Every company tries to raise funds from time to time in order to continue to operate to the best of its capabilities and achieve its full potential. Raising funds allows the company to do so by ensuring it is able to fulfill the essential requirements for running a business, including expanding the space of the facility, upgrading the machinery or even hiring new talent.
As companies seek growth in ways that involve raising funds, a lot of them are opting for initial public offerings (IPOs) as a convenient way to raise the capital they require to continue business operations. IPOs are often received favourably by the market and companies are often able to generate the funds they require by opting for an IPO.
As an investor, IPOs are an exciting avenue for you to become closely involved with a company’s operations and learn from the best with a close-up view. Making an investment in IPO should, however, give you pause before you march forward with the decision to invest. An IPO can prove to be highly successful for the company in terms of raising funds immediately, but can also prove beneficial to investors over a longer period of time as they earn interest.
Companies issuing their initial public offering (IPO) are scrutinised by the market very keenly before the IPO. Thus, it is quite rare for a company which does not have a significant history of operating in the market to issue an IPO. This is because a large part of the IPO’s success depends upon its public image, and a lack of history could discourage investors.
It is important for potential investors to understand the history of the company, its vision and goals before they invest funds into it. To ensure that investors are not left unaware, the Securities and Exchange Board of India (SEBI) has mandated certain norms that companies must follow in order to issue their IPOs. Read on to learn more about the requirements stated by SEBI before a company is allowed to issue an IPO.
There are two sets of eligibility norms. Eligibility through the Entry Norm II route requires at least 75% of the net offer to the public being mandatorily allotted to Qualified Institutional Buyers (QBI). The issue shall be through a book-building route, and the company is obligated to refund the investor’s subscription money if the minimum subscription goals that were expected from the IPO are not met. The other eligibility norms, listed under Entry Norm 1, have been mentioned below.
1. In each of the three preceding years, the company must have owned net assets to the tune of INR 3 crore, of which not more than 50% of the assets as monetary assets.
2. In at least three of the five years immediately preceding the IPO, the company must have generated a minimum average pre-tax-operating profit amounting to a minimum of INR 15 crore.
3. For each of the three preceding full years, the company must have had a net worth of INR 1 crore.
4. If the company has changed its name, the revenue generated under this new name must account for at least 50% of the revenue for the preceding one year.
5. The size of the issue during the time of IPO must be capped at a maximum of 5 times the company’s net worth pre-issue.
While SEBI keeps these eligibility criterion in place to ensure that only the truly promising companies are able to execute IPOs, it is important for investors to be vigilant too. There are several things an investor must carefully consider before they invest in an IPO. Read on to learn about the things you need to keep in mind before you set aside funds to invest in that promising new IPO.
Understand the gap it fills:
Every company positions itself as offering a unique solution that no other company in the market is able to offer. However, if you find yourself struggling to understand what this particular company is offering consumers and the solutions it brings to the market, it is best you stay away from this business. Chances are if you can’t understand the business, others might not be able to either, which means that customers will be hard to find and revenue will get harder to earn.
Study the risks:
Any investment carries a substantial amount of risk, and it is upto you to decide how much risk you wish to take and compare it with the risk profile of the investment. Before you invest in an IPO, it is essential that you understand the market thoroughly, as well as the risks that the company faces. This will help you gauge a deeper understanding of the company and its operations.
Research the management:
A company is only as good as the people who run it, which is why it is essential to spend a little time learning about the core team behind the company. The management is usually the team that takes the decisions and if they are not suited to the industry or the company, the company might end up failing and you could lose a lot of money, if you invested in it. Before you invest in an IPO, make sure to study the top team to ensure that the company is being run by competent professionals who will handle your investment with care.
A company’s valuation is a marker of its financial health and viability. The valuation will enable you to compare with the other companies in its space and of its size, and assess how the company’s performance has been. The company’s financials also offer a rare glimpse into how the company handles its finances and the expenditure it incurs on a regular basis.
Understand the needs for funds:
An IPO can be issued for a range of reasons. It is important to look deep into what the company is revealing and understand the reason behind them actually raising funds. If you know how your money is going to be utilised, it will help you remain invested in the company for a longer period of time.
An IPO is one of several ways that a company seeks to grow and increase its valuation and standing in the market. When you invest in IPO, remember to consider all the different factors mentioned above which will eventually play a significant role in how your investment pans out.