How to List a Company on Stock Exchange and IPO
In recent years, we have seen many Indian companies listing themselves on the stock exchange. The year 2021 was the year of IPOs. As per BSE data, 63 companies launched their IPO during the year. From Paytm, Zomato, Nykaa to Latent View, there were many big names which have gone public last year.
The year 2021 created history as 33 Indian startups became unicorns that year. Many known Indian companies are now planning to go public in the year 2022 like LIC, Ola, Delhivery, Flipkart, Snapdeal, and so forth.
Now many of the young entrepreneurs must have thought sometimes that how it all happen. Is there any limit or criteria to go public or any company can just get up and apply for the IPO?
There are many rules and regulations as well as criteria to be fulfilled in accordance with SEBI, Companies Act, and other regulations to be followed before applying for IPO and getting listed on Stock exchanges in India. We will discuss the same in detail in this blog.
Eligibility Criteria for Initial Public Offering (IPO)
Entry route - I
- It should be a public company registered under the companies act.
- Net tangible assets of at least Rs. 3 crores in each of the preceding three full years of which not more than 50% are held in monetary assets. However, the limit of 50% on monetary assets shall not be applicable in case the public offer is made entirely through an offer for sale.
- Minimum of Rs. 15 crores as average pre-tax operating profit in at least three years of the immediately preceding five years.
- Net worth of at least Rs. 1 crore in each of the preceding three full years.
- If there has been a change in the company’s name, at least 50% of the revenue for the preceding year should be from the new activity denoted by the new name.
- The issue size should not exceed 5 times the pre-issue net worth.
Entry Route - II
To provide sufficient flexibility and also to ensure that genuine companies are not limited from fundraising on account of strict parameters, SEBI has provided the alternative route to the companies not satisfying any of the above conditions, for accessing the primary market, as under:
The issue shall be through the book building route, with at least 75% of the net offer to the public to be mandatory allotted to the Qualified Institutional Buyers (QIBs). The company shall refund the subscription money if the minimum subscription of QIBs is not attained.
Steps and Procedure for Initial Public Offering:
Step-1 Appointment of Underwriter or Investment Banker
The company needs to appoint intermediaries to carry out the IPO process. Theintermediaries will act as an agent between thecompany and the investors.
Step-2 IPO Registration
The company needs to prepare a registrations statement and a draft red herring prospectus. Red herring prospectus is the document which investors can use to decide whether to invest in the company or not.
It is required to be submit to ROC as per section 32 of the companies act, 2013 and SEBI. Reh herring prospectus contains all the financial details of the company and details about the offer.
Step-3 SEBI Verification
Once SEBI verifies all the information provided by the issuer for any error, discrepancies, criteria requirements and if satisfied with the same, it can provide its approval. After SEBI approval, the company can decide the date for IPO.
Step-4 Application to Stock Exchanges
The company now requires to make an application to the stock exchange through which it is planning to make the IPO.
Step-5 Advertising IPO
To ensure that there is a demand of the shares of the company, the company likes to create an awareness among the potential investors through advertising its IPO. It is also known as IPO roadshow. Just like movies before their launch are promoted, similar is the case with the IPOs too. Road shows are used to educate investors about the potential of the company. They focus on the future growth objects of the company as well as the valuation.
Pricing the IPO:
There are 2 types of IPO pricing:
- Fixed price issue
- Book Building issue
In fixed price issue, price at which shares will be offered to the potential investors will be declared in advance.
In book building issue, the price is offered in a price band with 20% range. All the investors are required to submit their bids within this range. Once the bidding is closed, the final price is decided. The final price is also known as cut-off price.
Step-6 Allotment of Shares
Finally, the shares are allotted to the investors. It is usually allotted within 10 days of the last bidding date. Share are allotted proportionately if the IPO is oversubscribed.