Get familiar with IPO
You might have run into headlines like “so & so company released its IPO, which stands for Initial Public offering.
Also knows as going public, an IPO shifts the firm from privately held entity to public one.
Through IPO only a company enters into the public market which further enhances the firm’s image and recognition as well.
Thus, we can define IPO as a process in which a privately held enterprise proposes shares of its proprietorship to the public for the first time.
There are certain financial and other requirements, which shall be elaborated further here, as to why a company decides to get public.
After raising funds from the market directly, the company also gets a burden of responsibility and accountability to the financiers.
While angel investors, venture capitalist firms etc. may back the company with finances in its less developed stages.
Now, as the company sees more growth, it requires higher investments to expand and run itself.
And here saves them the IPO, which enables them to raise money by selling shares of their company.
However, there are specific eligibility criteria to perform and IPO, which a firm has to satisfy, else it would be rejected.
Eligibility Criteria for an IPO
1. Paid-up Capital
It is the amount of money which a firm accrues from the shareholders in exchange for stock-shares.
The company generates paid-up capital by selling its stocks directly in the primary market to the capitalists, typically through an IPO (initial public offering).
The eligibility criteria ask this paid-up capital of minimum 10 crores.
Furthermore, it also says that capitalization has to be 25 crores or more.
2. Fiscal requirements of a firm
The company should have a net worth, i.e., assets-liability, of minimum 1 crore for past 36 months.
The company must possess hard assets of minimum 3 crores for past 36 months.
And of these assets, majority of 50% are to be held in monetary resources.
In case the company changed its name through the previous year, it should have earned minimum 50% of the income for the previous 1 year.
And this revenue has to be from the activity by this new name.
The average functioning revenue for every year in past 36 months has to be minimum Rs. 15 crores.
The current paid-up share capital of the firm should be fully remunerated or forfeited.
This implies that the enterprise seeking an IPO should not hold partially paid-up stocks as a part of the equity.
3. Other company requirements
The firm trying to release its IPO and get catalogued on the stock exchange has to provide yearly reports of previous 3 business years to the NSE.
It shall be listed if:
- The firm has not been consigned to the Board for Industrial and Financial Reconstruction (BIFR).
- The net worth of the firm has not been obliterated by the collected losses leading to a negative net worth.
- The firm has not got any terminating petition acknowledged by a court.
4. Requirement of Promoters/ Directors
Here, promoters are those who posses at least 3 years’ experience in the similar business field.
And they also must have minimum 20% of the post IPO equity stake.
To be eligible for IPO, promoters/ directors/ selling shareholders of the company need to see the following:
There is no record of SEBI’s punitive action against them which means they have not been disqualified from partaking in the securities market.
In case, they are serving such sentence, the company won’t be able to reify the IPO.
However, if the barred duration is almost over, while the file is drafted before IPO, then the constraint shall not be counted.
In case, these members, before the IPO, ever held aforementioned position in other companies which were prohibited from accessing the market.
This would stop them from going further in IPO.
However, if the barred duration of restricted company is almost over, while the file is drafted before IPO, then the constraint shall not be counted.
In case these individuals have been labelled as defaulters by any financial institution or bank, the firm cannot further their IPO having them as promoters/ directors.
The aforementioned members should not have committed any fugitive economic offence under Fugitive Economic Offenders Act 2018.
5. Offerings proposed in IPO
In case the threshold requirements are fulfilled based on post IPO equity stake capital, the least percentage to be presented in IPO is determined.
- In case the post IPO equity share capital is 1600 crore or fewer then, minimum 25% of every group of equity share needs to be posed.
- In case the post IPO equity share capital is Rs. 1600 or more though less than Rs. 4000 crores, then a portion of equity shares equivalent to Rs. 400 crores must be proposed.
- In case the post IPO equity share capital is Rs. 4000 crores or more, then minimum 10% of every group of equity share must be proposed.
Also Read: What is Venture Capital, and How Does it Work?
Commentary on Statutory Lock-in
You should know that after IPO, the post IPO paid-up fund of the promoters and investors stays under 1-year lock in period.
Though after 1 year, minimum 20% of post-IP-paid-up finances need to be locked in for at least 3 years, since the IPO release.
This fact, nonetheless, is not applicable to alternative investment funds/ foreign venture capitalist or venture capital firms that have capitalized in the firm.
In case the post IPO stake holding is <20% then, alternate investment funds, scheduled commercial banks, IRDAI registered insurance companies, public financial institutions foreign venture capitalists may supply for the aim of meeting the shortfall.
This subsidy, though, is disposed to a max 10% post issue paid-up capital. This 20% legal lock-in is irrelevant if the issuer does not possess any distinguishable promoters.
Requirements that push the company to go public
Any firm wants to see itself get listed on the stock exchange for the following reason and needs:
- Firms can erect handsome capital from the public by selling its shares from its proprietorship
- Other options to raise funds like venture capital, bank or private investors may be really costly
- IPO helps in publicity of the firm greatly
- IPO facilitates the company to procure funds from public to expand itself
So far, in this write-up we discussed IPO (Initial Public Offering), its eligibility factors and requirements for the company.
A company has expansion as a chief factor in releasing its IPO, which helps them in raising funds directly from the public.
There are many legal requirements that a company has to fulfil in order to further the IPO, which you read above in detail.