An Initial Public Offering, also known as an IPO, is one of the important milestones in a company’s journey to expand their business. Whenever a private company goes for an IPO, the company has to issue shares to the public who are different kinds of investors like retail, high net-worth individuals, and big institutions. These big institutions can be asset management companies, pension funds, commercial banks, insurance companies, etc. IPO is one of the ways of raising capital for a company, while other ways include bank loans or issuing corporate bonds.

Initial Public Offerings in India are regulated by the market regulator Securities and Exchange Board of India (SEBI) which is responsible for setting the rules for companies planning to go public by listing their shares. These shares are listed in two exchanges namely National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). SEBI also ensures investors’ interests are safeguarded and there is transparency throughout the IPO process.

For companies in India, IPOs are a perfect launch pad to access larger capital from a wide range of investors, higher credibility due to stringent scrutiny by the market regulator and better brand visibility as the event is covered by media, analysts, finfluencers, etc. Meanwhile, IPOs are a rare opportunity for retail and institutional investors to participate in a company’s growth story.

Advantages of IPO for investors

Initial Public Offerings can be a good opportunity for investors as they have first mover advantages from capital appreciation. As the company starts to grow and posts higher profits, more and more investors will get interested in the company’s stock and push its stock price higher.

Some shares of good companies may get listed at a premium compared to its issue price, and investors get to gain from it. These gains are called listing gains. Many retail investors in India participate in the IPO specifically for this short-term benefit.

In recent years, India has seen IPOs from a wide range of industries including technology, renewable energy, healthcare, and consumer companies giving investors a lot of choice in diversifying their portfolio and mitigating risks.

Generally, companies going for IPO must disclose a lot of information like their business, their sector, balance sheet and profit & loss statement, financial metrics, competitor analysis, risk involved, etc. in their draft red herring prospectus document. This allows investors to make informed decisions before investing.

SEBI’s monitoring also gives investors’ confidence that the IPO process is strictly followed, further ensuring that the investors’ money is safe.

IPO gives a level playing field for retail investors, HNIs and institutional investors as they get the opportunity to buy shares at the same price and this is not the case in the secondary market as prices tend to fluctuate due to demand and supply.

There are no brokerage fees or any other fees while applying for an IPO, in contrast to buying shares in the secondary market or after listing on the exchanges.

Disadvantages of IPO for investors

Though IPO investments can be beneficial, they also carry significant risks if wrong companies are picked without adequate research.

Investing in IPOs based on marketing and too much hype about the future growth of a company even though when its financials are weak can be riskier. It can result in lower returns after listing. This was evident in stocks like Paytm.

Companies that are going public do not have any trading or price history, unlike established listed companies that have been trading for many years. This actually makes it harder to predict how the market participants will behave towards the stock, its price movement trends, and volume.

As the allotment of shares is random in the IPO process, the probability of allotment for retail investors is very limited, restricting their participation. As the number of demat account holders increased over the past few years, IPOs are getting heavily oversubscribed in India, and many applicants get very little share or nothing at all.

In the first few months after listing, the stock price can be volatile as market participants try to find the right price of the stock as against the initial hype or speculation.

Even though the red herring prospectus gives investors a lot of information, some qualitative aspects of the company like management efficiency, corporate governance, and their execution capabilities can be difficult to gauge beforehand. Investors actually find out about company problems only when they see bad quarterly results, and this can affect their investments and lead to capital erosion.

Important dates for IPO

Issue Open date, Issue Close date, Allotment date, Credit of share to your demat account, Initiation of refund, and listing date.

Conclusion

IPOs surely hold special cultural and economic meaning in Indian financial markets. Moreover, they represent important opportunities for both companies and investors in the country. These are big events that media covers a lot, and both old traders and new investors watch them closely as per market interest.

People pay much attention regarding these celebrations in the financial world. When companies go public, they get fresh capital and further gain credibility in the market itself. Basically, investors get the same opportunity to join new growth companies and sometimes make quick profits.

As per investment rules, IPO participation needs proper study regarding company details rather than just excitement. Understanding the company’s basic details, sector movements, and IPO pricing itself is crucial for further analysis. Retail investors should make a clear plan before investing in IPOs, deciding if they want quick listing gains or long-term holding, and further balance the opportunities with risks that come with IPO investing itself.

We are seeing that IPO can give good returns to investors, but it has some risks only. Basically, in India’s competitive market, investors who do proper research and follow the same disciplined approach have the best chance of making money from IPO investments.

Frequently Asked Questions

1. What is an Initial Public Offering (IPO)?

An Initial Public Offering (IPO) is an important event in a company’s journey to growth. It is one of the processes through which a company plans to raise money by selling its shares to the public for the first time.

2. Who regulates IPO?

Securities Exchange board of India (SEBI) regulates the IPO process. All companies going for IPO must file their Draft Red herring Prospectus with SEBI. Once the IPO process is over, the shares will be listed in NSE and BSE.

3. What are the benefits of investing in an IPO?

Investing in an IPO can be beneficial to investors as they have a first mover advantage. Investors can become a part owner of a growing company, can reap potential listing gains, enjoy long-term capital appreciation and also help them diversify their portfolio with new companies in emerging sectors.

4. What are the risks involved in IPO investments?

Like any other investment, IPO investment also have risks due to market volatility, oversubscription issues, lack of trading history, less knowledge about management and the company’s execution skills.

5. How can investors apply for an IPO in India?

Investors can apply for an IPO through their Demat account with Aetram Trades using ASBA (Application Supported by Blocked Amount) via net banking. The applicant must make sure the demat account is linked to the same bank account of the net banking login. No brokerage fee is charged during the IPO application process.