Gluing to IPOs

First-time investors are swarming the equity markets to earn quick bucks
Representational Pic
Representational Pic

In the ongoing Covid-19 crisis, we have witnessed an unusual huge flow of new gullible investors into the equity market. When millions were struggling to stay alive after hit by the deadly virus and millions were losing jobs owing to the pandemic-induced lockdowns, an unprecedented rush was observed in the capital markets with first-time investors boarding the platform. In an otherwise grim situation, the markets witnessed festive mood and gaining new heights every passing day became order of the day. This unusual enthusiasm even surprised the market experts.

One of the most notable activities in the markets has been the boom in the initial public offerings (IPOs) of companies seeking to list their shares. Even small companies came out with IPOs and successfully attracted bids worth thousands of crores.

I have been regularly receiving emails from various sections of the readers seeking information about the current IPO boom. Most of them are not investors in the market, but have desired to take route of the IPO to enter the market. Interestingly, some people around them have been new entrants in the share market and their investment in some IPOs has given them good returns after these companies were listed on the stock exchanges.

Of course, the current IPO boom wooing a huge section of people who have been all along their life banking upon bank schemes to multiply their savings. The main attraction to shift their investment from a bank term deposit to the share market has been the quick and hefty returns earned in investment in shares of a company. Here these first-time investors are mostly unaware about the volatility of the market.

Risk in the market is a huge issue and needs a thorough deliberation to make the investors, particularly the new breed of gullible investors, aware that returns in the share market are of course higher, but the risk of losing even the capital investment is a known possibility in the market.

However, let me today deliberate upon some important aspects of the IPOs which is currently dominating the share market. One needs to know the product before laying hand on it.

The massive success of some IPOs like Zomato etc. has made the small investors to believe that there is good money to be made by applying for an IPO. They hope to get an allotment, and then sell for a gain on the day of listing or in near future to book decent profits. Even the investors who have been in the market for a considerable time believe so and these type of investors bear risk tolerance more than the new entrants in the market.

It has also been an opportunity for banks to lend money to prospective investors to finance their IPO purchases. Here it is advisable not to borrow money for investment in share market. It is a double edged sword.

What is an IPO?

As already stated in the beginning, IPO stands for initial public offering. Basically, it is a route adopted by the companies to raise funds for expansion of their businesses. In this process, the company sells a portion of the company to public shareholders.The company then gets listed on stock exchanges like the NSE or BSE and its shares are traded actively.

What is the eligibility for a company to launch an IPO?

The process of launching an IPO for a company is not so easy as it appears. The company intending to go for an IPO has to be of a certain size. As per the information available, the company must have had at least 15 crore rupees in profits in each of the previous three years. The business’ valuation must be at least 10 crore rupees, and the promoters must have at least 3 years of experience of running the business.

The company has to hire investment bankers. The investment bankers conduct detailed analyses of the company, audit financials and streamline processes in line with the best practices. Besides, they create an exhaustive document that tells prospective investors everything about the business.

Then the company has to put in an application with the Securities Exchange Commission of India, which must sign off on the IPO.

Why IPOs are attracting investors?

The high returns on investment in share market and that too at a time when pandemic-induced lockdowns have played havoc with the economy, has been the main attraction. We have observed that the interest rates on deposits are very low and high inflation has been eating up the savings of people. In the current pandemic times, money invested in term deposits isn’t growing enough to negotiate the rising inflation.

The policy maintained by the Reserve Bank of India (RBI) since the onset of Covid-19 pandemic, has led to lower interest rates. The central bank has pumped new currency close to Rs 5.5 lakh crore into the financial system. Besides, It also cut the repo rate to an unprecedented low level.

The pandemic-induced lockdowns left innumerable small businesses shut. Millions of people lost jobs and millions saw drastic cut in their incomes. All this has led to a situation where people had to look for alternatives to generate an extra quick income. It’s here share market came into the focus of those who were contended to be strangers to the market.

As you know, to enter into the stock market, one needs to open a demote account. According to the reports, the number of such accounts between December 2019 and May 2021, have gone up by 55 percent to 6.10 crore.

The above mentioned scenario is believed to be the reason behind current boom in the IPOs people have been using IPO route to stay invested in the market.

What is difference between a stakeholder and a Shareholder?

Stakeholder and shareholder are not similar in status. A shareholder is always a stakeholder, but a stakeholder is not always a shareholder.

Let me first explain a shareholder.

A shareholder owns the shares of the company. Any one, either an individual, or an institution, that owns at least one share of a company is called shareholder of the company. Performance of the company directly impacts a shareholder. A good performance increases the stock price of the company and consequently the shareholder’s value of investment increases. On the other hand, a poor performing company sees its stock value declining and here the shareholder’s investment also gets a hit and value of his/her investment decreases. Although shareholders are owners of the company, they are not liable for the company’s debts or other arising financial obligations.

Stakeholders can either be internal or external. Internal stakeholders have a direct relationship with the company either through employment, ownership, or investment. On the other hand, external stakeholders are parties that do not have a direct relationship with the company but may be affected by the actions of that company. The relationship between the stakeholders and the company is bound by a series of factors that make them reliant on each other. If the company is facing a decline in performance, it poses a serious problem for all the stakeholders involved.

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