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Reason Behind Large Number Of Ipos In Pandemic

In 2021, a number of companies went public, ranging from computer start-ups to chemical manufacturing industries and restaurant franchises. In addition, more companies are expected to list on domestic stock exchanges through an initial public offering (IPO) later this year. According to investment bankers who analyze IPOs, this will be a great year for fundraisers. 30 corporations have already filed IPO papers for a total of Rs 55,000 crore, with at least 10-15 more preparing to go public and generate another Rs 25,000 crore. Later this year, more companies are likely to go public.

Companies have raised the most money through initial public offerings (IPOs) in almost a decade so far this year. Despite the impact of the Covid-19 outbreak, it appears that the country will experience a record number of initial public offerings (IPOs) this year. But why are so many corporations aiming to go public in 2021? Let's try to make sense of the initial public offering (IPO) mania.
 

What Is An IPO?

An initial public offering, or IPO, is a procedure in which a private firm sells its stock to the general public in order to raise funds. A private corporation becomes a publicly listed company through this approach. Some initial public offerings (IPOs) include an Offer For Sale (OFS), which allows existing investors to sell their shares in publicly listed firms. The money raised through the OFS route, on the other hand, goes to individual investors who are selling their stock. Unicorn companies (those with a valuation of more than $1 billion) are more likely to go public, but there are no hard and fast criteria.

Typically, private companies with good foundations and a track record of profitability file for an IPO to become publicly traded.

An initial public offering (IPO) is a significant step for a company because it is the first time it raises a considerable sum of money from the general public. A firm is completely owned by a small number of investors - founders, professional investors, and angel investors - before it goes public. Companies use capital acquired through public offerings for a variety of purposes, including debt repayment, company expenses, and expansion.

Some Interesting Things About Ipos

  • An IPO is a free issuing of equity shares that permits a private firm to offer its shares to the public.
  • Companies must follow a series of regulatory compliance defined by the country's market regulator, the Securities and Exchange Board of India (SEBI), before going public.
  • A Draft Red Herring Prospectus (DRHP), considered the preliminary registration document prepared by merchant bankers in charge of the IPO selling process, is required of companies.
  • The DRHP contains important information regarding the IPO, such as the company's operations, financials, industry position, shareholding pattern, and promoters.
  • The prospectus also explains why the company is seeking public funding and how it intends to spend the funds obtained.
  • SEBI either clears or requests amendments from merchant bankers handling the IPO on behalf of a particular company after reviewing the offer document (DRHP).
  • After the IPO has been cleared by the market regulator, a company can proceed with setting the IPO price, lot size, and launch date.

How Do Initial Public Offers Work?

When a firm receives market regulator's approval to go public, essential details about the IPO are released. The price range for the IPO, launch date, lot size, and share sale portioning for several types of investors institutional investors, non-institutional investors, Qualified Institutional Investors, existing employees and anchor investors - are all included in the information.

Once the IPO process has begun, a company's shares begin trading on the unofficial market (a market for unlisted shares also called grey market) until they are officially listed on the stock exchanges. This market's activity can be used to estimate demand for a company's shares before it goes public. In Grey market trading takes place over the counter (OTC), meaning they are not offered by a stock market and can only be traded by traders.

Simply defined, grey market activity predicts whether a stock will list at a premium or a loss on the stock exchanges. After the IPO release date, investors usually have a short window, usually 2-3 days, to subscribe to a company's public offering. Investors can trade for the shares on multiple trading platforms during this time. Investors must check their allotment status beyond the deadline through available methods, such as the BSE website or the registrar. Company's shares are listed on the stock market on a predetermined date once allotment is completed.
 

Why The Initial Public Offering Craze During Pandemic?

Since last year, a number of companies have gone public in order to raise capital. According to data, firms raised $4.6 billion through initial public offerings last year. According to investment bankers, this figure will be easily surpassed in 2021 as more companies choose to go public. Since the end of 2020, many companies have chosen to go public, owing to the impact of the Covid-19 epidemic on business and brisk stock market activity.

According to analysts, companies are going public as a result of strong stock market performance and increased participation of first-time investors, particularly high-net-worth individuals. According to a survey by the State Bank of India (SBI), over 14.1 million new individual investors participated in the stock markets in 2020-21. Despite the fact that the pandemic is still wreaking havoc on India's economy, the domestic stock market has remained unaffected.

The S&P BSE Sensex and Nifty50 stock market benchmark indices are currently doing better than ever. Given the strong market, a bigger number of recent IPOs have performed well, and more investors are keen to take advantage of this opportunity. The combination of high retail investor interest and liquidity has produced an ideal environment for companies to go public.

