IPO AND THE INVESTOR

-By Samridhi Garg

An IPO is also referred to as “going public.”

INITIAL PUBLIC OFFER is a process through which a private company can go public. It can do so by offering to sell its shares to public by registering itself on stock exchange.

ALWAYS READ THE PROSPECTUS

One should not put ones faith completely in the company. Any individual should never skip reading the prospectus. It may be a dry read, but the prospectus lays out the company’s risks and opportunities, along with the proposed uses for the money raised by the IPO.

THINGS TO READ IN AN IPO

  • Projected accounting figures
  • Where is the money going raised by IPO i.e. future endeavors

CONSIDER WAITING FOR LOCK UP PERIOD TO END

The lock-up period is a legally binding contract (3-24 months) between the underwriters and insiders of the company prohibiting them from selling any shares of stock for a specified period. When lock-ups expire, the previously restricted parties are permitted to sell their stock which may see fall in prices of shares.

 For example, Jim Cramer, known from TheStreet.Com (TSCM) and the CNBC program “Kudlow and Cramer.” At the height of TSCM’s stock price, his paper worth (of TSCM stock alone) was in the dozens upon dozens of millions of dollars. However, Cramer, being a savvy Wall Street vet, knew the stock was way overpriced and would soon come down to earth, along with his personal wealth. Because this happened during the lock-up period, even if Cramer had wanted to sell he was legally forbidden to do so.

RISK FACTORS OF THE PROJECT

Where the money goes is the most important factor to consider for any investor when he is investing the money. So it is important to look into the details of the project and analyze it thoroughly.

FINANCIAL TRACK RECORD OF THE COMPANY

Look into the company’s income and balance sheet to check how the company has performed in the past few years. If the numbers are lumpy, look for the reasons for abnormal growth or fall in the figures.

IS THERE ANY TAX INCENTIVES?

An important point to consider is what happens when the incentives are no longer available because it will directly affect the financial position of the company.

GRADINGS BY SEBI

Rating agencies such as Crisil and CARE grade IPOs on a scale of 1 to 5, where 1 denotes poor fundamentals and 5 strong. Historically, issuances with good ratings have given better returns compared with those with inferior ratings. Investors should look at these ratings to assess the company but should not be taking it as a recommendation.

OBJECTIVE RESEARCH

Getting information on companies set to go public is tough. Although most companies try to fully disclose all information in their prospectus, it is still written by them and not by an unbiased third party. Search the Internet for information on the company and its competitors, financing, past press releases, as well as overall industry health.

PICKING A COMPANY WITH STRONG BROKERS

Try to select a company that has a strong underwriter. We’re not saying that the big investment banks never bring duds public, but in general, quality brokerages bring quality companies public. Exercise more caution when selecting smaller brokerages, because they may be willing to underwrite any company. However, one positive of smaller brokers is that, because of their smaller client base, they make it easier for the individual investor to purchase pre-IPO shares.