IPOs: how to read one
Three hundred pages arrive and everyone has an opinion. What do you actually read?
12 of 12 chapters published
Chapters
Beginner
- What an IPO actually isA company selling shares to the public for the first time — sometimes its own new shares, sometimes shares its existing owners are selling, usually both. Which of the two you are buying decides whether the company gets any money.
- The three documentsA DRHP, a red herring prospectus and a prospectus are the same disclosure at three stages. Knowing which one you are holding tells you what is missing from it — and the draft is the one that is open to your comments.
- Who is in the roomA merchant banker, a registrar, banks that block your money, an exchange, a monitoring agency and SEBI. Six roles — and the one whose interests are least like yours is the one whose name is largest on the cover.
- How to applyYour money is blocked, not paid. Retail can tick one box that makes a bid valid at any price in the band, and a specific bid below the discovered price is simply thrown away. Both facts are worth more than they sound.
Intermediate
- Where the money goesThe objects of the issue say what the fresh money will do. Two caps limit how vague that can be — and the vaguest category of all is the one no monitoring agency is required to check.
- The three categoriesRetail, non-institutional and institutional investors bid in separate pools with separate reservations. Which set of percentages applies tells you something about the company before you have read a single financial statement.
- Building the bookThe price is not set, it is found. Bids arrive at different prices, the demand at each price is added up, and the issue price is the highest one at which the whole issue still sells. SEBI publishes a worked example; so does this chapter.
- Reading the numbersThree years of restated financials, a set of key performance indicators the company chose for itself, and a risk factors section written by lawyers who knew it would be read in court. Each needs a different kind of scepticism.
Advanced
- The basis for the priceIndia has had free pricing since 1992 and SEBI plays no part in it. What the seller must do instead is show its working — against a peer group the seller itself selected, which is where the whole section turns.
- Anchor investorsBig institutions can be allocated up to 60% of the institutional portion at the issuer's discretion, a day before everyone else bids. They pay upfront, cannot withdraw, and half of them can sell after thirty days.
- Listing day, and the lock-insShares list three working days after the issue closes, at a price nobody controls. Then a calendar of lock-ins expires over the following eighteen months, each date releasing shares that could not be sold before it.
- When not to applyThe regulator's own advice to investors is the shortest summary of this subject: do not deal in the grey market, do not apply expecting a quick listing profit, and invest for the long term. Here is the checklist behind it.