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IPOs. Should you invest?

Posted On : 2021-05-06

Author : CA P R Sankaranarayanan

Looking back to the history of IPO or Initial Public Offer we observe that the very first IPO happened in Netherlands during 1602 of United East India Company shares. It also led to the establishment of the first ever Stock Exchange in Amsterdam.

If an unlisted company issues shares to the public for the first time, it’s called IPO or Initial Public Offer. If a listed company makes fresh issue of shares to the public, it’s called FPO or Follow-On Public Offer. It could also be called NPO or New Public Offer. In India SEBI is the regulatory authority on such issues. A company benefits from IPO by branching out its shares, raising additional funds for further development and growth, enhancing goodwill of the company with the public, enhancing liquidity and accessing capital market.

Since 2000 when the bubble of large number of dot-com entities was burst, the IPOs had got hammered and the number of such issues was dwindling. After the recession of 1970s that showed the merger of both venture capital and IPOs, the IPOs started a big comeback since 1980s. During those days, we may recall the IPOs of Reliance, Infosys and similar companies. During late 70s and early 80s Reliance had a number of equity issues, debenture issues and so on.

Research points out that IPOs not only help overall economic growth and innovation but additional job creation, productivity and standard of living. A sizable number of equities bought during IPOs will lead to enhanced sometimes geometric growth of investment. During early 1990s Infosys was a start-up company by an electric engineer Mr. Narayana Murthy (not well known then) and his friends. Those invested in that company during IPO and/or FPO during early years did reap huge benefits of capital gains.

There are of course certain downsides like volatile market situations, industry getting into competitive pressure from foreign entities establishing in the country, external factors like war, raw material shortages, power shortages, etc. Therefore, investors should also watch and analyze market conditions frequently to cut loss, if any, envisaged. However, the intrinsic value and price should not be lost sight and market fluctuations leading to temporary tumbling of share prices shouldn’t be taken for granted. In a situation like this the investors should keep calm and should not resort to making decisions impulsively and without due consideration.

SEBI guidelines in India seeks to ensure investor protection as well as the safety of the company’s financials. It’s imperative for the companies to follow SEBI guidelines while the prospective shareholders too must do due diligence. In short IPOs and/or FPOs or NPOs are excellent opportunities to a right investor who does his homework well before investing.

A few recently closed IPOs were Yes Bank, Indian Railway Finance Corporation Ltd. Upcoming IPOs are Zomato, NSDL, NCDEX, LIC and Bajaj Energy. Views expressed are of my own as an individual and are not intended to market or suggest any shares. Investors may study well before investing or consult an expert when in doubt.

 

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