange in India plummeted to its lowest in 3.3 years.

The year began with some exiting IPO’s with the likes of SBI Cards in March but the fallout due to the virus made it seem as if the year would be extremely dry for IPO’s. This put companies in a tough situation where they were faced with one of the most challenging years and on top of that the markets seemed unresponsive. This almost cut of raising funds through equities a favorable source of funds in comparison to debt.

Market Reaction

The markets however began to steadily recover in the second half of the year. This was mainly in response to the stimulus and assurance provided by the respective government of various countries. The Nifty 50 Index has gained over 80% from its 52-week low in March. This led to indices surging to new levels as they broke past previous market records. This rebound attracted investors and at the same time encouraged Indian firms to sell shares. All this as the Covid-19 cases kept increasing in the country.

Indian companies have managed to raise $33.3billion since the start of the year, according to Dealogic data. The IPO market saw many major companies launch initial public offerings raising nearly $3.5 billion this year. What was considered to be a dry year for IPO’s gained momentum to produce some of the best IPO’s in the recent past. IPOs like the Mazagon Dock Shipbuilders, Burger King, and Happiest Minds Technologies were subscribed 157 times, 156 times and 151 times respectively.

IPO Performance 2020: IPOs launched in 2020 & Top performing IPOs!

When the compare IPO’s to the last financial year, the IPOs have actually performed better. In the first quarter of 2020 (between April and June) only 19 companies listed on the BSE, as opposed to 39 in 2019. IPOs began returning to the market more companies listed on the stock markets. Between June and October 46 Indian firms listed on the bourse, compared with 27 a year ago.

To make things better all the IPO’s launched were priced at the upper end of the price band and companies managed to raise almost twice that of 2019 by September. The biggest winners however are the financial institutions that have underwritten the IPO’s.

IPO Performance 2020: IPOs launched in 2020 & Performance

Here is the list of IPOs launched this year and IPO Performance 2020.

CompanyListing DateOffer
Price
Price as of 31 Dec 20Overall Subscription% Change Over Issue Price
Route Mobile21-09-202350.001107.4074.3216.4%
Burger King14-12-202060.00175.60156192.67%
Happiest Minds17-09-2020166.00344.6515151.84%
Rossari Biotech23-07-2020425.00949.4079123.39%
Gland Pharma20-11-20201500.002351.002.0656.73%
Likhitha Infra15-10-2020120.00163.009.535.83%
Mazagon Dock12-10-2020145.00221.15157.452.52%
Chemcon01-10-2020340.00435.9014928.21%
CAMS05-10-20201230.001796.354746.04%
Mindspace REIT07-08-2020275.00329.661319.88%
Angel Broking05-10-2020306.00332.3545.67%
Equitas02-11-202033.0037.501.9513.63%
SBI Cards16-03-2020750.00850.0022.413.33%
UTI AMC12-10-2020554.00561.052.31.27%

How was this possible?

We still have to find an explanation as to why markets reacted this way. Coupled horrible economic reaction with some of the best financial results. One reason has been the hype caused due to the quick recovery of the markets where markets gained over 80%. It encouraged many retail investors to move back in and take advantage of the situation. This coupled with easily available cost-effective online trading platforms, increased awareness, with more time on idle cash in investors hands amidst the pandemic.

Burger King IPO

This has been a cause of concern. It raised questions on whether these IPO buys were based on the fundamentals or a reaction to the bullish trends of the market and due to the hype and media coverage. An example of this has been the Burger King IPO which almost doubled in value initially but eventually declined.

It is also important to note that 2019 was one of the worst years for IPO’s. The primary markets saw their worst performance in the four years preceding it. The 16 IPOs raised only 12,600 crores.

ALSO READ

Best Performing Largecap Stocks in 2020 - Holding any of these?

Closing Thoughts

It is always advisable to vary of making investments in times of bullish craze. Especially when it comes to IPO’s where extra caution is a must. It is very important that investments made into IPO’s must be made after careful examination of their fundamentals. The response in 2020 has surprisingly encouraged more companies to go for IPO’s.

According to Geojit Financial Services, 80 firms have approached SEBI for approvals for tapping the primary market. These firms are planning to raise equity capital totaling Rs 51,515 crore from the primary market.

Some of the notable IPO’s coming up in 2021 include; LIC, Kalyan Jewellers, MilkBasket, Grofers, Barbeque Nation, NSE, UTI Asset Management, ESAF Small Finance, CAMS, Studds Accessories, Lodha Developers, Aakash Education, Lite Bite Foods, Indian Railways Finance Corporation. Which IPO are you most excited for, in 2021?

Lastly, Wishing you a Happy New Year 2021!

Eligibility Criteria for an IPO going public norms

Eligibility Criteria for an IPO: Requirements for a company to Go Public!

