IPO price discovery refers to the estimation of the appropriate issue price of the shares in the process of an IPO. The price discovery process involves studying the investor demand for shares and bring out the best issue price for both – the company and the market. Stock exchanges highly recommend it as the most efficient way for IPO price discovery.
Initial Public Offering (IPO) refers to the shares offered to the public when a company lists its shares on a stock exchange for the trading first time. An IPO helps the company to establish a trading market for its shares.
The issuing company not only analyses price, but prospective investors also opt for costly analysis to estimate the market price. A good forecast of the market price will bring significant monetary advantage for investors.
There are two ways to determine the price of an IPO.
- With the help of Lead Managers
- Through the Process of Book-building
Role of Lead Managers in an IPO
A company, planning for Initial Public Offerings (IPOs), appoints lead managers to decide the appropriate price for shares. Lead managers are independent financial institutions. Lead managers play a significant role in raising funds companies. The company can appoint more than one lead manager for large IPOs.
Process of book building
Book-building is a process of IPO price discovery. The book-building process involves recording and analyzing of the investor demand for initial public offering (IPO). Before arriving at the issue price, bids are collected from investors, during the period when the IPO is open and then offer price is determined.
The book-building is widely accepted and has become the standard method of IPO price discovery.
This is the process for price discovery in IPOs in India. Now we will discuss how SEBI and exchanges monitor IPOs in India.
Securities and Exchanges Board of India (SEBI) acts very strictly to check any misuse of funds raised through IPOs. As per SEBI guidelines, companies must appoint the monitoring agency for IPOs over Rs.100 crore. It is mandatory. A monitoring agency can be a bank or a public financial institution. The monitoring agency has to submit its report quarterly.
Non-banking finance companies (NBFCs) registered with the RBI with a net worth over Rs 500 crore are qualified institutional buyers (QIBs) and eligible to participate in IPOs.
Also Read – What is IPO Process in India?
Understand IPO Shares Allotment Process
Investment in an IPO can be tricky exercise. You have to bid higher for IPO shares. The higher the bid, the greater the chances of shares allotment to you. But it does not ensure allotment. It also depends on the demand for shares and category in which you are investing, i.e. Qualified Institutional Buyer (QIB) OR Retail IPO Investor. There is competition among lakhs of investors to get the allotment of a few IPO shares.
Refer to this detailed Investors Bulletin by the Securities and Exchange Commission (SEC).
Consider the following points for successful IPO Allotment:
- Determine the popularity of the IPO: Bid on the higher price range and for a more substantial amount, if it is going to be oversubscribed.
- Select an IPO with a significant and robust underwriter: Generally, major brokers bring quality companies. Select a company that has a reliable underwriter.
- Always read the Prospectus: A prospectus carries the company’s risks, opportunities and the proposed uses for the funds raised by its IPO. It is essential to review it and ask questions when researching an IPO. Do not take it at face value but don’t skip it also. The broker bringing the company public will provide the company’s prospectus on demand.
- Consider the Lock-in Period: If you follow the IPO charts, you will see that after a few months, the stock price declines. This is often because of the lock-in period. Wait until insiders are free to sell their shares because if they hold stock even after the lock-in period has passed, it shows that the company has a sustainable future. The contract of the IPO lock-in period prohibits them from selling any shares for a specified period. It is a contract between the underwriters and insiders of the IPO company.
- Avoid Red herrings IPOs: In simple words, don’t choose IPOs with too many regulatory and legal checkpoints in terms of liabilities, corporate governance, audit qualifications, compliance issues, etc. To analyze an IPO company, you need its latest figures and financial information on performance and management as there won’t be historical information. The primary source of data is the red herring only. The prospectus will help to find such issues in an IPO.
- Investors should avoid the company has a large capital base.
- Avoid investing money in IPOs if the stock market is under pressure with some domestic and global factors. Buy them on the secondary market relatively at lower prices.
- Know the company well. Take a look at its valuation.
These are the things to keep in mind as an investor. Invest wisely and enjoy significant returns on your investments.
No IPO found
|Issuer Company||Exchange||Issue Open|
|Yes Bank Ltd FPO||BSE, NSE||Jul 15, 2020|
|Rossari Biotech Ltd IPO||BSE, NSE||Jul 13, 2020|
|Reliance Industries Ltd. (RIL) Rights Issue||BSE, NSE|
|Antony Waste Handling Cell Ltd IPO||BSE, NSE||Mar 4, 2020|
|SBI Cards and Payment Services Ltd IPO||BSE, NSE||Mar 2, 2020|
|ITI Ltd FPO||BSE, NSE||Jan 24, 2020|
|Prince Pipes and Fittings Ltd IPO||BSE, NSE||Dec 18, 2019|
|Ujjivan Small Finance Bank Ltd IPO||BSE, NSE||Dec 2, 2019|
|CSB Bank Limited IPO||BSE, NSE||Nov 22, 2019|
|IRCTC Limited IPO||BSE, NSE||Sep 30, 2019|
|Issuer Company||Exchange||Issue Open|
|Billwin Industries Ltd IPO||BSE SME|
|Nirmitee Robotics India Ltd IPO||BSE SME||Mar 31, 2020|
|DJ Mediaprint & Logistics Ltd IPO||BSE SME||Mar 26, 2020|
|Laxmi Goldorna House Ltd IPO||NSE Emerge||Mar 20, 2020|
|Cospower Engineering Ltd IPO||BSE SME||Mar 17, 2020|
|RO Jewels Ltd IPO||BSE SME||Mar 12, 2020|
|SM Auto Stamping Ltd IPO||BSE SME||Mar 3, 2020|
|ICL Organic Dairy Products Ltd IPO||BSE SME||Jan 31, 2020|
|Chandra Bhagat Pharma Ltd IPO||BSE SME||Jan 31, 2020|
|Tranway Technologies Ltd IPO||BSE SME||Jan 27, 2020|