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Initial Public Offerings - An Overview of IPO Rush Investment

Jul-15-2021Blog by – Mr. Keval Lakhani (Chartered Accountant - Research)Read Time: 3 Min.Word Count: 493
163Initial Public Offerings - An Overview of  IPO Rush Investment

IPO, is the current trending word in the investment market and amongst many retailers and traders. Initial Public Offering (IPO), is the first step when company opens up to the public domain. The process of offering shares of a private company to the public in a new stock issuance is known as IPO launching.  This is a transition of company from being a closely held company to a public limited company. Through an IPO the company could be raising money either though new issue of shares or the possibility of existing shareholders exiting part or all of their holdings in the company. An IPO is generally a combination of a fresh issue and an OFS.

Given the spate of IPO’s that have flooded the Indian Capital markets, it becomes imperative for investors to understand to which sort of companies they are investing in keeping in mind their investment objective. There is a certain class of investors who merely invest for long-term gains, there are some who invest merely for anticipated IPO listing gains. There is a lot of information available to investors in order to decide which IPO to invest in, but the DRHP (prospectus) provides deep insight into the business model, financials of the company, peer group comparison as well as off-balance sheet items. 

IPO rush has also augured well for financiers who tend to provide funding to investors in order to subscribe in these IPO’s. IPO funding loans are mainly available to HNI investors. IPO funding is generally for a short duration. The interest rate charged on such funding varies for each institution but could generally vary between 8% p.a to 12% p.a. 

The quality of companies approaching IPO has also drastically evolved over time with new-age tech startups, consumer companies, etc. Many investors are approaching the bourses for listing instead of the old economy companies only. This shows that the Indian investors as well as the Indian capital markets have matured over time.  

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One pertinent point to note is that participation in IPO has gone through the roof as a result of which a lot of IPO’s are getting heavily oversubscribed. Some IPO’s have had an oversubscription to the tune of 50x-200x as well. Such high oversubscription leads to an extremely poor allotment structure for the retail investor. 

Another aspect of the Indian IPO market is the SME IPO platform. SME IPO refers to the small and medium enterprises (SME) company to offer its shares to the public in order to get listed on the BSE SME or NSE Emerge platform.  While there are enhanced criteria and metrics to be listed on the main board, SME platforms allow certain relaxations which in turn allow small companies to access capital, provide visibility and liquidity for shareholders among other benefits. 

The number of companies to access capital markets is only likely to grow here on. IPO is a mechanism which allows investors to participate in the Indian growth story. 

Also Read: IPO Investing: Here are some effective guidelines!

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