Understand the process, rules and valuation of IPO
IPO is an important financial process in the stock market in India, where companies sell their shares to the public for the first time. It not only gives companies an opportunity to raise capital but also provides investors with new investment opportunities.
Which companies can bring IPO?
In India, any company, be it private, government, new, old, large, mid-sized, or small, can bring IPO, provided they follow the rules set by SEBI. Notably, new rules have come into effect in 2025 for SMEs, in which companies must show an operating profit of ₹1 crore in at least two of the last three financial years.
What are the rules of IPO?
To bring IPO, companies have to file a Draft Red Herring Prospectus (DRHP) with SEBI, which presents the financial and operational data of the company. The company has to show a minimum of 3 years of operational record and financial transparency to give investors confidence. Details such as number of shares, price band, application date, allotment, and refund date have to be declared for the IPO. Also, the listing time has been reduced from T+6 days to T+3 days, which is mandatory from 1 December 2023, so that investors get shares quickly and companies can access funds quickly.
Who decides the IPO price and how?
The IPO price is decided by the company's management and underwriters together, taking into account the market demand and the company's valuation.There are two main methods:
Fixed price IPO : The company fixes a fixed price, which is usually used in small IPOs.
Book building IPO : In this, a price band is fixed, such as Rs 427-450 per share, and investors bid in this band. The final price is based on investor demand, the company's discounted cash flow (DCF) valuation, financial health, and market trends. The response of anchor investors also plays a significant role in pricing, as they buy shares in large quantities and boost market confidence. Pricing also includes factors such as the company's growth prospects, sector performance, and economic conditions.
How is the listing value determined?
The listing value, which is the price of the stock in the market on the day of listing, depends on several factors such as the price and band fixed during the IPO form the basis of the listing value, oversubscription, if the market is bullish, the listing value can be high, while in a bearish market it can be low. Investor interest and market conditions also affect the listing value. If the demand is high, the value can increase. The overall performance of the sector the company is in, and future prospects help determine the price.
Company fundamentals: The company's revenue, profitability, management credibility, and sector growth affect the listing value.
Valuation Methods: Value is arrived at by converting future cash flows into present value. Comparative valuation based on the company's earnings. Comparison with the value of other companies in the same industry.
Comments
Post a Comment