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[Sansad TV] The IPO Boom

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One97 Communications-owned Paytm will launch its initial public offering for subscription in the coming week.

This is the largest-ever public issue in the history of Indian capital markets.  Before this, state-run coal mining company Coal India had the biggest IPO of more than Rs 15,000 crore in October 2010.

Context

  • Driven by excess liquidity and a rising stock market, Indian companies has already raised approximately 72000 Crore rupees through IPOs this year, the highest amount over the last 20 years.
  • With several more IPOs of companies such as Paytm and Policybazaar, the overall figure is likely to cross 1 Lakh crore by the end of this year.

In this article, we shall discuss the reason behind the IPO Boom’ this year, how are these issues performing on the market after listing and what kind of value addition do they bring to the table.

What is an IPO?

  • Every company needs money to grow and expand.
  • They do this by borrowing or by issuing shares.
  • If the company decides to opt for the second route of issuing shares, it must invite public investors to buy its shares.
  • This is its first public invitation in the stock market and is called the Initial Public Offering (IPO).

Do you know?

The Dutch are credited with conducting the first modern IPO by offering shares of the Dutch East India Company to the general public.

What does it mean for investors to buy shares?

  • When one buys such shares, he/she makes an IPO investment.
  • He/she gets ownership in the company, proportionate to the value of your shares.
  • These shares then get listed on the stock exchange.
  • The stock exchange is where you can sell your existing shares in the company or buy more.

How does an IPO work?

  • The Securities and Exchange Board of India (SEBI) regulates the entire process of investment via an IPO in India.
  • A company intending to issue shares through IPOs first registers with SEBI.
  • SEBI scrutinises the documents submitted, and only then approves it.

Who can hold IPOs?

  • It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public.

Trading of shares

  • The company which offers its shares, known as an ‘issuer’, does so with the help of investment banks.
  • After IPO, the company’s shares are traded in an open market.
  • Those shares can be further sold by investors through secondary market trading.

Why are IPOs held?

Some of the main motivations for undertaking an IPO include:

  • Raising capital from the sale of the shares
  • Providing liquidity to company founders and early investors and
  • Taking advantage of a higher valuation

Benefits offered by IPO

  • Cheaper avenues of raising capital
  • More exposure, prestige and enhanced public image
  • Creating multiple financing opportunity through equity, convertible debt etc

Limitations of IPO

  • Disclosure of sensitive financial and business information
  • Risk of company performance in future
  • Risk of litigation by investors
  • Market pressure
  • Cost of trading (transaction cost) borne by the investors

Why is there a boom of IPOs in India?

There are multiple reasons for the spike IPOs:

  • Monetary push: In in a bid to boost the economy, central banks and governments over the world have been pumping money into the economy.
  • Liquidity: This money with people is finding its way into the stock markets.
  • Lower interest rates: As long as the interest rates remain low, investor enthusiasm remains and investors keep making listing gains on the last few issues.
  • Retailers’ entry: Besides big institutional investors, recent months have seen a hoard of first-time retail investors entering the markets.
  • Regulatory boosts: Positive changes in the regulatory environment are also forging IPOs as a sustainable path for scaled companies. The SEBI has been highly proactive in this regard.

Ever since the release of a web series on the stock market, every other person/aspirant is seen talking about share markets. This seems to be the rising awareness and sensation created among young investors in the stock market.

Concerns raised

  • The RBI has warned that there is a disconnect between Indian stock markets and the economy, which could pose a risk to the country’s financial stability.
  • There is a question of sustainability of the spike in stock market.

Conclusion

  • As a growing economy, India offers tremendous opportunities for entrepreneurs to build global companies.
  • A very active early-stage VC ecosystem enables entrepreneurs to take that risk in the early stages, and a buoyant private equity market enables strong early-stage businesses to access growth capital.
  • It is only natural to see a lot more IPOs in the future as these companies scale up.
  • A knowledgeable and active public market ecosystem with active retail participation alongside FIIs is expected to make the country a solid story for the years to come.
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