There is renewed interest in the IPOs, not just among traders but also from a large number of Indian households as most try to bite into the hottest flavour of the season.
But, while most understand the process in detail, some are left uninitiated. This piece is dedicated to the fence-sitters who are yet to make any sense of what IPOs are all about.
The process of an IPO is to take a company from being privately-held to public company status. The process allows retail investors, HNI investors, and institutions to invest in shares of the company and benefit from the ownership as the value of the company increases.
What is an IPO?
IPO is an acronym for Initial Public Offering. As the term literally spells out, it is an initial offering of a company’s, made by a corporate, to the public at large.
The value of a company is divided into multiple small units known as shares. These shares are owned by investors; initially a small set of investors which includes founders of the company.
In an IPO, the company decides to offer a certain percentage of its shares to the general public at large. This is done to raise more capital for the firm or offer an exit to existing shareholders.
Top five terminologies critical to understand a public offer better:
1. Abridged Prospectus: Every IPO comes along with a prospectus document that has all details pertaining to the IPO. The abridged prospectus, as it literally suggests, is a concise version of the full prospectus that contains the key features. This is much easier to consume version of the otherwise lengthy prospectus.
2. Price Band: The price band is the price range within which a subscriber to the IPO can bid for subscription to the IPO. For instance, if the price band is decided as INR 500 to INR 510, one can not bid under INR 500 or over INR 510 for the shares on offer
3. Lot Size: This is the minimum number of shares one can bid for, for anyone intending to bid for more, it should be for a quantity in multiples of the minimum lot size.
4. Under/oversubscription: If the aggregate number of shares investors bid for in an IPO exceeds the total number of shares on offer, the IPO is said to be oversubscribed and if it is lesser, undersubscribed.
5. Listing Date: Listing date is the date on which the shares offered on the IPO is listed on the stock exchange and is available for buying and selling by secondary market participants.Key elements to look out for while deciding if an IPO is good enough for you to invest into the exercise of an IPO evaluation is rather extensive and is best done with help of an investment professional.
However, here are the top three parameters you may want to look at and dig deeper into or seek more information on from your investment consultant.
1. Business Evaluation: It is critical to understand the business model, competitive edge, market share, financial performance among other key elements.
2. Future Prospects: While assessing the business, it is important to form a view on the future growth prospects of the industry, business segment and the company specifically.
3. Deployment of Capital: Typically included in the prospectus, it is important to understand if the company intends to use the capital for growth and if the plan seems like it will result in the growth desired.
While there is a lot more to consider before making the right IPO investment choice, the above elements are key to consider to at least get a step closer to making the right decision.
(The author is Head of Research at Fisdom)
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