List of Eligibility Criteria for an IPO in India: An Initial Public Offering( IPO) is a route through which a company raises funds through the market. The Indian markets saw 123companies opting for IPO’s in the FY 18-19 in order to get themselves listed on the country’s two primary exchanges, the BSE (Bombay Stock Exchange) and NSE ( National Stock Exchange).

But as open these exchanges may be for companies to apply and get listed on them there are still requirements a company has to meet in order to be considered eligible to be listed. Today, we take a look at the eligibility criteria for an IPO in India. Here, we’ll look into financial requirements and other legal & compaliance norms that a company has to meet for an IPO.

Eligibility Criteria for an IPO: What makes a company ready for an IPO?

1. Paid-up Capital

The paid-up capital of a company is the amount of money it receives from shareholders in exchange for shares in an IPO. according to the eligibility requirements, it is necessary that the company has a paid-up capital of at least 10 crores.

 In addition to this, it is also necessary that the capitalization (Issue Price * No. of equity shares post issue) of the company should not be less than 25 crores.

2. Offering to be made in IPO

If the minimum requirements are met then based on the post IPO equity share capital the minimum percentage to be offered in an IPO is decided.

  • If the post IPO equity share capital is less than Rs. 1600 crore then at least  25% of each class of equity shares must be offered.
  • If the post IPO equity share capital is more than Rs. 1600 crore but less than Rs. 4000 crore then a percentage of equity shares equivalent to Rs. 400 crore rupees must be offered.
  • If the post IPO equity share capital is more than Rs. 4000 crore then at least  10 percent of each class of equity shares must be offered.

Companies that do not meet (a) and satisfy (b) and (c)  are required to increase the public shareholding to at least 25% within 3 years of the securities being listed on the exchange.

3. Financial requirements of a company

  • The company must have a net worth (assets – liabilities) of at least 1crore for each of the last 3 years.
  • The company must have tangible assets of at least Rs. 3 crore in each of the 3 preceding years. Out of these assets, a maximum of 50% must be held in monetary assets. 
  • The average operating profit for each of the last three years must be at least Rs.15 crore.
  • If the company has changed its name in the last one year it must have earned at least 50% of the revenue  for the preceding full year from the activity indicated by the new name;
  • The existing paid-up share capital of the company must be fully paid or forfeited. This means that the company looking for an IPO should not have partly paid-up shares as a part of its equity.

4. Other requirements for the company

The company looking to get listed on a stock exchange must provide the annual reports of the 3 preceding financial years to the NSE. It can go ahead with the listing requirements if 

  • The company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).
  • The net worth of the company has not been wiped out by the accumulated losses resulting in negative net worth.
  • The company has not received any winding up petition admitted by a court.

4. Promoters/Directors Requirements

The next set of requirements are pertaining to the promoters, directors, selling shareholders of the company. Promoters here are people who have experience of a minimum of 3 years in the same line of business. In order to be considered a promoter, they also have to hold at least 20% of the post IPO equity share. This 20% can be held either individually or severally.

It is necessary that these promoters/directors/selling shareholders (henceforth individuals)

  • Do not have any disciplinary action taken against them by the SEBI. i.e. they should not have been debarred from accessing the markets. If these individuals are still serving their debarred period then the company cannot go ahead with the IPO with them as promoters/directors. But if the period of debarment is already over at the time of filing a draft offer prior to IPO then this restriction is not applicable.
  • If these individuals were prior to the IPO also promoters/ directors of another company that is debarred from accessing the markets then the company cannot go ahead with the IPO with them as promoters/ directors. But if the period of debarment is already over for the other company at the time of filing a draft offer prior to IPO then this restriction is not applicable.
  • If these individuals have been classified as wilful defaulters by any bank or financial institution or consortium then the company can not go ahead with the IPO with them as promoters/ directors. A willful defaulter is one who has not met repayment obligations like loans to these banks, financial institutions, etc.
  • It is necessary that none of the promoters/ directors have been categorized as a fugitive economic offender under the Fugitive Economic Offenders Act 2018.

Note on Statutory Lock-in:

It is also necessary to note that after the IPO the post-IPO paid-up capital of the promoters is subject to a one-year lock-in period.  After one year at least 20% of post-IPO paid-up capital must be locked in for at least 3 years (Since the IPO). This, however, is not applicable to venture capital funds or alternative investment funds (category I or category II) or a foreign venture capital investor that has invested in the company.

If the post IPO shareholding is less than 20 percent, alternate investment funds, foreign venture capital investors, scheduled commercial banks, public financial institutions, or IRDAI registered insurance companies may contribute for the purpose of meeting the shortfall. This contribution, however, is subject to a maximum of 10% post issue paid-up capital. This 20% statutory lock-in is not applicable if the issuer does not have any identifiable promoters.

