There was a lot of uproar in the Indian market regarding some recent IPOs listing and how lakhs of investors lost money when the IPO was listed at a discount, and the stock continued to fall later in the day. Most individuals apply for IPOs without completing their homework and for ridiculous reasons. There’s a good premium on the grey market, it’s a well-known brand, and everyone is talking about how large the IPO is; my stockbroker advised this IPO, and so on.
The stock market performance of new-age technology businesses has recently been a source of intense dispute. Paytm, Cartrade, Policybazaar, Fino Payments, and Zomato have all received criticism from investors as their stocks sank on bourses in line with the overall market trend.
A few market commentators have previously labelled new-age computer businesses’ highly-hyped initial public offerings (IPO) as a massive bubble. The most common charge was that promoters and founders pushed their loss-making businesses to the market and sold their interests to public shareholders to profit.
Retail investors who spent big on new-age IT businesses are now kicking themselves since many of them are selling below their IPO price. Following the losses, the high valuations of companies for pre-IPO and IPO private placements and issue pricing were scrutinized.
The main reason behind the loss of common people’s money is that companies like Paytm and Zomato launched their IPOs at a very high valuation. Knowing that these are loss-making companies doesn’t justify why SEBI approved that valuation. IPO of these companies was oversubscribed, and when going public at the Indian stock market, the price of their share is continuously decreasing. Common investors are continuously losing their hard-earned money. So before investing in an IPO or company, people must consider these critical points.
Investors Watch these before investing in any IPO.
1. Research very well about the company
When it comes to stock investment, the capacity to undertake extensive research on the company you want to invest in, no matter how time-consuming it may appear, is the best strategy. Download and read the company prospectus from the firm’s official website or the SEBI website. If you don’t grasp specific terms, ask for help, but don’t skip parts. The prospectus includes information on the company’s financial performance, the rationale for the IPO, promoter information, dividend policy, offer information, management information, regulatory and statutory disclosures, etc.
As a result, the prospectus is a fantastic place to start your investigation. To supplement your study, read the company’s press releases and keep up with any current developments. To get a better idea of how reliable the firm is, look for incidents of corporate governance failures, legal conflicts the company has been involved in, ongoing compliance concerns, quick managerial departures, etc. Only then should you move along if you are entirely pleased on all fronts. While this may appear to be a time-consuming task, do not skip this step. You could find some flaws that will help you evaluate whether or not this is a good investment option for you.
2. Reason behind IPO
A corporation must file a Red Herrings Prospectus (also known as DRHP) to the SEBI when it goes public. This prospectus covers all of the pertinent information regarding the offering. Before applying for an IPO, one should read the DRHP carefully and learn everything there is to know about the offering. One item to watch for is the issue’s goal or what the firm intends to accomplish with the cash received from the offering. If the product’s primary purpose is to help the client grow and expand their business, it is typically a significant plus.
Other incentives might include paying off the company’s present debt (not a good sign), providing an exit to early investors (although specific regulations apply, this can’t be the principal or significant purpose of the offering), etc.
3. Valuation of the company
Investors should also look at the company’s values, as the offer price might be low or overpriced based on the industries in which it operates and the financial parameters.
4. Read the red herring prospectus
When a company like Paytm wants to raise money from the public by selling shares of the company to investors, it files a Draft Red Herring Prospectus with SEBI. The DRHP also explains how the firm plans to use the funds received and the dangers investors may face. Because of all of these, before investing in an IPO, investors must read the DRHP.
5. Financial Health of the company
The company’s financial performance must be evaluated regarding whether revenues and earnings have increased or decreased in recent years. It would be a brilliant investment if revenues and earnings were to rise. Before purchasing an IPO, investors should endeavour to evaluate the company’s financial condition. Check the values because the offer price may be low, reasonably priced, or overvalued based on the industry specifications and profitability measures.
6. Analyze management and Promotor Background
It is critical to determine who is in charge of the firm since they are its backbone. Investors should pay attention to its promoters and managers since they play a significant part in all its operations and activities. The organization’s management plays a critical role in propelling the company forward.
Checking the credentials and amount of years spent in the firm by the senior management will give you a sense of the organization’s working culture.
7. Peer Comparison
Always compare the financials, previous growth, prospects, and other aspects of the firm to its competitors. Please take a look at how its close competitors have performed in the past and how their stock prices have performed over time. Also, compare the offering’s valuation to that of its peers; it should be avoided if it appears to be significantly overvalued compared to its counterparts.
To cut a long tale short, most IPOs would earn money in a bull market like the one we’re in now, except for a few exceptions. However, things are not always as they seem, and, like the secondary market, the primary market has its own set of concerns. It’s critical to comprehend the company as a whole, determine whether the offering has a positive future view, and then decide whether or not to file for an IPO based on your study. Common Investors have a higher success rate this way.
Edited by Prakriti Arora