Factors to watch before investing in IPOs

If you hope to make money in public equity offers, you have to make some efforts and become an informed investor, says Prithvi Haldea of Prime Database.
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Jul 07, 2005, 11.17 AM | Source: Moneycontrol.com

Factors to watch before investing in IPOs

If you hope to make money in public equity offers, you have to make some efforts and become an informed investor, says Prithvi Haldea of Prime Database.

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Factors to watch before investing in IPOs

If you hope to make money in public equity offers, you have to make some efforts and become an informed investor, says Prithvi Haldea of Prime Database.

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If you hope to make money in public equity offers, you have to make some efforts and become an informed investor, says Prithvi Haldea of Prime Database.

Further he adds, read the offer document carefully (though always remember it is still a seller’s document). Abridged prospectus is too difficult to read. If you have a problem, demand a full copy of the prospectus from the company or from the lead managers. Their email IDs is given in the abridged prospectus. If they do not provide, send a complaint to Sebi.
 
There is too much to read, so concentrate on key issues and try finding answers to the following questions…

Is this an IPO or an FPO?

  • In IPOs, initial public offers, company decides the price and the collective secondary market discovers the true price post-listing after more information inflows/analysis.
  • In FPOs, follow on public offers, the price is already discovered; gains/losses can only be marginal; no new information for the market to analyze/process.
Is this a fixed-price or a book-building issue?

  • The methodology, classes of investors and issue pricing are totally different.
  • There is no book or price discovery in a fixed-price issue.
  • There are no reservations for FIIs/HNIs in a fixed-price issue; 50% of the issue is reserved for small investors (in book building, it is 35%).
  • Fixed-price issues are typically small.

Issues in 2004-05 (Rs in crore)           Source: Prime Database

Issue
Type

No. of
Issues

Issue
Amount

Average size
of Issue

Fixed Price

10

378.82

37.88

Book Building

19

21,052.74

1,108.04









Is this a “good” promoter?

  • Get to “know” the promoter – that’s the key.
  • If the promoter is okay, almost all other factors will automatically get taken care of.
  • If there is any foreign collaboration of repute, it helps.
What is the promoters’ background and experience?

  • Experience in the same business/industry (promoting individuals/ promoting companies)
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