5. Other factors that SEBI considers in an IPO Verification

The SEBI may also reject the draft offer document for the IPO for any of the following reasons.

  1. The ultimate promoters are unidentifiable;
  2. the purpose for which the funds are being raised is vague;
  3. The business model of the issuer is exaggerated, complex, or misleading, and the investors may be unable to assess risks associated with such business models;
  4. There is a sudden spurt in business before the filing of the draft offer document and replies to the clarification sought are not satisfactory; or
  5. Outstanding litigation that is so major that the issuer’s survival is dependent on the outcome of the pending litigation.

Also read: How to Invest in Share Market? A Beginner’s Guide!

Closing Thoughts

In this article, we discussed the Eligibility Criteria for an IPO in India. After going through the requirements one would realize that these requirements hover around the financial and litigations faced by the company its directors and promoters. These requirements are put in place to ensure quality companies are offered to investors.

These requirements also go a step further to protect investors by ensuring that the company and the people managing it are credible. These restrictions filter out financially weak companies and companies that are run by those that have the potential of swindling investors of their money. Most importantly the restrictions play an important role in ensuring the quality of the Indian stock markets.

LIC IPO 2020 - Are You Ready? | Expected IPO Dates & Details cover

LIC IPO 2020 – Are You Ready? | Expected IPO Dates & Details

LIC IPO 2020 Details: Earlier this year Finance Minister Nirmala Sitharam announced during the 2020-21 budget that the government would sell a part of its holdings in LIC through means of a public listing. Judging by the size of the company it could be the largest IPO the country has seen. The IPO of LIC may even be bigger than this expectation as the government also plans to incentivize the participation of retail investors by offering discounts on IPO price and issuing bonus shares.

Today we take a look at where the IPO stands as we almost near the end of 2020. In this LIC IPO article, we’ll discuss a brief history of IPO, why the government is going for LIC IPO, the Expected dates of LIC IPO, and much more. Let’s get started.

LIC India – Brief History

LIC was founded in the year 1956 and is wholly owned by the government. The state-owned life insurance and investor is the oldest and the largest in the country. The company is headquartered in Mumbai. There are currently 24 insurance companies operating in the country but none of them come close to LIC which holds a 69% market share. 

Moreover, As of 2019, Life Insurance Corporation of India is the biggest insurance company in India and had a total life fund of ₹28.3 trillion. The total value of sold policies in the year 2018-19 is ₹21.4 million. LIC settled 26 million claims in 2018–19. It has 290 million policyholders. The company is estimated to have assets worth Rs. 34 trillion.

The government had initially expected to offload a 10% stake. But later revised it to 25% as SEBI guidelines state that within 3 years of listing the minimum public shareholding should be at least 25%. The government is expected to incentivize retail investors with a 10% discount followed by a bonus issue. Of the shares offered 5% of the shares are expected to be reserved for retail investors and employees of LIC.

This IPO is expected to increase transparency in the affairs of the company as all financials will be required to be released to the shareholders. The company’s investments in bonds and equity are expected to come under greater scrutiny post the listing.

lic details financials

(Source: LIC Annual Report 2019-20)

When will the LIC IPO be held?

Currently, the LIC IPO stands delayed due to the COVID-19 pandemic and its occurrence depends on future market conditions. The pandemic has delayed a lot of the pre IPO work.

  • IPO Date: Yet to be Announced (Expected Q4 2020/21)
  • Price Band: —
  • Minimum Lot Size: —
  • Issue Size: —

The government still has to value its business and value its physical assets. Valuations of the company are expected to be completed in a short period of time but valuations of its physical assets which is the most crucial part of the pre IPO process may take from 6-8 months. This means that the IPO will not hit the markets this year. The earliest estimates state that the IPO may occur in the 4th quarter of 2020-21.

The LIC IPO 2020 will offer a good opportunity to retail investors and the company’s employees to become investors in one of the most reputed companies in India. Moreover, the IPO may also offer listing day gains to the shareholders. Further, whether LIC Policyholders will get any reserved quota in this IPO is yet to be decided.

Why has the government chosen to disinvest LIC?

The government plan to sell LIC is part of its Rs. 2.1 trillion disinvestment plan which was announced in the budget. The government expects to raise up to Rs. 90,000 crore from LIC and IDBI bank stake sales. Out of this, the government aims to raise Rs.20,000 cr. from sales of IDBI. As of September, the government has raised Rs 4.99 trillion through its disinvestment process. There is very little to rejoice about as the Narendra Modi government will have to use this to try and bridge the budget gap that has now been widened due to the coronavirus lockdown.

