Five aspects to consider before investing in IPO

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The frenzy stock and primary market have driven the year 2021 due to the stellar listing gains.

If you are planning to invest in the upcoming IPOs, here are a few legal and investment aspects to consider:

  1. Read the prospectus

The prospectus is a document that invites the investor into an IPO.  The prospectus contains the price band for subscription, minimum bids, opening and closing dates of the offering.

Give standing instruction to your broker regarding the number of shares you want to acquire and at what price range.

It is like take it or walk away. You would like to walk away when the settlement is not within your budget.

2. Individual or joint account?

A person can invest his money into an offering through a joint or individual account. It is essential to know whether the joint account holders are comfortable with the process of IPO and all the documentation, which may affect familial relations.

There could be a potential agreement between the family members for the potential risks of an asset class. Discuss and document the conversations with the family members in confidentiality. Take suggestions when you are uncertain.

3. Background of the company

DRHP (Draft Red Herring Prospectus) gives a fair image of the company. It provides details about the historical background of the company and its relations with other companies. Look at what the company is proposing when you are offloading the shares.

DRHP has some necessary things like ‘Risk Factors’. Consider the red-flagged risks in the DRHP of the company and then take the investment decision.

Do not miss out on the section ‘Outstanding litigation’. It gives you a view of whether the litigation ending will be in favour of the company you are investing in or not.

Ask yourself that why does the investment make sense. Take a look at the ‘Market Overview’ section in the DRHP, which is the company’s obligation during IPO. Make sure that it is beneficial for you. Look at the potential pitfalls.

Have a thorough knowledge about the financials of any company before investing, especially the unlisted ones, as they might be next in line to file DRHP.

4. Conflict with the current company

You have decided not to hold a share in any other company in the same sector. Like if you invested in TCS, you won’t put your money in Infosys. But what if the company that you are looking forward to investing (say Kotak Mahindra) conflicts with your current company (TCS).

You can have an alternative investment structure with your joint account holders.

5. Capital gains

You need to pay capital gains on the listing gains. The regulator monitors your transactions and expects you to be honest about the income tax return (ITR). It is because you need to link your PAN and Aadhar Card numbers.

Your salary may fall under the lower tax bracket, and the capital gains from IPO investment may land up in the higher tax bracket.

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