Fundamentals of IPOs
Right since mid-2016, it has been raining IPOs at the street in India. Investing in IPOs has become a buzz in the investor fraternity in India. Many good private businesses have taken to the Indian stock markets in the past year or two, making IPOs a very popular investment tool. Indian investors now often wait for news on upcoming IPOs because they have realized the potential it possesses as an investment asset class in terms of maximizing money while helping in diversifying. An initial public offering (IPO) is a
mechanism where a private company offers its shares to the public at large using a prominent stock exchange as a medium. A private company that makes IPO, does so with the main objective of listing its shares for public trading on recognized stock exchanges such as the BSE or NSE. It is important to note that this will be for the first time in the private company’s history that it will be undertaking this step. A private company, through an IPO, offers part ownership to its investors. However, the extent of the ownership is defined by the extent to which each investor has subscribed to the company’s shares through the IPO. IPOs are an effective mechanism for a private company to procure funds when it most needs them. One must have to bear in mind that private companies or SMEs are in general need of funds on a regular basis for expanding their business or for diversifying their product portfolio. They can use the money proceeds of the IPO to fund their capex requirements. Moreover, all they have to do to get these funds is to share part of the ownership in the company with the investors only to the extent invested by each of them in the company through the IPO. Therefore, private companies or SMEs wanting to scale up their production units or diversify business can fund their capital requirements through IPO proceeds. Moreover, IPO is a more cost-effective way for a private company or SME to raise capital. This is purely because funds raised through IPO are not a loan taken from investors. In fact, the funds represent the investors’ equity stake in the company. Since the funds are not debt, there is no interest that needs to be paid by the company to the investors as in case of debentures. Thus, IPOs are a very profitable investment mechanism for a company to procure funds.
When a company uses IPO proceeds for funding its working capital, it improves its operational efficiency, which leads to longterm benefits for the people investing in the company through the IPO. Likewise, when IPO proceeds are used by a company to repay its debt, it improves profitability through reduction in interest expense, which again improves the overall business profitability, creating long-term benefits for investors in the company through the IPO. It is very crucial to for you as an investor before parking your money in the IPO to know about the company’s business prospects, industry outlook, and other related key business and market factors. Read the prospectus carefully and do your research on the Internet about the company. This will play a big role is helping you decide to invest in the IPO and in assessing the long-term profitability. To know more about investing wisely, easily, and securely in an IPO, seek the help of expert financial services providers in India, call us on 022–2858 4545 or visit us at www.investmentz.com