IPO Investment: Understanding its prospectus
Investors should exercise caution as the Initial Public Offerings market grows more robust and not be misled by the noise and excitement around this investment. Five fresh IPOs have recently become available for subscription. Additionally, the IPO calendar for the coming months appears to be jam-packed, with at least 15-20 companies seeking to list on the stock exchanges.
Investors should study the offer document or IPO prospectus thoroughly in this situation and make an informed judgement. On the other hand, these records are usually highly technical and lengthy. Rather than feeling overwhelmed, investors may use this simple way to read the brochure and make an informed decision about the company. This article decodes the prospectus and knows the various points to pay attention to.
Where to get the prospectus for IPO?
It can be found on the Securities and Exchange Board of India website, among other places. You find information about the firm launching its IPO on the SEBI website, the investment bankers for the IPO, your stockbroker, and business news websites. The prospectus document is found by searching for ‘ABC firm IPO prospectus’ on search engines. It is free to download and use.
What to check on the prospectus?
Overview of the company
This is the starting point for everything. Analysing its operations and strengths and weaknesses provides some insight into IPO Investment. Investors must determine whether the company has a long-term economic moat (competitive advantage). “Buy a stock the same way you would buy a house,” Warren Buffet advises. “Understand and like it to the point where you’d be happy to own it in the absence of a market.”
Similarly, it is critical to learn the industry dynamics in which the company operates and an overview of its competitive landscape. A prospectus includes information about an industry’s demand-supply mechanisms, future growth potential, and trends.
Company’s financial profile
You need not go through a company’s detailed financials, usually mentioned in section V of a prospectus. Instead, a glance at the financial summary in the ‘Introduction’ section should suffice. The goal of reading this information is to gain an understanding of the company’s strength concerning:
- Revenue growth
- Margin profile
- Cash flows
Well-established companies have a track record of paying dividends consistently. Generally, avoid companies that always incur losses or have massive debt on their books. Watch out for details like price-to-book and price-to-Equity ratios, indicating whether an IPO gets priced appropriately.
The prospectus’ ‘Introduction’ section appears and explains how the company will use the funds raised through the IPO. A company’s plans to use the money to pay down debt and expand are generally regarded as positive indicators.
Read about the company’s founders, directors, and management team’s experience, qualifications, expertise, and track record. These details help understand how the company’s strategies get implemented and highlight the company’s corporate governance practices.
This section starts with the introduction of the offer document and is extremely important. The company discusses different internal and external risks that can significantly impact its business and finances. Although some changes, such as the impact of COVID, are generic and apply to most peers, others are more company-specific.
This includes a high reliance on one or two customers/industries/geographies, the withdrawal of tax breaks, pending legal cases against the company/promoters, and information about contingent liabilities. To give you a recent example is the scrutiny of a government-owned company’s independent decision-making.
These factors in the company’s IPO prospectus stated unequivocally that its businesses and revenues were heavily reliant on ‘XXX’ government entity. Any adverse changes in that entity’s policy may negatively impact its business and operation results. The IPO prospectus is a goldmine of helpful details and insights. By thoroughly reading this document, investors make sound and well-informed decisions.
IPO and Demat Account
Almost all stock exchange transactions and clearing and settlement get done solely through the Dematerialised (Demat) mode. Hence, understand how to buy shares via Demat and the importance of a Demat Account. So, is this account only required if you want to invest in Stocks? According to the answer, you need a Trading Account to purchase shares in the market. A Demat Account is a secure storage location for your shares.
You cannot conduct transactions with this account. The Trading Account is required only for transactions. So, when you buy Stocks, you need to do so through your Trading Account. On T+2 day, the shares get automatically transferred into your Demat Account. There are a few Demat Account opening charges that you need to know. The costs are as follows:
Annual Maintenance Charges (AMC)
An AMC is a fee charged by depository participants to maintain your Demat Account annually.
Account opening fee
This is a one-time service fee by almost all DPs as part of opening a Demat Account.
DPs charge postal fees to deliver documents and account statements to you physically.
How do I open an online Demat Account?
Here’s how to open Demat Account online through the NSDL website:
Step 1: Contact an NSDL-registered Depository Participant (DP).
Step 2: Complete the KYC requirement by submitting the completed application form and requested documents.
Note: The documents include a copy of your PAN Card, address proof (passport or Aadhaar), and bank information for the DP.
Step 3: The DP verifies the submitted documents.
Step 4: They open Demat Account online with NSDL on your behalf if the verification is successful.
Once the account is ready for use, you are given information such as:
- NSDL Demat Account number (with “IN” followed by a 14-digit numeric code).
- DP ID.
- Client ID.
- Copy of your client master report.
- Tariff sheet.
- Copy of the rights and obligations of the beneficial owner and the DP.
- Your DP also offers you login information so that you can easily access your NSDL Demat Account.
Once the account is opened, the following details get shared with you:
- NSDL Demat Account number ((starts with “IN” followed by a 14-digit numeric code).
- DP ID
- Client ID.
- Copy of your client master report.
- Tariff sheet.
Documenting the rights and obligations of the beneficial owner and DP is also a must.
Your DP also hands over the login credentials, using which you can easily log into your NSDL Demat Account.
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