Come , let's explore it together.
What is an Initial Public Offering (IPO)?
An IPO or Initial Public Offering is the first time a private company sells its shares to the general public and lists them on a stock exchange. It is a very simple way to increase the capital of the firm. It is a very unique way to attract a large audience as people are more curious to explore new things that emerge in the market arena .
Is IPO Registration Mandatory?
Yes, it is legally mandatory
Let's understand why ?
2) Exploring prices - The exchange uses a market quotation to explore fair market value on the basis of public mandate .
3) SEBI's Safety Rule (Regulatory Mandate):SEBI, the watchdog of the Indian stock market, makes it mandatory for every company to register before launching an IPO.
🎯 The Goal: To keep regular investors safe from scams, frauds, and heavy financial losses.
4) Building Faith - The trust that company builds on getting registered on a Stock Exchange, indirectly gives assurance that they are investing their money at the right platform.
What is the Role of SEBI in an IPO?
When a company wants to launch an IPO and list its shares on the stock exchange, it cannot do it directly. They must go through SEBI (Securities and Exchange Board of India), which acts as the main regulatory authority and watch-dog of the Indian stock market.
The primary role of SEBI is to protect the interests of retail investors. Before a company can bring its IPO to the public, SEBI thoroughly reviews its Draft Red Herring Prospectus (DRHP). SEBI checks the company's financial health, internal audit reports, and ensures complete transparency. Without SEBI’s final approval, no company can legally launch an IPO or get listed on stock exchanges like NSE or BSE.
Before you use any product or avail any service , some kind of instructions along with precautions are always given so that the customer gets fully aware of , as it can have a downside potential too .
Let's understand it's DISCLAIMERS :-
⚠️ Major Red Flags: Beware of These Warning Signs!
1) Explore the Business -
Before investing, it is essential to understand by what way it incurs money and how long its growth is going to sustain. Also check whether growth is not only by way of offering discounts. Alongside revenue should also be taken into account.
2) Don't Just Observe Profit, observe Statistics -
Look at margins , return on equity and debt to equity ratio. Increasing liabilities can signal manipulation of working capital. Negative cash flow in companies due to expansion is not always a danger sign at initial stage .
3) Beware of warning signs
i) Major exit by promoters
ii) An obscure auditor
iii) Frequent changes in CFO/ CEO in 3-4 yrs preceding the IPO
THESE ARE MAJOR RED FLAGS
4) Don't rely blindly on listing gains -
Listing gain strategies are merely based on /built on speculation. There entails no promise of getting stock alloted or incurring profit , but interest on borrowed money must be returned back . Therefore IPO investment using borrowed funds should be extremely avoided.
5) Check where your investment goes ?
Money raised through an Offer for Sale does not go to the company. Raising capital vs Fund expansion are solely different concepts and has nothing to do with profit of individuals who invest .
Conclusion
IPO is indeed a very interesting topic to explore for the new investors who wish to invest at an initial level just to understand how it works. Looking at the disclaimers , we can easily decode that lot of risks are involved . Invest wisely as it does not take guarantee of your profit.
STAY TUNED FOR PART II ........COMING SOON
Designed By
Komal Nagarkar
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