For most Indian investors, the excitement around a new IPO begins the moment a company announces its intention to raise capital from the public markets, but few pause to consider everything that happens behind the scenes before that offering ever reaches their trading screen. Just as important, though often overlooked in the excitement, is the quiet infrastructure of the Demat Account sitting in the background, ready to receive shares the moment allotment is finalised. Understanding this broader journey, from a company’s initial decision to go public through the months of preparation that follow, gives investors a far richer context for evaluating whether a particular offering deserves their hard-earned money, rather than reacting purely to headlines and subscription figures.
What Happens Before A Company Reaches The Public Markets
Long before you as a retail investor ever see an application form go out for a particular stock, a company considering a public listing goes through an extensive and usually protracted preparation process. This involves engaging investment bankers and legal advisors who help them structure the offering, work out an appropriate valuation range, and produce the detailed documentation required by regulatory authorities, which alone can take many months or even years.
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During this time, the company’s financials are audited and its business model, growth ambitions and risk factors documented in substantial detail. These filings, although very dense in nature, make up one of the most valuable resources for prospective investors, giving a look into how the company thinks about its opportunities and risks, away from the more tailored messaging that it would employ in its marketing to the public.
Regulatory authorities also play a considerable role, reviewing the filings and often requesting additional disclosure before allowing the offering to proceed, which can be both frustrating to companies seeking to raise capital and a critical security feature to protect retail investors who are due to apply for shares once the doors open.
Following the regulatory approval, companies typically go on a roadshow, showcasing the opportunity to major institutional investors ahead of the general release of the offering. With these investors representing a sizeable chunk of the available liquidity, there is often an anchoring effect to be seen, wherein the perceived value of the investment opportunity is determined by the degree to which it has been received by other such institutional players. This, however, should be used with caution as a guide to what the general retail public should think about an offering, as these players have considerably different risk tolerance, time horizons and liquidity needs as compared to your average individual investor.
Reading Between The Lines Of Subscription Data
Once the offering opens for subscriptions, this becomes one of the most fiercely debated topics in the investing public sphere, with the figures always being presented in great detail in the news and on social media. Although it is true that subscription data can give a useful indication of the general reception of the offering, it is also easy to get misled by taking these numbers at face value.
Most offerings are actually split into multiple categories – typically retail, qualified institutional buyers and high-net-worth individuals, all of which subscribe at vastly differing rates. A company could be oversubscribed several times over by institutional investors while only seeing relatively modest subscription rates from the general public, or the other way around, and an understanding of the makeup of the subscription figures can provide greater context to the overall level of enthusiasm for the particular stock.
Another common trap is to conflate high subscription numbers with high performance potential, without considering the actual fundamentals of the business, as some of the most heavily subscribed offerings have gone on to underperform significantly in the following months and years, once the initial frenzy had died down and earnings reviews started rolling in with unpleasant surprises. On the flipside, there are stocks that have seen only mediocre subscription numbers that went on to become multi-bagger gains over the long term as the fundamentals steadily impressed throughout the years since the listing. Subscription data should always be taken with a pinch of salt, used as one tool among many, but certainly not as an oracle to be blindly followed.
The grey market, although unofficial and not recognised by any official capacity, is also a place where speculation about the soon-to-be-listed companies takes place, and often has a predictive power over the listing day performance. However, once again, investors should be aware of the limitations of such data, as grey market volume figures should be seen as no more than a curiosity to most individual investors, with actual fundamental research being required to truly understand the long-term prospects of the company.
Approaching New Offerings With A Long-Term Investor’s Mindset
Perhaps, the most important change in approach for investors interested in new offerings is to stop viewing them as a short-term trading opportunity and instead apply the same analysis to a new stock that one would use for any other long-term holding. That means asking fundamental questions about the competitive advantages of the company, its standing in the industry, the quality of its management team, and its plans for the capital being raised.
Comparing the valuation multiples of the offering to similar companies already on the market can also provide valuable context, with companies having to offer significantly more compelling prospects justifying their typically higher valuations at the time of listing. A company listing at a significantly higher multiple than its competitors in the same space should be examined more closely to understand what specific advantages it possesses that the others do not, and whether the offering prospectus overstates the potential growth of the business, as investors should always be wary of unsubstantiated claims.
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Patience following allotment is just as important as due diligence preceding the subscription, as companies tend to have very volatile price movements in the months following the listing, as the market looks to price the stock appropriately on a more regular, quarterly reporting cycle, as opposed to the multi-year reviews that were used to determine the initial issuance. Investors who take a measured approach to applying their capital, and instead take the opportunity to reassess their positions in light of the newly published financial statements, are more likely to benefit in the long run from the fundamentals of the business actually speaking for themselves.
Developing a habit of reviewing the quarterly reports following the listing and comparing the actual performance figures to those used in the prospectus can prove invaluable in cultivating a proper long-term view on an investment. This process, which can be applied to any new stock purchase that an individual makes, ultimately serves to highlight the fact that any participation in a public offering is only one step in the investor’s journey and should be undertaken with a patient, long-term outlook.