Understanding IPOs in the Indian Share Market: A Simple Guide
The IPO is one of the most exciting moments for any company. It is that point in time when a previously private company comes out and offers its shares to the public for the first time, thus signing its entry into the stock market. In India, this process can be undertaken on either the National Stock Exchange (NSE) or the **Bombay Stock Exchange (BSE), and the whole process is governed by the Securities and Exchange Board of India (SEBI).
An IPO is something of a coming-out party for companies; they get to raise money from all sorts of everyday investors, build visibility, and grow their business. To investors, it's an opportunity to buy shares in a company right from the very beginning. But what does this all mean, and exactly how does this work? Break it down for me:
Why Do Companies in India Go Public
The reason an organization holds an IPO is more often than not for one key purpose: raising cash. The proceeds from an IPO can be used to help a company with expansion, development of new products, debt retirement or even entry into new markets. Occasionally, early investors, such as venture capitalists, will also utilize an IPO as a means to exit.
Advantages associated with being listed on a stock exchange:
1. More trustworthiness: Issuing shares with NSE or BSE will make your company more trustworthy. Customers, investors, and even some of the most talented employees are attracted.
2. More exposure in the market: Any company's presence increases by going public. The media starts talking about it, and analysts start paying more attention to them.
But going public is not a one-time task. It brings an additional responsibility with which companies have to follow SEBI's rules, communicate financial updates to the public from time to time, and keep the shareholders pleased.
How Does the IPO Process Work?
Although the Indian IPO process has some minor modifications, broadly speaking it follows these steps:
1. Hiring Merchant Bankers: First of all, an underwriting merchant banker guides a company in the process of IPO. Underwriters assist in deciding the number of shares to be sold and their selling price, besides promoting the sale of the issue among various investors.
2. SEBI Filings: The company files this document called the Draft Red Herring Prospectus (DRHP) in SEBI before selling shares. This document gives out detailed information about the company's finances and business model, besides the risks involved. In this process, SEBI reviews the same to ensure complete disclosures for the investors.
3. Price Band and Bidding: Most of the IPOs in India employ a book-building process wherein a price range or price band is said to be given for the shares. The investors provide their bids within the range, and the final share price is known according to the demand.
4. IPO Subscription: Once the IPO is open, subscribers can offer to buy shares by using ASBA whereby the application money gets held in the account of the applicant until the shares are allotted. In a situation that is oversubscribed wherein more demand than shares available, some people may not get any shares and the money would be refunded.
5. Listing on NSE or BSE: After the shares are allotted, the company gets listed on NSE, BSE, or both. The shares begin trading on the day of listing. Prices swing high and low according to the market's viewpoint about the company.
Why People Get So Excited About IPOs:
IPOs can be an excitement for investors since they get a chance to purchase shares of a company even before it is traded in the stock market. The value of their stocks can rise really fast in successful companies. For example, early investors into companies such as Infosys and TCS of India earned plenty of moolah after listing on the stock market through IPOs.
IPOs also hog headlines with the promise of new innings, especially if it pertains to emerging industries like technology or consumer goods. Every investor wishes to find that elusive big thing!
But What Are the Risks?
While IPOs can do a great job in the event that they turn out profitable, there is also a list of risks for them:
1. Volatility: Share prices in newly launched companies can go on a wild swing in the first few days of trading. Some can take off while others come crashing down.
2. Overvaluation: Sometimes, companies become over-hyped before they go public and then offer their shares at inflated prices that immediately drop back down when the market learns to get accustomed to the new company.
3. Uncertainty: Most newer companies that have just gone or are going public do not have a lot of historical data. This makes it much more difficult for investors to predict what will happen with future performance.
This is why SEBI makes it strict for companies that the statements accompanying an IPO be transparent, and that's why the onus falls on an investor to do his homework before even investing in any IPO.
Conclusion:
An initial public offering could almost be said to be a grand open door for companies in India to raise funds with growth and give early investors a chance to buy in on what may well become a highly successful business venture. However, like anything invested in, one needs to be careful and keep informed. Not all IPOs are alike, and certainly, some of them don't provide an investor with the returns he or she is looking for.
The right amount of research can make IPOs a very smart way to grow your wealth, but as usual in the stock market-nothing is guaranteed!
