The Initial Public Offering (IPO) Process in India: A Comprehensive Beginner’s Guide

By Rupin Chopra and Shantam Sharma

In recent years, the Indian stock market has seen a significant rise in Initial Public Offerings (IPOs), and has experienced remarkable growth in recent years, reflecting the confidence of both companies and investors in the country’s economic prospects. In 2023 alone, 243 Indian companies raised a staggering US$8.4 billion through IPOs, signaling a robust appetite for public offerings.

This influx of IPOs highlights the growing trend among Indian companies to tap into the equity markets for capital, driven by the need for growth, expansion, and diversification.

What is an IPO ?

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An Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time. This marks the company’s entry into the stock market, allowing its shares to be bought and sold on exchanges like the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). Through this process, companies raise capital for a variety of purposes, including expansion, debt repayment, and meeting working capital requirements.

Why Do Companies Opt for an IPO ?

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Companies pursue an IPO for several reasons, primarily for raising capital to fund their growth strategies. Some of the key motivations behind an IPO include:

For Funding Needs:

1. Funding Capital Requirements for Growth: IPOs help raise funds for organic growth initiatives such as launching new products, expanding operations, and entering new markets.
2. Expansion Projects: Capital raised from an IPO can be used to fund large-scale projects, including setting up new manufacturing units, research and development centers, or acquiring new technology.
3. Diversification: Companies may diversify into new sectors or geographical regions, requiring substantial investment.
4. Global Expansion: IPOs enable companies to raise funds for entering international markets or forming joint ventures abroad.
5. Strengthening Infrastructure and Distribution Channels: The capital can also be directed toward building better infrastructure, enhancing marketing initiatives, and creating a robust distribution network.
6. Repaying Debt: Companies often use the proceeds from an IPO to repay debt, thereby strengthening their balance sheets.
7. Corporate Purposes and Investments: IPO funds can also be used for general corporate purposes or for making strategic investments in other businesses.

For Non-Funding Needs:

1. Enhancing Corporate Image: Going public boosts a company’s corporate stature, increasing its visibility and credibility.
2. Employee Stock Options: IPOs allow companies to offer stock options to retain and incentivize key employees.
3. Providing Liquidity to Shareholders: An IPO creates liquidity for existing shareholders, including founders, early-stage investors, and employees who may wish to cash out their investments.

Regulatory Requirements for an IPO in India

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The Securities and Exchange Board of India (SEBI) regulates the IPO process in India. Companies wishing to go public must meet strict eligibility criteria and follow a well-defined legal framework, primarily governed by SEBI’s Issue of Capital and Disclosure Requirements (ICDR) regulations.

Eligibility Criteria [4]:

To be eligible for an IPO, a company must meet the following criteria:

1. Net Tangible Assets: The company must have net tangible assets of at least ₹3 crore (USD 3,50,000  approx.) for each of the preceding three years. No more than 50% of these assets should be held in monetary form unless the company can demonstrate that these assets have been committed for business use.
2. Operating Profit: The company must have an average operating profit of at least ₹15 crore (USD 1.7 million) in the last three years.
3. Net Worth: The company must have a net worth of at least ₹1 crore (USD 1,20,000 approx). in each of the preceding three years.
4. Revenue from New Activities: If the company has changed its name in the past year, at least 50% of its revenue for the last year should come from the business associated with its new name.

General Conditions:

Apart from the above eligibility requirements, companies must comply with general conditions before launching an IPO:

• Stock Exchange Approval: The company must seek approval from at least one stock exchange for listing its shares.
• Dematerialisation of Shares: All securities issued before the IPO must be converted into a dematerialized form.
• Debt Repayment and Project Financing: The company must secure 75% of the necessary finance for any project it is raising funds for, excluding the IPO proceeds.

The IPO Process in India [5]

The IPO journey in India involves a series of critical steps, each designed to ensure transparency, compliance, and investor protection. Here’s a detailed breakdown of the steps involved:

1. Preliminary Planning
   The company begins by assessing its readiness for going public. This includes evaluating its financials, growth prospects, market conditions, and regulatory compliance requirements. A team of advisors, including investment bankers, legal experts, and auditors, is brought on board to guide the company through the IPO process.
2. Selection of Underwriters
   Investment banks or underwriters are hired to manage the IPO. The underwriter’s role is crucial, as they help the company determine the offering price, market the IPO to potential investors, and ensure successful execution. Underwriters may also agree to purchase the entire IPO issue and sell it to investors, thus assuming the risk.
3. Due Diligence
   In this phase, the company undergoes a thorough due diligence process, which involves a detailed review of its financial statements, legal standing, regulatory compliance, and corporate governance practices. This step is essential to ensure that all material information is disclosed to potential investors.
4. Drafting the Prospectus
   The company, with the help of legal and financial advisors, prepares a draft prospectus. This document provides detailed information about the company’s business model, financial performance, risk factors, and the intended use of the IPO proceeds. The prospectus serves as the primary marketing tool for attracting investors and must comply with SEBI regulations.
5. Filing with SEBI
   The draft prospectus is filed with SEBI, which reviews the document to ensure compliance with the regulations. SEBI may seek clarifications or additional disclosures before granting approval for the IPO.
6. Roadshow and Investor Presentations
   Once SEBI approval is obtained, the company and its underwriters embark on a roadshow, presenting the investment opportunity to institutional investors. The roadshow helps gauge investor interest and allows the company to finalize the offering price based on demand.
7. Pricing and Allocation
   Based on investor demand and prevailing market conditions, the company and its underwriters set the final offering price and determine the number of shares to be issued. Shares are then allocated to different categories of investors, including retail investors, institutional investors, and high-net-worth individuals.
8. IPO Subscription Period
   The IPO is opened for subscription, allowing investors to apply for shares. The subscription period typically lasts for three to five days. Once the subscription period closes, the company finalizes the allotment of shares based on demand.
9. Listing on Stock Exchanges
   After the shares are allocated, the company’s stock is listed on the stock exchanges, where it can be traded freely in the secondary market. The listing is a critical milestone as it provides liquidity to the shareholders and allows the public to invest in the company.
10. Post-IPO Compliance
    After the IPO, the company must comply with ongoing regulatory requirements, such as periodic financial reporting, maintaining transparency with shareholders, and adhering to corporate governance norms. SEBI monitors these obligations to ensure continued compliance.

Conclusion

The IPO process in India is a complex and highly regulated procedure designed to protect investors and promote transparency. For companies, going public provides access to significant capital and opens up new opportunities for growth and expansion. However, the decision to go public also brings with it additional responsibilities in terms of regulatory compliance and shareholder accountability. Understanding the intricacies of the IPO process is essential for both companies considering an IPO and investors looking to participate in this exciting opportunity.

[1] Regulation 2(1) (W), SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND

DISCLOSURE REQUIREMENTS) REGULATIONS, 2018

[2] Available at: https://www.adityabirlacapital.com/abc-of-money/understanding-the-ipo-process-in-india

[3] SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2018, Available at- https://sebi.gov.in/legal/regulations/may-2024/securities-and-exchange-board-of-india-issue-of-capital-and-disclosure-requirements-regulations-2018-last-amended-on-may-17-2024-_80421.html

[4] CHAPTER II – INITIAL PUBLIC OFFER ON MAIN BOARD, Regulation 6 of SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND

DISCLOSURE REQUIREMENTS) REGULATIONS, 2018

[5] Available at: https://www.adityabirlacapital.com/abc-of-money/understanding-the-ipo-process-in-india