An Overview of IPOs and the Upcoming IPOs in India in 2023

An Initial Public Offer (IPO) is the first or ‘initial’ sale of shares to the public. This is by a privately owned company that then becomes a publicly-traded one and raises funds through IPO. It is often seen as a traditional exit strategy for the company’s investors and founders once they have realised the full profit from their private investment. An IPO is a critical step in business growth. This is mainly because it offers funds via the public capital market. The primary reasons to offer for sale are:

• debt repayment
• working capital
• acquisitions

The company can also get its name listed on the stock exchange. They will have to hire reliable investment banks to set the IPO open date, price and market. Official reports found that 25 out of 31 IPOs in 2022 have delivered positive returns (an average of 32%) with 4 stocks doubling investor wealth during the year. This article tells you more.

History of IPOs

IPOs date back to the 1700s in the US. The biggest IPO during that time was the Bank of United States which had raised $8 million from private investors. An additional $2 million was raised by the federal government. The Dutch East India Co. was the very first company to offer fresh equity shares of its business to the public. It was a joint stock firm and was one of the first businesses to compete for spice exports and the slave trade.

Reports from Ernest and Young (EY) say that India has emerged as a ‘bright spot’ in the EMEIA (Europe, Middle East, India and Africa) region amid the global IPO market slump. When the total number of EMEIA IPOs fell by 53% and the amount raised dropped by 55%, the number of Indian IPOs spiked from 134 to 138 leading to a $7.5 billion. In this, $2.7 billion was given by Life Insurance Corp of India- one of the biggest IPOs in the country.

There have been 138 IPOs in India in 2022 till December 5 which is up from 134 in 2021. Although the proceeds for the same year declined, the country saw one of its biggest listings (Life Insurance Corp of India) as per EY Global IPO Trends 2022 as mentioned before.

Features of IPOs

Start-up companies consider going public through an IPO. It is an extremely helpful step to boost their public profile. IPOs are ‘star marked’ in the stock market calendar and there is plenty of buzz around these events. This is a fantastic opportunity for companies to highlight their products and services before a new set of customers. Top-tier Indian banks offer the following lucrative features. A clear idea beforehand will help make an informed choice.

Paperless Application: All you need is a DEMAT account. Now apply for your desired IPO on the go or from the comfort of your home. Make sure you have a smart device with a steady internet connection.

Easy Refund Policy: No IPO allotment can entitle you to automatic refunds to your bank account.

Excellent Pricing: Explore and pick from IPO listings to make the most of the competitive prices offered by companies. Various economic factors like debt status and residual business income are taken into account to conclude the true value of an IPO.

Multiple Application Mode: You can either visit the bank branch or take the help of digital trading platforms. Mobile apps are also a quick way to apply with just a few clicks.

A company has limited shareholders before an IPO. This includes angel investors, venture capitalists and founders. But then it opens the shares to you, the public, for sale through an IPO. It is known to be the largest source of funding with an indefinite maturity of the company.

Types of IPO

There are many upcoming IPOs in India after a long hiatus since 2015. Studies found that ₹60 crores was raised through the public equity market then and it has only been on the rise. This was an increase of 844% over 2014. But before taking the leap, know about the types to be able to pick the best-fitted one.

Fixed Price Offering: A ‘fixed’ price is offered to the investors. They with a merchant bank to make sure the level of risks is reduced. This is done by figuring out the:

• the total current value of a company
• future prospectus of a company

The bank also conducts a ‘risk overview’ of the investments and how they can reimburse the investor in case they face troubles. Now they will fix a genuine price that is offered to raise the desired funds or capital for your company smoothly.

Book Building Offering: The company will offer a 20% price band on stocks. The investors like fund managers then bid on the shares before finalising the price. The lowest is the floor price and the highest is the cap price. It is usually above or equal to the floor price. This process is typically known as price discovery. The investors will have to specify the number of shares they wish to buy and the amount they can pay per share.

IPO shares are generally priced through underwriting due diligence. The existing private shareholder’s shares become worthy of public trading prices. The transition is said to be the key time for private investors to earn the returns they had expected.

Steps of an IPO

If you are considering investing in an IPO, it is important to avoid getting convinced by the ‘hype’ that is created by young companies. In fact, investors had become quite aware of these risks during the technology stock bust and boom back in the 1990s and early 2000s. Before you participate in a new upcoming IPO, it is a good idea to know the different stages.

Step 1: Proposals: Estimated time frame for market offering, the best type of security to issue, number of shares, services and offering prices are discussed by underwriters presenting valuations and proposals.

Step 2: Underwriter: The company will choose the underwriter and will formally agree to underwrite terms through an agreement.

Step 3: Team: An IPO team will be formed comprising underwriters, lawyers, securities and exchange commission (SEC) experts and certified public accountants (CPAs).

