11 Mins

What is IPO Listing?

Initial Public Offering (IPO) is the process by which an unlisted company gets listed on a stock exchange by offering its securities/ shares on the primary market. The purpose of an initial public offering can be to expand the company’s existing activities, establish new projects, or any other purpose specified by the company in its offer document. It may simply be to list the company’s existing equity shares by diluting the stake of existing equity shareholders through an offer for sale.

A corporation may have very few shareholders before its IPO. Such as founders, angel investors, and venture capitalists. During an IPO, the company makes its shares available to the general public. You can purchase shares directly from the corporation as an investor and become a shareholder.

Companies can raise equity capital through an IPO by issuing new shares to the public, or existing shareholders can sell their shares to the public without raising new cash.

A corporation that offers its shares to the public is not required to refund the investors’ funds.

The issuer (the corporation that issues shares) does so with the assistance of investment banks. After an IPO, the company’s shares trade in the open market. Investors can sell these shares through secondary market transactions.

Need for IPO

IPO offers multiple benefits to companies who opt for it. Following are some reasons that highlight the need for an IPO:

The fundamental reason firms choose an IPO is because it gives easy access to capital. Being a publicly-traded firm entails significant responsibility. Companies that publicly trade are accountable to all shareholders. Thus, a company’s credibility increases.

IPO helps gauge how the public perceives a company’s potential. In addition, it provides an exit strategy for private investors, who may sell their shares for substantial profits or just see their net worth rise as the share’s price rises.

Going public significantly influences the company when negotiating financing terms, interest rates, or finalizing a mergers and acquisitions transaction. Listed companies can acquire capital at a lower interest rate through loans. Additionally, company shares may be part of M&A transactions.

Why Do Companies Opt for IPO Listing?

There may be numerous reasons why companies opt for IPO listing. Each corporation has a different motive for diluting its shares. Following are some of the key reasons why companies opt for IPO listing:

Raising Capital

IPO is a cost-effective method of raising capital. A privately held firm’s operations and growth processes are financed by shareholders, investors, and venture capitalists. Even though this can assist a firm get off the ground, there are times when it needs to scale up its operations or expand its variety of services/ products to keep up with the competition, which requires a substantial monetary infusion.

If existing investors/ shareholders cannot raise the necessary amount, the company has two major options: obtain a loan or issue new shares.

If a company has assets, it may easily get loans, but the interest charged on such loans might harm its finances and make profitability challenging.

By going public, the company is able to meet its capital needs in a more cost-effective manner.

Profitability and Liquidity for Existing Shareholders

A small number of shareholders invest funds to get a private company off the ground. As the company acquires clients and expands, the stockholders begin to earn income.

However, the company’s brand value and market goodwill cannot be leveraged until the corporation goes public.

When a firm issues shares, the market value of those shares is determined by how investors perceive the company’s performance.

Therefore, if the company has a strong presence and attractive brand image, existing shareholders can enjoy greater returns on their shares. Additionally, the shares of such companies trade in high volumes, which also increases liquidity.

Enhances the company’s credibility

The Securities and Exchange Board of India (SEBI) controls the Indian stock market and has established tough requirements for companies seeking to go public.

Therefore, if a firm is conducting an IPO, investors may rest assured that it has met SEBI’s requirements and is a strong organization. This contributes to its overall trustworthiness.

The demand and supply of a stock controls it’s market price. Therefore, if a company’s stock sells for INR 1,000 while its competitor’s stock sells for INR 350, the former has more market value.

This enables the company to attract a good workforce and facilitate profitable mergers and acquisitions.

Market Presence

Every month, IPOs are introduced. In many instances, investors do not know about the firm that is launching the IPO and learn about it during the launch period.

As the company promotes and advertises its initial public offering, investors begin conducting research on the company, studying its business and finances, etc. This helps increase the company’s market presence. Additionally, companies can also leverage this buzz to expand their business.

Process of IPO Listing

Following is a quick overview of the IPO listing process:

  • When a private firm seeks to obtain funds through a public offering, it chooses the IPO route.
  • The private company then appoints an underwriter. An underwriter is a consortium of investment banks. These banks evaluate the company’s financial position and needs and determine the share price for issue (price band) and the number of shares that have to be part of the offering.
  • The underwriter then creates a draft of the application for SEBI approval. The application consists of the company’s historical financial records, including profits, assets, liabilities, and net worth. In addition, the proposal also describes how the funds would be utilised.
  • SEBI permits the publication of the ‘Red Herring Prospectus’ after a thorough review of the application and confirmation that all eligibility requirements are met.
  • The ‘Red Herring Prospectus’ is a company release that specifies the number of shares and share issue price (price band) for the IPO. It also offers information regarding past performance.
  • Next, a ‘Road Show’ is held, where the company executives travel to meet with potential investors and encourage them to purchase their company’s stock.
  • An initial public offering may be open for three to twenty-one days but is often open for five days.
  • During this time, regular investors can bid on stocks through their online brokerage accounts. You must have a demat account and trading account, and a PAN card in order to participate in an IPO. Your demat account will be credited if the bid on stocks is successful. If not, you will receive a refund.
  • After the IPO concludes, the stocks will trade on a stock exchange. Thereafter, the publicly held shares can be traded on the stock market.

