It is raining IPOs (Initial Public Offerings) on Dalal Street with several small- and medium-sized companies going public this year. Big names such as Honasa Consumer IPO, the parent company of Mamaearth, and Cello World are about to make their debuts on the bourses next week. To understand the IPO concept better, Zee Biz has curated all the significant details related to IPOs.
What is an IPO?
An IPO is a way for a company to go public. In this process, the company offers shares to the public in a new stock issuance for the first time.
Explaining the concept in simple terms, Vaibhav Kaushik, Research Analyst, GCL Broking, said, “IPO is when a company’s shares are offered to the public for the first time.”
Why do companies go public?
According to Amar Ranu, Head – Investment Products & Insights, Anand Rathi Shares, and Stock Brokers, companies go public for the following reasons:
-Getting access to capital for various purposes like expanding operations, paying off debt, or investing in research and development.
-For creating liquidity for existing shareholders.
-To increase the visibility and credibility of the company.
-Due to regulatory compliance.
Echoing similar views, CA Manish Mishra, a virtual CFO and growth advisor, said that going public lets groups elevate considerable capital by selling shares to the general public, enabling them to fund increases, research, and development.
Mishra added that going public also increases a company’s visibility.
Common terminologies used in IPO:
-Anchor lock-in: Anchor lock-in is a duration through which optimistic pre-IPO traders, known as anchor buyers, are prohibited from selling their shares after the IPO. This provides balance to the stock’s initial buying and selling days.
-Book building: The method by which an underwriter establishes the price at which shares in an IPO must be sold is known as book building. The underwriter must solicit bids from different institutional investors, including fund managers, among others, to carry out the price discovery process.
-Draft Red Herring Prospectus (DRHP): A document that is prepared to introduce a new business or product to a potential investor.
There are seven easy steps to describe the process of an IPO in India:
Step 1: Hiring underwriters or investment banks Generally, a company appoints two or more investment banks.
Step 2: Registration for the IPO: The company files a Draft Red Herring Prospectus as per the company’s act.
Step 3: Verification by market regulator- Securities and Exchange Board of India (SEBI). Once the document is compliant with the guidelines set, SEBI allows the company to carry on with the IPO.
Step 4: Application to stock exchanges where it plans to float the issue.
Step 5: Roadshow and advertisement for the promotion of an IPO.
Step 6: Fixing the price of the IPO. The company here has the option to either go for a fixed-priced IPO or a book building issue.
Step 7: Once the price has been finalised, the company and the underwriters will work together to determine how many shares are to be allotted to each investor. This is done within three days of the last date of bidding.
How should investors decide whether to apply for an IPO?
Experts suggest investors keep the following factors in mind before applying for an IPO.
-They must assess growth ability and aggressive function within the market.
-Read the prospectus of the company.
-Understand financials and valuation.
-Study the management
-Understand the objective of the IPO
-Decide the investment horizon
Mishra cautioned the investors that participating in an IPO may be risky, as proportion fees may be risky at some stage in the early buying and selling days.
Who can apply for an IPO?
-Anyone above the age of 18 years.
-Retail investors, institutional investors, high net worth individuals (HNIs), and qualified institutional buyers (QIBs).
-Individual traders, business investors, or even employees of the business enterprise can participate.
Why should one invest in an IPO?
As per experts, the following are the pros and cons of applying for an IPO:
-Investing in groups with boom capability at an early stage
-Potential for capital appreciation
-Lack of Historical Data
-Stocks can be priced above their intrinsic value.
Kaushik warns that investors should consider the fact that such investments are highly volatile and prone to high risks.