The Procedure of Initial Public Offering in India

Generally, an unlisted company chooses to go for Initial Public Offering (IPO) when the need for raising a massive amount of capital arises. Usually, the process of IPO lets companies sell their securities, and in turn, they get to raise funds.

Before an IPO, the company is private with limited accredited investors and a few shareholders. However, after an IPO, the company becomes a public or listed company on the stock exchange whose shares are offered to the public.

Therefore, the process of IPO is also referred to as ‘going public.” But many of you might be wondering how to go public or how to sell your company’s existing or new securities on a recognized stock exchange. Well, that’s what this blog is all about.

We will make you aware of the procedure of Initial Public Offering in India. But, prior to that, you must understand the idea of IPO clearly. Hence, let’s start with the definition.

What is Initial Public Offering?

An Initial Public Offering is a process of listing the shares and other securities of an unlisted company on the stock exchange. In other words, an IPO is a process where a private company offers its shares to the public.

Moreover, it’s a path for raising funds and the first share sale by a company to the institutional investors, public, and HNIs. After the initial sale or share, the company no longer remains a private company. It becomes a public company whose shares are listed on the stock exchange.

Apart from these, the main objective of an IPO could be to expand the existing activities of the company. Furthermore, it could be to set up a new project or any other goal as specified by the company in its offer letter.

The entire process of an IPO is regulated by the Securities and Exchange Board of India (SEBI^[1]).

What is New Listing?

A new listing is a route through which a listed company approaches the stock exchange for listing its equity shares. Hence, the company that fulfills the eligibility criteria specified by the Exchange on a timely basis is listed on the Stock Exchange.

Why does a Company need to file for an IPO?

There are various benefits of a company preferring to convert its privately-held status to a public listed company. Some of them are described below:

• To facilitate the process of Mergers and Acquisitions
• For raising funds from a wider pool of investors
• To let early investors make an exit
• For gaining the increased visibility

Eligibility Criteria for Initial Public Offering

According to NSE (National Stock Exchange), an applicant who is desirous of listing its securities with NSE must satisfy the following criteria:

• The applicant must have the paid-up equity capital of not less than ₹10 crores. Furthermore, the capitalization of the applicant’s equity should be at least ₹25 crores.
• The issuer must adhere to the criteria pertaining to listing as emerging from inter-alia from the :

  1. Companies Act, 2013,

  2. Securities Contracts (Regulations) Act, 1956,

  3. Securities and Exchange Board of India Act, 1992,

  4. Any rules and/or regulations set under foregoing statutes, as also any circular, clarifications, guidelines issued by the appropriate authority under foregoing statues.

• A minimum of three years track record of either

  1. The applicant who seeks listing; or

  2. The promoters/promoting company that is incorporated in or outside India; or

  3. Partnership firm and subsequently converted into a company (not in existence as a Company for three years) and approaches the exchange for listing. Moreover, the company so formed will be considered for listing only if it fulfills the conditions specified by the SEBI in this regard.

  4. The company must not have referred to the BIFR (Board for Industrial and Financial Reconstruction).

  5. The company’s net worth has not been wiped out by the accumulated losses resulting in negative net worth. Besides, this criterion doesn’t apply to companies with the proposed issue size of less than ₹500 crores.

  6. The company should not have received any winding up petition admitted by a court.

• The applicant willing to list its securities must meet the exchange on the following:

  1. There shouldn’t be any disciplinary action by other stock exchanges as well as regulatory authorities in the last three years.

  2. The applicant must follow the redressal mechanism of Investor grievance.

  3. The promoting or applicant company shareholding pattern on March 31st of last three financial years separately displaying promoters and other groups’ shareholding pattern must be as per the regulatory requirements.

  4. The promoting company, applicant, companies promoted by the promoters, group companies litigation record, the status of litigation, the nature of litigation during the last three years should be clarified to the exchange.

  5. The applicant must present the track record of the director(s) of the company displaying that they are not accused of any civil or criminal cases.

Also, read about how to start your own Mutual Fund Company in India.

Process of Initial Public Offering (IPO) in India

The applicant needs to follow several steps before making an application for listing its securities on the National Stock Exchange. Usually, such steps are necessary to ensure that the issuer complies with the specific compliance requirements prior to listing its securities. 

The steps include:

Step 1: Listing with SEC

The applicant, along with the under-writers, needs to file the registration statement with the Securities and Exchange Commission, which includes every financial data and business plan of the company. Furthermore, it should also mention how it’s going to utilize the funds that are to be raised from the IPO as well as the securities of public investment. 

Step 2: In-principal approval of draft prospectus from SEBI

Secondly, the issuer has to file the draft prospectus. Along with this, it’s necessary to attach the documents as mentioned in the checklist for IPO vetting. Furthermore, the prospectus should be drafted in a way as prescribed by the SEBI (ICDR) Regulations, notification, circulars, other statutes, etc. 

SEBI will thoroughly analyze and examine these documents. Furthermore, it will provide approval only after it is entirely convinced. Until the company receives the approval from SEBI, it must mention the status of SEBI’s approval pending on its prospectus. 

Step 3: Fixing the price of Shares

On the receipt of the approval from SEBI, the company needs to fix the price of the share as well as the number of shares it is going to issue. 

Usually, IPOs can be issued in two ways: a) fixed price and b) book building. A fixed price is a kind of IPO issue where the company decided the share price in advance. 

However, book building is the one where a company has offers a range of share prices. Then, you have to bid shares within this range. 

Step 4: Making the shares available to the public 

Once the company has decided which type of issue you want to proceed with, the company could make its shares available to the general public. 

Step 5: Submission of Application

Now, the investors need to submit their applications indicating that they are interested in buying the shares by the issuers. On the receipt of the subscriptions from the public, it proceeds further with the allotment of shares. 

Step 6: Listing of shares on the stock exchange

Ultimately, when you are done with the above processes, you can list the shares on the stock market. Once the shares are issued in the primary market to the investors, they will be listed in the secondary market. Later, trading such shares becomes a daily business.