Things To Know Before Investing Through IPO Listing

Following are the things to know before investing through an IPO:

Red Herring Prospectus

The Draft Red Herring Prospectus is filed with SEBI by the company seeking to generate capital by offering its shares to the public.

This paper discusses how the company intends to use the funds obtained from the public and the potential risks for investors. Therefore, you must review this document before investing in any IPO.

Motive Behind Going for an IPO

It is essential to determine how the company intends to use the capital raised through the Initial Public Offering. Check to see if the company intends to repay its debt or if it plans to raise capital for partially repaying debt, developing the business, or utilising the funds for corporate reasons.

This indicates that the funds will be spent appropriately in the firm, which is a positive indicator for investors.

Understand the Business

Before participating in a company’s Initial Public Offering, you should have a thorough understanding of the business concept.

Once you understand the company’s line of business, you should next try to identify the new market opportunity for the company.

This is due to the fact that the size of the opportunity and the company’s ability to gain market share can have a significant impact on the company’s growth and shareholder returns.

If the company’s commercial activities are unknown to you, then you should avoid investing in the IPO.  

Analysing Management and Promoter Backgrounds

It is essential to examine the company’s leadership, as they are its backbone. You should evaluate the company’s promoters and managers, as they significantly influence all of its operations and functions. The qualifications and tenure of the company’s top management might provide insight into the company’s work environment. Thus, the company’s management plays an essential role in propelling the business forward.

Strengths and Weaknesses of the Company

Before investing in a company’s IPO, you should conduct a SWOT (Strength, Weakness, Opportunities and Threat) analysis.

The DRHP provides an analysis of the company’s primary strengths and shortcomings. You should determine the company’s standing in the industry in which it operates.

In order to evaluate the future possibilities of a firm, it is essential to read as much as possible about the company and its strategies.

Valuation of the Company

You should also examine the company’s valuations. The offer price may be undervalued or overvalued depending on the company’s sectors and its financial parameters.

The Health of the Company

You must examine the company’s financial performance over the past several years to determine whether the company’s sales and profit have been expanding regularly.

If the company’s income is growing, investing in its IPO can be a wise decision. Before investing in a company’s IPO, it is vital for investors to understand the company’s financial condition.

Investment Horizon

Before investing in a company’s IPO, you should have a clear investment horizon. Decide if you intend to invest in the IPO solely for trading purposes on the day of listing or if you intend to hold the shares longer. Since the trading strategy depends on the present market conditions, the long-term plan depends on the company’s fundamentals.

Peer Analysis

You should also consider the company’s competitors. The DRHP will have both financial and valuation-based peer comparisons. Thus, you must examine the comparative values to determine whether the company’s valuations are comparable to those of its competitors.

Market Potential

You should also consider the company’s market potential, i.e. opportunities and threats in its operational areas.

Who Should Invest Through IPO Listing?

There are numerous types of investors that can participate in an IPO. Following are the different categories:

Individuals who invest up to INR 2,00,000 in a particular offering are retail investors. Individuals who invest more than INR 2,00,000 in a particular offer are high net worth investors.

You must be at least 18 years old to become an investor. Furthermore, to invest, you must have a demat and trading account.

Difference Between Regular Investing and Investing Through IPO Listing

There are two types of share markets in India – primary market and secondary market. The primary market is where companies offer their shares to the public for the first time. Thus, IPO activity is through the primary market. During an IPO, a company becomes a public company from a private one. On the other hand, once the company issues the shares in the primary market, they can trade in the secondary market. Thus, the secondary market is where you can easily buy and sell the shares after the IPO.

Investing through an IPO requires you to study all the prospect documents and company financials. Since the company is available to the public for the first time, you do not have any information relating to the share price movements. On the other hand, through regular investing, you can study the share price movements with respect to different market cycles and also analyse the company’s financials.

You can invest in an IPO for either listing gains or the long term. At the same time, regular investing can be either for short term trades or long-term investing. Short term trades can be intraday trading or holding the stocks for a short duration.

Discover More