The LIC IPO will contribute significantly to the governments’ aims to meet its funding requirements Unfortunately the governments plan to disinvest its stake in LIC and other companies like Air India, BPCL, Concor have been delayed due to the pandemic. 

As the government is required to give up 25% of its stake in the company, the proposed IPO is estimated to be worth Rs.3 lac cr. This raises the problem as the market may not find sufficient buyers in India. In order to combat this, the government has decided to disinvest in tranches starting with 10% but this too may not be absorbed by the domestic markets. Hence, the government has looked into listing the company in overseas bourses in order to attract large investors. With the decision still in progress, the government has already received pitches from global stock exchanges.

Also read: ‘Vi’ – Vodafone-Idea Rebranding’s Reasons and Benefits!!

Closing Thoughts

The Price of the IPO is not known as the price is generally announced a week before the shares are opened up for the subscription. There is a good probability for oversubscription especially after considering that investors around the world and retail investors domestically have been left dry especially if they are IPO hungry as many IPO’s have been derailed.

The LIC listing could turn out to be bigger than expected and could turn LIC into India’s biggest companies in MCAP that can compete with the likes of Reliance and TCS.

What is an IPO Grey Market cover

What is an IPO Grey Market?

Understanding IPO Grey Market: If you’re actively involved in the market, you might have come across the terms White market, Black market, and surprisingly Grey market. A white market is one that is considered a legal, official, and authorized market for goods. A black market is a complete opposite which is illegal.

A grey market, on the other hand, stands for a market that exists with the knowledge of the owner of the goods but takes place outside the official channels of exchange. Today we have a closer look at the IPO grey market.

An IPO is a means for the company to raise capital for its growth and expansion needs. For the investor, it may be an opportunity to make a quick move into owning the shares of a fastly growing company. The purchase of these shares generally takes place through authorized mediums which is the stock market regulated by the SEBI.

What is an IPO Grey Market?

A successful IPO generally has all its shares subscribed or oversubscribed. In cases of oversubscription, the shares are allotted on a pro-rata, or in cases where the subscription is too high a lottery system is adopted. Here the chance of an allotment is too low. In these situations, investors turn to the grey market for prospective sellers who have also applied for allotment.

When the IPO gets sold through unofficial or unregulated markets it is known as a Grey IPO market.

What is an IPO Grey Market meme

The Grey Market generally involves a seller, buyer, and dealer.

  1. The Seller is the person who actually takes part in the application for shares with the motive of selling them in the grey market.
  2. The Dealer acts as a mediator between the buyer and the seller.
  3. The Buyer is the person who purchases the allotted or unallotted shares in the IPO from the grey market

It is necessary to note that there is no regulatory body governing the Grey Market. All the agreement transactions that take place are on the basis of mutual trust placed on each other.

Also read: What is the Process of IPO Share Allotment to Retail Investors?

Timeline of an IPO

When an investor attends the IPO through the white market, he/she applies and bids on the day the IPO opens. The process of allocation of shares generally takes around ten working days. It takes two weeks for the shares to get listed and start trading after the closure of the IPO.

how do ipo works

When an investor involves himself in the grey IPO market, the trading can start before the IPO begins and even after the allocation is done.

How does a grey market function?

In a grey market, the trading is done through a dealer or a mediator.

— Depending on the demand and conditions in the market the Grey Market Premium is set. The Grey Market Premium is the amount in excess of the offering price ( offering price is the price at which the company sells shares to investors in an IPO).

— The buyers who are willing to purchase it at this price make a deal with the mediators. The mediator, in turn, contacts the seller. The bids by the buyers can take place before the application even happens or even after their -allocation.

— The shares then get allocated to the seller. As soon as the shares are listed, on the direction of the buyer, the mediator may instruct the seller to transfer the shares to the buyer’s Demat account. Or he may request that the shares be sold in the stock market on the settlement price and transfer the sales proceeds to the buyer.

In the case where one of the party defaults there is no action that an individual can take as there is no regulatory body to monitor the transactions and all the transfers take place online.

Kostak and Kostak Price

In the grey market, it is possible for a person to have his ‘Application for the IPO’ be sold. The buyer will pay a price called the Kostak price in return for the seller promising his IPO application to the buyer. 

It does not matter if the application gets allocated or not. Irrespective the buyer will have to pay the Kostak price to the seller.

Benefits of taking part in the Grey market

The main benefit the buyers acquire is the increase in their chances of allocation of shares in cases of subscription. It generally takes up to 2 weeks from the closure till the shares get listed. The buyers in the Grey market bet on the fact that the prices will be higher on a listing day in comparison to the unofficial price (inclusive of the grey market premium) from the Grey market.

The Buyer can then sell this at a higher settlement price once the stocks are listed and make a profit. On the other hand, the buyer also faces the risk of a potential fall in the price which may result in a loss. 

