So far in 2021, 41 companies are listed on stock exchanges in India apart from companies listed in overseas markets and thus far have traditionally outperformed. IPO Day swings that occurred during the boom in 2009 and 2011, and many years earlier.
If you are someone who is planning to dabble in the primary market by Investment In the upcoming IPO, consider these 5 legal and investment aspects before investing your money for membership.
1. Always read the prospectus
A prospectus is a sacred document that invites potential investors to make an offering. The prospectus contains the bid limit, minimum bid and opening and closing dates of the IPO. While it’s likely that you can’t remember the dates, what might be missed is the price band. With the increasing trend of loss-making companies coming into the market with their IPOs, sometimes the price range is decided by the bids received. This is a game of hope. It would be wise to give a standing instruction to your broker as to how many shares you would like to acquire and at what price range. Yes, it can be like the popular show ‘Pawn Stars’ – take it or go where you want to ‘walk’ if it doesn’t settle well within your budget. This way you can use this amount to invest in any other suitable investment option.
2. Investing through individual or joint account?
The account (for an individual) from which the investment is made for the IPO is either a joint account or an individual account. With the increasing changes in family arrangements, it would be prudent to discuss with your joint account holder whether they are comfortable with the process and document it in case of any incident affecting the family relationship. There may be a contractual arrangement between family members for a specific class of investments, where they agree to the risk capacity within limits. It can be multi-party agreements that take into account family bonding and serve as a ‘go-to’ document when uncertain. Discuss and document the discussions in a large family environment – which is of course personal and not for anyone’s business to know. The contract may also provide for confidentiality so that no one has access to it except to whom you decide to grant access. It can range from a nuclear family contract to a large joint family arrangement. When you are unsure, seek advice.
3. Do a company background check
The purpose of the Draft Red Herring Prospectus (DRHP) is to give a true and fair view of the Company. DRHP The best document to see is the interrelationship of the company’s historical events and the company’s relationship with other companies. While selling you shares, always keep in mind what the company is offering. The DRHP is a lengthy document and you would not want to miss an essential feature called ‘Risk Factors’. It was recently featured in a major IPO of a start-up when it was listed. In DRHP it is important to fit the risk with your individual or the combined risk capacity/s of your partners. There is a growing tendency for litigation against a company that can bring down or revive large corporations. See the section where ‘Excellent Litigation’ is mentioned. This gives you a view of the likelihood that the lawsuit will end in favor of the company you are considering investing in. Remember, you are the investor and what they told Venture Capitalists (VCs) in the past is being addressed to you but with legal repercussions. Bring out the VC in you and ask yourself why this investment makes sense. Help yourself with DRHP’s ‘Market Overview’, which is binding on the company at the time of listing. Use the liability to your advantage and filter it thoroughly for potential losses. Yes, many of these companies have IPOs which we use in our daily life like Zomato, Paytm, Nykaa or Sapphire Foods (KFC, Pizza Hut operator). And we may have ‘heard or basic’ information about the financial health of these companies. It is also quite likely that the company you are tracking is getting listed. However, it is important to thoroughly understand the financial statements of any company, especially an unlisted company, before investing.
4. Conflict With Your Current Company
One of the many issues that I face as a legal advisor is whether this investment will have a potential conflict with the company it is operating now. In the past, this was not an issue because the companies you invested in privately did not belong to the company you worked for. Now, you must have signed on the dotted line agreeing not to invest in any other company in the same sector. Relive those memories and remember what you signed up for. It is quite possible that the company you are investing in is in conflict with your current one. The alternative framework for investment, ie through your family, will have the same issues as listed in point 2. Think and consult before taking this decision so that it does not affect your future.
5. Capital Gains
Yes, you have to pay capital gain on the listing profit from the IPO. Agreed. But, it has to be reported in your Income Tax Return (ITR). With your Permanent Account Number (PAN) and Aadhaar linked, it is quite likely that the regulator is monitoring the transactions being carried out and expects you to be honest it is the investment being made in the ITR and the profit you have made. Make a habit of wrapping it as it is cut. Talk to a professional to assess the impact on your income tax for that year. Remember, ITR consists of 5 heads of income and you are assessed on total income including income from capital gains and it is quite likely that your salary alone may leave you in a lower tax bracket but from capital gains from your IPO investments. The collision may put you in a higher bracket.
(The author is a legal counsel and barrister.)