New Delhi: Every few months, a new business makes news with the promise of becoming Dalal Street’s next great thing through an IPO. Social media is flooded with tales of quick profits, investors are lining up, and the excitement is growing. Everyone wants a piece of the action, whether they are experienced traders or novice investors. However, the reality frequently appears very differently after the frenzy subsides and the stock lists are released.
There is a world of danger and uncertainty hidden under the glitz of ringing bells and overcrowded issues. While some initial public offerings (IPOs) discreetly deplete investor funds, others prove to be stepping stones to success. Why are they still being pursued? Is it curiosity, confidence, or just a dread of losing out? We interviewed fund managers and industry experts who have witnessed both booms and crashes to learn more about the true dynamics driving the IPO craze. Their wisdom tells a tale that is much less about making quick money and more about knowing where you are investing your money.
Why do businesses choose to go public?
An initial public offering (IPO) is a fundraising event in which a private firm makes its shares available to the public for the first time. Through this process, a private corporation becomes public, enabling ordinary investors to purchase stock in the company. IPOs are used by businesses to raise money for debt repayment, expansion, or to provide early investors with a means of cashing out. Following the completion of the initial public offering (IPO), the company’s shares are listed on a stock market and are available for free trading. Fixed Price Issues and Book Building Issues are the two primary categories of initial public offerings (IPOs).
Before the IPO begins, the business and its underwriters determine a predetermined price for the shares in a fixed price issuance. Investors submit bids within a price band that is offered in a book building offering rather than a set price. The final price is determined by demand. Hiring investment bankers, creating and submitting documents such as the Draft Red Herring Prospectus (DRHP) to SEBI, holding roadshows to draw investors, and then putting the issue up for public bidding are all typical steps in the initial public offering (IPO) process.
There are dangers associated with investing in an IPO, but there are also potential rewards. If the business does well, a successful IPO can provide substantial listing profits and long-term rewards. But not every initial public offering (IPO) results in a profit; occasionally, poor market circumstances or weak fundamentals cause prices to drop after listing. Before making an investment, investors should research the company’s goals, business plan, and financials rather than relying solely on market hype.
Every business has two primary methods of raising capital for expansion: debt and equity, according to Pranav Haldea, Managing Director at PRIME Database Group. “Debt is taking out a loan to grow a business and then paying it back with interest. Conversely, equity refers to providing a portion of the company’s ownership in return for funding. Companies can use private equity, venture capital, angel funds, or initial public offerings (IPOs) to raise these kinds of funds’, he said.
Only a small number of India’s millions of businesses are currently listed on the stock exchange. Businesses issue initial public offerings (IPOs) to either raise additional funds to support expansion or to enable current shareholders to sell a portion of their ownership. SEBI mandates that businesses designate merchant bankers. “These merchant bankers help them at every step, including submitting the Draft Red Herring Prospectus (DRHP), which includes all of the company’s information on its board members, financials, and commercial activities. These files are sent to SEBI for examination and frequently contain over a thousand pages. The company must launch its initial public offering (IPO) within a year of SEBI’s analysis and clearance, Pranav continued.
Additionally, he stated that companies and their bankers conduct roadshows with prospective investors before to the IPO debut in order to acquire a feel of pricing and to share their growth story and capital requirements with the investment community. “The day before the issue opens is set aside for anchor investors, which are big institutional investors that receive about 60% of the 50% of the deal that is set aside for QIBs. Therefore, 30% of the issue size is set aside for anchors. Anchor investors’ support fosters trust among retail investors by demonstrating that reputable organisations have faith in the business and its pricing, according to Pranav.
These anchor investors often consist of insurance firms, mutual funds, and FPIs. Their involvement frequently gives smaller investors confidence in the issue’s legitimacy. Institutional investors may choose to invest in the main book during the initial public offering (IPO) or during the anchor book stage. “While investing later in the main book may not ensure allocation, anchor investors are assured allocations. Listing comes next once the IPO concludes. According to the subscription level, shares are distributed,” he clarified.
IPO Risk
Pranav Haldea stated that investing in initial public offerings (IPOs) carries a significant risk. Mutual funds are the safest option for individual individuals to make market investments. Direct stock market investing is an option for those who want to assume a little bit more risk. However, because there is no track record to assess, investment in initial public offerings (IPOs) bears the highest amount of risk. The performance, profitability, and management history of the company are unknown to investors. Additionally, it’s unclear how the business will do after going public on the stock exchange. Therefore, before making an investment, investors must exercise utmost caution,” he stated.
India’s capital markets are shown significant signs of resilience and maturity, according to Amit Ramchandani, CEO and Head of Investment Banking at Motilal Oswal Financial Services.
Companies raised over Rs 69,500 Cr through 65 initial public offerings (IPOs), Rs 45,200 Cr through 18 qualified institutional placements (QIPs), and Rs 13,700 Cr through 25 rights issues in the first half of FY26.
“This cross-sector fundraising is a reflection of investor confidence, controlled pricing, and increasing domestic liquidity. India’s markets continue to show depth and self-sustainability despite periods of foreign portfolio investor (FPI) outflows and global uncertainty, which is a definite sign of their growing stability and strength, according to Ramchandani.
Consider Before Chasing IPO FOMO
Dhirendra Kumar, the CEO of Value Research, told media that when it comes to investing in the stock market, particularly through initial public offerings (IPOs), regular investors frequently suffer from FOMO. However, based on IPO history, these investments have frequently been dangerous. “Pricing can be erratic, and investors have reportedly lost money in nine of the last ten significant initial public offerings (IPOs) over the medium to long term.
Some individuals think that selling their shares right away after allotment will allow them to profit quickly, but this is more like playing the lottery than making a wise investment. Every day, there are opportunities to invest in the stock market. According to Kumar, “missing one IPO does not mean missing your chance to grow your wealth.”
Dhirendra Kumar acknowledges that mutual funds taking part in specific initial public offerings (IPOs) can occasionally have an impact on ordinary investors. However, “individual investors and mutual funds have very different risk appetites.” Retail investors shouldn’t just follow the herd and approach initial public offerings (IPOs) as lottery tickets where money is sunk with the expectation of rapid returns. The secret is to make investments based on the company’s merits rather than anticipating an instant increase in the share price. Your investments won’t be genuinely profitable till then,” he continued.
How MF selects investments for IPOs
According to Vijai Mantri, the founder of Vijai Mantri Financial Services and a seasoned financial expert, mutual fund schemes have unique investment goals, and choices about investing in initial public offerings (IPOs) are based on those goals. He clarified that although initial public offerings (IPOs) might occasionally yield favourable results, they also carry a significant amount of risk; therefore, only investors who are at ease with such risks ought to give them considerable thought.
Mutual fund houses make these investing decisions on their own, without outside interference, Mantri explained. He went on to say that there is always risk involved in the stock market and that no investment, no matter how big or small, can guarantee rewards. However, he cautioned that regular investors should refrain from investing in initial public offerings (IPOs) because they frequently experience long-term losses.
For long-term financial security, he says it’s usually better to exercise caution and avoid investing in initial public offerings (IPOs).
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