The Basics of IPOs
IPO (Initial Public Offering) is a way to invest in companies before they get listed on the Stock Market. From tech giants to fast-food chains, IPOs let you invest in the growth stories of your favourite companies before they hit the Market.
Hello and Welcome to our new series - Learn with Upstox.
Here, we shall try to make investing easy and simple. Whether you want to invest in IPOs, Mutual Funds, Digital Gold, Stock Market or Real Estate, don’t worry because we are going to discuss all of these topics here.
And in this article, we will discuss IPOs.
When we want to start a new company, we invest our own money as the capital or we borrow it from our friends and relatives. As the company grows we require more and more funds and to obtain them we either take loans from banks or approach various corporations, investors and venture capitalists.
But even after all this, when our funds get exhausted and we need additional funds to expand our business, we ultimately raise money from the general public.
Now, before we move any further, let’s understand what IPOs or Initial Public Offerings are?
What is an IPO?
When a company offers its shares for the first time, it is called an IPO or an Initial Public Offering. During this process, the company offers its shares to the general public and this entire process is carried out through the primary market.
It simply means that through IPOs, the company collects funds which it uses to grow the business or to pay off any heavy debts. Through the IPO, an unlisted company becomes listed in the stock market.
What does it mean to the company?
When the general public like us invests in IPOs, it gives the company the responsibility to manage it efficiently so that the shareholders aren’t at a loss. This leads the company to make itself efficient and effective.
What does it mean to the investors?
When you buy a share in an IPO, you become a shareholder in the company. It means that you become the owner of that much part of the company which you bought the share for.
Let’s look at some interesting things related to IPOs.
You might have heard this on various media platforms that if you invest in so and so IPOs, you can earn lakhs in a day because of the listing gain. But is it true? The short answer is No.
Because first of all - you can’t invest unlimited money in an IPO. Which means that if you want to buy an ITC share, you can buy one for Rs 1000 or Rs 10,000 according to your wish. But you can’t do that in an IPO. Unlike shares, you can only buy IPOs in lots. So you could take one lot or you could take multiple, which usually adds up to around Rs 14,000 or Rs 15,000.
So, even if you get the listing gains and double your money, you’re going to get a maximum profit of around Rs 15,000. Hence, it’s not at all true that you’ll invest in an IPO and become rich overnight.
Secondly, the IPOs which are successful are oversubscribed. Take IRCTC for example, it was over subscribed 112 times! But what does that mean? It means that of the 112 people who applied, only one got the IPO. And you definitely have to be lucky to get this IPO amongst 112 people for Rs 15,000.
Now, the question is:
Should you invest in an IPO?
Again, let’s take an example to understand this. Suppose you want to buy an ITC share and you want to buy it for Rs 200. Now, there is also an investor who has ITC shares and he wants to sell it for Rs 210. In this case, there’s a seller and a buyer who negotiate and then decide to sell and buy the share for Rs 200, and hence the trade will get executed.
When we are trading shares, the price is negotiable. But this is not the case for IPOs. The prices are not negotiable.
Now, let’s see - who decides the prices for the IPOs?
Well, they are neither decided by the government, nor by the public. These prices are decided by the owners of the company itself.
Let’s take another simple example. Assume that there’s a land owner, who wants to sell her land. Now what would she want? She’d obviously want to get the maximum amount of money for her land, not less. She won’t think that because the land’s value is Rs Fifty Lakhs, she’ll only sell within that price range. If some buyer is ready to pay her Rs Sixty Lakhs, then she’ll obviously sell it for that amount happily.
Similarly, the owner of a company will also want to get as much money as possible from the public. And that is why a lot of IPOs are overvalued and not available at the right price. The shares that generally cost around Rs 500 will be available for Rs 700 or Rs 800 during IPO.
But not every IPO is overpriced.
Let’s consider the example of the land owner. If the land owner is in urgent need for money, then she will not wait to get Rs Fifty Lakhs or more, she might even sell it for a lesser amount.
