Initial Public Offering
Updated: Aug 9
Many us have heard about IPO, but do you actually know what an IPO really is?
It is the process by which a Private Company goes Public by selling its shares to the general public for the first time. IPO can be issued by a new company or an old company. With Initial Public Offering, the company gets its shares listed on the stock exchange(NSE or BSE). IPO is the last stage of funding for Start-ups, it is the only way a company can raise a huge capital / funds when the company has already exhausted all the other 5 stages of funding options which are:
1. The Pre-seed Funding Stage - It’s not even considered as a start-up funding. The pre-seed funding stage generally refers to the time period in which a start-up is getting their operations off the ground.
2. Seed Stage – In this stage, funds are usually invested by the promoter, his friends and family members.
3. Series A Funding – Funds are induced in the company by Angel Investors and Venture Capitalists.
4. Series B Funding – Further funds are introduced by Angel investors and Venture Capitalists when there is a high positive response in the market for the company’s product.
5. Series C Funding – Funds are to increase share in the companies on their expansion by acquiring other Start-ups and exploring new markets.
Companies float it to raise funds by issuing new shares to the public. However, the existing shareholders can also sell their holding to the public without the issue of fresh capital.
Why are IPOs issued?
There are several reasons for a Company proceeds to raise capital through IPO -
1. Undeniably the main purpose of issuing an IPO is to raise money. Companies are in constant need of funds to expand, upgrade or repay their loans and other debts.
2. Going public, the credibility, recognition and brand value of the company increases.
3. Exit option to Angel Investor: Due to IPO, the shares of the company are listed on the Stock Exchange. This increases the liquidity of stocks which also gives an exit option to Venture Capitalists and Angel Investors.
4. Opening itself to expansion and Growth which was not possible earlier i.e. It can issue Further Shares (FPO) to public to acquire other companies or business, for mergers or amalgamating with other companies etc. Thus, enabling them to N-number of possibilities for expansion and growth.
Do you know how an IPO is Issued and Listed?
Procedure for Issuing and Listing of an IPO:
1. Firstly, Company’s MOA and AOA are altered to allow issuing shares to general public and relevant forms are filed with the Registrar of Companies.
2. Hiring A Merchant Banker to handle the whole process of IPO.
3. Entering into Underwriting Agreements with Merchant Bankers or Other Institutions to buy the shares which were not taken up by the Public in an IPO.
4. Filing of Registration Statement with SEBI and Stock Exchanges by the Company and Merchant Bankers along with Underwriting Agreement and other Documents.
5. Allotment of a date by SEBI to announce IPO.
6. Listing Application is accepted by the Stock Exchange.
7. Listing Fee is paid to Stock Exchange.
8. Price Band and Amount of Capital to be raised is agreed by merchant bankers and the company.
9. Prospectus is issued to the general public.
10. Acceptance of Application money from the general public.
11. Finally, the shares are alloted to the general public.
Eligibility for an IPO-
Companies should fulfill the following norms laid down by SEBI ICDR (Issue of Capital and Disclosure Requirements) before attempting any Initial Public Offer:
Entry Norm I (Profitability Route):
1. The minimum net worth of Rs 1 Crore in each preceding three full years.
2. Minimum net Tangible Assets, of at least Rs 3 Crores each, not more than 50% of which are held in monetary assets, in the preceding three full years.
3. Minimum of Rs 15 Crores as average Operating Profit(before tax) in at least three out of five preceding years.
Entry Norm II (QIB Route):
For all those companies who genuinely require a larger capital base, but fail to accomplish any of the rules laid down above, SEBI has introduced an alternative route. This route enables the companies to access the public interest through Book Building Process. 75% of this net offer to the public is to mandatorily allotted to Qualified Institutional Buyers (QIBs). If the minimum subscription of QIB is not achieved, the company shall refund the subscription fees.
Along with above mentioned rules, ICDR General Regulations are to be followed mandatorily.