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© Sunil Matkar Everything you should know before investing in IPOs; are they worth betting on?

At first glance, it appears the Indian market is awash with initial public offerings (IPOs). With a sharp turnaround in secondary markets after the March lows, the primary market, too, has rebounded after witnessing a dull first half.

As one after another IPO hits the Street, investors are rushing to the primary market to make most of the opportunity. The increase in liquidity flows is also helping their cause.

After COVID hit the markets hard in March, many companies put their IPO plans on the back burner. However, as the market sentiment improved, hopes of getting better market valuations made companies revive their IPO plans.

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As per industry reports, nearly 30-35 companies have received approvals for initial public offerings (IPOs) totalling around Rs 33,500 crore. Prashanth Tapse, AVP Research, Mehta Equities also feels a revival in the primary market is on cards as investors’ confidence is building up.

“The first half of 2020 we have witnessed a COVID backed underperformance in not only the broader market but also in the primary market, but the second half of CY20 looks better than the first half. If the broader markets continue to remain buoyant or even stay stable, we will see a steady flow of IPOs in the coming months,” he reasoned.

Also read: CAMS IPO: Allotment status finalised, here’s how to check

The what & how

Before you decide to invest in IPOs, you must be properly acquainted with the terminologies, rules and process of investing in IPOs.

IPOs are divided into three broad categories- retail, institutional categories and high net worth individual (HNI).

A retail investor can participate in the retail category. Ideally, investments up to Rs 2 lakh in an IPO are termed as retail. Market regulator SEBI designs this category to ensure that as many retail investors as possible get allotment.

In the HNI and institutional categories, the allocation is proportionate or discretionary.

Apart from this, there are broadly two types of IPO pricing – book-built offers and fixed price offers.

While in a fixed price IPO, one can only apply at a fixed price set by the company in advance, a book built IPO has a price range.

Book building is a process of price discovery. Hence, the Red Herring prospectus does not contain a price. Instead, the red herring prospectus contains either the floor price of the securities offered through it or a price band along with the range within which the bids can move.

A retail investor can bid in a book-built issue for a value not more than Rs 1,00,000. Any bid made in excess of this will be considered in the HNI category.

After the closure of the issue, the bids received are aggregated under different categories i.e., firm allotment, qualified institutional buyers (QIBs), non-institutional buyers (NIBs), retail, etc.

The oversubscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document. Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for.

The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined.

This process is followed in the case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.

Investors can check the application and allotment status either on the BSE website or the registrar’s website.

There is a lock-up period that prohibits one from selling any shares of stock for a specified period.

Are IPOs worth investing?

An IPO is a means of collecting money from the public by a company for the first time in the market to fund its projects. In return, the company gives the share to the investors in the company.

Investment in an IPO can be a good choice if the growth prospects of the company look bright and the valuation of the offering is reasonable.

“The key is to invest smartly and find the right IPOs at the right time and the right price,” brokerage firm Angel Broking points out.

IPOs provide an opportunity for investors to invest in a company in its early days. The investment grows as the company grows with time.

IPOs are considered ideal for long-term investment purposes as they generally bring decent returns in the long run.

However, all these factors do not mean one should take a jump into IPOs blindly; a careful perusal of various aspects of an offering is required before investing in it. One must read the prospectus before investing in an IPO.

“Before investing in any IPOs, it is first important to formulate a clear idea of what your risk appetite, investment budget and financial goals look like. It is only by figuring these factors out that an investor can narrow down the IPO listings that best fit his portfolio,” Angel Broking highlights.

If one has a good risk-appetite and fair understanding of the trends of the market and economy, IPOs can be a good option for investment.

There are chances of investors getting access to a new business in an IPO, which hitherto was not listed on the bourses. Such IPOs can offer robust gains due to the scarcity premium (i.e. lack of other listed players from the sector, leading to heightened investor interest).

“However, investors need to be careful that they don’t get lured just by the novelty factor. Investors should make sure they do adequate research to understand the dynamics of the sector and potential risks it can face across different economic cycles.

Disclaimer: The views and investment tips expressed by the investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.