Heard your friend got a listing gain of 270% on Sigachi Industries and you regretted not investing in the company?
To compensate and probably because of FOMO, you tend to invest in the next upcoming IPOs. In 2021, 63 companies
collectively raised ₹1,18,704 crore (USD 15.4 billion) through IPOs. This is the most money raised through IPOs in a
calendar year. The previous best year for IPO was 2017 when ₹68,827 crore was raised.
During Jun-Sep-2021, IPOs were coming up with absurd valuations. Such valuations are seen mostly at the peak of the
market. This pattern has played out exactly like the years 2007 and 2017.
We have seen the listing gains that the IPOs in 2021 gave its investors.
In pursuit of such inevitable gains, many retail investors have started to subscribe to the IPOs. The average number
of applications from retail investors has increased to 10.02 lakh, in comparison to 7.57 lakh in FY23.
However, as retail investors, you should keep the following points in mind before investing in an IPO.
1. Know the company
Before purchasing a bike, you would ask your peers and look into factors like mileage, company name,
after-services and other such details. The same rule should be applied before you invest in a company either
through IPO or via the stock market. Scrutinise the company's prolific management, assess the financial
statements, promoter’s stake, the background of the company, understand the purpose of the issue, learn about
the sector to which the company belongs and other details that can affect the issue.
2. Check for IPO valuation
The euphoric year 2021 gave the companies the confidence to the companies to go for an IPO. Owing to the 2021
IPO boom that was witnessed in India tend to overprice their valuation. Hence it becomes necessary to look at
the company's valuation, market share and compare the prices among its peers & competitors.
3. Never trust every bit of information online
Everything online is not necessarily true. Certain companies tend to push the positive narrative before their
IPO listing. This is merely done to build a liking for the stock and attract investors. Irrespective of the
disclosures and disclaimer followed, investors might overlook the aspect of the disclaimer and believe in the
information mentioned in the advertisement.
4. Brand name is good but not always
Retail investors mainly look at the brand name associated with the IPO, but it might not be fruitful always.
Research and read more about the company through its prospectus before investing. Dig deep into the managerial
power of the company, board of directors, independent directors, audit committee and check if there were
frequent changes done in the management or the auditors.
5. Current market situation
Analyse the current market situation as it will decide the fate of the IPO. Compare how the previous IPOs have
performed in the recent past. This could be an indicator of how the IPO you want to invest will shape up.
6. Intention of the investors
Every investor wishes to gain money when they invest in an IPO but one has to define if they are looking at a
listing gain or long-term association with the company. Some investors stick to listing because of the revenue
made by them on the listing gain. But, this might not yield results always. The decision to stay long term will
be based on factors like past performance of the company, future plans, management, industry and sector
analysis. Hence, defining the intent of your IPO investment will be crucial.
7. Nature of IPO
Companies often consider going public through a fresh issue when they need funds for expansion. The promoter's
willingness to dilute their holding is seen as a positive sign for investors. However, sometimes an offer for
sale is used to provide liquidity to private equity investors or promoters looking to exit, potentially
burdening retail investors to give the exiting members a high valuation. It's wise to be discerning about the
8. Lack of Information
Assessing a company's performance during an IPO can be challenging since only the last three years of data are
typically available. To make a more informed judgment about the company's future prospects, having historical
data spanning at least 5 to 10 years is essential to understand its progress since its inception. Insufficient
data can lead to inaccurate investment decisions.