In this episode, we explain the process of IPO Investing and how you can gain from it.
Initial Public Offering (IPO) is the way an organization goes public, lists itself on the exchanges, and sells share to raise capital. By participating in an IPO, investors can buy shares of companies before they trade on stock exchanges. However, in case of an IPO, an investor will have to buy shares directly from the companies.
Investors can apply for shares under the following categories:
- Retail Individual Investor: Investors can not apply for more than Rs 2 lakh in an IPO. Retail Individual investors have an allocation of 35% of shares of the total issue size in Book Build IPO's.
- High Networth Individual (HNI): If retail investor applies more than Rs 2,00,000 /- of shares in an IPO, they are considered as HNI.
- Non-institutional bidders: Individual investors, NRIs, companies, trusts etc who bid for more than Rs 2 lakh are known as Non-institutional bidders. They need not to register with SEBI like RIIs. Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO's.
- Qualified Institutional Bidders (QIBs): Financial Institutions, Banks, FIIs and Mutual Funds who are registered with SEBI are called QIBs. They usually apply in very high quantities.
First steps of offering an IPO
To begin with, a company hires an investment bank to handle the IPO. The investment bank and the company work out the financial details of the IPO in the underwriting agreement. Later, they file the registration statement with SEBI along with the underwriting agreement. SEBI scrutinizes the disclosed information and if found right, it allots a date to announce the IPO.
Reasons for offering an IPO
- A company offers an IPO to raise money. Every company needs capital in order to expand, improve their business or infrastructure, or to repay loans etc. Trading stocks in the open market leads to increased liquidity.
- A company going public means that the brand has gained enough success to get listed in the stock exchanges. It is a matter of credibility and pride for any company.
- In a demanding market, a public company can always issue more stocks. This will pave the way to acquisitions and mergers as the stocks can be issued as a part of the deal.
The IPO process
- Watch out for media alerts
When a company comes out with an IPO, it usually advertises about it extensively to ensure that the issue is a success. If you are keen to invest via this channel, you should look out for related advertisements. However, it is very important that before applying for any IPO investment, an individual goes through the company's financial statements, its track record and management's future plans.
- Manual Application
An individual needs to fill up the application form which is easily available with the brokers or any agent who sells mutual funds. The forms come free of cost. Fill up the form as per the directions mentioned in the form. Also, attach a cheque for the amount of shares you wish to buy. There are a minimum number of shares one needs to buy for specific issues, which is specified in the application form. Submit the form within the mentioned time frame.
- Online Option
An individual can also apply for an IPO online through ASBA (Applications Supported by Blocked Amount). This is a process developed by SEBI while applying for an IPO. Through ASBA, the IPO applicant's money doesn't get debited until shares are allotted to them. An individual can login to his netbanking account and apply for IPOs directly.
Scores of companies launch IPOs. However, there is no guarantee that it will perform well. And so, as an investor, you should thoroughly check and evaluate a company, its financials, its future plans before investing in its IPO.
Things you should consider before investing
- Background of the Promoter/Company: You should check if there are any criminal proceedings against the company or its promoters, or if the company has defaulted in the past or if there has been any legal complaint against the company or its promoters.
- Performance of the company in the past: Check how long the company has been into the business; evaluate its growth rate over the years.
- Financial health of the company: Go through the changes made by the company in accounting policies and be cautious of bloated profits.
- Earnings Per Share (EPS)
EPS is an indicator of the company's profitability. EPS is calculated by dividing the net earnings by the number of shares in the issue. Investors also tend to calculate the future EPS in order to get an idea how much profit they will earn in the future.
- Price to Earnings Ratio (P/E)
The P/E ratio indicates how the company is priced - whether it is cheap or expensive. It is calculated by dividing the share price of the company by it earnings per share. If the P/E ratio of a particular company is higher as compared to other companies in the same sector, it means that the shares are overvalued.
- Return on Capital
Return on capital is the profitability ratio of the company. If the return on capital of a particular company is higher, it means that the company is growing and is successful. This ratio is calculated by dividing the EBIT (Earnings Before Interest and Tax) by capital employed.
Objects of the Issue
Check where the money raised from investors will be utilized. Find out whether it will be used for any of the following: Diversification of business, acquisition, open new branches, or for fund subsidiaries.