The conditions could be similar for IPOs as well. Company owners will face some restrictions and experiences when working with Banks, NBFCs or while listing their stocks on NSE or BSE. Since these companies have to follow government, RBI or SEBI guidelines, they are under pressure to get their IPOs listed quickly because penalties could be levied on them if IPOs are not listed within the right time period. And they also have to be fully subscribed. And that is why these IPOs aren’t overvalued because they don’t want to take the risk of being undersubscribed.
Because these IPOs follow certain guidelines by RBI or SEBI and are forced to get their IPOs at a fair value, they are called as Forced IPOs.
Forced IPOs are fairly priced and hence it’s a good idea to invest in them.
Because some companies have this pressure, they launch their IPOs through OFS.
What is OFS?
OFS stands for Offer For Sale. Through OFS, the company promoters sell their shares on exchange platforms to lower their ownership. All investors including companies, foreign institutional investors, qualified institutional investors, buyers etc can bid on these shares. This mechanism was introduced by SEBI so that promoters can publicly lower their shareholding. This doesn’t affect the capital of the company as the ownership gets transferred from one shareholder to another.
Let’s understand this with the example of a CAMS IPO pattern. Recently when CAMS launched its IPO, they did so through OFS. Their promoters had liquidated their holding in the market. The major promoters of this company were NSEIL, who liquidated their entire shares which were around 37%. They had to do this because they hadn’t taken the permissions prior to investment from SEBI. Because of which, later on they had to liquidate their shares through OFS.
Now, let’s talk about FPO.
What is FPO?
We have seen that when a company offers its shares for the first time, it is called an IPO. On the other hand, when an already listed company raises funds from the public again, it is called a Follow on Public Offer or FPO.
A company could offer a FPO because of many reasons:
- If it needs funds for a new project, or
- For expansion
Some people consider FPOs to be Right Issue but they are slightly different.
In a Rights Issue, only existing shareholders can participate. Whereas in a FPO, any investor can participate. FPO increases the capital of the company with the chances of diluting its Earnings Per Share (EPS).
If you look from the point of view of the investor, FPO is always a cheaper and safer option than IPO because during FPO, we already know the background, business model, management and strategies of the company. And hence it becomes very easy to analyse if we want to apply for an FPO or not.
But when we talk about an IPO, we have to be very cautious while investing. Because as we discussed, IPOs aren’t always offered on a discount and it means that we also have to make value evaluations.
And even if you are ready to pay a premium while investing in an IPO, you have to make sure that the growth potential of the company is really good.
This year a lot of good IPOs are going to come up and if you want to invest in them, you can do so with the help of Upstox with a very simple procedure.
How to apply for an IPO on Upstox?
- Step 1: You have to click on this link - https://upstox.com/ipo-initial-public-offering
- Step 2: Pick your preferred IPO and click on the ‘Details’ tab
- Step 3: When you open this link, you have to enter your user ID and PAN card details
- Step 4: Now, you will be logged in’
- Step 5: Enter your birth year for verification
- Step 6: Scroll through the summary page of the IPO to the bottom where you will find a ‘Place Bid’ option
- Step 7: Click on the ‘Place Bid’ option
- Step 8: Enter your UPI id here
- Step 9: Choose your investor category. If you’re an existing shareholder, then choose ‘Shareholder’, otherwise choose ‘Individual Investor’ and click on continue.
- Step 10: Bid for shares within the IPOs price band. You could either choose on the price band or simply choose the cut off price. You also have to enter lots here. Click on continue
- Step 11: Verify the order details and
- Step 12: Place the order
After this you'll receive an SMS of payment approval on your UPI app which means that your amount will be blocked till the allotment day.
And that’s a wrap!
Thank you for reading this article. We hope that you found it helpful. If you want to read more on the topic, check out our series on investment topics here on our blog or you could also check them out on our YouTube channel.
Have a good day!