Prudent Investor: A Primer on IPO Investing

At about 149 listings, India registered the maximum number of Initial Public Offerings (IPOs) as of September 2023. As per a study by EY, there were 144 IPOs by Indian companies during the financial year 2022, which included listing by large, small, and medium enterprises (SMEs).

Overall, the public response to these IPOs has been quite positive. It was buoyed further by strong listing performance. The average listing gain increased to 29.44%, in comparison to 11.56% in the first half of 2022-23. Of the 28 IPOs that have been listed thus far, 20 gave a return of more than 10%. 

In the next 4-5 months, there may be many more IPOs being introduced before the commencement of general elections. In the case of retail investors, experts advise taking into account a few key considerations before parking their money in IPOs.

Gain insight about the company: Investing in an IPO investment is similar to the lines of equity investment. Before investing, an investor should take into account a company’s sustainable growth model, good governance practices along reasonable valuation.

Be diligent in reading the Red Herring Prospectus: As an investor, it’s important to read the risks section in the prospectus. In this particular section, the company’s management details the specific risks they currently perceive, both within the company and across the whole spectrum of the industry. This would arm an investor to make a prudent investment decision.

Avoid investing merely for listing gains: As a thumb rule, it is always better to invest for the long term. An investor should make an effort to undertake research and homework about the company.

Eye on IPO grading: IPO grading is the credit rating issued by any credit agency registered with the market regulator, the Securities and Exchange Board of India (SEBI). Typically, an IPO could be graded in the range of 1-5 (1 being the worst, while 5 being the best). The grading takes into consideration the prospects of the industry, the strengths and weaknesses associated with the company, and the risks involved, just to list a few.

Lock-in periods: An IPO has a lock-in period, and an investor should be well-versed in this fact. In case an IPO draws a lukewarm response, it may be observed that anchor investors look to exit their positions once the lock-in period ends. While this doesn’t always occur and majorly depends on the institutions’ perspectives on the company. It’s a crucial factor to consider in case an investor does not have a long-term view of a company.