Recent IPO Performance
|#||Issue date||Issuer Company||Issue Size INR||Offer price INR||Current Market Price INR||Gain / Loss|
|1||17-Jul-17||Salasar Techno Engineering Ltd||36||108||300||178%|
|2||21-Jun-17||Central Depository Services (India) Limited||524||149||371||149%|
|3||24-Aug-17||Apex Frozen Foods Ltd||152||175||426||143%|
|4||19-May-17||PSP Projects Ltd||212||210||429||104%|
|5||8-Sep-17||Dixon Technologies (India) Limited||600||1,766||2,704||53%|
|6||16-Jun-17||Tejas Networks Limited||327||257||383||49%|
|7||11-May-17||Housing and Urban Development Corporation Ltd||1,224||60||87||45%|
|8||10-Oct-17||MAS Financial Services Ltd||460||459||646||41%|
|9||15-Sep-17||Capacit'e Infraprojects Limited||400||250||349||40%|
|10||3-Aug-17||Cochin Shipyard Ltd||1,468||432||576||33%|
|11||26-Sep-17||Prataap Snacks Limited||482||938||1,172||25%|
|12||6-Oct-17||Godrej Agrovet Limited||1,157||460||568||23%|
|13||19-Sep-17||ICICI Lombard General Insurance Company Ltd||5,701||661||681||3%|
|14||19-May-17||IndiGrid InvIT Fund||2,250||100||98||-2%|
|15||20-Jun-17||Eris Lifesciences Limited||1,741||603||580||-4%|
|16||2-Aug-17||Security and Intelligence Services (India) Ltd||362||815||782||-4%|
|17||11-Oct-17||Indian Energy Exchange Ltd||1,001||1,650||1,563||-5%|
|18||5-May-17||IRB InvIT Fund||5,921||102||95||-7%|
|19||22-Sep-17||SBI Life Insurance Company Ltd||8,400||700||643||-8%|
|20||13-Oct-17||General Insurance Corporation of India||11,373||912||837||-8%|
|22||8-Sep-17||Bharat Road Network Limited||601||205||181||-12%|
|23||23-Jun-17||GTPL Hathway Limited||485||170||141||-17%|
|24||28-Apr-17||S Chand and Company Ltd||729||670||488||-27%|
Mr. Himanshu Jain is the Chief Executive Officer of IIFL Wealth Finance Limited. A Career Banker with more than 15 years of experience of setting up & scaling the NBFC Lending Business including defining Products & Governance structure. A lending banker covering onshore India, worked with IL&FS, Citigroup, Merrill Lynch and Morgan Stanley.
Ask an Expert
What is an Initial Public Offer (IPO)?
IPO or Initial Public Offer is a way for companies to raise money from investors for their business activities or selling securities to the public in the primary stock market. Here investors can buy shares of companies directly from the companies at issue price.
What is the role of Lead Managers in an IPO?
Companies going public appoint financial institutions as Lead Managers. Companies can assign more than one Lead Manager to manage large IPOs. Lead Managers are known as Book Running Lead Manager and Co Book Running Lead Managers.
Lead Managers initiate the IPO processing, assist company in road shows, create draft offer document and get it approved by SEBI and stock exchanges, and help companies to list shares at stock market.
What is Follow on public offering or FPO?
When an already listed company issues fresh shares to public, it is called Follow on public offering (FPO). FPOs are popular means for companies to increase additional equity capital. One should not be get confused between FPO and IPO; when a company goes public for the first time, it is called an IPO, while when already public company issues fresh shares to public it is called FPO.
What is primary market?
Primary market is the market where shares are offered to public by the issuer company to raise capital. Primary market is the way for companies to enter into secondary market.
What is secondary market?
Secondary market is a market where securities (e.g. stocks) trade after the IPO. Secondary market comprises of equity market and the debt market. Secondary market is a platform to trade listed equities.
What is the difference between Floor Price and Cut-Off Price for a Book Building Issue?
Floor price is the minimum price at which investors can place their bids for an IPO. If an IPO came with price band of Rs 100-101, Rs 100 is the floor price. Companies opt for Book Building Public Issues declare a price band for IPOs. Investors can place their bids at any price in the price band.
In Book Building IPO retail investors have an option to choose "Cut-Off" price for bidding. Cut-off price means investors are ready to pay any price decided by the book building process.
What is Book Building Issue?
Issue price is not known in advance to the investors. A price range is given and investors bid in the price range. Demand of the offer is known everyday as the book build.
What is Fixed Price Issue?
Issue price is known in advance to the investors. Demand of the offer is known only after the closure of the issue.
Who are Retail investor, High Networth Individual (HNI) and Qualified Institutional Bidders (QIBs)?
Retail individual investors are those investors who cannot apply for more than Rs 2 lakh in an IPO. About 35% of the issue size is allocated to Retail individual investors.
If retail investors apply more than Rs 2 lakh in an IPO, they are considered as HNI.
Financial Institutions such as banks, FII's and Mutual Funds who are registered with SEBI are called QIBs. They generally apply in very large quantities.
Is it mandatory to have PAN number to apply in an IPO?
Yes, PAN number is mandatory for IPO applicants. Forms submitted without PAN numbers are considered as faulty application and they are not considered for IPO allotment.
Does applying in an IPO guarantee me to get certain amount of shares?
No, applying in an IPO does not guarantee to get the shares. In a bidding process, allotments depend on the number of bids received and the price at which investors apply for shares.
How to apply for IPO?
An individual can apply for an IPO online through ASBA (Applications Supported by Blocked Amount). This is a process developed by SEBI while applying for an IPO. Through ASBA, the IPO applicant's money doesn't get debited until shares are allotted to them. An individual can login to his netbanking account and apply for IPOs directly.