Reading an IPO document has perhaps lost its importance with the Securities and Exchange Board of India making it mandatory for the companies to get these listings graded.
This is because IPO grading should be clearly reflective of the value that it can provide to the investor. However, things can never be that simple, especially when you think of stock markets.
This is because, it will become a question of value judgement on your part if you were to invest in a scrip which does not have any past record, yet may have a great business model.
Market experts like Prithvi Haldea of Prime Database feel that this would hamper small IPOs as these firms enter the market at a nascent stage. Grading them would be a tough challenge for the rating agencies as these small companies do not have a past record.
But it is important to know that a poor grading does not mean that the company will not make it big in future. For example, Infosys' IPO actually forced the underwriters to buy the unsubscribed portion.
So, in case you decide to be bullish on 'no track record' companies, here are some important sections which are 'must see' in an offer document.
Risk factors: It summarises the various challenges which could hurt the company's business prospects. It also entails pending legal cases against the company, as well as its directors and their status.
Moreover, the companies have to disclose, whether they have any loss-making subsidiary and whether its losses could hamper its business plans.
Capital structure: This includes many things, which are tough for a layman to understand. Sometimes, the structure could be complicated and the investor may not realise how many shares the company is selling, what the preferential allotment would be and how the promoters' shareholding would come down. But, if the IPO is an outcome of a sale of shares by some other investors, then the investor could take a cue from that.
Business model and issue objective: The investor has to know, why the company is raising money and where it would be put. Is the issue meant for general corporate purpose or is it for retiring debt?
Companies with either weak or over-hyped business models have been tapping the market since many years. Sometimes such scrips are manipulated by market operators. In such cases, the genuine investor suffers.
Promoters and their background: Finally, it is the promoters who run the company. Knowing their background, past investments, returns and other business interests helps the investor.
Of course, there could be some promoters with little known track record, but could come out with a good business model and the stock could do well in medium- or long-term.
Here the investor has to take his own call, as there is no defined mechanism to say whether the promoters merit investment. One signal could be a high stake of promoters after the IPO, which indicates their good faith and trust in the business.
Financials: You can't skip this. One has to start understanding some terms, if one wants to put one's hard earned bucks into equities. You need to see how the company has performed over the past few years, and estimate how it can grow in the future.
Investing in IPOs is not an easy task, especially when we see a lot of them list lower than the issue price. One needs to put in some effort before embarking on that road to invest in IPOs. All the best.