The year 2021 has proved to be revolutionary in the landscape of IPOs in India. A lot of big and small businesses that were doing dismally in terms of revenue and profits have rushed to initiate an IPO this year. This trend has been started by a leading food E-commerce company back in July 2021 when they offered their IPO in the market despite highlighting heavy losses for the past few financial years. A host of other big names have followed suit.
The quick and widespread popularity that the trend picked in the field of commerce, especially highlighted in startups, is evident of the fact that there must be some profitable reasoning behind the decision.
Below we have discussed some of the reasons that may justify the steps taken by these popular businesses:
Factors that enable loss-making companies to issue IPOs
The reasons behind the move can be several, depending from business to business. However, the two prime reasons that may have led to the move are Market Valuations and Interest rates.
IPOs have a history of experiencing a boom when market valuation reaches all-time highs. Additionally, when interest rates are low, borrowing becomes easy. This leads to a large influx of money into the stock market, which in turn soars the valuation. In fact, when interest rates are low, and borrowing is easy, valuations take a backseat in the investor's priority list. The main focus comes down to potential future growth.
Following this principle, startups like Zomato have successfully issued IPOs to raise funds despite suffering heavy and consistent losses since the market is currently evaluating them on their potential, not their current valuation or earnings. Thus, they have been able to garner a considerable response in the stock market and raised funds well above their expectations.
Reasons to Invest in IPOs
According to a recent report by Ernst & Young the number of IPOs in India rose from 1 in Q1 of 2020 to 17 in Q1 of 2021. The huge jump is indicative of the growing market of IPO.
When IPOs are soaring, the one question that undeniably arises in the mind of most investors is what makes investment in IPO different or better than other investment options available in the share market.
To answer that, we have listed some prominent benefits of investing in an IPO as follows-
Buy low- At the time of making an Initial offer to the public, most companies give a certain discount on the face value of their shares. Thus, by investing in IPOs, investors can get more shares for relatively lesser money, which makes IPOs attractive for investors.
Higher Returns- The Indian business and startup markets have been growing rapidly. If picked correctly, the investor can get very high returns from his/ her investment in a promising company’s IPO. As the company progresses and increases its revenues and profits, the returns of the initial investment will increase with it. Thus, the usual trend of rapid growth in companies offering IPOs makes it a good investment option.
Beginner-friendly- Investment in IPOs is not as tedious as some of the other options available in the market. IPOs are thus beginner-friendly investments. This enables even the new investors with limited knowledge and experience to invest in the primary market without fearing extreme risk liabilities or capital requirements.
The risk associated with investing in loss-making companies' IPO
The purpose of IPO is for the company to raise funds to provide for its future plans and expansions. Once the funds have been raised, it is the duty of the business to utilize them in the best possible manner and realize their goals before providing consequent returns to their investors. However, there is always a possibility that the borrowing company may fail to employ the funds properly and not be in a position to provide returns to its investors in the future. Thus, to avert this risk, investors need to exercise proper precaution and spend due time in evaluating the valuations and potential of the companies before they invest their money in IPOs.
Getting started with investments in IPOs
IPOs are fast- growing and carry several benefits. One can avail these benefits by following the simple steps as mentioned below-
Selecting the ideal IPO- The first and foremost step for investing in IPOs is to study the various options available and select your ideal investment. You can rely on information from the company prospectus for making this decision. The prospectus is a document that is mandatorily issued by all companies at the time of issuing an IPO and covers all relevant details of the company that may facilitate an investor's decision.
Choosing and enabling mode of investment- After selecting your ideal investment option, you now need a Demat account for trading. A Demat account can be made very easily online by supplying basic information about yourself and identity proofs such as Aadhaar Card and Pan Card. You can also rely on offline mediums of investing by visiting your broker and carrying out the procedures from there.
Placing the bid- You are now required to select the number of shares you wish to apply for in the IPO and place a bid on them. You can revise your bid in IPO investment.
Allotment of shares- Typically, the number of applications exceeds the number of available shared in the market so, most investors get fewer shares than what they applied for. If, however, the investor gets allotted all the shares he applied for, he will receive a CAN number within six days of the transaction.
Now the investor only has to wait for the stock listings to be revealed which usually get done within seven days of the finalizing of the share allotment.
The trend of IPOs in India is fast picking as the new-age startups have joined the race recently. With the loss-making companies offering their shares in the market, the investors need to be even more careful while analyzing the IPO investments they make. If they make a correct assessment, these presently loss-making businesses may arise to expected or even greater levels of profits and provide very high returns in the future.
The author, Ankit Yadav, is Wealth Manager (USA) and Director of Market Maestroo Pvt. Ltd. The views expressed are personal
First Published: IST