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Overview of Initial Public Offering and its process in India

  1. What is mean IPO?

    An initial public offering means the Company will be converted into a Public listed Company and the shares of the Company can be traded on Stock exchanges. The Company can list its shares at the designated stock exchanges by the successful completion of IPO.
     
  2. Why company goes for an IPO?

    Every Company needs investment for its growth and expansion. In general, it would issue it to share to Angel Investors or Private equity firms that is a specific set of people and will get funding over their which involves more legal process.

    The other method is IPO where the company can get additional capital by selling shares to the public directly.
     
  3. What are all the laws that govern IPO in India?

    It is essential for the entities that wish to list on the stock exchanges in India to conform and comply with initial listing and continued listing requirements under the uniform listing agreement, the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations 2018, as amended (the ICDR Regulations), as amended, and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015, as amended (the Listing Regulations).

    Chapter 3, Part I is dedicated to the public offer. Amid the new amendments of 2018, there have been drastic changes in Section 26. Matters related to the prospectus will now be dealt with SEBI in consultation with the central government. Till the SEBI notifies matters related to the prospectus the companies can refer to the information and reports on financial information under the regulations made by the Securities and Exchange Board under the Securities and Exchange Board of India Act, 1992.

    Compliance of Listing Agreement with the concerned stock exchanges after the listing of securities. Securities Contracts (Regulations) Act, 1956, RBI regulations in case of foreign/NRI equity participation.
     
  4. What are all the preconditions to be satisfied by the company for an IPO?

    One should refer to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations) for the eligibility criteria.

    The below are the criteria:

    • Ensure that, if the company is in existence for less than three years or does not meet certain financial strength tests, allot at least 50% of the shares forming part of the IPO to retail and institutional investors.
    • Ensure that neither the company nor its affiliates are barred from accessing the capital market by SEBI or any other authorities; and none of the promoters, directors, or persons in control of the company were or are a promoter, director, or person in control of any other company which is barred from accessing the capital market, under any order or directions made by SEBI.
    • Ensure to make an application for listing of the specified securities in at least one recognized stock exchange having nationwide trading terminals.
    • Ensure to appoint one or more merchant bankers, at least one of whom shall be a lead merchant banker and shall also appoint other intermediaries, in consultation with the lead merchant banker, to carry out the obligations relating to the issue.
    • Ensure that it shall not make an allotment under a public issue if the number of prospective allottees is less than 1000.
    • Ensure to agree with a depository for dematerialization of specified securities already issued or proposed to be issued.
    • Ensure all existing partly paid-up equity shares of the company have either been fully paid up or forfeited.
    • Ensure that there are no outstanding convertible securities or any other right which would entitle any person with an option to receive equity shares excluding convertible debt instruments issued through an earlier initial public offer, ESOPs, and or fully paid-up outstanding convertible securities that are to be converted on or before filing the red herring prospectus.
    • Ensure equity shares offered for sale to the public have been held by the sellers for at least one year before the filing of draft offer document with the Board subject to exemptions as provided in Regulation 26 (6) of the ICDR Regulations, 2009.
    • Ensure that it satisfies all five sub-regulations to Regulation 26 to be eligible to make an IPO under this regulation (Profitability route), summarily listed here:
      • Net tangible assets of at least INR 3 crore for three full years
      • Distributable profits in at least three years.
      • The net worth of at least INR 1 crore in three years.
      • The issue size should not exceed five times the pre-issue net worth.
      • If there has been a change in the company's name, at least 50 percent of the revenue for the preceding year should be from the new activity denoted by the new name.
      • Where the company fails to meet the financial criteria, it is required to make the issue under Regulation 26 (2) through compulsory book built or Appraisal route. The compulsory book-built route requires at least 50% subscription by Qualified Institutional Buyers, and the appraisal route requires 15% participation in the project by scheduled commercial banks or public financial
      • Ensure that the promoters contribute 20 percent of the total capital. This is known as 'minimum promoter's contribution' and is locked in for three years.
      • Ensure that the contribution of non-promoter entities, e.g. investors, is locked in for 1 year. However, VCs registered with SEBI are exempt from this requirement of lock-in.
      • Obtain grading for the IPO from one or more credit rating agencies registered with SEBI.
      • Ensure corporate governance compliances are met as required under clause 49 of the listing agreement.
         
  5. Intermediaries of an IPO

    Following are the intermediaries who are required to be registered with a valid certificate from SEBI.

    • Merchant Bankers

      They are the most vital intermediaries among all. From preparing prospectus to listing at the stock exchange, they assist all along. Merchant bankers check all the information provided in the prospectus. This is important as they are required to carry due diligence for all the information that the prospectus provides, after which they issue a certificate to SEBI.
    • Underwriters
      They come into play when there is an under subscription by subscribing to the unsubscribed amount to make the issue a success.
    • Registrar & Transfer Agent
      Allotting basis of share is analyzed by them based on the application received from the public. They handle the dispatching of share certificates/refund orders.
    • Bankers to the Issue
      They accept all the applications on behalf of the company which is then given to the registrar and transfer agent to further process.
    • Stock Brokers & Sub-brokers
      They invite the public to subscribe to shares for which they receive a commission.
    • Depositories
      They hold securities in dematerialized form for the shareholders.

    Procedure for IPO:

    • Filing a prospectus with the SEBI is a must for a company to come out with a public issue.
    • To file the prospectus, a company needs a merchant banker who along with the due diligence certificate submits the prospectus to SEBI.
    • After receiving it SEBI scrutinizes it and suggests changes under 21 days of receiving it.
    • The company can go public within 365 days from the date of the letter from SEBI or in absence, within 365 days from the date of expiry of 21 days of submission of the prospectus with SEBI.
    • If up to Rs. 20.00 crores are the size of the issue, then merchant bankers file prospectus to the regional office of SEBI which falls under the jurisdiction where the registered office of the Company is situated. If it's more than Rs. 20 crores then prospectus is filled at the Mumbai office.
    • A prospectus is also required to be filed with the concerned stock exchanges along with the application for listing its securities.

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