Example: ABC company sets the offering price at Rs. 150per-share.

  1. Based on the demand for the shares of ABC the Grey market premium is set at Rs. 30.
  2. In this case, the total official price comes up to Rs 180.
  3. If the settlement price on the listing day is set at Rs.200 then the buyer is set to make a Rs. 20 profit.
  4. On the other hand, if the settlement price on the opening day is set at Rs. 160 then the buyer makes a loss of Rs. 20.

Taking into consideration Kostak.

In the same example as above for ABC company say the Kostak price is set at Rs.100 and a single lot size is of 100 shares. The application by the seller has been for one lot.

  1. In the above case say the price is set at Rs. 200.
  2. Here the seller will sell the lot and transfer the gain to the buyer’s account. The profit here is 20(200-180) x 100 =2000.
  3. From this amount Rs. 100 is deducted for the Kostak amount owed and the net gain is transferred to the buyer in exchange for the risk he took over.
  4. Similarly in the above example if the settlement price is at Rs.160 the buyer will face the loss of the price falling below the unofficial price and Rs 100 added from the Kostak price.

In the case of the seller not receiving an allotment for his application, the buyer will still have to pay him Rs. 100.

The buyer will also face a loss if the seller application does not get allocated. Hence in order to reduce the risk of non-allocation he creates an agreement with many sellers. Say if the IPO is oversubscribed by three times he then creates an agreement with multiple sellers he reduces the chances of loss because of Kostak price due to non-allocation.

Also read: How to Invest in Share Market? A Complete Beginner’s Guide

Closing Thoughts

The Grey market also serves the function of giving other investors an idea of the demand the shares of a company might have and the investor may adjust his application accordingly. The demand may also indicate a price at which the shares may trade once listed.

The Grey market may also be used by the company or the underwriter to push up the demand for the shares. Hence before using the Grey market as a reference, it should be noted that they are subject to manipulation. In addition, the stock market is a risky enough place. The grey market only adds to the risk due to the lack of a regulatory body and because the risk of trust cannot be quantified.

Offer for Sale (OFS) vs IPO - What's the difference?

Offer for Sale (OFS) vs IPO – What’s the difference?

Offer for Sale (OFS) vs IPO: An IPO has always been popular and preceded with loads of razzmatazz to impress the investors considering the stock. An investor in India may purchase a stock from the Primary market during such public offerings. Moreover, in other cases, they can take advantage of a situation while stock already trading in the secondary market. The SEBI in 2012 brought forward Offer for Sale (OFS). This allowed promoters to sell their shares directly in an exchange instead of waiting for a public offering.

Today we look at OFS and public offerings and their attributes. In this article, you’ll learn what exactly is OFS and how to differentiate Offer for Sale (OFS) vs IPO. Let’s get started.

What is an OFS and a Public Offering?

The OFS (Offer for Sale) was introduced to allow promoters to dilute their investment in a company through simpler means. Soon other shareholders who hold more than 10% in a company were also allowed to benefit from OFS. However, OFS is currently limited to only the top 200 companies (in terms of market capitalization).

stock market bse

Public Offering are of two types. The Initial Public Offering (IPO) and Follow on Public Offer (FPO). In a Public Offering, the company offers shares to investors in exchange for capital. A Public Offering is one of the means for a company to raise further capital.

Any company that fulfills the requirements of the SEBI can go public. IPO is the first time a company raises equity capital through means of public offering. After an IPO if the need arises for capital the company can still raise equity capital by means of FPO (Follow on Public Offer).

Also read: Is it worth investing in IPOs?

how do ipo works

Differences between Offer for Sale (OFS) vs IPO

Here are the most distinguishing features between Offer for Sale (OFS) vs IPO based on prominent factors:

1. Purpose

OFS (Offer for Sale): The purpose of an OFS is to provide shareholders holding more than 10% with an easy alternative to sell their stake in the company. This is especially used by government companies to reduce their holdings in a transparent channel through an exchange. None of the amount raised from investors is transferred to the company. It is instead transferred to the promoter to suit his needs in exchange for the ownership he had.

Public Offering: A company goes for IPO or an FPO to raise capital for its growth and expansion needs. The amount, in this case, moves from the investors to the company in exchange for ownership through shares.

2. Regulations

OFS (Offer for Sale): In an OFS, it is necessary for the company to inform the exchange 2 working days (bank) before the OFS takes place. The ability to indulge in an OFS is available only to the shareholders who hold more than 10% stake in the company. The OFS takes place on the trading day.

25% of the shares undergoing an OFS are reserved for mutual fund and insurance company purchases. However, no single bidder (Mutual Fund or Insurance Company) can get more than 25% of the shares in OFS. The OFS takes place in one trading day. 10% of the shares in OFS are saved for retail investors. The maximum cumulative bid a retail investor can make is 2 Lacs.

