- Date : 26/01/2020
- Read: 4 mins
Investing in IPOs can bring financial success in the future. But before doing so, here are some things you should know.
All about IPOs in India
You may have heard about the bumper listing of Avenue Supermarket—the company that runs D-Mart stores around the country. Its stock price jumped 102% on the first day after getting listed. Shares of Avenue Supermarket were trading at over Rs. 600, despite the issue price being just Rs. 299.This is just one of the many Initial Public Offerings (IPOs) in the country.
Here is all you need to know about IPOs in India:
What is IPO?
First question first, what is IPO? Every company needs money to grow and expand. They do this by borrowing or by issuing shares. If the company decides to opt for the second route of issuing shares, it must invite public investors to buy its shares. This is its first public invitation in the stock market and is called the Initial Public Offering (IPO).
When you buy such shares, you make an IPO investment. You get ownership in the company, proportionate to the value of your shares. These shares then get listed on the stock exchange. The stock exchange is where you can sell your existing shares in the company or buy more.
Related: What is ASBA? All you need to know
How does an IPO work?
The Securities and Exchange Board of India (SEBI) regulates the entire process of investment via an IPO in India. A company intending to issue shares through IPOs first registers with SEBI. SEBI scrutinises the documents submitted, and only then approves it. While awaiting the approval, the company prepares its prospectus, in which it mentions that SEBI’s approval is pending.
Once approved, the company decides two things; it fixes the price of the share and the number of shares it plans to issue. There are two types of IPO issues: fixed price and book building. In the former, the company decides the price of the share in advance. In the latter, the company gives you a range of prices. You then need to bid for shares within this range.
After deciding on the type of issue, the company makes the shares available to the public. Investors then submit applications showcasing their interest in buying the shares. Once the company gets subscriptions from the public, it proceeds to allot the shares.
The last step in this process involves listing it on the stock market. After the shares are issued to investors in the primary market, they get listed in the secondary market. Trade in these shares, happens daily.
How to invest in an IPO?
Before jumping into the dynamic market, you must do the groundwork and understand how the IPO process in India works. The prospectus issued by the company is an invitation to the public, stating financial details. These include the money that the company intends to raise and the type of shares. The prospectus also outlines how the company plans to use the IPO money, and expand its business. This helps you make an informed decision.
The process to buy shares
- Get a physical application form from a broker, distributor, or bank branch. Online applications are also available
- Fill up the form with various details like personal, bank and demat account details
- It also asks for your total investment amount
- Share allotments happen within 10 days from the closing date of the offer.
When you subscribe to such shares, you become one of the first shareholders of the company. So, you often get shares at lower prices. If the company flourishes, its share price rises. You, thus, could get a good deal.
Risk is an integral part of stock markets. Your returns depend on the growth potential of the company. If the company fails to grow over time, you might lose your money. Unlisted companies do not have to publish their financial reports and statements, so you cannot check their past performance while subscribing to their shares.
Of course, the prospectus provides the company’s track record. One can use that to carry out due diligence on projected performance and figure if the IPO investment is in line with your expectations. However, past data usually does guarantee future performance.
The bottom line
IPO investment has its own risks and rewards. But do not invest blindly; read the prospectus carefully. You would then get an idea about the company’s potential.