Finance

How do IPO investments work and what is the role of Sensex in IPO?

Running a company is a mammoth task. It involves a lot of costs that one must bear to get a company started. There are costs associated with renting a place to run the company, setting up the operations and logistics, paying salaries to employees, running sales, manufacturing and/or distribution units, etc. Most companies start out as private enterprises, and once they’ve gained momentum and the attention of the public, decide to go public. This is done by launching and IPO. But how does a private company launch an IPO, how to invest in IPO and what is the role of Sensex in IPO? Here’s all you need to know.

How is an IPO launched?

There comes a time when a private company may not find funding form private investors and may feel the need to raise funds publicly, from external investors. The company takes the necessary steps which includes hiring an investment bank or ‘under-writer’ to verify the financial health of the company, here known as the ‘issuer’. The underwriter does its research and analysis of the company’s financial health, before providing the company the necessary permission to ‘go public’. The under-writer evaluates the company’s assets and liabilities and then the two parties enter into an agreement which allows the private company to publicly trade on one the two stock exchanges in India the Nifty and the Sensex.

What is Sensex and what is its role in IPO?

Sensitive Index, commonly known as Sensex, is essentially a market index consisting of 30 financially stable companies chosen from different sectors on the basis of free-float capitalisation. The companies chosen basically represent a sample of liquid, large, representative companies. A company that is newly launched on the exchange, through the IPO may or may not feature immediately on the Sensex. In case the demand for a particular IPO is high, and the value per unit is high as well, than a newly launched public company can also find a place on Sensex or Nifty. As such, if a newly launched company features on the Sensex, it is an indication of its good economic health.

How to apply for IPO?

After the under-writer grants a private company the right to go public, the company announces their intention to launch the IPO. This information is relayed on news and to all investment broking firms. The private company also rolls out forms for the public to fill. Here’s how to invest in IPO.

1. Ask you investment broker to provide the IPO application form or download it form the website of the company offering the IPO.
2. Fill the IPO application form and provide the basic details including your name, address and phone number.
3. There is a section in the application form where you need to fill in the details about the amount of money you would like to invest and/or the number of share units you’d like to buy.
4. Provide the details of the savings account i.e. your name and account number, bank branch and IFSC code of the bank to deduct the sums from your savings account on the day of IPO launch.
5. The shares are allotted to you after which, the IPO is launched on the secondary market.

Final word: Knowing Sensex meaning and its role in IPO is incredibly important. Note that not every company launched via IPO will automatically qualify for a space on the Sensex, although investors can buy shares of the company from both stock exchanges easily. Also, ensure that you research about the financial health of the company launching the IPO before investing.

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