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Nykaa launches its IPO. Things to consider before investing in an IPO.

By anjali kumari 10th August 2021

Nykaa, a retailer of beauty products on the internet, has filed preliminary documents with SEBI for an initial public offering, and according to media reports, its value could reach more than $4 billion. The company is headed by former banker Falguni Nayar.

Nykaa has been listed as one of the most unique startups to hit the public markets. The company was the only unicorn headed by a woman to go public amid a wave of Internet offerings. Despite this, the promoters still control a majority share of the company.

About the company Nykaa

Nykaa operates an e-commerce portal for the sale of cosmetics and beauty products online. Its website offers an assortment of organic, natural, and branded products for men, women, and children, thereby allowing them to select from a variety of offers and discounts on all beauty, makeup, and wellness products.

The Nykaa marketplace competes with companies such as Myntra, Purplle, Flipkart, and Amazon. The company has its private label in the cosmetics and personal care segment and follows an inventory-driven business model.

India is currently experiencing a rush to list on the stock exchange, with at least 28 companies having already filed their IPOs and raising more than Rs 42,000 crore over the last seven months. Following the successful listing of food tech unicorn Zomato, other tech-based companies are at the forefront with plans to list this year, including PhonePe, MobiKwik, Grofers, PolicyBazaar, Flipkart Internet, and Delhivery.

Are you also planning to participate in the IPO race? We would recommend that investors and companies seeking to invest in an IPO get a better understanding of the uncertainty and risks involved. So let’s dive in and learn more about IPOs, their benefits, and their disadvantages.

What is an IPO?

The initial public offering is the first time a company sells stock to the public. As part of its expansion plans, the company offers the stock for sale to the general public.

IPOs present many advantages both to companies and investors. But several disadvantages counterbalance its benefits. Be sure to consider the pros and cons of IPOs before investing. 

ADVANTAGES & DISADVANTAGES OF IPO
ADVANTAGES & DISADVANTAGES OF IPO

Let’s look at the advantages first

For companies

  • Raising funds

The IPO and subsequent funding rounds will allow companies to raise substantial amounts of money to support normal corporate operations, growth opportunities, R&D, marketing, and capital expenditures. 

  • Publicity & Credibility

 Each initial public offering is covered by analysts around the world to allow their clients to decide whether to invest, and numerous news agencies highlight different companies that are going public. In addition to receiving a great deal of attention when a company goes public, it also gains credibility. 

  • Bringing down corporate debt

IPOs or subsequent stock offerings by public companies may reduce interest costs and improve cash flow and the debt to equity ratio so that debt can be repaid. 

For Investors

  • Fair & transparent pricing 

In a public offering, the prospectus filed by the company contains full information on the price valuation of equity shares. Therefore, you can access data similar to that of the biggest investors. 

  • Small investments and greater returns

An IPO’s price is the best price that you are offered for buying equity shares in a company with the potential for success. The stock price may rise immediately upon listing itself and enable you to extract huge profits quickly. In this year’s IPO market, there have been IPOs with listing gains of more than 70%.

There are a few cons to an IPO. Let’s have a look at it

For companies

  • Possibility of losing control over your company

A public company receives substantial funds from its shareholders when it goes public. The company is obliged to act in the shareholders’ best interest since shareholders invested so much money in it, even if that means going in a direction the founders dislike. Shareholders who feel the company does not operate in the best interests of shareholders will force your company to appoint new leadership through shareholder votes or public criticism.

  • Information about confidential or financial nature disclosed 

A company should regularly disclose to its shareholder’s information of critical importance, including financial information. Information of this nature would be of use to rivals, suppliers, and customers, and could result in a loss for the company

  • Auditing costs are high

Regulatory agencies will charge a rolling fee for periodic reports and proxy statements filed with the regulatory agencies and distributed to shareholders. Auditors and other compliance procedures for public companies should be carried out by the company. It costs money to perform a procedure and to produce a report.

For Investors

  • Private information is compromised

In the paperwork and application for an IPO, investors must provide a lot of information. Your private information may be included in it, which you would not normally want public knowledge of. However, it is your responsibility to provide the same if you are investing in a public entity

  • Requires extensive research 

A thorough study of the company and its past performance is necessary before investing in an IPO. Even though the prospectus provides the same information, interpreting it is a complex and time-consuming undertaking.

While IPOs are one of the most risk-free investment opportunities, there can be uncertainties, especially with market risk and frequent over-hyping today, this can be dangerous for companies and investors. Thus, you ought to consider the positives and negatives of an initial public offering beforehand

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