All about Initial Public Offering

LIC IPO is all set to make equity culture popular in India
All about Initial Public Offering
Representational ImageFile/ GK

Market is abuzz with the launch of a mega initial public offering (IPO) of Life Insurance Corporation (LIC) soon. Slated to be India’s biggest IPO to date, the mammoth IPO is expected to drive retail investors in hoards to the Dalal Street.

Remarkably, the Government of India holds 100 per cent stake in the insurance company. However, the government is planning to offload around 5 percent of its shareholding through this IPO and may sell 316 million shares.

The embedded value of the company has been estimated at over Rs 5 trillion. The valuation of LIC IPO will be around three to five times the embedded value and could be around Rs 15 trillion. In terms of total assets, LIC is the sixth largest with $522 billion.

Among the outstanding features of this major insurance player, it has been its unmatched reach, trust and brand loyalty that it enjoys amongst its policyholders and general public.

Statistically speaking, the LIC has over 29 million policyholders and around 1.3 million agents. Reports suggest that around 10 per cent of the IPO would be set aside for the LIC policyholders.

Despite the entry of some major private insurance players in its playing arena, the LIC enjoys the highest market share of over 66 per cent as of FY 2020-21 in the country.

Here it is worth mentioning that the life insurance industry, as per the latest data available, is growing at 22.5 per cent and has been giving higher returns to the investors in the sector.

During the pandemic years, we witnessed millions of first time investors entering the market and there was a huge surge in the demat accounts. In a way the pandemic has been promoting equity culture in the country.

If reports are to be believed , the LIC IPO would be wooing over 1 crore new customers to open demat accounts before its launch.

Let me produce an interesting statistics regarding demat accounts which reveals that Central Depository Service (India) Limited (CSDL) has more than 50 million demat accounts currently as against about 291.5 million LIC policyholders and agents.

The data indicates a huge opportunity for the financial institutions to acquire new customers in the demat account segment. The IPO is all set to double the retail investor base in the country. Not only this, the IPO throws a huge opportunity to get a considerable number of dormant demat accounts reactivated.

We have observed that all the financial institutions and intermediaries are already active in making the IPO a grand success by increasing the retail participation in this IPO.

However, it depends upon these institutions how they hand-hold and also educate their customers about the IPO and other set of right financial products to get them boarded on the equity market.

As the year 2021 has been the year of IPO festivals, the LIC IPO is all set to decorate the year 2022 as a memorable year of investment, especially for those who are new entrants in the equity market. The IPO boom of 2021 triggered enthusiasm in the market where millions of investors, more particularly millennial first-time investors, shopped for a series of IPOs.

One of the most outstanding features of the IPO boom has been the entry of new businesses which are driven by the Internet. The onslaught of the viruses on the economy dried the resources of capital for many businesses and internet-based enterprises were no exception to it. The market regulator (SEBI) responded to the changing trend of raising capital of online businesses and eased the entry norms and we saw Zomato, Paytm, Policybazaar etc as part of this historical IPO boom.

Meanwhile, let’s specifically have a straight talk about investment in IPOs. During the on-going pandemic years, returns from IPOs have indeed been phenomenal, owing to the continuous bullish trend in the stock market.

What are the things you should keep in mind while investing through IPOs?

The first and foremost thing to remember is that an initial public offer (IPO) is a route taken by a company where it’s for the first time it raises money from the public for a wide range of activities. The funds raised through IPO may be utilized for clearing debt, funding expenses, going for business expansion and also achieving other business goals.

A thriving share market presents an excellent opportunity to a professional investor who understands the market and other products well in line with his risk bearing capacity, to multiply his investment. But investing in the stock market purely based on hearsay can lead to heavy losses and can even wipe out the capital investment.

You can invest in the shares of a company directly through the primary market, that is., via Initial Public Offerings (IPOs). Besides, there is the secondary market where you can invest in the shares of the company after the IPO listing.

As far as IPOs are concerned, we witnessed a sort of festival in the market where several unlisted businesses came up with their IPOs to raise capital. However, there was a mix of these companies where some are having a huge brand value in the market and others are not known much.

In the given market scenario, there are certain things which you need to take care of before investing through IPOs.

You should be aware of the company’s business and evaluate its business model to check the growth potential. Don’t invest in IPOs of such companies whose business model is confusing or unclear to you.

It’s also very important to have a look at the past performance of the company and check the credentials of its management and promoters. Here it’s vital to know about the stability in the management of the company. If you find frequent changes in the management cadre of the company, it would be better to avoid investing in the IPO of such businesses.

Don’t ignore fundamentals of the company. There is no alternative to strong financial parameters of a company. If you are not able to understand the financials, consult a financial advisor and let him analyse the company’s financials for you. This will help you to assess the company’s growth prospects. Consider only companies with strong financial health.

So, you should select such a company with good fundamentals that can allow good returns in the future even if it fails to provide listing gains.

What are the risk factors in investing through IPOs?

Investing in the share market always carries high risk. So, it makes sense to learn about the risk factors before investing through an IPO. Let me quote an acquaintance who is a market expert. According to him, “you may not know the risk which the company carries by looking just at its financials.

To know about such risks, you should carefully read its Draft Red Herring Prospectus (DRHP). Companies mention all risk factors that may impact their businesses in the short and long term in the DRHP. It may include litigation, contingent liabilities, and the possible threats which may impact its normal business operations.”

What are other key things to keep in mind?

The first and foremost thing is to think of investment in shares if you have your own funds and parking money in IPOs is in complete sync with your financial goals and risk bearing capacity.

Don’t borrow funds to invest. Market experts advise that you should try to invest in an IPO on the second or third day after opening. This will give you an idea in assessing the public response. If the issue is oversubscribed by several times, chances of listing gain increase.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK

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