Investing in IPO – Check the Offer Document Carefully  

check offer docOften there are times, when you come across lot of IPO’s (Initial Public Offers) coming in the market and you find yourself surrounded with thoughts like whether you should invest in this IPO or not, should you wait for the scripts to be available in the secondary market, will it be more risky to deal in the primary market, has the company made genuine declarations, should you get the offer document read by an expert before investing. Here, you got to understand one thing very clearly that the listed companies are under a compulsion to abide by each and every thing that they have written in their offer document. For that reason, it is really very important for an investor to read the offer document carefully before taking a decision to invest in that IPO. But what exactly you will have to look for in the offer document? Take a note from here.

Often there are times, when you come across lot of IPO’s (Initial Public Offers) coming in the market and you find yourself surrounded with thoughts like whether you should invest in this IPO or not, should you wait for the scripts to be available in the secondary market, will it be more risky to deal in the primary market, has the company made genuine declarations, should you get the offer document read by an expert before investing. Here, you got to understand one thing very clearly that the listed companies are under a compulsion to abide by each and every thing that they have written in their offer document. For that reason, it is really very important for an investor to read the offer document carefully before taking a decision to invest in that IPO. But what exactly you will have to look for in the offer document? Take a note from here.

You need to check up the competitive strength of the company as compared to the other companies in the industry. Check what the industrial regulation has to say for this kind of business, i.e. the provisions, the laws, the opportunities, the challenges, subsidies and so on. You need to look at the corporate structure of the organization which has launched its IPO. You need to understand the broad and main objects of the company that are listed in the offer document. Details on the subsidiaries of this company will help you in identifying the potential, diversification and certain other aspects of the business. Don’t forget to check the management and board of directors, corporate governance, compensation policy of the company, information on related party transactions, exchange rates including a very important indicator i.e., dividend policy of the company.

Check for the level of debt of the company. Perform a detailed check on the accounting policies of the company specifically related to depreciation and revenue recognition among others. A detailed analysis on the various ratios of the company derived from accounting information would obviously be a great help in assessing the financial condition of the company.

I am sure you must be thinking that what all information is straight way available from the offer document of an IPO. You will get the following details:

Details on the Cover Page – You will find the following information:

  • Contact details of the company, its registered address, details of the registrar
  • Complete details regarding the listing of this company
  • The nature, number, price and the amount of instruments that has been offered. The size of issue will also form of the cover page of the offer document.

Introduction – You will find the following information:

  • Merchant bankers details inclusive of their responsibilities and list of brokers
  • Complete details of the capital structure of the company, objective of offering, total requirement of funds, the plan related to funding, schedule of implementation of the plan, funds that are deployed, sources of existing funds, sources of funds for the balance funds, details on the interim use of funds, if any, term for which the issue of made, basis of the issue price and tax benefits

Risk Factors – Viewpoint of the management on the various internal and external risks to the company. The proposal to deal with this risk will also form part of this section. In addition to the above, it will include forward looking statements by the management for the company.

Financial Statement – The financial statements for last 5 years will be included in this section and this will also include restatement on cash flows, profit and loss, assets and liabilities.

Legal Information – If there is any outstanding litigation on the name of the company then it is compulsory for the company to specify it in the offer document. Similarly, any development in the company, its subsidiaries and group companies and promoters will also be written. If there is any material development in the company since the last date of balance sheet including government approvals or issuance of licenses, investment approvals or indebtedness, then this kind of information will also be included in the offer document.

Regulatory and Statutory Disclosures – This includes:

  • Eligibility of the company to enter the capital market and issue shares, letter of allotment, letter of refund orders (if any), copy of consents and expert opinion
  • Capitalisation of reserves or profits of the company
  • Revaluation statement of company’s assets and liabilities, classes of shares and the stock market data for its equity shares
  • Performance of past issues and the promise of output with the current issue
  • Dispute/ grievance redressal mechanism by the company for investors

Information on Offering – This includes terms of the issue, size of the issue, procedure and the process of applying.

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