In recent times, Initial Public Offering (IPO) has emerged as one of the most popular investment options among Indian investors to boost their portfolios and grow their wealth. Driven by the IPOs of Zomato, Paytm, Nykaa, PowerGrid Infrastructure and MTAR Technologies, 2021 has been a bumper year for the IPOs with 63 companies collectively raising Rs1.2 lakh crore, the highest ever raised in a single calendar year.
Some of the upcoming IPOs such as Ola, Flipkart, Swiggy and Go Airlines are already grabbing headlines among investors. If you are an amateur IPO investor, you must conduct due diligence before the investment. Here are some fundamental details to get you started.
What is an IPO?
An IPO is the first issue of shares to the public by a privately-owned company. The company lists its shares on the stock exchange and opens them to the general public for buying. It then becomes a publicly-traded company instead of a privately-owned company. People who buy these shares become shareholders in the company.
However, before launching the IPO in the market, the company has to seek approval from the market regulator Securities and Exchange Board of India (SEBI). The company has to fulfill a lengthy set of formalities and documentation processes to get SEBI approval.
Why do Companies Go Public?
There are several reasons why companies launch an IPO:
- Raise Capital
The companies need additional funds for growth and expansion. IPO can help companies to launch new products, explore new markets, acquire new companies, and open new branches or stores. For example, Zomato launched its IPO to fund organic and inorganic growth opportunities.
- Pay Off Debts
Most companies avail of loans from banks and financial institutions to run their operation. However, debts undermine the value of the company and negatively impact the balance sheet. With funds raised from the IPO, companies can reduce their debt burden and become financially stable.
- Fund New Research and Development
Pharmaceutical and healthcare companies usually raise an IPO fund for their R&D efforts. This is because R&D costs are substantial and it can take years to get the new drug or desired results.
- Give an Exit Route to Founders and Early Investors
IPO enables the company to increase its liquidity. If the existing founders and early investors wish to liquidate their interest and exit the company, they can sell their shares to the public via IPO. They take the money earned from the sale and bid goodbye to the company.
- Increase Brand Reputation
IPO generates huge publicity for the company. It improves their visibility and credibility in the market. The buzz around the IPO gives the company a breakthrough with respect to new customers and market segments.
- Show Transparency
Once the company goes public, they have to strictly adhere to SEBI rules and regulations. The company has to show complete transparency concerning its financial statements, operational and trading activities, compliance practices, etc. Hence, there is very less likelihood of fraud or scams. This kind of transparency builds trust in the shareholders.
- Get Global Attention
A company that launches an IPO gets on the global radar due to an increase in its valuation. It can also explore prospects of mergers and acquisitions from international firms or even consider listing on foreign exchange.
How to Invest in IPO?
You can invest in IPO by opening demat and trading accounts with SEBI-registered broker firms. You should always choose a broker who has strong expertise in dealing with IPO investments and guide you through the entire process.
Did you know that some brokers can also help you invest abroad? So, if you need to know how to invest in US Stock from India, you can do so directly by purchasing US stocks or indirectly through ETFs (Electronic Traded Funds) or mutual funds.
IPO makes a sound investment decision as long as you research thoroughly about the company and ensure that the investment meets your financial objectives.
