Introduction of IPO, investors and importance of issuing IPO

What is an Initial Public Offer? Where do companies get listed in India?

An Initial Public Offering (IPO) is the process through which a private company offers its shares to the general public for the first time. This transition allows the business to raise capital by selling ownership in the form of equity shares. Once the IPO is complete, the company becomes publicly listed on stock exchanges such as NSE or BSE in case of Mainboard IPO and is regulated by the Securities and Exchange Board of India (SEBI). In case of SME IPO, a company gets listed on NSE SME or BSE SME. 

List of Upcoming IPO in India

Who can invest in an IPO?

The following categories of investors can participate in primary market through IPO

• Qualified Institutional Buyers (QIBs) – Large financial institutions, such as mutual funds, banks, and insurance firms.

• Non-Institutional Investors (NIIs) – High Net-Worth Individuals (HNIs) other then QIBs.

• Retail Individual Investors (RIIs) – Small individual investors with investments under ₹2 lakh

• Anchor Investors – Institutional investors who invest before the IPO opens to the public

List of Upcoming SME IPO

How does a company benefit by going public?

1. Enhanced Valuation – An IPO enables a company to establish a market-based valuation, driven by investor demand. This is particularly valuable for startups and high-growth companies looking to benchmark their worth.

2. Improved Corporate Governance – Publicly listed companies must adhere to stricter regulatory frameworks and disclosure norms, often resulting in more transparent operations and improved corporate governance.

3. Reduced Financing Costs – Raising funds through equity eliminates the burden of interest payments, thereby placing no pressure on profitability. Additionally, conducting an IPO and subsequent stock exchange listing can enhance the company’s credit rating, provided all post-issue compliance requirements are fulfilled. Improved credit ratings can lead to more favorable interest rates on future debt financing.

4. Future Fund Raise (FPO) – After listing and IPO a company can raise funds at a later stage for its business operations. As the company is traded on the stock exchange, the company raises further funds through FPO or private placements or any other method.

What are the risks involved in taking a company public?

1. Legal and Financial Compliances– A listed company has to comply with various regulatory requirements, such as conducting Annual General Meetings (AGMs) and regular financial disclosures as mandated by the Companies Act, 2013 and SEBI LODR.
2. Ownership Dilution – Any kind of fund raise through equity, like VC, Private Equity or IPO, reduces the controlling stake of existing shareholders, as ownership is shared with public investors, which may impact strategic decision-making.
3. Short-Term Pressure- Public companies often face pressure to deliver short-term results to satisfy shareholders and analysts, sometimes at the expense of long-term strategy.
4. Mandatory Disclosure- As per SEBI ICDR regulations in India, the IPO process requires full disclosure of financials, business risks, legal issues, and strategic plans in the Draft Red Herring Prospectus (DRHP), which may expose sensitive information to competitors.

Explore Upcoming DRHP of SME IPO

What are the potential gains for investors to participate in an IPO?

1. Early Entry in Primary Markets –  Investments in IPO may yield substantial returns, especially when investing in companies with strong growth potential. Early-stage entry might lead to high returns for investors, though it requires proper assessment of risks and benefits attached to IPO investing.
2. Potential for High Returns – Through IPOs, investors gain early exposure to companies before they become widely recognized in the market, allowing for both short-term gains and long-term value appreciation.
3. Portfolio Diversification – Newly listed stocks across various sectors enable investors to diversify their portfolios, potentially increasing returns while mitigating risks.
4. Corporate Transparency – Public companies are legally required to disclose detailed financial and business information, empowering investors to make informed and data-driven decisions.

     What are the risks of investing in IPOs?

1. Volatility Risk – Investment in IPO can be highly volatile. There is no guarantee that the stock price will rise post-listing, and in many cases, prices may fall below the issue price, leading to potential losses.
2. Risk of Overvaluation – Companies may overprice their IPOs based on market sentiment rather than fundamentals. If actual performance does not justify the valuation, investors may see poor returns.
3. Long-Term Underperformance – Some IPOs fail to deliver sustained performance in the long run. Factors such as poor management, market conditions, or execution challenges may hinder post-IPO success.
4. Regulatory and compliance risk – Non-compliance with legal requirements or sudden regulatory changes can significantly affect a company’s performance, and by extension, investor returns.

To summarise, IPOs represent a significant milestone for companies and a compelling investment avenue for investors. While they offer several advantages such as capital access, valuation transparency, and investment opportunities, they also carry inherent risks. Companies must weigh the long-term implications of going public, and investors should conduct thorough due diligence before participating in any offering. With careful evaluation, IPOs can be a powerful tool for mutual growth and value creation.

FAQs

What is an IPO? 

An initial public offering is a method of raising funds by offering ownership in the company to the public. It is a method of raising funds from the primary market. There are two types of IPO, Mainboard IPO and SME IPO. IPO Advisors can assist in the entire IPO process of filing DRHP, choosing the top merchant banker in India and post IPO compliances.

What are the different Investor categories for IPO?

There are major 4 types of investor categories: 

1. Qualified Institutional buyers (QIBs) – Large financial institutions like banks, mutual funds, commercial banks and others. They have specific criteria to be met, like minimum net worth, net profit, and turnover, as set by the Securities and Exchange Board of India (SEBI) and Stock Exchanges. 
2. Non-Institutional Investors (NIIs) – They are high networth Individuals other than QIBs. They often include companies, Trusts and NRIs. 
3. Retail investors – Individual and small investors with an investment under Rs 2 lakh.
4. Anchor Investors – Institutional investors investing before the IPO opens to the public. Investments by Anchor investors boosts public confidence. They make applications for more than Rs 10 crores. 

What is IPO Listing?

Through Initial Public Offer, a company can list itself on any one of the stock exchanges of India, National Stock Exchange (NSE) and Bombay Stock Exchange(BSE). After getting listed on any of the stock exchange, general public can sell and buy the equity of the company through the stock exchange. A company can bring IPO under Book Building Method or Fixed Price method.

What are the benefits of investing in an IPO?

• Investors may expect higher returns. 
• IPOs provide early investment opportunity 
• Investing in IPOs also allows investors in diversifying their portfolio.

What are the common concerns for investors during an IPO?

• Volatile stock markets
• Overvaluation
• Regulatory discrepancies post IPO.

What is the role of SEBI?

SEBI (Securities and Exchange Board of India) regulates the process of IPO listing, ensuring transparency in disclosures of important information and protection of investor from frauds and misrepresentation. A company has to follow the IPO Eligibility Criteria as laid by SEBI for listing on BSE, NSE or BSE SME or NSE Emerge.

What are the disadvantages for company issuing an IPO?

increase in regulatory restrictions

• increase in compliance cost 
• dilution of ownership and control. 

How does an IPO reduce a company's financing costs?

Raising funds through equity eliminates the burden of interest payments, thereby placing no pressure on profitability. Additionally, conducting an IPO and subsequent stock exchange listing can enhance the company’s credit rating, provided all post-issue compliance requirements are fulfilled. List of SME IPO in India