“An IPO is like a negotiated transaction – the seller chooses when to come public – and it’s unlikely to be a time that’s favorable to you.”
– Warren Buffet
In the last year, Indian Economy saw many dramatic changes. From that surprising date: 8th Nov 2016, exactly eleven months have passed. People still recall those long queues, the banks working overtime, money coming in pieces, and uncertainty coupled deftly with a positive hope- One day; we will have a black money-free economy.
This was not just one step, the government started strategically with Voluntary Disclosures, then Jan Dhan Yojna, continuing with Demonetisation and following up with GST. Multiple reports and conflicting viewpoints influenced public sentiments and manipulated decisions of private firms.
All the changes have combined with a constantly disruptive environment to provide a boost to the previously subdued Indian Initial Public Offerings (IPO). The past year has proved to be a ripe time for investments. Firms have tried to compete with each other, realizing in the process that they cannot keep up their profitability without going public.
In a surprising observation, Tejas Khoday, CEO at Fyers Securities wrote- “ Almost all IPOs since 2016 are trading above their listed prices”. He also insisted that the Indian public has been “warming up” for investments in strong companies with IPOs.
Some questions arise- How much has the upsurge been? How exactly has it affected the economy? To answer these, we need to start with the basics and understand how the change has transpired.
Part1: The Beginning
What is an IPO?
It is a simple tool used by private companies. Through this, the company raises capital by selling its shares to the public. This is the very first sale of stock. Prior to this, a company is ‘private’ with less number of shareholders. After issue, the company becomes a public enterprise and its shares can be bought (by the public) on a security exchange. Young and small companies commonly issue IPOs to expand their capital without taking debts. Some big private firms also issue them to raise capital for their projects.
Let’s suppose the owner (named Z) of a small private company ABC wishes to expand his business. Despite being profitable, he falls short of the required money for expansion. If he doesn’t wish to take debts, he may go to an investment bank to create an IPO. The bank would value the company and split the value into shares. Some portion of the shares will be kept by Z (Let’s say 50%), and the rest would be issued through IPO. In this way, by partially transferring the ownership, Z will have money to expand the business.
How can you Invest?
Investment can be done online or offline. In the offline mode, your next door broker will help in the process. Booking through Online mode is relatively easy. It can be simply done through a demat-cum-trading account. The shares will be credited to your demat account.
Demat Account: The term Demat refers to ‘dematerialization’. This account holds all your shares in an electronic (or Dematerialized) form.
Trading Account: Used to implement trading strategies. Trading strategies include the factors affecting the entry and exit in a trade. These strategies help in minimising the risk of investment and can provide a mathematical expectation of returns.
Risky, aren’t they?
Investing in an IPO seems alluring to many. This happens due to the high returns an IPO can provide. It often happens that these initial shares are oversubscribed and these are allotted to the chosen few (through the lottery system), and these people gain exceptional returns.
However, with high returns comes high risk. An investor before investing in an IPO should be well versed with the following factors-
Historical record of the firm as well as the promoters
The potential growth of the products offered by the firm
Productivity, project value, and risk involved in launching and executing a plan
Technological advancements in the company
Further, a thorough objective analysis of the private firm should be carried out using Red Herring data (Red Herring is the prospectus filed by the company at the time of IPO. It gives most of the data regarding operation of the company). It should be observed if the firm has hired a quality Broker for the IPO process. The future plans of the company and strength of financial statements must also be analyzed.
Part 2: IPOs in 2017
What has happened in the last year?
Since 2016, IPOs have emerged as attractive investment options. Steps by the government and developments in the business environment have prompted companies to go public. Among the numerous IPOs that have penetrated the market, Insurance has scored over others. Let us look at the major IPOs that have found a place in the Indian Market.
Insurance Sector became the flavor of the season!
Last year, the life insurance company, ICICI Prudential became the first insurer in the country to list its shares on an exchange. ICICI Pru raised Rs 6,057 crore through an initial public offer (IPO).
The surge in raising money in insurance sector continued in the last month. Within a week, ICICI Lombard General Insurance and SBI Life Insurance Company went public. While ICICI Lombard GIC garnered Rs 5,700 Crore, SBI life raised Rs 8,400 crore through IPO.
The impending IPO in the next week is General Insurance Corporation of India(GIC Re), the sole reinsurance company in the Indian insurance market. The issue size of GIC Re is Rs. 11,372 crore, which is the third largest IPO in India in terms of size. Also, HDFC Standard Life Insurance and New India Assurance got their approvals from the SEBI to go public.
This sharp change has come over due to bright speculations in the insurance industry. According to the IBEF, India’s insurance market is expected to quadruple in size over the next 10 years from its current size of US$ 60 billion. Amidst the proliferation of insurance schemes, Insurance penetration in India is expected to cross the 4% mark by the end of the year. All these future prospects and regulatory changes made companies to look out for profits by raising money through IPO and increase their market share.
From the stakeholder’s perspective, going public will increase the much-needed accountability and transparency in the sector, leading to a better future.
Finance had its own share!
With the increasing percentage of Non Performing Assets in Banks, the Non-Banking Financial Company (NBFCs) and Microfinance Institutions are getting bigger in size and are going public.
AU Small Finance Bank, which converted from NBFC was listed on the exchange in July 2017. The issue size was Rs 1,912.51 Cr and its running profits. Another NBFC, MAS Financial Services IPO, which is currently going on, is expected to raise Rs 460 crore.
And other companies from various sectors…
In Pharmaceuticals sector, Eris Lifesciences issued an initial public offering for a size of Rs 1,741.16 Cr. In Infrastructure sector, Bharat Road Network went public with an issue size of Rs 600 Cr.
Further, there were various other companies entering the IPO mania including:
- Apex Frozen Foods (Food Processing Sector)
- Avenue Supermarts
- Capacit’e Infraprojects (Construction Sector)
- Cochin Shipyard
- Central Depository Services (India) Limited
- Godrej Agrovet Limited
- Indian Energy Exchange Ltd (India’s first and largest energy exchange)
- Matrimony.com Limited
- Tejas Networks Ltd
- SnapShot of IPOs
In the first nine months of this year, the Indian companies have raised $17.2 billion dollars. A 138% increase compared to the same period last year. Of which, $4.74 billion dollars fund was raised through initial public offerings (IPO) by 25 companies.
A lot of investors in the domestic market have started investing in IPOs. Market analysts said that adequate liquidity in the market and the desire of institutional investor like private equity players to exit their holdings have created traction in the primary market i.e., IPOs. Besides, gains and returns by newly listed companies are also the positive sentiments. Another important factor that has boosted the market is the government’s recent initiative of divesting its holding in some public sector undertaking(PSUs).
As of now, most of the IPO flowing in are expected to be healthy investments till the overall market conditions remain positive. If the investors remain cautious and chose wisely, these can yield good returns. Let us hope for the best and keep observing the changes in the business environment.
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