Step 4: Documentation: Company information is compiled for required IPO documentation. The S-1 registration statement is the primary one. It is further divided into: the prospectus and the privately filled information. The preliminary information on the expected filling date is also included.

Step 5: Marketing & Updates: Pre-marketing of the new stocks requires marketing materials. Executives and underwriters ‘market’ the share issuance to estimate demand and then determine a final offering price. They may change the IPO price and issuance date as per their requirements. Know that these revisions of the financial analysis can go on throughout the whole marketing process.

Step 6: Board & Process: A board of directors is formed and processes are ensured for reporting auditable financial and accounting information each quarter.

Step 7: Shares Issued: This is issued on an IPO date. The capital from the primary issuance will be received in cash by the shareholder and will be recorded as equity shares on the balance sheet. Now, this balance sheet becomes dependent on the company stockholder’s equity per share valuation.

Step 8: Post IPO: Underwriters can have a specified time frame for additional shares after the initial public offering date. You as an investor can meanwhile be subject to a quieter period. This is the time frame between the date when a company files its IPO registration with the SEC and the date on which the IPO actually takes place.

The IPO process involves the fresh issue of shares to raise capital for investors. The main objective is to get the required funds for growth from an outside source. The goal here is to create liquidity for existing investors.

What are the Benefits of IPOs For Indian Investors?

There are different categories when it comes to IPOs. They are Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs) and Retail Individual Investors (RIIs). Share allocation will differ for all groups in an IPO. You will come under RIIs as an individual investor and can start with as low as ₹10,000 - ₹15,000. This can go up to ₹2 lakhs.

Here’s a look at the top advantages of investing in upcoming IPOs.

• Opportunity to buy shares in a company and become a part owner. They are readily available through financial intermediaries.
• It is free of cost since underwriters do not charge companies for distribution.
• Easy access to all information (non-public) of a company and the industry.
• You may trade anything after buying your shares months and years later.
• May offer huge returns at a lower risk. Try to buy small stocks and boost your profit substantially as and when the company does well.

Other benefits are a greater diversity of portfolio since the company trades shares between investors on an exchange. No investor can have a majority share. Upcoming IPOs can be usually traded on the stock exchange like any other marketable instrument. The listing price on the exchange determines its premium or the discount against the issue price.

What are the Benefits of IPOs For Companies?

One of the topmost advantages of going public (IPO) is share listing for fund raising now and in the future. Others are as follows:

1. This is a significant exit opportunity for stakeholders who invested a considerable amount of money, time and resources in the company. IPO offers much-needed capital which is especially attractive if investors have not seen good returns for years.
2. IPO helps increase a company’s exposure by thrusting it into the public spotlight. Now analysts will start guiding their clients regarding where to invest or simply bring their attention to companies that have decided to go public. All of this ensures better publicity and credibility over time.
3. Public stock can act as a currency which can be bought and sold at a marker price whenever. This is a great way to compensate employees or acquire more business via advertisement and marketing. These grow your brand and helps you stay relevant too.
4. Public companies can reduce debts via IPO or subsequent share offerings. This helps lower the interest costs and ultimately the cash flow.
5. An IPO can maintain the corporate name and status. This is because the company is not being acquired by another one but has chosen an exit strategy. In fact, it can become more recognisable and can attract potential customers. It is done through media coverage and press releases.

Given the many pros, it is a good idea to check the upcoming IPO list and invest in the best- suited one. But how to know which one could be ideal for you? Read on.

How to Find a Good IPO?

When a company considers an IPO, the future growth prospectus is usually high. But you should not invest based on their promotions or because they are garnering positive attention. While issuing an IPO indicates the good health and efficiency of a company, you must still consider these factors beforehand.

Check the Background of the Company and Its Offering: Look at the product performance, history, customer reviews and promoter qualifications to shortlist a company that you would like to invest in. Go through the details carefully, including how many years a manager has spent in the firm and make sure there are no corporate governance issues in the company.

Learn the Current Trends: It’s a good idea to have an understand of the stock market trends. There is a growth opportunity in the investment when the market is on the rise. So, make sure to invest even when you see the market is likely to rise in the near future.

Risk Analysis: Go through a company’s strengths, issue purpose and risks involved in operations. Doing this can help you take informed choices before investing in upcoming IPOs in India. You may also be able to minimise the risks. On the other hand, check your risk appetite as well and invest only as much money as you are okay to lose.

Business Strength: Buy the Red Herring prospectus. All companies issue this. Here all critical information like website, media report and annual report are included. You can also see the purpose of raising the funds, balanced sheet, promoter expenses, legal opinion on the listing, net proceeds of the company, copy of the underwriting document, commissions and discounts of the underwriter and earning statement of the last 3 years, if applicable. Refer to these sources before you think of picking from the upcoming IPO list in 2023.

