Complete Guide to Initial Public Offer in Indian Share Market
What is Initial Public Offer?
Initial Public Offer means a company is selling its shares to public for the first time. Before Initial Public Offer, only company owners and some investors could buy company shares. After going public, anyone can buy and sell these shares in stock market.
Think IPO like this – imagine you own a small business. You want to expand but need more money. So you decide to sell part of your business to public. This is exactly what companies do in this process.
In India, companies use this metod to raise money from NSE and BSE stock exchanges. Once Initial Public Offer is complete, shares get listed on these exchanges for daily trading.
How Initial Public Offer Works in India?
Company Preparation Phase
Before launching Initial Public Offer, company must prepare many documents. SEBI (market regulator) checks all these papers. Company cannot start it without SEBI approval.
Company also decides how many shares to sell through Public Offer. They also fix the price range for shares to offer. This process takes several months to complete.
IPO Application Process
Once SEBI approves, company announces offering dates. Investors can apply during this period. IPO application period usually lasts 3-5 days.
You can apply for Initial Public Offer through your broker app or bank. Many people apply for popular company offer issues. If too many people apply, company uses lottery system to decide who gets shares.
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Types of Initial Public Offer
Book Building Offer
In book building IPO, company gives price range instead of fixed price. For example, shares may be priced between ₹100 to ₹120. Investors bid within this range.
Most big IPO issues in India use book building method. This helps companies discover fair price for their shares based on demand.
Fixed Price Offer
In fixed price Initial Public Offer, company announces exact share price. All investors pay same price. There is no bidding process in this type of offer.
Smaller companies often use fixed price offer method. It’s simpler but doesn’t help in price discovery like book building offer.
Benefits of Investing in Initial Public Offer
Early Entry Opportunity
IPO gives you chance to buy company shares before they start trading on exchanges. If company performs well after listing, you can make good profits from your initial offer investment.
Many successful IPO investments have given excellent returns to early investors. Companies like Infosys and TCS made their Initial Public Offer investors very rich over time.
Potential for High Returns
Some offers shares give very high returns on listing day itself. If Initial Public Offer is priced lower than market demand, share price can jump significantly on first trading day.
However, not all public offer investments give positive returns. Some offer shares also fall below issue price after listing.
Risks in Initial Public Offer Investment
No Historical Trading Data
Unlike existing listed companies, IPO companies have no share price history. You cannot check how share price moved during different market conditions.
This makes investment more risky compared to investing in already listed companies. You must rely only on company’s financial information and business prospects.
Market Conditions Impact
Initial Public Offer performance depends heavily on overall market mood. If market is falling when IPO gets listed, even good companies may see share price drop.
During market crashes, most IPO shares perform poorly regardless of company quality. Timing plays crucial role in this metod success.
Company Performance Risk
Not all companies launching Initial Public Offer become successful. Some companies may face business problems after getting listed. Their share price can fall significantly from initial offer price.
Always study company’s business model, financial health, and growth prospects before investing in any Initial Public Offer.
How to Evaluate Initial Public Offer
Read Company Prospectus
Every Initial Public Offer comes with detailed prospectus document. This document contains complete information about company’s business, finances, and risks. Always read prospectus before applying for it
Prospectus tells you how company plans to use money raised through this method. Companies should use Initial Public Offer money for business growth, not repaying old debts.
Check Financial Performance
Look at company’s revenue and profit growth over last 3-5 years. Consistent growth indicates good business. Avoid companies with declining revenues in offer applications.
Also check if company is making profits or losses. Loss-making companies are riskier investments compared to profitable ones.
Analyze Business Model
Understand what business company does and how it makes money. Simple and understandable business models are better for Initial Public Offer investment. Avoid complex businesses you cannot understand.
Check if company’s business has good future growth potential. Industries like technology, healthcare often offer better opportunities than declining sectors.
Learn: Financial ratio analysis for IPO evaluation in our Fundamental Analysis Course
Initial Public Offer Application Process
Documents Required
You need PAN card, Aadhaar card, and bank account to apply for Initial Public Offer. Your bank account should be linked with your demat account for smooth Initial Public Offer allotment process.
