Why Invest In IPOs?

Key Highlights

• IPO Offers access to early-stage companies for long-term wealth creation.

• IPOs provide transparent pricing and affordable entry points, which may be beneficial for small investors.

• Smart investors should track upcoming IPOs for wealth-building opportunities.

Why Should You Consider Investing in an IPO?

In an Initial Public Offering (IPO), investors have the opportunity to purchase shares of the issuing company, making them shareholders through their financial investment. Shareholders, based on their stake, receive entitlements such as dividends and bonus shares, determined by the company's earnings and management declarations. Traditionally, equities have demonstrated superior returns compared to other asset classes.

Consequently, it is advisable for investors to include a proportion of equities in their portfolio. Nevertheless, equities come with inherent risks, as share prices can be volatile due to various economic and non-economic factors, often without clear triggers. Over the long term, however, engaging in the stock market allows for wealth creation by investing in valuable stocks from reputable companies with strong business models and financial performance.

Benefits of Investing In IPO

Investing in Initial Public Offerings (IPOs) presents investors with a range of potential advantages. Various benefits of investing in an IPO are explained as follows.

1. Gains from Listing

Potential advantages of investing in an IPO include the prospect of obtaining listing gains if the company debuts at a price surpassing the offer price. If an investor, having applied for shares at the offer price, receives them and the company opens at a higher price, significant profits can be realised.

2. Enhanced Liquidity

Upon a company's public debut, investors gain the ability to trade their shares in the open market. Publicly traded stocks offer investors the flexibility to buy or sell shares at any time, thereby ensuring liquidity.

3. Fair Opportunities for Retail Investors

SEBI has implemented relaxed norms to ensure that small retail investors have a fair chance in IPO share allocations. In cases of oversubscription, SEBI mandates that subject to availability, all retail investors receive at least one lot of shares. If individual lot allocation is unfeasible, a lottery system is employed for equitable IPO share distribution.

4. Stringent IPO Regulations

To safeguard retail investors, SEBI has established rigorous IPO regulations. The company's prospectus, encompassing vital information such as performance, financials, growth, risks, and plans, empowers investors to make informed decisions.

5. Cost-Effective Purchase

When companies go public, they often offer shares at discounted rates. This enables investors to acquire shares at a lower price, potentially leading to long-term wealth creation if the company experiences significant growth.

6. Shareholder Authority

Allotment of shares during an IPO confers shareholder status, providing investors with voting rights in the company's annual general meetings and a sense of ownership.

IPO Success Stories

Here are some of the IPO success stories in India:

• ICICI Lombard: Insurance Giant

ICICI Lombard, a well-known general insurance company, made waves in the pre-IPO market in 2009. Trading commenced at ₹70, and after an eight-year wait, it entered the stock exchange in 2017 at ₹680 per share, resulting in a remarkable nine-fold return.

• BSE Limited

Established in 1875, BSE Limited entered the pre-IPO share market in 2010 at ₹120. Seven years later, it was listed on the National Stock Exchange at ₹1069 per share, yielding an impressive eight times return.

• Lux Industries

Lux Industries, renowned for its innerwear range, entered the pre-IPO market in 2014 at ₹75. Within a year, it was listed at ₹735 per share, delivering a remarkable nine-fold return to its investors.

• ICICI Prudential

ICICI Prudential offered its shares in the pre-IPO market in 2011 at ₹70. After a five-year wait, it went public in 2016 at ₹350 per share, resulting in a substantial four-fold return.

• Tata Technologies IPO (2023)

Book built issue of Rs.3,042.51 crores. Bidding: Nov 22 - Nov 24, 2023. Listed on Nov 30, 2023, with a price band of ₹475 to ₹500 per share.

Conclusion

Participating in an IPO allows investors to engage with a company during its initial phases, offering the potential for substantial returns down the line. Given India's swiftly advancing economy and the surge in IPO activity, the country stands as an attractive investment prospect for both local and global investors.

Nevertheless, a prudent strategy involves thorough research, risk evaluation, and seeking expert guidance before committing to any investment decisions. Adopting a careful approach, investing in Indian IPOs can serve as a valuable diversification within one's investment portfolio.