Post-pandemic, investing has become a popular source of income, especially for millennials. Investors today have the opportunity to invest in high-quality private companies to generate returns. This process is known as an Initial Public Offering (IPO) from which both investors and companies benefit.
This article explores multiple aspects of an IPO investment in detail.Â
IPO Investment: What Is It?
In an IPO or Initial Public Offering, a private company offers its shares to the public for the first time. A private company's shareholders may include its angel investors or venture capitalists (VCs). Once the IPO goes live, the general public can also become a shareholder through a share purchase.Â
Alternatively, we can say that promoters sell their shares to the public. An IPO requires compliance with the regulations of the Securities Exchange Board of India (SEBI). Companies hire credible underwriters to supervise the entire process from documentation to issuance.Â
Why Invest in IPOs?
Today, there are many IPOs lined up in the market. But why is it so popular? Besides raising capital, it can also increase companies' visibility that furthers the contribution to their valuation. Early investors can enjoy high returns on exit due to the liquidity. Also, companies do not need to borrow to finance the operations that save them the interest costs.
Now, let us talk about the benefits of IPO investment for investors.
First mover advantage
The companies that launch an IPO are typically startups or growing businesses. These are the companies with high potential growth that need to raise funds for expansion. By investing in these rapidly growing companies before they grow, investors benefit from the first-mover advantage.
Affordable investment
With an IPO, companies are seeking growth and expansion. Hence, the IPO price is usually at a discounted price. In the future, this could result in a rise in the share price of the company. Thus, the IPO market allows investors to invest in such companies at an affordable price at the start of their growth.Â
Long-term goals
As an investor's life progresses, their financial goals change. From buying a house to sending children to college, to planning for retirement. IPO investments can help with these long-term savings goals. Through IPOs, investors are mainly investing in equity instruments and can reap better returns.Â
TransparencyÂ
To launch an IPO, a company must comply with SEBI regulations. In addition, SEBI has imposed penalties on companies that do not comply with these terms. Thus, the entire process of issuing shares as well as documents are transparent. This builds investor trust. Furthermore, it is beneficial for the company to gain more clients.Â
Investing in IPOs: Things to Consider
To distinguish between a good and a bad IPO investment, proper research and analysis are crucial. Before discussing how to invest in IPO, there are some things that every investor must analyze:
Credibility and track record of management
Promoters and top management are the ones who run a company and decide its goals. The market reputation of the promoters of the company represents the fairness of its management, so it is vital to evaluate it. To understand the company's working culture, investors can also find out how long the top management has been with the company.
Past performance of the company
Evaluate the financial health of the business. Analyzing the profitability metrics will be able to reveal how the company has performed in the past. It will show if the company is on track and favorable for investment. To gain a better insight, the financial accounts can also be put in comparison with its market peers.
Risk factors
Risks are inherent in every investment. A successful investor assesses both returns, and risk in an investment. Investing in an IPO requires careful consideration of a company's litigation history and liability burden. Debts could affect the company's ability to operate.Â
Purpose of IPO
Investors must understand the purpose of an IPO launch by the company. This can be done by reading the draft red herring prospectus of the company. The prospectus provides details on how the company plans to use the money raised, and the risks involved. By doing so, it outlines its plans. If the company does not intend to expand or grow, it may not be the ideal option.Â
How to Invest in IPOs?
You can use the following methods to invest in an IPO.
Each investor must ask himself three questions before investing in an IPO:
What amount are you interested in investing in the IPO?
Is it possible for you to invest the necessary funds?
What is your risk appetite? Are you willing to accept a certain level of risk?
What is the purpose of investing in an IPO? In other words, what are the financial objectives?
To invest in an IPO, investors will need the following accounts:
Demat Account - This is a dematerialized or electronic account where shares are stored. It is a must that every investor has one.
Trading account - Investors who wish to invest online in an IPO must have a trading account. This will allow them to trade in shares according to their preferences.Â
Bank account -An IPO application requires a bank account. If the IPO application is accepted, the payment will be debited from the bank account.Â
Now, investors have the option to apply for an IPO through two routes:Â
Via ASBA facility provided by the bankÂ
Via UPI
ASBA facilityÂ
ASBA route requires investors to log into their net banking account.Â
In the request tab, they need to click on the IPOs option and apply for the one under the list of IPOs.Â
Investors must submit information regarding the number of shares and the bid price. Since it’s a bank account, personal details like name, PAN will already be prefilled.
After investors accept the terms and conditions and confirm the transaction, the amount will be blocked from their account and debited if their IPO application is accepted; otherwise, it will be released.Â
UPI facility
Log into a trading account.
Choose the IPO to invest in.
Submit the number of shares and the bid price of shares.
Fill in the required personal information, including the UPI ID.
Complete the IPO form and accept the terms and conditions. Amounts will be blocked from their accounts and debited if the IPO application is accepted. If not, the funds are released.Â
Understanding with Example
Let us understand the process further through an example.Â
You have an HDFC net banking account and wish to invest in an IPO like Aditya Birla Sun Life AMC Ltd. You can either visit their nearest branch or apply online. In this case, we will talk about applying through the online ASBA application process.Â
You will then follow these steps:
Log in to your HDFC net banking account. Choose the "IPO application" option from the bottom left menu. Only resident individuals have access to this option.
After being directed to the IPO online system, you can select your IPO, bid price, and the number of shares.Â
The hold will be marked on the total amount that will be the highest bid price in your account. The money will remain blocked until the allotment is completed.Â
You should ensure that you have sufficient available funds equivalent to the IPO application amount. In case of inadequate funds, the application will be rejected.
If you are allotted shares, then this amount will be deducted from the account. If any information furnished is incorrect, the bid will be rejected. Neither the bank nor the company will be responsible for any losses.Â
Requirements for IPO Investment Application
Valid PAN number
Demat account details
Personal identification documents like AadharÂ
Savings account with bank through which IPO application is being made.
UPI ID if applying through the UPI
Final Thoughts
By now, we hope you have a fair idea about how an IPO can turn into a smart investment IPO with due diligence and research. Consider the above factors when deciding if a particular IPO is worthwhile. Investors must ensure they fill out all the required information appropriately to avoid rejection of their IPO investment application. For any assistance, you can always consult a financial advisor.
Ans: An IPO investment offers investors a good rate of return over a short period. Additionally, since these are high-quality companies and SEBI-regulated, they are suitable for beginners.
Ans: The reasons for rejection may include the following:
Invalid bidÂ
Invalid PAN
Invalid Demat account
Multiple applications from the same name
Incorrect information
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