Use of IPO Proceeds: Make sure you know how the IPO returns are used by a company. See if it uses in charitable activities which is quite a noble cause. Others typically use the proceeds for:

• debt repayment
• future acquisitions
• research and development
• organic business growth.

It can also be used to tick off corporate monetary needs like operating costs, capital expenditures and stocking inventories. Further, the funds are used to enter new markets or make growth-related investments like new technology.

IPOs are flooding the Indian equity markets which leave you spoilt for choice. This makes it tricky to get the best one that fits your objectives. Putting the above-discussed tips into action can help in a successful investment.

Considerations for IPO Performances

There are certain factors that can influence the returns of the upcoming IPOs in 2023. Knowing them well will keep you from getting swept solely by the hype.

Lock- Up: This is a legal contract between insiders of the company and underwriters. It prohibits either one from selling shares of stock for a particular period. This is typically between 6 months for individual investors like you who buys shares via IPO. The timeline is usually longer for anchor investors. This agreement is typically signed by company employees and officials when the company goes public. But the issue is that when a lock-up expires, all the insiders can start selling their stocks.

Flipping: This is when an investor resells shares in the first days or weeks post an IPO. It is usually not encouraged with lock-ups and other guidelines for new investors. But new issue typically requires some flippers for creating buzz and trading volume. On the other hand, flipping makes sense since stocks might witness the highest prices in the initial weeks only.  

Waiting Period: This is included by a few investment banks in their offering terms. Some public shares are set aside after a period. The price is likely to increase if the allocation is bought by an underwriter. Else it can decrease.

IPOs are usually popular among investors for a number of reasons. Firstly, they offer volatile price movements on the same day as the IPO and shortly later. This has the potential to produce large gains. Make sure to read the company prospectus of the upcoming IPOs in India along with their risk tolerance and current financial situation.

Companies can often delay an IPO in case of large fund infusion from another source. For instance, consumer tech enterprise Imagine Marketing (the company behind boAt accessories) raised 500 crores from Warbug Pincus affiliate and Malabar Investments through a private placement of share preferences. So, they postponed their IPO plans in 2022. In these cases, investors in unlisted shares receive a double blow:

• one from the IPO deferment
• other on the account of a drop in valuation when compared to their listed peers in the stock market.

To be on the safe side, businesses must consider a few alternative options for secondary placement across markets. For instance, taking out debt is a smart move if you do not wish to give up on equity. But you will have to handle bankruptcy or debt overhand tactfully. Refinancing is another excellent alternative. This involves restructuring the company’s debts by adjusting interest rates or simply increasing loan tenures. Crowdfunding is another excellent way to raise capital online by working with a large number of small investors.  

IPO Glossary

Issuer: This is usually the firm or company that wants to issue shares in the secondary market. The primary purpose is to finance the business needs.

Lot Size: The minimum number of shares to bid on in upcoming IPOs is the lot size.

Cut-Off Price: This is the lowest price at which shares are allotted in the IPO. The different amount will be refunded to the investor is the bidding price is higher than the cut-off price.

Listing Date: It is the starting date of IPO shares trading on a stock exchange.

Absolute Valuation: This is a way to measure the strength and financial status of a company.

Relative Valuation: This is a method in which a company’s share value is determined by taking the value of similar companies into account. 

Economic Valuation: A set of predefined parameters like debts, residual income and asset values (both owned and liabilities) and risk-bearing potentials are considered.

Frequently Asked Questions (FAQs) about IPOs

How is an IPO valued?
Investment banks compile all data and analyses the assets and liabilities of a company. The revenue generation and market performance are also taken into account. Now, these are analyses and submitted for an audit. Based on this, the price or value is determined.

What is compliance in IPO?
All upcoming IPOS must maintain transparency and abide by the provisions of the Securities and Exchange Board of India and RBI exchanges.

What is the Green Shoe Option?
This is the overallotment of IPO. It means the underwriter will sell more shares than originally planned by the company. This is usually a common phenomenon when the demand for a share is higher than expected.

How much money is required for an IPO?
The applicant company must be in business for at least 3 years. It must see profits in at least 2 of these years. The minimum net worth must be ₹3 crores. There should not be any pending litigation against it. Lastly, a minimum of 25% of the shares must be offered in public.

What do you need for an IPO?
The investor will require a DEMAT account, trading account, UPI ID and bank account. The whole process can be done online.

Do you need SEBI approval for an IPO?
Yes, the company prospectus is presented to SEBI. It gives a green signal for the initial offering process if it is satisfied with the documents. Else, the company will have to make changes before it is shared with public investors.

Does IPO give high returns?
Yes, if the company has strong fundamentals and good growth potential, you may stand the chance to get higher returns over the long term.