Initial Public Offering
When a company wishes to raise more funds, it generally goes public and issues it securities in exchange of funds. The process of becoming a public company is initiated by the process of IPO i.e., Initial Public Offering.
Initial Public Offering (IPO)
Initial Public Offering simply means the sale of shares of a company to the public for the first time. By Initial Public Offering, a private company becomes a public company and the number of its shareholders increase tremendously. IPO also helps in improving a company’s public image and allows the company to speed up its growth multifold.
What is the IPO Process?
Eligibility Criteria For Initial Public Offering
Entry Norm I (Profitability Route)
- Net tangible assets of at least INR 3 crore in each of the preceding three full years of which not more than 50% are held in monetary assets.
However, the limit of 50% on monetary assets shall not be applicable in case the public offer is made entirely through an offer for sale.
- Minimum of INR 15 crore as average pre-tax operating profit in at least three years of the immediately preceding five years.
- The net worth of at least INR 1 crore in each of the preceding three full years.
- If there has been a change in the company’s name, at least 50% of the revenue for preceding one year should be from the new activity denoted by the new name
- The issue size should not exceed 5 times the pre-issue net worth
However, there are two alternative routes for companies that do not meet these conditions:
Entry Norm II (QIB Route)
The issue shall be through book building route, with at least 75% of the net offer to the public to be mandatory allotted to the Qualified Institutional Buyers (QIBs).
The company shall refund the subscription money if the minimum subscription of QIBs is not attained.
A listed issuer making a public issue (Further Public Offer i.e.
FPO) is required to satisfy the following requirements:
- If the company has changed its name within the last one year, at least 50% revenue for the preceding 1 year should be from the activity suggested by the new name.
- The aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year.
- Any listed company not fulfilling these conditions shall be eligible to make a public issue (i.e.
FPO) by complying with QIB Route as specified for IPOs i.e.
issue shall be through book building route, with at least 75% to be mandatory allotted to the Qualified Institutional Buyers (QIBs).
Initial Public Offering (IPO) Process
The Securities and Exchange Board of India (SEBI) regulates the process of investment via IPO in India. The company that wishes to go public and issue its shares through IPO must get registered with the SEBI.
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The first step for Initial Public Offering is to consult a Merchant Banker. A merchant banker helps the company with the Initial Public Offering process, assisting with the due diligence, DRHP and other IPO formalities.
Certain information filed along with the application with the SEBI in form of a document that includes details like the offering as well as company information such as financial statements, management background, any legal problems, where the money is to be used, etc.
The application is evaluated by SEBI the documents are verified before they are approved.
During the evaluation period, the applicant company prepares the prospectus for the public about its offerings. However, it is mandatory to mention the status of SEBI’s approval as pending in the prospectus.
What Happens After the IPO Approval?
A Draft Red Herring Prospectus (DRHP) is circulated to the public after SEBI approves an IPO.
The document contains details of the initial share offer and the company such as financial information and risks associated with the business. After that, the Roadshow i.e. Marketing of the shares is done by the underwriters and company officials in different trade hubs.
Once the approval from SEBI is granted, the company must decide two things:
- The fixed price of shares it wants to issue.
- The number of total shares it wants to issue.
Initial Public Offering (IPO) shares are of two types:
- Fixed Price IPO: When the price of shares is fixed.
- Book Building IPO: When the price is set within a range and the purchaser needs to bid to buy the shares.
Once the type of share and amount of shares are decided, the company can make its shares available to the public.
Interest investors can then submit their applications to buy the shares. The company allot the shares based on the subscriptions it gets from the public on the date mentioned in the prospectus. The company then needs to list itself on the Stock Exchange. Once the shares are issued to investors, the company must enlist itself on the stock market for the public.
However, if a company does not want to issue Initial Public Offering, it can choose to remain as a private company and raise funds from venture capitalists and angel investors.
LetsComply can help your business with its Initial Public Offering (IPO) process and help you convert your private company into a public company.
04 Intro To Stocks - The IPO Process
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