Initial Public Offerings (IPOs): What You Need to Know?

An initial public offering (IPO) is the procedure of introducing shares of a privately held company to the public through issuing new stock, marking its debut in the stock market. This strategic move enables the company to secure equity capital from public investors. The upswing in IPO activity can be attributed to companies’ eagerness to access capital markets, strategically timed before or after the Lok Sabha elections. This trend is bolstered by robust economic activity and a favourable outlook from both domestic and international investors toward India. The positive momentum is anticipated to persist well into 2024.

Upon the company’s first Initial Public Offering (IPO), a direct relationship is established between the company and investors. The funds generated are designated as the company’s “Share Capital.” Shareholders, as a result of their participation in the IPO, become owners of the company, entitling them to ownership rights. Subsequently, these shareholders retain the freedom to divest their investments through the secondary market.

Thus, investing in IPOs can be a smart move if you are an informed investor.

There are two common types of IPO:

1. Fixed Price Offering

A Fixed Price IPO is essentially the predetermined price set by certain companies for the initial offering of their shares. Investors become aware of the stock price designated by the company for public release. The market’s demand for the stocks becomes evident upon the closure of the issue. Investors engaging in this IPO are obligated to ensure the full payment of the share price when submitting their applications.

2. Book Building Offering

In the book-building process, a company launching an IPO provides investors with a 20% price band for the stocks. Prospective investors participate by placing bids on the shares before the finalization of the price. In this context, investors are required to indicate both the quantity of shares they wish to purchase and the price per share they are willing to pay. The minimum share price is denoted as the floor price, while the maximum is identified as the cap price. The conclusive determination of the share price is contingent upon the bids submitted by investors.

Listed below are some reasons to awaken your calling to invest in an IPO:

1.     It provides investors with the opportunity to enter the inception stage of a company and capitalize on its potential for growth.

2.     In India, IPOs are typically priced at a discount to their market value, offering investors favorable value for their investment.

3.     It aids in the portfolio diversification of an investor, mitigating risk and enhancing overall returns for individuals.

4.     It has the potential to raise awareness regarding a company and its offerings, paving the way for heightened demand and elevated stock prices in the probable future.

5.     It offers liquidity, enabling investors to swiftly and effortlessly sell their shares when the need arises.

6.     IPOs hold the promise of yielding substantial returns, particularly in swiftly expanding sectors like technology and healthcare.

7.     An IPO could present tax benefits, given that long-term capital gains are subject to a lower tax rate compared to short-term gains.

The stock market experienced several significant events in 2023. A few company shares performed remarkably well. The Tata Group conducted its first initial public offering (IPO) in twenty years. Even before they could purchase shares, people were thrilled about it. The IPO opened on November 22 and closed on November 24. On the last day, the bids exceeded the available supply by nearly 69.43 times. The final listing took place on November 30. With its shares trading at ₹1,200 on the National Stock Exchange (NSE) and ₹1,199 on the Bombay Stock Exchange (BSE), Tata Technologies got off to an impressive start. This represented a stunning 140% premium over the price range of the initial public offering.

Choosing to invest in an IPO presents an outstanding avenue to capitalize on the nation’s economic expansion and the potential of emerging companies joining the market. IPOs offer the opportunity to engage with a company during its initial phases, with the prospect of reaping substantial returns in the future.

Making money from investing in an IPO depends on picking the right ones. To decide, it’s significant to research well about each IPO in the market. The amount of interest people show in an IPO, called its subscription status, is crucial. If many people want it, there’s a better chance of making money when it starts trading. On the other hand, if not many people are interested, you might not make much profit, or even face a loss. So, checking the subscription status tells you if there’s a good chance to make money on the first day or not.

Against the backdrop of a rapidly progressing economy and a surge in IPO activity, India emerges as an attractive investment prospect for both domestic and international investors. Nevertheless, it is imperative to undertake comprehensive research, evaluate associated risks, and seek professional counsel before making any investment decisions. With a well-informed approach, incorporating IPO investments can constitute a valuable enhancement to any diversified investment portfolio.