By: Namisha Agarwal
An IPO is like a negotiated transaction - the seller chooses when to come public - and it's unlikely to be a time that's favourable to you. - Warren Buffett
The choice of whether or not to go public during a company's existence is crucial. When a company goes public, it offers its shares in an IPO to raise external equity capital.
An Initial Public Offering (IPO) is the first time a corporation sells shares to the general public. An organisation may choose to get listed in a stock market for a variety of reasons, such as simpler access to extra cash, reduced funding costs with better diversity and liquidity, as well as the opportunity to make some appealing investments. After getting listed, the organisation must adhere to certain regulatory norms set by SEBI and publish quarterly reports to the public after changing its hierarchy from private to public.
LET'S DECIPHER WHAT AN IPO CYCLE MEANS
The IPO isn't just one big event that happens on a random day. It is a lengthy and time-consuming process. A firm must engage an investment banker to oversee the entire process and act as an underwriter for the issuance. Investment banks are in charge of handling all legal and compliance matters with the financial regulatory body, i.e. SEBI and set the initial stock price at a level that will attract enough investment to secure the financing that the company wants or needs.
The steps that make up the IPO cycle are structured as follows:
SEBI Registration and Approval: The official procedure for creating and issuing an IPO is through a well-structured and well-documented manner. The transformation that a firm undergoes when it goes public justifies all of the red tapes. The SEBI must receive a registration statement as the first step. This declaration often contains details on the company's financial situation and possible business strategies. SEBI examines it and then decides whether to approve or disapprove.
Building a Draft Prospectus: After going through the approval process, the firm should create the Draft Red Herring Prospectus (DRHP). The DRHP is a thorough report that includes information on the company's business strategies, financial performance and stability, office and plant locations, and anticipated IPO price range. A firm that wants to publish a red herring prospectus must submit it to the Registrar at least three days before the subscription list and offers are open. Here, investment bankers come into the picture to draft the prospectus, and the main intention behind showcasing the DRHP prospect is to get a review from the investors.
Roadshows: The company tries to generate interest in the market through roadshows before an IPO opens to the general public. Over two weeks, the company's leaders and employees spread the word about the upcoming IPO around the nation. The executives employ various approachable techniques, including Q&A sessions, multimedia presentations, group sessions and meetings, online virtual roadshows, and others to advertise the upcoming IPO. In essence, this is a marketing and promotion strategy to draw in potential investors.
Pricing range: After going through the above steps, the company can begin pricing its IPO through a fixed-price IPO or a book-binding offering. When a fixed price offering is made, the cost of the company's stock is disclosed beforehand. In the case of a book binding offering, a price range of 20% is declared, after which investors may submit bids that fall within the price range. Investors must submit their bids for the auction in accordance with the company's quoted Lot price, which specifies the minimum number of shares that must be purchased. In addition, the company stipulates an IPO Floor Price, the lowest bid price, and an IPO Cap Price, the highest bid price. Investors may avail themselves of the chance to revise their bids within the allotted time during the booking period, which is usually available for three to five working days. The company will decide the Cut-Off price—the final price at which the issue will be sold—after the bidding procedure is through.
Bidding: The dates for such issuance are determined after a number is assigned to its size and price range. On the specified days, investors may submit their offers to purchase the company's shares.
Share Allocation: The company and the underwriters will decide how many shares to allot to each investor once the IPO price is set. Partial allotments will be made if there is an over-subscription. Within ten working days of the final bid date, the IPO stocks are typically allocated to the winning bidders.
Listing: Depending on the demand and price bidding by investors in the IPO application form, the shares are distributed. Investors receive the shares credit to their Demat account when this is completed. Investors might not get the exact number of shares they requested in the event of oversubscription (when demand exceeds the number of shares launched by the firm). They could receive fewer shares once the lottery is over, and some shareholders might not even receive any shares. These investors receive a reimbursement of their investment in such situations.
INTRICACIES OF IPO
IPOs usually happen in cycles. Because IPOs tend to arrive in waves marked by hot/cold market periods, these cycles in IPO volume and swings in the extent of under-pricing are noted. Hot issue markets, which often indicate periods with high average initial returns, appear to be followed by times of high IPO activity. Two widely used indicators of IPO volume are the number of IPOs and the total funds obtained in the offers. The number of enterprises going public is far from random, and it has a strong correlation with underpricing. However, the cycles of underpricing and IPO volume are not always precisely timed.
METRICS FOR JUDGING A SUCCESSFUL IPO
When evaluating an IPO performance, the following measures are used:
Market Capitalization: Within 30 days of the initial public offering, the company's market capitalisation must be equal to or higher than that of its industry competitors for the IPO to be deemed successful. Otherwise, the IPO's success is in jeopardy.
Market Capitalization = Stock Price x Total Number of Company’s Outstanding Shares
Market Pricing: An IPO is deemed successful if the difference between the offering price and the issuing company's market capitalisation is less than 20%, 30 days after the IPO. Otherwise, the IPO's success is in doubt.
The Indian stock market saw a spectacular bull run in 2021, with benchmark indices reaching new all-time highs until October when it peaked. Following that, it had considerable pushback from higher levels, particularly with the discovery of the novel Omicron Covid-19 version in November 2021. The year 2021 proved fruitful for primary markets, with over 63 IPOs going public, raising over 1 lakh crore.
Given the present market situation, we are on the approach of setting a new high. Thus, this would be "icing on the cake" for prospective IPOs. With strong underlying data backing them up, IPOs may be multi-baggers for investors. Growth-oriented businesses, on the other hand, will position their value at high premium pricing. So, with the support of the bull run, the index is set to establish a new all-time high, and an IPO might be one method to reward investors with multi-fold gains.
CONCLUSION
The IPO process takes several months. It necessitates that the business engage in a charm offensive, perform advertising blitzes, complete extensive paperwork, resolve intractable issues, endlessly analyse numbers, and put in endless hours of labour.
After the IPO equities start being traded in the secondary market, the price of the stocks may or may not rise. Promoter and non-promoter stockholders must retain their IPO shares for specific amounts of time due to lock-in periods stipulated by SEBI. There can be a brief decline in the stock price when these periods expire.
IPO is a great money-making opportunity. High-profile companies make headlines with huge gains when they go public. But while they're undeniably trending, one must understand that IPOs are risky investments that deliver volatile returns over the long term. As the famous saying says, "The key to making money in stocks is not to get scared out of them". We need to understand it and invest accordingly.
Knowledgeable Article💯💯