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Eligibility and Procedure of IPOs

Prabhat Nigam

| Updated: Dec 16, 2021 | Category: IPO Support

Eligibility and Procedure of IPOs

There has been a buzz going on in the financial market with the upcoming IPOs and India has seen the best of seasons so far. A pattern has been observed that listing and success of the IPOs depends on the seasons where bull-run in the market has been observed. That is why the years of 2007, 2017, 2018 and 2021 have seen most number of listing in the IPOs and their respective successes. Raising capital by means of an IPO requires a firm understanding of the procedure to list and float IPOs must exist. Following blog gives us a brief understanding of the application and process of IPOs.

What is an IPO?

When an unlisted private company goes to the public offering a share in the ownership by selling its shares to the public or thorough fresh issue of shares paving the for the company to gain access to the stock market and listing and trading of issuer’s securities. This method of raising capital from the public in exchange of equity stake in the company is called Initial Public Offering (IPO).

Eligibility criteria for listing of IPOs

Following is the eligibility criteria

  1. The company must have net tangible assets of Rs. 3 crores in each of the preceding three years of which not more than 50% is held in the monetary assets by the same company.
  2. The company must have a minimum average pre-tax operating profit of 15 crores, calculated on the basis of restated and consolidated basis, from the three most profitable years out of the immediate preceding five years.
  3. The company has a net worth of at least Rs. 1 crore in each of the preceding three years.
  4. The total amount of the proposed issue and all the other previous issues made by the company in the same financial year in terms of size must not exceed five times its pre-issue net worth as per the audited balance sheet of the last financial year.
  5. In case the company has made changes in its name within the last one year, then at least 50 % of the revenue generated by the company must come from the business activities of the newly named company.
  6. The size of the IPO should not be more than five times the net worth of the company before the issue of IPO offered by the company.

Alternative options available to the IPOs

The SEBI has brought out an alternative route for those companies who do not satisfy the above conditions and to provide flexibility to the genuine companies from the rigidities of the above procedure. Following is the alternative route:

  1. The IPO must be made through book building process.
  2. The issue must make 75% of the offer to the public to the Qualified Institutional Buyers (QIBs).
  3. The company must refund all the subscription money of if it fails to secure the minimum allotment to the Qualified Institutional Buyers.

Procedure for listing of IPOs

  • Engaging the services of Underwriters: The first step of the company coming out with the IPO begins with task of hiring an investment bank which becomes the underwriter for the company. It becomes the intermediary between the company and the investors.
  • Registration for IPO: The underwriter then becomes responsible for preparation of registration statement and the mandatory Red Herring Prospectus. The Red Herring Prospectus (RHP)[1] is the most important document that the company gets prepared carrying details related to the business, the amount of shares that are offered along with the mandatory requirements mandated by the SEBI and Companies Act, 2013.

The RHP is the document thorough which the retail investor gets the information regarding the public issue and retail investors use that information laid down in the RHP to form decision whether to subscribe or not.

  • Evaluation of documents by SEBI: After the company presents the RHP for the public the SEBI scrutinises whether all the mandatory requirements have been complied with till date by the company and whether the company is fit enough for raising capital through IPO or not.
  • Application to desired Stock Exchange: The company then makes an application to the desired stock exchange where it plans to launch its IPO.
  • Initiating ‘Road Show’: Once the application is made to the desired stock exchange, the company’s management sets out on the most important task of IPO i.e. ‘road show’ which actually means travelling to multiple locations promoting the proposed issue in the public and to generate awareness among the retail investors. This is like an event to draw the potential investors into subscribing to the offer. This is the time to create hype about the IPO by the underwriters and the company. They show the investors about the potential growth of the company and the market share that the company possess and what it expects to gain in times to come.

Because of the pandemic and things going digital, the companies have started organising the ‘road shows’ online with the help of multimedia presentations, online interviews etc. to give better insight to the investors in making their investments.

  • Fixing price of shares:  There are two methods used by the companies in fixing the price of their shares. It is done either by Fixed Price method or by Book Building method.

In the Fixed Price method, as the name suggests, the price of the shares is fixed by the company made known to the investors beforehand.

On the other hand, in the book building method, the issuer gives the investor a range of 20% within which the investor makes his bid for shares and after the bidding process gets finalised, the investors are allocated the shares on the basis of their bidding. Neither can the bidding range go below the floor price nor can it go above the ceiling price.

Usually the issuer goes with the book building process instead of going with the fixed price method because book building process gives the issuer an advantage to determine the actual price of the share depending on the demand and supply from the market.

  • Allotment of shares: Once the process of IPO closes, the shares are allocated to the investors. In case of oversubscription of the issue, the shares are allotted to the lucky bidders proportionately.

Conclusion

Though raising of capital by means of IPO seems to be a viable option. However, high stakes are involved in the success of the IPO failing which the company issuing shares may incur huge losses coupled with a dent in reputation. A strong need is felt for an experienced team to undertake the procedure of coming out with the IPO of a company. This includes merchant banker, underwriters, auditors etc.

Read our article:SEBI Proposes Stricter IPO Norms

Prabhat Nigam

Prabhat has done his BA LLB (Hons) and has been writing research papers since his law school days. His interest in content writing made him pursue a career in legal research and content writing. His core areas of interest are indirect taxes, finance and real estate.

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