IPO Investing

Posted Nov 9, 2022

By Shlok Kamat 4 min read

Introduction

Had you invested ₹10,000 in Infosys’ 1993 IPO, you would have a little over 2 crores today. A mere 100 shares would have made you a crorepati. The shares were offered at a price of ₹95 but started trading at a significant premium at 145 a share. The listing gain would have been mouthwatering for an average investor to cash out. It was only the disciplined investor who was rewarded over the long term. With IPOs flooding the equity markets, investors are spoilt for choice. Knowing which is the best IPO to buy can be tricky. Investors are on a quest to find the next Infosys.

What is an IPO?

An IPO is an offer in which a company decides to go public by registering itself and listing on the stock exchanges. There can be multiple reasons that a company decides to go public; these include but are not limited to

Raise money for CAPEX purposes
Raise money to prepay/repay outstanding debt (loans)
Facilitate current investors to exit the company
Going public in an IPO can provide companies with a tremendous amount of publicity
Companies may want the standing and gravitas that often come with being a public company, which may help them secure better terms from lenders

How to analyse an IPO

Behind every IPO, there is a company that has a legitimate business. When you buy shares, you buy a part of that business. Analysing a business may be complex, but having a basic outline to analyse IPOs is a must for investors seeking to invest in them. Following are the things to take notice of while exploring IPOs

Type of Issue
Reason for IPO
Performance of the company
Subscription of the issue

Type of Issue

When a company issues its shares to the public, there are two significant issues, one being Offer for Sale (OFS) and the other one being Fresh Issue. During an OFS, existing company shareholders sell their shares, and no proceeds go to the company. On the other hand, a fresh issue results in all proceeds going to the company. These proceeds are further used to finance the post-IPO plans of the company.

Reason for IPO

One can get an excellent idea about the company, its business model, and the reasons for its IPO from the Red Herring Prospectus. The Draft Red Herring Prospectus, or DRHP, is filed by a company to SEBI when it intends to raise public money by selling company shares to investors. DRHP also elaborates how the company plans to use the funds raised and the possible risks for investors. Thus, investors must go through the DRHP before investing in an IPO.

Performance of the Company

The DHRP also has a dedicated section for performance-related matters. It has the company’s previous income statements, balance sheets, and cash flow statements. These can be used to evaluate the financial health of the company as well as make an informed decision before investing in the company.

Subscription of the Issue

An IPO window is usually open between 4-7 days. This is the duration where investors can bid for the shares. Every IPO has a certain quota reserved for different categories of investors. These divisions are based on the total application amount. Retail investors have an application amount of under ₹2,00,000 (2 lakhs). HNI or High Net Individuals are applications greater than ₹2 lakh, and QIB or Qualified Institutional Buyers are Fund houses, Marquee Investment Companies, pension funds, etc. A retail investor can look for the subscription of QIBs as a crude indication of the success of the IPO.

Bottom Line

The stock market is all about timing – when you enter and exit the market. Sometimes, the timing is correct during the IPO; sometimes, it’s better to wait. Make a decision depending on how much risk can you take and how good the fundamentals of the business are concerning its valuation. Be sceptical. When it comes to the IPO market, a suspicious and informed investor is likely to fare better.

FAQs

How can one apply through the HNI category?

To apply via the HNI category, one has to id for shares totalling more than ₹2,00,000. This can be done via your broker.

What is the shareholder quota in an IPO?

In some public issues, the company going public keeps a special reservation for existing shareholders of the group or holding company. If you apply for the IPO in the shareholder category, the likelihood of allotment can be higher since most other applicants apply in the retail category. You need to hold 1 share of the parent company to be eligible for the shareholder quota.

What is ASBA?

Applications Supported by Blocked Amount (ASBA) is a method developed by SEBI to block the funds for Initial Public Offer (IPO), Rights issue, Follow-on Public Offer (FPO) etc., applications. In ASBA, an IPO applicant’s bank account doesn’t get debited until they receive the allotment of shares.