Public Offering: An IPO is generally lengthier and takes 3-10 days to take place. An IPO requires an Investment Bank to be appointed for underwriting the IPO. This is then followed by registration with the SEBI and drafting a prospectus. 35% of the shares issued are reserved for retail investors. The maximum amount that can be invested by a retail investor in a public offering is 2 Lacs.

3. Cost

OFS (Offer for Sale): The cost incurred by the promoter and shareholder in the company during an OFS is minimal. The only requirement is for the company to have the exchanges informed two days in advance. The investor, in this case, incurs only the regular transaction charges.

Public Offering: An IPO is preceded with a lot of advertisement activities to get the word out. The more obscure the company is the greater difficulty it will face and hence will be required to spend higher at this stage. Appointment of an underwriter and other SEBI formalities adds to the expenses.  

4. Allotment

OFS (Offer for Sale): The company is to provide the floor price before the OFS takes place. That is T-2 or T-1 with ‘T’ being the day of the OFS. The floor price is the price at and above which the investors are allowed to bid. The investors generally receive a discount of 5% on their bids. If the investors bid an amount below the floor price the bid gets rejected. The investor is allowed to change the specifics of the bid throughout the day. But no cancellation can be made.

In case of oversubscription two types of allotment may be made

  1. Single Clearing Price: Here al the investors are allocated shares at the same price but on pro-rata basis
  2. Multiple Clearing Price: In this case, the investors with higher bid are given preference. This goes on till the subscriptions are full.

Public Offer: The price band here is set by the investment bank prior to the IPO. In the case of oversubscription, the shares are allotted based on a pro-rata basis or automated lottery system.

5. Effect on the Balance Sheet

OFS (Offer for Sale): In the case of an OFS, there is no change in the Balance Sheet. Here the company does not raise any additional capital. The same number of shares that may have been with a respective promoter will be present now in the hands of the new shareholders via. OFS.

Public Offering: When shares are issued in a public offering the Balance Sheet of the company will now have increased share capital under Equity and Liabilities and the asset side Cash and Cash Equivalents will account for the cash coming in.

Quick Note: New to stocks? Want to learn how to make consistent returns your stock market investments? Check out this amazing stock investing course for beginners – How to pick winning stocks? Enroll now to begin your journey in the exciting world of stock market today!

Closing Thoughts

An OFS and Public offering both are attractive from an investor perspective. This is considering the discounts received in an OFS and investors making first movers advantage in the case of Public Offering. However, investors must still beware and consider investing only after a thorough study of the company. Both these methods might be used by promoters and venture capitalists as an escape strategy when they do not see future prospects in the company.

How to apply for an IPO with Zerodha Account cover

How to apply for an IPO with Zerodha Account?

In this article, you’ll find out the exact process to apply for an IPO with Zerodha account. However, before we begin, let me tell you my experience of applying to an IPO’s through Zerodha Account.

I’ve been using Zerodha for over four years now and been a happy customer. This discount broker has helped me save a lot of un-necessary brokerage charges if I had used any other full-service broker instead.

Anyways, there was one ‘cons’ of using Zerodha as a broker which bugged me in the past. And it was not having the facility for the customers to directly invest in Initial public offerings (IPOs) through the Zerodha dashboard.

Prior to this recently launched facility, the Zerodha customers have to use ASBA (Application Supported by blocked account) on their net banking portal to apply for IPOs. However, this was not a simple one-click process unlike what most of the other traditional big brokers like ICICI direct, HDFC sec, etc offered.

Although I am not a regular investor in IPO’s and only invest if I find the new offer a lot appealing. Nonetheless, having a simple process to invest gives flexibility whenever the opportunity arrives. Nonetheless, investors can apply for IPO’s directly within Zerodha console. And the best part is that the process is really simple.

Before you apply for an IPO

Obviously, you’ll need a Zerodha account if you want to apply to IPO’s with Zerodha. If you haven’t opened your account with Zerodha yet, here’s a detailed blog post on how to open your Zerodha Demat and trading account. Else, you can use this direct link to open your account.

Next, you need is a UPI account. And this is nothing new. These days everyone uses UPI to make fast and secure payments. For example, you can use apps like Phonepe, Bhip app, iMobile by ICICI, etc. Here is the link to the UPI apps and banks that allow IPO payment.

