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IPO Process in India

INITIAL PUBLIC OFFER (IPO) PROCESS

Before understanding the process of IPO, it is essential for any investor to understand what exactly is an IPO. A company has various options to raise funds. One of the methods is making an IPO by selling its shares on the stock exchange. Most of the trading in the Indian stock market takes place on its two stock exchanges i.e. the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

For the company, it's an opportunity to raise money for development and expansion. IPOs promote new business creation, job opportunities, and investor interest. When a company starts its IPO, the employees are also allowed to buy a limited number of shares at the initial offer price. They are also entitled to buy at that price for several months after the IPO in employee stock options. Through an IPO public image of a company also goes up once it has been publicly listed and it gets more recognition from suppliers and customers too. Apart from various PROS, there are few CONs too in IPO as it is a time-consuming process including high costs and fees payable to the intermediaries. Also, the listed companies have to comply with various regulations on a periodic, quarterly, and yearly basis. For participating in an IPO one should do all the research on the company’s financials before investing.

Now before an IPO, the company has to draft and execute agreements with all the intermediaries listed below:

• Depositories
• Registrar to Issue
• Market Makers
• Bankers to Issue
• Printers
• Advertising Agency

Let’s now discuss some of the intermediaries associated with an IPO:

• MERCHANT BANKER: Merchant banks are banks that conduct fundraising, financial advising, and loan services to large corporations. Merchant banks do not provide services to the general public, their services are limited to business entities and large business corporations only.
• CREDIT RATING AGENCY: A credit rating agency means a body corporate that is engaged in, or proposes to be engaged in, the business of rating of securities that are listed or proposed to be listed on a stock exchange recognized by the SEBI.
• PORTFOLIO MANAGERS: A portfolio manager means a body corporate, which pursuant to a contract with a client, advises or directs or undertakes on behalf of the client, the management or administration of a portfolio of securities or goods or funds of the client.
• STOCK BROKERS:  Stock Broker means a person has trading rights in any recognized stock exchange and includes a trading member.

PRE REQUISITES FOR AN IPO

Before issuing a share to the public the issuer shall make sure that it falls under the eligibility requirements as prescribed by SEBI under SEBI (ICDR)Regulations, 2018. Let’s discuss the eligibility criteria for IPO.

ELIGIBILITY CRITERIA FOR IPO AS PER SEBI (ICDR) REGULATIONS, 2018:

An issuer shall be eligible to make an IPO only if:

1. The issuer has net tangible assets of at least Rs. 3 crores, in each of the preceding 3 full years of which a maximum of 50% should be held in monetary assets;

However, if more than 50% of the net tangible assets are held in monetary assets, the issuer has utilized or made firm commitments to utilize such excess monetary assets in its business or project.(i.e the issuer shall make a firm commitment to reduce such excess assets)

1. The issuer has an average pre-tax operating profit of at least Rs. 15 crores, during 3 most profitable years out of the immediately preceding 5 years;
2. The issuer has a net worth of at least Rs.1 crore in each of the preceding 3 full years.
3. In case the issuer has changed its name within the last year, at least 50% of the revenue for the preceding full year has been earned by it from the activity denoted by the new name.
4. Lastly, the issue size should not exceed 5 times the pre-issue net worth.

NOTE:

• Net tangible assets shall mean the total physical assets of a company minus all intangible assets and liabilities.
• Monetary assets include cash and cash equivalents, such as cash on hand, bank deposits, etc.
• Pretax operating income is an accounting term that refers to the difference between a company's operating revenues (from its primary businesses) and its direct expenses (except taxes) tied to those revenues.

ALTERNATIVE ELIGIBILITY REQUIREMENTS:

As per SEBI (ICDR) Regulations 2018, the Issuer can also opt for an alternative eligibility route if the issuer company cannot be able to fulfill the main eligibility requirements.

In the alternate eligibility route also known as the QIB route,

1. issuer shall make sure that the issue should be made through the book-building process and;
2. Issuer undertakes to allot a minimum 75%of net offers to the public to QIB’S.

NOTE:

• The company issuing the IPO shall refund the entire IPO subscription money if the QIB part is not subscribed even if the IPO is oversubscribed. 
• QIBs are a group of qualified /expert professionals in the securities market and established as institutions.

Let’s now discuss the process of an IPO.

PROCESS FOR IPO:

1. The issuer shall appoint one or more merchant bankers, which are registered with the Board, as lead managers to the issue and an escrow account will be opened.
2. The merchant banker shall then conduct due diligence regarding the Company.
3. The merchant banker shall prepare and submit a Draft Red Herring Prospectus (DRHP) with the ROC and SEBI.
4. After submission SEBI verifies the documents and may suggest any modification and the company shall add suggested things.
5. The company now has to make an application to the Stock Exchange for floating its initial issue.
6. Before an IPO opens to the public, the company endeavors to create a buzz in the market about the IPO the company will advertise the impending IPO across the country.
7. The company can now initiate pricing of IPO either through Fixed Price IPO or by Book Binding Offering. In the case of Fixed Price Offering, the price of the company’s stocks is announced in advance. Whereas in Book Binding Offering, a price range of 20% is announced, following which investors can place their bids within the maximum price cap. Accordingly, the investors have to place their bids as per the company’s quoted Lot price, which is the minimum number of shares to be purchased. 
8. Once the IPO price is finalized, the company along with the underwriters will determine the number of shares to be allotted to each investor.
9. After the allotment company shall obtain listing permission from the concerned stock exchange.
10. The issuer shall then seek trading approval from the Exchange by filing the trading application.
11. After that funds will be transferred to the issuer.

Apart from the whole process of an IPO, a company can also opt for a fast-track issue. The company which is making the public issue and trying to raise funds for their project can utilize it only when all the compliances under ICDR regulations have complied which will take approximately 6 months time to complete. If a company wants to raise funds quickly they can go through a fast track issue as well after complying with some conditions stated under regulations.