Make sure all your KYC documents are updated with your broker. Incomplete KYC can cause problems in application process.
Application Methods
You can apply through online banking, broker apps, or physical application forms. Online application is fastest and most convenient method for IPO investment.
Most brokers now offer one-click application facility. You just need to select quantity and bid price for book building applications.
Allotment Process
After Initial Public Offer closes, company and registrar decide share allotment. If offer is oversubscribed, they use computerized lottery system for fair allotment.
Retail investors (applying for shares worth up to ₹2 lakhs) get preference in allotment process. This increases your chances of shares.
Initial Public Offer Categories
Retail Investors
Retail category is for individual investors applying for Initial Public Offer shares worth up to ₹2 lakhs. This category gets 35% reservation in every issue.
Most small investors fall in retail category. Higher allotment chances make this category attractive for individual.
High Net Worth Individuals (HNI)
HNI category is for investors applying for shares worth more than ₹2 lakhs but less than ₹10 crores. This category gets 15% allocation.
Competition is usually very high in HNI category for popular Initial Public Offer issues. Allotment chances are lower compared to retail category.
Institutional Investors
Big institutions like mutual funds, insurance companies get 50% allocation in every IPO Their participation often indicates issue quality.
If good institutions are investing in IPO issue, it’s generally positive signal for retail investors. However, don’t rely only on institutional participation decisions.Learn free more in our Basic Share Market Course
Post Initial Public Offer Listing
Listing Day Performance
After Initial Public Offer closes and shares get allotted, company shares start trading on stock exchange. First day of trading is called listing day for IPO shares.
Shares may list at premium (above issue price), at par (same as issue price), or at discount (below issue price). Listing performance depends on market demand and overall sentiment.
Long-term Performance
Listing day performance doesn’t guarantee long-term success. Some Initial Public Offer shares perform poorly on listing day but give excellent returns over years.
Focus on company’s business fundamentals rather than short-term IPO price movements. Good companies eventually reward patient investors regardless of listing day performance.
Common Mistakes to Avoid
Applying Blindly
Don’t apply for every IPO without research. Many investors apply just because of market hype or friend’s recommendation.
Always do your own research before any issue. Understand company’s business and check if offer price is reasonable compared to similar companies.
Ignoring Market Conditions
Market conditions significantly impact issue performance. Avoid applying for IPO during highly volatile or bearish market periods.
Wait for stable market conditions before making investments. Bull markets generally provide better environment for success.
Expecting Quick Profits
Many investors expect immediate profits from investments. This unrealistic expectation leads to disappointment and poor investment decisions.
Treat Initial Public Offer as long-term investment opportunity. Give company time to grow and prove its business model before expecting significant returns.
Tax Implications of Initial Public Offer
Short-term Capital Gains
If you sell Initial Public Offer shares within one year of allotment, profits are treated as short-term capital gains. You pay 15% tax on these gains plus applicable surcharge and cess.
This high tax rate makes short-term IPO trading less attractive from tax perspective. Consider holding shares for more than one year for tax benefits.
Long-term Capital Gains
IPO shares held for more than one year qualify for long-term capital gains tax treatment. You get ₹1 lakh annual exemption on long-term capital gains.Gains above ₹1 lakh are taxed at 10% without indexation benefit. This lower tax rate makes long-term IPO investment more tax-efficient.
Success Stories
Technology Companies
Many technology companies have given excellent returns through their Initial Public Offer investments. Companies like TCS, Infosys created enormous wealth for early Initial Public Offer investors.
These success stories encourage more people to invest in IPO . However, remember that not all technology offer investments become success stories.
Banking and Financial Services
Several banking and financial service companies have also delivered good returns from their Initial Public Offer. HDFC Bank, ICICI Bank are examples of successful banking investments.
Strong business models and consistent growth helped these companies deliver superior returns to investors over long term.
Conclusion
Initial Public Offer investment can be rewarding if done with proper research and patience. Don’t get carried away by market hype around popular IPO issues.
Study company fundamentals, read prospectus carefully, and consider market conditions before any offer application. Remember that IPO investment carries higher risks compared to investing in established listed companies.
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