2024 was a bumper year for initial public offerings (IPOs) in India. Several big-ticket IPOs hit Indian markets last year. Even this year, many mainboard and SME IPOs are in the pipeline. Investing in IPOs lets you share a company’s growth story and own its stocks. However, participating in an IPO warrants careful preparation. The decision shouldn’t be rushed but a calculated move.
Preparing for Upcoming IPOs
Understand Your Financial Goals
Before participating in an IPO, you must know your financial goals. Find out if the IPO fits into your overall financial strategy. Are you looking to build long-term wealth, diversify your portfolio, or gain entry into a rising sector? Clearly defining your objective lays the foundation for a sound investment strategy.
Investing in an IPO only if it fits your broader strategy and goals is prudent. Not every IPO that hits the market is worth investing in.
Study the Company’s Red Herring Prospectus
Every company going for an IPO must prepare and file its red herring prospectus (RHP) with the capital market regulator SEBI. The RHP is a vital document with essential details about the company and the IPO. The RHP has many sections and often runs into hundreds of pages. Some essential sections that deserve the attention in a company’s RHP, which help you better understand a company and its prospects, are:
- IPO Objectives: Determine how the company plans to utilise the IPO proceeds. Is it to fund expansion, invest in new technology or repay its debts? While the previous two are positives, the third one can be a red flag.
- Financial Performance: A critical section of the RHP is about the company’s financial positioning. A company with healthy revenues, profit after tax, return on equity, etc., is more promising than a company that has experienced negative growth.
- Internal Risks: This is another vital section of the RHP that highlights the risks a company is exposed to. Every company going public to offer stocks faces certain internal risks. While some are within the company’s control, others are beyond it. It’s crucial to be aware of these risks and ensure you’re comfortable with them. Risks can significantly impact your investments and hence warrant careful consideration.
- Industry Outlook: Review the industry outlook section of the RHP to understand how the company’s industry is poised to perform in the future. This will help you determine how the company will likely perform and your investments.
- Offer Structure: This section of the RHP discusses the maximum number of shares likely to be allocated to different categories of investors, such as qualified institutional bidders (QIBs), retail investors, and non-institutional investors (NIIs). You can expect the shares to be allocated depending on your category.
Open Demat Account
Once you’ve ticked the above boxes in the RHP, the next step is to open Demat account. This account helps you hold shares electronically. You can open a Demat account with a full-service or discount broker. Make sure to evaluate the broker’s reputation, service quality and charges. Go for a broker offering high-quality services at a cost-effective price point.
Set a Budget
This is another essential consideration. Decide how much you are willing to invest in the IPO. While investing in an IPO may seem lucrative, it’s essential not to invest an amount you can’t afford to lose. You will get information about the price of shares you need to pay. If the IPO is fixed, you need to pay a predetermined price.
On the other hand, if it’s a book-built one, the company sets a price band. You’ll receive the shares only if your bid falls within the band and the cut-off price is set.
Choose the Cut-off Price While Applying
If the IPO is book-built, it’s prudent to opt for the cut-off price while applying. Choosing the cut-off price increases your chances of allotment and eliminates guesswork to a great extent. This option is available when you apply for an IPO online through your broker’s trading platform.
That’s not all. Opting to invest in a company’s IPO by opting for the cut-off price also makes refunds easier, in case you’re eligible. Equally important is to verify the details in your IPO application, including the number of stocks you wish to acquire, bank account details, PAN, etc. Any error can result in your application being rejected.
Know the Mechanism to Check Allotment Status
Once the IPO hits the market, you should know how to check the allotment status of the shares. You can check the status from the stock exchange, BSE, or NSE, where the IPO is likely to be listed, or from the IPO’s registrar, which you learn from the RHP.
Stay Informed Post Listing
While it’s natural to be excited if you receive the allotment of shares, staying informed after listing is vital. The performance of shares after listing goes a long way in determining whether your investment is a success or failure. In the past, several big-ticket IPOs that performed well on the listing day nosedived after listing, resulting in losses.
Therefore, you must stay informed about the company, its financials and performance even after listing.
Conclusion
Just like you need to prepare for any big event, an exam, match or interview, it’s crucial to cover all bases while applying for upcoming IPOs. Making the right moves enhances your chances of success.
HDFC SKY is your one-stop destination to invest in all the IPOs. Get a Demat account and get access to the upcoming IPO list along with closed recently listed and current ones. Along with IPOs, you can invest in various financial instruments like mutual funds, stocks and commodities. Happy investing!
