In past one and half year from Avenue Supermarts to Khadim India, all have seen over subscription. This shows the interest and excitement of investors in these IPOs. But its worth noticing that 35% of the IPOs came in 2017 are trading below issue price. Some years back people used to say that one who is new to stock market should start with IPOs. That’s not the case anymore when the IPOs which is priced at 202 times of earning still gets oversubscribed and debuts at 35% premium over issue price. Indian IPO market became highly overvalued due to the fact that subscribers are looking for listing gain. They are not termed as Investor in market they are known as speculators.
To become an investor one need to know the basics and what he should know before applying for an IPO. IPO – initial public offering, when share of a company are available for public to buy it. Those share may be belonged to the current shareholder/s which is called offer for sale or those can be belonged to company which is known as fresh offer. In offer for sale the money goes to the shareholder whereas in fresh offer money goes to the company.
Any company which is going public submit a red hearing document to the SEBI. Investors can look for these documents at website of SEBI or any of the stock exchange where the company is going to be listed.
There are four things one must look at in the red hearing prospectus before subscribing for an IPO –
#1. Risk Factors – there are two type of risk one is internal and other one is external. External risk factors are which are beyond the control of the company. These factor affects the entire industry or the economy. One can say Mr. Donald trump is an external risk factor to the IT industry.
Internal risk factors are one to which only the company is exposed to in the industry. To the most extent company can control them. Some of these factors are – if there is legal proceeding against the company, if promoters are accused of charges, if the group has listed companies and they are facing some issues. One need to read and analyze them. One should think what worst can happen, what is the possibility of that and what will be the consequences of that.
#2. Object of offer – this is the statement which states that how the company will use the money it raises from the IPO. Best object of offer is one in which the company uses the raised fund for business. If the money is used for business it will generate money which results into sound position of the company and will ultimately grows the investors’ money. One should avoid the offerings which will use the raised fund for loan repayment. As one invest in share because he feels that it will generate more money than any of the debt instruments, which means that debt is cheaper than equity. And here when one is paying back to cheaper option available to him by borrowing from a costlier one.
One should also avoid subscribing for those who do not specify the purpose or mentions – general corporate purpose or something like that.
#3. Capital Structure – One should analyze that how are the corporate governance practices in the company. Capital structure is one of the tool which can be used for this purpose. It shows the history of share holding pattern, bonus and splits. If there are a lot of bonus issued in past years, it is a sign of faulty corporate governance practices. One should try and avoid them.
#4. Summary of financial statement – here come can look for balance sheet, P&L, Cash Flow, Ratios based upon one’s own understanding of these they can analyze them.