IPO Overview
All you need to know about the upcoming, ongoing, and closed IPOs at a glance.
How to Apply for IPO
on Torus Digital
- 1. Login to your Torus Digital Account
- 2. Select the IPO issue
- 3. Enter number of lot purchases and price
- 4. Enter UPI ID
- 5. Complete the transaction on your UPI app
What is an IPO?
An IPO, or Initial Public Offering, is a significant event for a company, indicating its transition from private to public ownership. When a company chooses to go public and get listed on stock exchange, it offers company's shares for the first time. This IPO process helps the company raise capital, which may be crucial for its growth and expansion.
During an IPO, investment banks play a vital role in determining the share price and creating interest among potential investors. After the IPO, the company’s shares become publicly traded on a stock exchange, which significantly affects the company's visibility and reputation. An IPO is the inflow of capital, which allows the company to invest in new projects or pay down debt.
Types of IPO
There are a few main types of Initial Public Offerings (IPOs), each catering to different company strategies and market conditions:
1. Traditional IPO :
This is the most well-known type where companies hire investment banks to underwrite the offering. Underwriters help to determine the share price based on market demands and manage the entire process, including a roadshow to attract investors.
2. Book Building IPO :
In this approach, the price of the shares isn’t fixed initially. Instead, the company establishes a price range, specifying the lowest and highest price per share, and invites investors to place bids within this range. Based on these bids, the final price is set before shares go public.
3. Fixed Price IPO :
Here, the company predetermines the share price before the IPO, and investors know exactly what they will pay per share. Although less flexible than book building, fixed price IPOs are straightforward and more predictable.
4. Direct Listing :
Companies opting for a direct listing bypass underwriters altogether and directly sell shares on an exchange. This method is usually cost-effective and allows existing shareholders to sell their shares immediately.
5. Reverse Merger (or SPAC) :
A private company merges with a publicly traded shell company to become public without the typical IPO process. This is quicker and cheaper but carries the risk of regulatory and market skepticism.
Eligibility to invest in an IPO
| Criteria | Eligibility |
|---|---|
| Demat and Trading Account | To invest in an IPO in India, you must have both a Demat and Trading account. |
| Minimum Age | Investors must be at least 18 years old. |
| PAN Card | A Permanent Account Number (PAN) card is required. |
| Eligibility | Both resident Indians and Non-Resident Indians (NRIs) can participate in IPOs, though NRIs must follow specific guidelines. |
| ASBA Process | Applications are made through ASBA (Application Supported by Blocked Amount), where funds are blocked in the investor's bank account until the IPO allotment is finalized. |
| Minimum Investment | The minimum investment is determined by the lot size of the IPO. |
| Unique Applications | Each IPO application must be unique to avoid rejection (i.e., you cannot submit multiple applications under the same name). |
Benefits of Investing in IPO
Investing in an IPO can offer several potential advantages, especially for investors looking to get in early on promising companies.
1. Early Access to Growth :
One of the biggest draws of an IPO is that it allows investors to buy shares at the ground level, potentially before the company experiences significant growth. If the company performs well, early investors may see substantial returns as the stock price appreciates over time.
2. Portfolio Diversification :
IPOs often bring new types of companies into the public market, particularly from emerging sectors like technology, green energy, or biomedicine. For investors, buying into IPOs can diversify a portfolio and provide exposure to industries they may not have access to otherwise.
3. Long-Term Gains and Compounding :
If an investor holds onto IPO shares long-term, they can benefit from compounding returns, especially when investing in companies with growth potential. Over the years, companies that have grown successfully since their IPOs have generated exponential returns for their shareholders.
Risks and Considerations for Investors
Investing in IPO stocks comes with its share of risks and considerations, which are important for any investor to evaluate before making a decision. Here are some key points to consider:
1. Volatility and Unpredictability :
IPOs can be highly volatile in the early days of trading. Since the market is still trying to determine the stock's fair value, prices can fluctuate dramatically. This can result in quick gains, but just as often, it can lead to steep losses, especially if the company doesn’t meet initial expectations.
2. Limited Historical Data :
One of the main challenges with IPOs is the lack of long-term financial history. Many companies going public are younger or rapidly growing and may not have a proven track record in public markets. This makes it hard for investors to assess how the business will perform in the long run based on limited data.
3. Potential Dilution:
After the IPO, companies may issue additional shares in the future to raise more capital. While this can help the business grow, it can also dilute the value of each share, impacting the returns for existing investors if the company doesn’t grow its earnings proportionately.
4. Market and Economic Conditions:
External factors like interest rates, inflation, and overall market sentiment heavily influence IPO performance. For example, during a downturn or recession, IPOs tend to struggle as investors become more risk-averse, and new offerings can be postponed or priced lower due to reduced demand.
Doing thorough research, understanding the company's financials and growth plans, and recognizing market conditions can help an investor mitigate some of these risks. However, it’s also wise to approach IPOs with a degree of caution, as not all are guaranteed to succeed in the public market.
Important Things to Remember while Investing in an IPO
While participating in an IPO, it requires careful evaluation of several factors:
1. Company Fundamentals: Assess the company’s financial health, growth potential, and competitive advantage. Review the Draft Red Herring Prospectus (DRHP) for detailed insights into its financials, management, and risks.
2. Valuation : Pay attention to the pricing of the IPO. Evaluate if the offered price reflects the company's true value, considering market conditions and future prospects.
3. Governance and Management : Ensure the company has a strong governance structure, transparent operations, and capable management. Good governance enhances long-term investment confidence.
4. Risks : Be mindful of risks outlined in the Draft Red Herring Prospectus DRHP, including market competition, regulatory challenges, or sector-specific hurdles.
Things to avoid in an IPO
1. Overpricing :If the IPO is priced too high, demand may falter, and the stock may drop below the offering price once listed, resulting in immediate losses for investors.
2. Inaccurate Disclosures : Any discrepancies or incomplete information in the Draft Red Herring Prospectus (DRHP) can signal hidden risks. Investors rely on full transparency, and anything less can lead to legal risks or future surprises.
3. Weak Governance : A company lacking strong governance structures, such as an independent board or audit committee, raises concerns about decision-making and accountability, increasing investment risk.
4. Unclear Use of Funds : If the company doesn't provide a clear plan for how IPO proceeds will be utilized, it may indicate poor planning or lack of vision, causing doubts among investors about the company’s growth strategy.
5. Neglecting Investor Communication : After the IPO, failing to maintain clear and consistent communication with investors may lead to volatility and erode confidence in the company’s long-term prospects.
Key Terminologies
| Term | Definition |
|---|---|
| Issuer | Issuer is the company which offers shares to the public in order to raise capital by becoming publicly traded. |
| Underwriter | Underwriter which is generally an investment bank or issuing house, typically oversees the entire IPO process, including setting the share price, ensuring compliance with regulatory requirements, and marketing the offer to potential investors. |
| Prospectus | A document detailing the company’s financials, business model, and risks to guide investor decisions. |
| Price Band | In a Book Building IPO, this is the price range investors can bid within. The final price is determined by the demand within this range. |
| Book Building | The process where the final share price is set based on bids from investors, helping match supply and demand. |
| Lot Size | The minimum number of shares investors must apply for in an IPO, ensuring an accessible entry level. |
| Listing Day | The first trading day on the exchange, often marked by high volatility as the stock finds its market value. |