Companies are going public to raise finance in the aftermath of the Covid-19 outbreak or to fund corporate expansion in response to growing demand. The primary motivation for most digital and online delivery start-ups, such as MobiKwik, Paytm, Zomato, and others, to go public is to generate finance and expand their businesses as market develops rapidly. Analysts predict that over 50 digital technology companies will be listed on stock exchanges in the next few years.

In-Depth Analysis:
This year will see a number of large IPOs. The IPO of public sector insurer Life Insurance Corporation (LIC), which has received Cabinet approval, is anticipated to collect at least Rs 70,000 crore. It will be the country's largest initial public offering. The current IPO craze, which is primarily coming from the startup world, has resulted in ecstatic tales about sky-high valuations, massive fund-raising, and a who's who of elite investors.

The Indian new-age IPO market, in my opinion, is in a bubble and promoters are rushing to get their loss-making businesses on the market in order to protect their own futures. No one seems to care how much of the IPO is an OFS (offer for sale), in which current promoters and investors dump their own shares on public shareholders.

Are they, nevertheless, to blame? Why are investors willing to pay 30-80 times sales for companies that are not profitable, do not have a path to profitability, or have such fierce competition that any meagre profits earned can vanish in an instant due to competition or regulation? The answer is likely to be found in the phenomenal success of Big Tech in the United States. Indians have witnessed the remarkable growth of firms like Amazon, Facebook, and Google and believe that now is the moment to invest in such new-age technology equities. After all, hasn't Amazon been losing money for a long time?

There are two major issues with using Amazon as an example - and Amazon is almost always used as an example.
  • Amazon's retail business was struggling, but Amazon web services, which no one foresaw coming along, stepped in and began spouting cash with a fury. That cash is what propelled the stock to new heights.
     
  • Amazon is and has always been a strong worldwide business with the ability to lower costs through size. It developed a virtuous cycle by being a low-cost, consumer-friendly enterprise that returned a big portion of its scale gains to the client. Because of Amazon's scale, individuals were able to get low pricing, and as a result, more people purchased more things on the site, increasing its size. Even then, this isn't enough because many other companies, such as Costco and Walmart, have done the same thing in the offline world. Walmart attempted to replicate the same in the internet realm, but failed miserably.

Take a look at the stocks of the Big Tech companies. Is it possible to imagine a world without Google (YouTube, Search, Maps, Gmail, Translate)? Is there a tech company in India that is as dominating in its field as WhatsApp or Facebook, or that has as devoted a customer base as Apple? Do we have a Tesla or Netflix equivalent? Almost all of the Big Tech companies in the United States have global supremacy. When you look at each company that is launching an IPO in India today, you'll see that none of them are brand new.

They've been in business for a while and are still having trouble. Their claim to fame is a public relations campaign, most likely funded by the companies themselves, that focuses on how much money they have garnered from investors. Is it possible to live without Paytm for a day? Yes, without a doubt. It's really unlikely that you'll notice. Can Zomato make money if labour laws become more stringent or if (and when) eateries come up with their own ordering apps?

Nobody wants to be the one to say that these initial public offerings are overpriced. Investors are ecstatic if they receive an allotment and see a positive return on their investment. No one is interested in buying and holding these companies for the next ten years. In reality, for many entrepreneurs, bringing their company to market is the final goal, rather than a phase in the long and laborious process of establishing a business.

I'm not the type of person who obsesses over monetary values. I believe that high-quality items are always costly. But paying an exorbitant premium for something that the promoters are eager to sell and that has a dubious business model with a nebulous road to long-term success terrifies me. I am quite concerned of the current IPO situation in India because I come from a middle-class family and feel that capital is precious and irreplaceable. The bubble is in place. In low tones, it is recognised. However, no one wants to leave the gathering. For the obvious reason that nobody ever knows whether the party is coming to a close or is just getting started.
 
Conclusion
During the Covid 19 pandemic, many industries, particularly entertainment and hospitality, suffered significant losses as a result of the lockdowns. While some businesses suffered losses, those in the fintech and medical sectors generated big profits. Those that have suffered losses are launching initial public offerings (IPOs) in order to pay off their debts and maintain a healthy operating capital. Those who have profited are bringing in their initial public offerings (IPOs) so that they can expand their operations and cater to a larger audience.

Because of the government's favourable policies, analysts believe that more companies will issue initial public offerings this year. In addition, following the pandemic's imposed lockdowns, the government is now formulating favourable laws to encourage startups and businesses in different areas. This is being done in order to help the country's economy.

Moreover, during the lockdowns, the stock market in the country was severely impacted and suffered a significant drop, wreaking havoc on the economy. Following the relaxation of the norms, the market is currently gaining traction. The initial public offerings (IPOs) that were launched in 2020 performed remarkably well. They delivered a phenomenal result, attracting an increasing number of investors to invest in fresh IPOs. The combination of significant retail investor interest and liquidity has provided them with an ideal platform, increasing demand for new IPOs in the stock market.

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