Also read: Zerodha Review –Discount Broker in India | Brokerage, Trading Platform & More

A Quick List of Upcoming IPO’s in 2020

StockDatePrice rangeMin. qty.
SBI Cards and Payment Services02 Mar 2020 - 05 Mar 2020750 - 75519
Antony Waste Handling Cell04 Mar 2020 - 06 Mar 2020295 - 30050
NSDLTo be announced--
Indian Railway Finance Corporation (IRFC)To be announced--
Barbeque NationTo be announced--
National Commodity & Derivatives Exchange (NCDEX)To be announced--
Life Insurance Corporation (LIC)To be announced--
Computer Age Management Services (CAMS)To be announced--
UTI Asset Management CompanyTo be announced--
Bajaj EnergyTo be announced--
Equitas Small Finance BankTo be announced--
Burger King IndiaTo be announced--
Chemcon Speciality ChemicalsTo be announced--

Steps to apply for an IPO with Zerodha Account

1. Login to Zerodha Console. Here’s the quick link.

2. On the top menu bar, go to Portfolio → IPO.

3. On this page, you can find the list of the active IPO’s.

1 sbi cards apply for an IPO with Zerodha Account zerodha console

4. Select the IPO that you wish to apply from the list of active IPOs and click on ‘Place bid’.

5. A pop-up screen will launch with IPO information. Here you can find details like issue date, issue price, market lot, discount (if any), minimum order quantity, etc.

2 sbi cards 1 apply for an IPO with Zerodha Account zerodha console

6. Next, enter your UPI id. Make sure to select the correct bank account.

3 sbi cards apply for an IPO with Zerodha Account zerodha console

7. Place your bid by entering the ‘Quantity’ and ‘Bid price’.

For the quantity, it should be minimum order quantity or the multiple of the lot size. For the ‘bid price’ you can enter any price between the offered issue price range. Anyways, for the maximum chances to get an allotment, it is recommended to use the ‘Cut-off’ price.

4 sbi cards apply for an IPO with Zerodha Account zerodha console

8. After filling the details, click on the ‘checkbox’ stating that you’ve read the prospectus and you’re are an eligible UPI bidder as per the applicable provisions of the SEBI.

9. Finally, recheck the details and click on ‘Submit’.

10. Besides, if you want to make any changes if the bidding later, simply click on ‘Bid details’ on the IPO page and make the changes.

5 sbi cards apply for an IPO with Zerodha Account zerodha console

Once submitted, you’ll receive the request to complete the “UPI Mandate” on your UPI app.

Please note that sometimes it may take a few hours to receive the UPI mandate request. Anyways, in my case, it was instantaneous and I received payment request on my iMobile ICICI app as soon as I submitted the application on the Zerodha Console. Accept the request once you receive it to complete the process.

ICICI Bank UPI Mandate

On accepting the payment request, your UPI app will block the IPO funds in your bank account till the date of allotment. You’ll receive an SMS from exchange once your application is placed successfully.

If you’re allotted the IPO shares, the amount will get debited from your account and shares will be credited in your demat account. On the contrary, if shares are not allotted, then blocked funds are released on the date of the payment. You can read more about the process of IPO share allotment to retail investors here.

That’s all. This is the exact step-by-step process to apply for an IPO with Zerodha Account.

Closing Thoughts

Zerodha is continuously innovating to provide a better investing and trading facility to its customer. The procedure to apply for IPO is a lot simpler now. You should definitely check it out. Further, comment below if you face any difficulty in applying for IPO using Zerodha account. Happy Investing!

Is it worth investing in IPOs

Is it worth investing in IPOs?

Is it worth investing in IPOs?: Everyone gets excited about new things. The new clothes, new bike, new car, new job, etc always attract the public. Investors are also like ordinary people and hence they are also tempted by the word ‘NEW’. Be it new technology, a new industry or a new company.

In this post, we are going to discuss whether it’s worth investing in these new companies which enter the market for the first time.

What is an Initial Public Offering (IPO)?

When a privately held company offers its shares for the first time to the public, then it is called Initial public offering (IPO). It is a way for companies to enter the stock market. Until a company offers IPO, the public is not able to buy the company’s share.

Before the IPO of a company, its shareholders include limited people like founders, co-founders, relatives, friends and initial investors (like an angel investor, venture capitalist etc). However, after the company offers its IPO, anyone (public, institutional investors, mutual funds etc) can buy the shares of the company.

A few of the famous IPOs of 2017 are BSE, CDSL, Avenue supermarket (Dmart), SBI Life insurance etc.

how do ipo works

What does ‘Going public’ mean?

Going public means that a ‘privately owned company’ is conducting an initial public offer (IPO) to the public in order to enter the stock market as a ‘public company’.

In short, when a company is offering an IPO, it is said that the company is going public.

Also read: #27 Key terms in share market that you should know

Why do companies conduct IPOs?

There can be a number of reasons why any company offer an IPO. Here are a few of the top ones:

  1. For a new project or expansion plan of the company
  2. To raise capital (financial benefit)
  3. For carrying out new research and development works
  4. To fund capital expenditures
  5. To pay off the existing debts or reduce the debt burden
  6. For a new acquisition
  7. To create public awareness of the company
  8. For the group of initial investors desiring to exit the company by selling their stakes to the public.

