Stock market investors value initial public offerings (IPOs) for their potential for substantial returns. They offer a way for investors to capitalise on a company’s growth in its early stages. Read on to learn more about these equity investments!
Understanding Initial Public Offerings (IPOs)
An Initial Public Offering (IPO) refers to when a private company becomes a publicly traded one. Simply put, it is the first time a company offers its shares to the public on a stock exchange. The sales proceeds go to the company for its growth, to pay off debt, etc.
The IPO process involves several steps, from selecting investment banks as underwriters, registering for an IPO with the SEBI and getting approved, conducting a road show for investors and finally offering their shares to the public.
The Benefits of IPO Investing
- Get Early Access: By investing in a company’s IPO, you can capitalise on its success. This means you can earn a lot of money in a short period.
- Buy Low, Sell High: The IPO price is the cheapest price a company offers for its shares. The company may even offer it at a discounted price. If you miss this window, investing later may be difficult because the stock’s price can skyrocket.
- Price Transparency: The price per stock is mentioned in the IPO order document. You get access to the same information as high-network individuals and institutional investors (fund houses).
Evaluating IPO Opportunities
You need to check the company’s prospectus. It can be found on the SEBI’s website. It will list everything you need to know about the company before you invest.
IPO evaluations are similar to evaluating the stocks of listed companies. You will need to look at the company’s competitive advantages, its quality of management and the relative pricing of the stocks, all of which can be found on the prospectus.
Strategies for IPO Investing
- Investing in IPOs is just as risky as investing in other equities. Look into the company’s financial robustness. Compare the company’s past revenue and profits, margin profile and return ratios with listed competitors/peers.
- Promoters will sometimes price the IPO offer higher. Compare the new company’s valuation with its competitors. You can always buy stocks later when the price drops/corrects.
- Check the risk factors section in the prospectus. It will tell you if the company has any pending legal cases. If there are too many pending cases, stay away.
Participating in IPOs
- Individual/Retail investors can use a brokerage account or relevant documents from the intermediaries or firm participating on the IPO process to apply for an IPO.
- Institutional investors, like hedge funds, mutual funds and pension funds, can participate in IPOs by placing large orders directly with underwriters (investment banks) or through the book-building process.
Regulatory and Tax Considerations
IPOs are governed by the Securities and Exchange Board of India (SEBI), which regulates the securities market. The Issue of Capital and Disclosure Requirements (ICDR), 2009 document details the IPO process and its regulations and legalities.
When you invest in an IPO, the shares you receive will not be taxed, but the money you get from selling these shares will either be taxed as capital gains based on your holding period:
- For profits exceeding ₹1 lakh, 10% long-term capital gains (withdrawn after 12 months)
- 15% short-term capital gains (withdrawn within 12 months)
During January and September 2023, the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) were the leading stock markets worldwide on IPO deals1.
The Indian IPO market is growing, meaning more opportunities to invest in upcoming IPOs in India and cash in on the company’s success.