IPO has become a trend like Kaadha in 2021, all thanks to the economic boom which defied all logic. People were and have been witnessing the IPO Mania still in 2022. But they also have been regularly applying to almost all IPOs, hoping to make a good fortune. However, only a handful of people truly understand the IPO game and its psychology. Most of the retail applicants go for an IPO as they think “if you get the IPO, you will double your money”. We’re sure that now almost everyone knows about the IPO, but if you’re still unaware of it, let’s clear the fuss for you.
What’s an IPO?
As taught in a stock market technical analysis course, Initial Public Offering (IPO) is a process when a company goes public for the first time and seeks investment through shares. The investors apply for the IPO if they see potential in it (point gets usually forgotten, haha!). Prior to IPO listing, the company was owned only by the promoters and the venture capitalists (VCs). However, with participation from the IPO, the public will also be the stakeholders in the company’s equity. A company reaches the stage of IPOs after submitting some crucial documents to SEBI which every retail investor should know of.
The company uses a document to communicate and invite the public to invest via purchasing its securities. This document is called a prospectus, and it contains exhaustive information on the financial position of the company. This vital document also encloses names of its directors with details, the objects of the public offer, names of the signatories to the memorandum, changes in the finance, etc.
An abridged prospectus has all the significant information of the prospectus but is rather a compact form, i.e. within 5 pages. This document has to be submitted to the SEBI. In simpler words, it summarizes the prospectus. It saves precious time for prospective investors as they can decide to invest without missing out on any important information.
Draft Red Herring Prospectus (DRHP) (Important Alert!)
DRHP functions as blood, if IPO were a body. Underwriters submit the DRHP to the SEBI. DRHP contains every piece of information about the company’s management, financial statements, reasons for raising money, division of the company, and its future usage. The plans of the company’s and the shareholders’ future benefits are also present in this document. SEBI reads the document and even asks for necessary changes if necessary. People can easily find the DRHP document on the company’s and the stock exchange’s websites. Nowadays, some brokerage companies like Groww also host the DRHPs of all the “about to go IPO” companies.
Red Herring Prospectus
A DRHP that gets approved by SEBI and subsequently gets signed by the company’s registrar is an RHP. Being an improved version of DRHP, it includes some extra details, such as the dates and price of the IPO, with the latest financial data. Interested investors can find complete information about the company in this document. However, if the company goes via a book-building process (determines the share price for the public), then they will not disclose the prices per share. Here, the company takes help from interested investors and places bids, which helps the underwriter to arrive at a price range for the share price of the company.
What is a Price Band?
Price Band is a range within which the company prices their shares. It’s visible when people open their respective Demat account’s IPO section. They can usually see it as a price range, e.g. Rs 2,890-2,900. Here, 2,890 is the floor price and 2,900 is the cap price. The former denotes the minimum buying share price, and the latter signifies that the company can’t hike the buy price above it.
In the RHP development process, once the bids have finished, the public gets to apply for the company shares at the issue price. Underwriters of the company decide this issue price based on the amount the company wants to raise and the demand from investors. When the entire process gets complete and the broker opens the IPO application, interested investors apply for the allotment of the shares at an issue price. The investors can invest only in multiple lots (1 lot = X number of shares). The price on which investors get their allotted shares is the listing price, which depends upon the demand and supply in the market. This is something which you wouldn’t find in any Stock market courses for beginners.
The rule of Minimum Subscription!
As per the rule of minimum subscription, there has to be a minimum subscription of 90% of the company’s IPO for it to be listed on the stock exchange. If the company cannot get its IPO subscribed by 90%, the IPO gets canceled and investors get their refunds.
What is Under-subscription?
An IPO is under-subscribed when the number of shares applied for by the investors is lesser than the number being offered by the company. It happens when investor participation is low because of an infinite number of reasons.
What is Oversubscription?
An IPO is oversubscribed when the number of shares applied for by the investors is more than the number being offered by the company. It usually happens when investor participation is overwhelming because of an infinite number of reasons.
IPOs are highly unpredictable, so knowledge of the relevant terms and information is a must. People burn their hands trying to make 2x or 3x returns by applying in a sub-par company but refrain from investing in a good, pricy company. If IPO investing was as simple as people think, experts would cover it in their stock market courses online. A prime example of people facing losses in an IPO is Paytm. Want to know more about the Paytm story.
Where can you find all this data?
You can find all the data related to past IPOs from here: Money Control
We can find the sheets of IPOs from here: Chittorgarh
Carrying out your own research will help you achieve desired returns in the market, both- IPO and Investing. Doing a fundamental analysis of Indian stocks is something which we teach in our stock market course to our students, so they can win in the stock markets.