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A company can typically go public to raise a good amount of capital in exchange for its ownership. As a private company goes public, it has to go through the Initial Public Offering (IPO) process. All the following steps must be completed accurately to make it successful. Companies that want to expand, grow, or remove debt use the stock exchange to list the ownership of the company in the public domain.
But in the case of investing in an IPO, appearances can be deceptive, as blindly investing in any IPO without good research can be risky. So do proper research and make up your mind whether to invest or not.
You must know that the entire IPO process is regulated by the Securities and Exchange Board of India (SEBI). SEBI is a regulator of all the activities that happen on India’s stock exchange. Since the revolution in trading, SEBI has kept a close eye on the brokers, companies, and other participants of trading to avoid any scams or wrongdoing. The complete process of converting private companies into public ones requires tons of experts like lawyers, underwriters, and auditors.
Table of Contents
What is an IPO Process?
The IPO is a process by which previously unlisted companies sell new or existing securities to retail and other institutional investors.
Prior to the IPO, the company was privately owned and had a limited number of investors. This effectively closes the door to further expansion in the absence of a high-interest loan. But with the launch of an IPO, companies list their shares on a recognised stock exchange. After the completion of the IPO process, these shares can be listed and freely traded in the share market.
The IPO Process Roadmap
The process of an IPO is detailed and involves simple steps.
Investment banks follow two methods to fix the prices of shares.
- In the first method, companies offer a fixed price for their share. When a company decides to issue shares at a fixed price, the price is specified in both the draft prospectus and the final prospectus approved by the SEBI.
- In the case of the other pricing method, the company sets the upper and lower limits of the bidding process. A Red Herring Prospectus (RHP) contains these price bands along with the details of the issuing company, except for the effective date and offer price.
Once a company finalises the price, the IPO issue price is made public. After that, interested investors can apply for an IPO from a broker like Share India. After listing dates, the share will be credited to your Demat account.
Why Should You Invest in IPOs?
One of the retroactive reasons for investing in IPOs is the discounted price of shares. Investors believe that the IPO is offered at a discount price, and after the listing process, the share price will soar, and investors can make good money out of it.
The IPO lock-up period restricts investors from selling the shares for a time period. So, without any additional pressure or frequent selling, the share is in a stable position. After a certain period, the investor can trade their share in the stock market. These lock-in periods apply to insiders, founders, owners, and managers of the company; they also sometimes apply to early investors such as venture capitalists. You can also call this period a cooling-off period to ensure the natural rule of supply and demand. As the liquidity is low in the initial phase, it may increase with time.
Metrics for Judging a Successful IPO Process
To identify a successful IPO, you can go through the following IPO metrics:
- Market Capitalisation: The IPO is considered successful if it breaks the barrier of market capitalisation. So when the market capitalisation is equal to or greater than the competitor, it will be good; otherwise, the performance of the IPO is at risk. The calculation of market capitalisation = stock price x total number of the company’s outstanding shares
- Market Pricing: If the difference between the offering price and the company’s market capitalisation is less than 10%, the IPO is considered successful. If the market capitalisation and issue price are less than 20%, then the performance of the IPO is questionable.
Conclusion
As a novice investor, it’s important to know the process of an IPO and how to make your decision about whether to invest or not. SEBI supervises the complete process of an IPO and stock exchange. To invest in an IPO, you must first open a Demat account. Share India provides a free Demat account opening service. Within ten minutes, you can open a Demat account with Share India.