In addition, IPOs generate lots of publicity for the company and hence helps in creating market exposure, indirect exposure, and brand equity.

Why are the disadvantages of conducting IPOs?

Here are the few disadvantages for the companies who offer their IPOs:

  1. Public disclosure: When a privately held company offers its IPO, it has to disclose a number of documents to the public like its financials, promoters list, debts etc.
  2. Entering a regulated market: Indian stock market is highly regulated by Securities and exchange board of India (SEBI) and hence the newly public company has to play by the rules of SEBI. There has been a number of cases of companies getting delisted by SEBI as they do not follow the norms of the market.
  3. Market pressure: The companies performance are closely scrutinized by the public and investors. Hence, the company’s management is consistently is pressure. Sometimes the companies focus more on short-term performance over long-term due to market pressure.
  4. Loss of control: As the shares are distributed among the investors, the decision making power is now in the hands of the shareholders.
  5. Failing of IPO: Many companies fail to attract investors during its IPO and the offered shares might remain under-subscribed. In such a scenario, the company is not able to raise enough capital that is expected to achieve the goal of IPO.

Why do many IPOs come in the bull market?

bull market ipo

The promoters of the company sell their stakes only when they are confident of getting a good price. This generally happens only in a bull market.

During a bull market, the owners of the company can raise enough fund for their cause as the public is optimistic. People are willing to pay good prices to buy shares of the company.

Why do not many IPOs come in bear market? During bear market, people are pessimistic and are not willing to pay a good price for the shares of a newly public company. The owners feel that they won’t be getting the right price for their shares and hence most owners do not introduce their IPO during a bear market

Also read: What is Bull and Bear market? Stock Market Basics

Who gets benefits from IPOs?

There is a common myth that the company’s shares are undervalued during its IPO and hence the early subscribers of the IPO feel that they have made a very good deal.

However, IPOs are the by-products of a bull market and they are generally over-priced.

The owner and the initial investors of the company (like angel investors, venture capitalist etc) are the ones who get maximum profits during an IPO as they are able to sell the shares at a good price.

Why are people excited about IPOs?

There are a few common reasons why people are excited about IPOs. They are:

  1. Under-pricing myth: When a company announces its IPO, it’s presumed that the offered price is less than its true value. People are excited about the fact that they are the first one to buy the stock and will be rewarded handsomely when the company’s true price will be realized by the market. However, it’s very rare that the owners will be willingly underpricing the shares.
  2. Herd-mentality: As everyone they know will be applying for the IPO, people do not want to be missed out.
  3. Overhype by media/ underwriters: Media gets a high advertisement fee for the promotion of the IPO. Moreover, IPOs are intentionally overhyped by the investment banker and the underwriters. They make sure that these IPO’s get enough attention as this is their job to promote and sell the shares.
  4. ‘The Next …’ strategy: People compare the upcoming IPO with the Winners in the same industry and conclude that it will perform the same. ‘The next Eicher motors’, ‘The next symphony’, ‘The next Infosys’ etc. This ‘Next’ philosophy makes a lot of people excited about the upcoming IPO.

Is it worth investing in IPOs?

A lot of investors have made huge wealth by investing in IPOs. Had you invested in ‘INFOSYS’ when it got listed, you might have been sitting at a huge pile of wealth today.

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However, the performance of the majority of the IPOs in the Indian stock market is under-satisfactory. The number of IPOs underperforming in long-term are comparatively quite larger than the number of IPOs that performs well in the market.

Further, IPOs are never priced in the benefits of the public.

In the case where few IPOs are fairly priced, it gets a lot of demand from the public during its offerings and gets over-subscribed. Moreover, it soon becomes over-priced once it starts trading in the market. A few IPOs might give you a good return in the 1-2 months of its listing as they are introduced in the bull market, however, in the long run, their performance is quite poor.

If you are willing to invest in the long-term, then be cautious about investing in IPOs. Focus on the quality of the company, not the hype generated by media or underwriters.

Nevertheless, you can always pick these companies from the secondary market once the hype is over and the price is attractive. There are over 5,500 companies listed in Indian stock market. It’s better if you pick a good one among them than picking the upcoming hyped (5,500+1)th company.

New to the stock market? Confused where to begin? Here is an online video crash-course for beginners: How to pick winning stocks?

Footnotes / References:

  1. Upcoming IPOs in India (2018)
  2. IPOs in 2017: A third of stocks listed this year trading below issue share price
  3. Live Mint- Why 2016 is the year of IPOs
  4. Indian IPO market to pick up pace in coming months: EY
  5. NSE: Past issue IPO