Initial Public Offerings (IPO)
ELM Special Gyan
IPOs should not be reckoned as a fast-track method for earning huge profits. With IPOs, It is generally advisable to invest for the long term .
Here are the not-to-forget smart tips you should consider before participating in an IPO in India: -
Trusting a third-party website’s views on the company is not a wise idea as he/she may have vested interests. It is better to check the Qualified Institutional Buyers (QIB) data for the issue. Also, check the company’s annual growth for the past few years against the growth of that particular industry. This will give you a clear insight into the company’s performance. The DRHP, Company Website, Brokerage Notes, Social Media Interest can also be used in the decision-making process. A thorough research must also be done on the sector/industry in which the company operates.
Check the Promoters
Never commit the mistake of risking your capital without conducting a basic background check on the promoters. Management integrity is a consequential factor in accessing investment decisions.
Also, remember to check the performance of other listed companies of the same promoter (if any).
Companies with Foreign Collaborators
Domestic companies with foreign partners must be preferred for investments as they provide the local partner with technical know-how, thus enabling operating efficiencies.
Check the Company Prospectus
Check the company’s prospectus to know details as to how the company plans to spend the funds collected from the issue. The prospectus shall also give you crucial insights about the growth of the company, future plans for expansion, inherent risks in the business and most importantly the mindset of the promoter.
Know your risk bearing capacity
Debuting companies usually spend heftily on marketing activities with a view to garner investor interest in the IPO. However, it becomes extremely important to separate the wheat from the chaff. Not all IPOs live up to their hype and end up disappointing investors.
Best time to invest in IPOs
The performance of IPOs are closely related to market trends. Listing gains are almost sure-shot and certain in bull markets. On the flipside, bull markets bring with them high valuations as investors simply turn a blind eye to the issue price.
Do not borrow to invest
Present-day, leveraged investments in IPOs have become more or less a norm. This is an acceptable level of risk for investors belonging to the retail quota as the investor is only eligible for a single lot of shares, and that too with a lot of luck.
Note- We have assumed that the IPO has been oversubscribed
Nonetheless, many institutions and other individuals frequently arrange for a bank loan to fund their IPO purchases. They usually apply through the HNI quota and intend to exit by making a quick listing gain. Such practices are an example of unsound risk management as GMPs are their primary decision-making tool. Reiterating what has been said earlier, GMPs are extremely volatile and are prone to manipulation by people with vested interests.
The stock has to list at a very high premium compared to its issue price to make up for the interest payments and turn profitable for those acquiring shares through margin funding. The investor faces a double whammy in case the issue lists at a discount as he also has to account for the interest charges on the entire amount he applied for.