IPO pandemic | Raw investors, particularly the first-time young investors, need to understand what these initial public offerings (IPOs) are all about?

Global outbreak of coronavirus among many things has created a unique situation in the financial landscape. The banking system is facing stress on deposits’ front owing to the pandemic-induced financial instability.

On the assets front, the banks have been loaded with all the economic stimulus packages and relief components announced by the government from time to time during the ongoing pandemic. The performance of assets (loans & advances) over a period of time bears a question mark as the scale of economic activities continues to be low to generate decent earnings for the businesses.

   

Precisely, the pandemic has brought stress on the banking system in both ways – deposit as well as asset side. However, the capital markets are witnessing a boom as investors are flooding the financial markets and taking the equity route to make money.

One of the investment options explored by the investors, mostly by the first time investors, in the share markets has been the IPO route.

A report by Refinitiv – a global provider of financial market data and infrastructure, stated that the global primary market was on fire with 670 initial public offers (IPOs) of companies raising a collective $140.3 billion thus far in calendar year 2021 (CY21) till May 10. This is nearly four times the amount raised during the corresponding period in CY20.

Remarkably, at 670, the number of issues / IPOs in the first five months of CY21 is the highest in two decades. Back in the calendar year 2000, 667 IPOs hit the Street globally and raised $82.3 billion in the corresponding period.

However, the money raised thus far in CY21 is second to the $91.8 billion raised via 503 IPOs in 2007, Refinitiv data show.

In the Indian context, a report reveals that 30 companies have already filed IPO papers to raise Rs 55,000 crore, while around 10 more are lined up for this month itself, seeking to mop up another Rs 25,000 crore. Notably, an influx of investors — a vast majority of them first-timers – coupled with a liquidity overflow has been driving the market with a non-stop rally. Almost every week the market hits new peaks. This rush of IPO is going to make 2021 a record year for fundraising through initial public offerings (IPOs).

During the past two years, IPOs witnessed massive over-subscription across sectors and issue sizes because of the record participation of retail and high net worth individual (HNI) segments.

During this period we observed a basic shift in risk appetite of retail investors, largely due to the low interest rates on deposits, a maturing investment ecosystem and the changes in the demographics. We have noticed that the breed of millennial investors is not afraid of taking additional risks.

In the given scenario, we are witnessing the IPO boom all around in the financial markets where scores of companies are coming out with their offers in this financial year.

Day in and day out, we are coming across reports suggesting multiple companies planning to hit the market with their IPOs and this has created a sort of enthusiasm in the market where first-time investors are seen more in queue to invest their money through the IPO route.

In other words, seize the opportunity seems to be the mantra for these investors.

It’s worth mentioning that a good number of Internet firms like Paytem, PolicyBazar etc. lining up their IPOs have created a sort of IPO festival in the financial markets.

It’s also interesting to note that most of the investors, particularly the young ones who are mostly first-time investors, have been showing exuberance for IPOs of the internet-driven firms and are ready to bet on these firms without caring for the risks in such investments.

The rush of investors towards internet stocks seems mostly based on the element of ‘hope’ where the investors may be drawing parallels with Amazon, Facebook etc while planning their investment in an internet-based firm.

But the fact is that every internet firm cannot be Google, Facebook or Amazon. It’s important for an investor to assess whether a firm in which they plan to invest through IPO would be able to dominate its market or would have to share the space with one or more other players. Assessing the long term future of the company is most important to arrive at a decision of investing in its IPO.

Amidst this IPO boom which is witnessing a rush of raw investors, particularly the first-time young investors, it makes sense to make the investors understand what these initial public offerings (IPOs) are all about? Let me explain in simpler terms.

It’s the process through which a private limited company is transformed into a public company. So, whenever any private company decides to change into a public company, it offers its shares to the general public to buy its stock and invest in the company.

Then we say the company has gone for IPO. After the IPO process is over, the company gets listed in stock market – Bombay stock exchange or national stock exchange of India.

Why does a company sell its shares to lose a part of its ownership? When a company feels to have additional capital, it either takes on debt or sells a part of its ownership.

A company prefers to part its ownership with the public instead of issuing debt securities for several reasons. Capital raised through an IPO does not have to be repaid, whereas debt securities such as bonds are to be repaid along with interest.

What are the risks associated with investment in IPOs? There are, of course, risks associated with an IPO. It has been observed that very few IPOs hit the market when the appetite for stocks is low or we can say when stock prices are cheap.

Under these market conditions, pricing an IPO at high end is very slim. It’s to be understood here that an IPO is usually promoted during the times when stocks are in demand and prices are high. This situation suits the company raising capital through IPO, but for those participating in the IPO (those who are buying the shares), the situation may not be favourable.

Sometimes you will find these IPOs are associated with huge first-day gains. But these IPOs lose steam when the market is down and fail miserably.

For small investors, particularly for an individual investor, it’s difficult to reap huge gains. Since most of the time, institutional investors have access to the stock at the offering price, they make most of the first-day gains much before small investors or individual investors can trade the stock.

In view of the risks associated with an IPO, there are certain factors which an investor needs to take into account before taking the route of an IPO to enter into the share market.

I think the first and foremost thing one should know is about the health of the company which has come out with an IPO. The health of the company means its fundamentals.

Is the company financially sound and making profits? What’s going to be its future prospects? These are a few basic questions which an investor needs to probe and find answers before venturing into its IPO. Notably, by looking at the past performance of a company, you can arrive at its future performance. If you find the company making good profits, you can expect a good return on your investment in the company. Relatively bad performance means a loss and you should avoid investing in the company.

The bottom line is that you should always take informed decisions by studying the fundamentals of the
company. Seek guidance of a financial advisor before investing in a company. At the same time be cautious if your financial advisor insists you to invest in a company you have never heard of. Check out yourself about the company before investing. Do not listen to market rumours and don’t get carried away by luring advertisements.

(The view are of the author & not the institution he works for)

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