20 POINTS TO BE CHECKED BEFORE INVESTING IN AN IPO : Several Companies are coming up with the Initial Public Offers (IPOs) of the shares of their companies. However, all IPOs are not good for investment and any retail investor should be extra careful before investing in these IPOs. Recently we have seen IPOs like One97 Communications Ltd more popularly known as Paytm. IPO of Paytm was offered at Rs.2150 per share and it is now trading at a huge discount of around 75% of its issue price at around Rs.520. Any investor who has invested Rs.1,00,000, has incurred a loss of around Rs.75,000. In this article we will discuss about 20 points to be checked before investing in an IPO so that the retail investors do not get cheated like they have been cheated in Paytm like IPOs.
20 POINTS TO BE CHECKED BEFORE INVESTING IN AN IPO :
Common retail investors are not experts in capital markets. Therefore, we will try to give here 20 points checklist in very simple and easy to understand language, so that retail investors can check these things before deciding to invest in any IPO. If out of 20 points, they get positive response/report in respect of at least 15 points, then only they should proceed to invest in any particular IPO.
How to to do due diligence?:
20 POINTS TO BE CHECKED BEFORE INVESTING IN AN IPO :
- Business of the Company: Look into the Information Document/Prospectus of the Company about the Business of the Company and try to understand the future prospects of the business.
2. Face Value of the Share: Always compare the IPO price of the share with its Face Value. Any IPO may look deceptively at very attractive in price, but when you look at its Face Value, you will find that its IPO price is not attractive enough. For example, there may be an IPO at Rs.50 per share. Considering other factors, you may assume that this IPO is very attractive in price. However, when you check its Face Value, then you may find that the face value of the share is just One rupee. You are getting a Share with face value of One rupee for Rs.50.
3. Book Value of the Share: Always look at the Book value of the Share before investing. Any company offering an IPO at a price which is at huge variance with its Book Value should be out rightly rejected. Similarly when you check, you may find that some companies having a negative book value are offering their IPO at hefty premiums. Never make a mistake of investing in such useless IPOs where book value of the share is itself negative or very low in comparison to the IPO offer price.
4. Sales/Revenue : Look at the comparative Sales/Revenue figures for the last 3 years. You will be able to know how the company is performing.
5. Net Profit : Look at the comparative Net Profit figures of the company for the last 3 years. You will be able to know how the company is performing. If the company is continuously making losses or there are losses in 2 out of the 3 years, investment should be avoided.
6. Past Accumulated Losses: Company may be making some profits in the current period, but it may have huge accumulated losses for the past years. Quantum of these Losses should be considered.
7. IPO Price Vs Performance: Looking at the financial performance as explained above, try to understand whether the financial performance is justifying the IPO price asked by the Company.
8. Borrowings of the Company : Look at the figures of Loans which the company has taken from Banks and other entities. Whether these loans are being serviced by the Company without making any default, should be looked into.
9. Unpaid Taxes/Penalties/Demands: Check whether there are huge amount to be paid by the company towards Taxes/Penalties and other demands by the Government and other Regulatory/Statutory Authorities.
10. Promoters Background : Background and history of the Promoters of the Company should also be checked from the Information document to see whether they are of reasonably good reputation and whether any criminal cases are pending against any of these promoters. IPOs backed by the promoters having questionable/criminal background should generally be rejected.
11. Purpose of IPO: It should be checked as to for what purpose this IPO is being offered to retail investors. If this is for the expansion of the existing business then it is OK. If the IPO proceeds are not to be used in the existing business, then Investors should not invest in such IPO
12. IPO Price Fixing : Check, how the company has arrived at the IPO price. If the IPO price is solely based on the future projections, then you may be trapped like Paytm Investors. IPO price must be linked more with the past performance than with the future projections. Any IPO price based on SOLELY on future projections, should be rejected.
13. Strength & Weakness of the Company : Look whether the company is dealing with the products which are exclusive and company is having a monopoly in some of the products. Whether the products or services being offered by the company are exceeding the demand or supply, should also be checked.
14. Comparison with Companies with similar business model : This is also a very simple and effective check. If the company is having several competitors, then the performance and the share price of the competitors should also be a guiding factor.
15. Health of the Company : Health of the Company can be easily checked with the help of simple Balance Sheet analysis. Whether the net worth of the company is negative, whether there are excessive borrowings, whether there are obsolete stocks being shown as Inventories, whether there are huge intangible assets. Al these factors need to be looked into to check the health of the company
16. Government Policy: If the products/services offered by the Company are subject to some Government policy, then it should be checked as to what will be the effect on the financial performance of the company,If Government decides to change any policy. Telecom, Liquor and Entertainment/Broadcasting industries are examples where Government policies from time to time can play a major role.
17. Statutory Compliances: Whether the company is making all statutory compliances timely and depositing all taxes and Government dues timely should also be checked.
18. Political affiliation : Whether the company is directly or indirectly is affiliated to any particular political party, should also be checked.
19. Politician Promoters: The fortunes of even a professionally managed company, having any politician on its Board, may change significantly, depending upon whether the party to which that promoter belongs is in power or not. One should be extra careful in all such cases.
20. The Most Important Point : 99% retail investors think that since the IPO has been cleared by the SEBI, therefore they should not check anything. This is wrong. You are investing your money into IPO. SEBI is not investing any money into IPO. It is your responsibility to make proper due diligence before investing. SEBI clears the IPO based on the technical parameters. SEBI has no role to play in IPO price fixation.
Also Read:
Also Read:
Why SEBI has failed to check IPO overpricing in India? (indiatimes.com)
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