IPOs are becoming more popular among Indian firms due to the perception that global institutional investors are interested in investing in tech firms. IPOs are discussed in more detail below.
What is IPO?
Initial Public Offerings (IPOs) transform privately held companies into public companies. Intelligent investors can also benefit from this process by earning handsome returns on their investments.
An informed investor can benefit from investing in IPOs. There are, however, some IPOs that are not suitable investments for investors. IPOs come with both benefits and risks, and the basics should be understood before you jump on the bandwagon.
Meaning of IPO
Using an initial public offering (IPO), a private company or corporation can become public by selling a portion of its stake to investors.
The purpose of an IPO is typically to monetise existing stakeholder investments, raise capital for the future, or facilitate easy trading of existing assets.
IPOs are generally issued to infuse the firm with new equity capital, promote easy trading of existing assets, or raise money for the future.
Individuals with a high net worth, institutional investors, and the public access the prospectus. In a prospectus, the proposed offerings are described in detail.
IPOs allow a firm’s shares to be listed on the open market and can be traded freely. The stock exchange imposes a minimum free float on the claims in absolute terms and a proportion of the total equity capital.
The types of IPOs
IPOs fall into two main categories. They include:
- Fixed Price Offering
Companies that set a fixed price for their initial public offering are known as fixed price IPOs. Whenever a company decides to make its stocks public, investors are notified of their costs.
Upon closing the issue, it will be possible to determine the demand for the stocks in the market. Those who participate in this IPO must make sure that they pay the total price of the shares when they apply.
- Book Building Offering
When a company launches an IPO, it offers investors a 20% price band on the stock. After the price band is determined, investors may bid on the shares.
In this case, investors specify how many claims they intend to purchase and the amount per share they will be willing to pay.
Stock prices are referred to as floor and cap prices, depending on how low or high they are. An investor’s bid determines the cost of the shares in the end.
What are the steps to investing in an IPO?
To achieve wealth, an investor needs to follow specific steps. Here are those steps:
Choosing an IPO is the first step an investor needs to take. New investors may not have the expertise that the existing ones have, making it intimidating for them. Upon reading the prospectus of companies initiating IPOs, investors can form an opinion.
Investors can better understand the business plan and the company’s objective by reading the prospectus. The next step should be considered once the investor has made his decision.
Having decided that he intends to invest in an IPO, the next step is to arrange the funding. Savings can be used to purchase a company’s shares.
Banks and Non-Banking Financial Organizations (NBFCs) offer loans at a set interest rate to investors who do not have enough savings.
- Opening a Demat-cum-trading account
To apply for an IPO, you need a Demat account. Providing investors with an electronic storage system for shares and financial securities is the role of a Demat account. Aadhaar, PAN, address, and identity proof are required to open a Demat account.
- The application process
Through his bank account or trading account, an investor can apply for an IPO. You can bunch your Demat, trading, and bank accounts with some financial organisations.
The investor will need to familiarise himself with the ASBA facility after he has created the Demat-cum-trading account. This is a requirement for all IPO applicants, and banks can arrest funds from an applicant’s bank account through the ASBA application.
As part of the IPO application process, the ASBA application forms are electronic and physical. To avail of this facility, you cannot use a cheque or a demand draft.
The investor needs to provide his Demat account information, PAN number, bidding information, and banking information in the application form.
As part of an IPO application, an investor must make a bid. According to the company’s prospectus, lot sizes are determined. An IPO lot size refers to the minimum number of shares an investor must apply for to participate.
Investors are required to offer within a price range that has been set. Investors may revise their bids during an IPO, but they must block the necessary funds before bidding. Amounts in banks that are awaiting allotment earn interest until they are allotted.
In many cases, the number of shares available on the secondary market can exceed their demand. Also, one can get less than ANOTHER had demanded if fewer shares are awarded. At this point, banks either release all or part of the money arrested.
Nevertheless, if a potential investor gets a full allotment, he would receive a CAN (Confirmatory Allotment Note) within six working days. The company credits the investor’s Demat account with the shares after they have been allotted.
To list the stocks in the stock market, the investor must follow the steps mentioned above successfully. After the shares are finalised, the process usually takes seven days to complete.
IPO trend in India
The startup sector in India has witnessed several IPOs in 2021, including that of One97 Communications (Paytm), the largest ever IPO of an Indian company with an offering size of Rs 18,300 crore. Zomato, Policy Bazaar, PharmEasy and Nykaa, Tarsons are among the other significant IPOs announced in 2021.
This article examines the trend behind IPOs in India and how the regulatory framework has evolved to ease the process for startups to list.
What is the attraction of IPOs for tech startups?
The perception that global institutional investors are eager to invest in India’s tech companies is a crucial factor driving Indian companies to go public.
In a recent press conference, Vijay Shekhar Sharma, CEO of Paytm, stated that international investors are interested in investing in Indian startups both publicly and privately.
In addition, companies are looking to leverage the stock market’s recovery to secure enough capital for expansion plans not to require further investment from existing shareholders as they prefer to raise money through IPOs.
In October, the Sensex crossed the 61,000 mark for the first time, and it is now trading 40 per cent higher than its year-ago level.
During this year’s public offering of tech companies, how has the market responded?
Paytm’s recent IPO was subscribed more than 1.8 times, but FSN E-Commerce Ventures’s (Nykaa’s parent company) was subscribed more than 82 times. An IPO price of Rs 1,125 was 79.4% higher than the listing price of the profit-making cosmetic company.
On the final day of the IPO auction on November 3, the offering of Policybazaar’s parent company, PB Fintech, was oversubscribed by 16.6 times.
How should investors evaluate the IPOs on offer?
Researchers say that startup businesses should not be considered a single entity by investors. According to a leading brokerage firm’s head of research, startups based on technology should be assessed from their business opportunity and potential.
Investors should carefully evaluate fintech companies going public since banks have upgraded their digital presence and implemented new technologies.
“Investors should exercise caution when considering companies that cannot clearly define their business models and keep changing their focus,” said a senior official with a financial services company.
Are startups more likely to go public because of the regulatory environment?
It has been made easier for startups to be listed on Indian exchanges thanks to several changes implemented by the Securities and Exchange Board of India (SEBI).
SEBI has reduced from two years to one year when early-stage investors must hold 25 per cent of the pre-issue capital.
The SEBI also amended regulations prohibiting startups from making discretionary allotments in the IPO process. Startups may now allocate 20% of their issue size to an investor under fair market value for a 30-day lock-in period.
As a conclusion
In general, Initial Public Offerings benefit a company by increasing exposure and prestige and enlarging its equity base.
While allowing investors to earn handsome returns, it also allows them to invest wisely. However, to identify the opportunities, one must remain on top of the latest IPOs and analyse financial metrics.
edited and proofread by nikita sharma