Initial Public Offerings:
An initial public offering refers to the issuance of new securities to the general public through the primary capital market with an objective to become a public entity. Under this process, an unlisted private company offers new securities to the general public through the primary market. Issuance of new securities to the general public leads to conversion in the public company.
A company takes an online IPO decision due to an increase in operations, business scale, profits, and brand value. In the present era, startup companies are growing fast with a high customer base in a short period of time that influences them to go public through the issuance of new stocks. The IPO results in the exit of some founders and private investors as they have already earned their desired returns on capital provided.
Key requirements and norms for a company to issue an IPO:
As per the Securities and Exchange Board of India, the company needs to comply with various norms to go public through the IPO process. These are some important points regarding the norms:
- Eligibility norms for profitability route:
- A company must have at least 3 years with more than Rs. 15 core operating profits (pre-tax) in the preceding 5 years.
- Net worth of a company in the last 3 years should be at least Rs. 1 crore.
- In case of a change in the name of a company, 50% of revenue from operations in the last year must be from the new name.
- Eligibility route for QIBs:
- IPO will be initiated with a book-building process only.
- As per the norms, a company is obliged to allot 75% of the total issue offer to QIBs.
- In the aforementioned case, if a minimum subscription would not be received, then a company shall refund the subscription money.
If a company satisfies the above-mentioned norms, then it can start an IPO process that uses a book-building process to determine the issue price and other key aspects.
Mechanism of IPO (Initial Public Offerings) :
A process to go public through the issue of a new type of securities in the market seems easy, but it requires following a systematic method. A company and its founders adopt the following steps for a successful Initial Public Offerings:
- Prior to any task, promoters appoint a registrar to an issue, underwriter firms, investment, and merchant banks. Apart from these institutions, a book-runner firm is also appointed to proceed with a full process of issuance. These financial expert firms act as an intermediate between the public and the company.
- Registrar to an issue and book-runner determines the price range with an upper and lower limit, issue date and size, allotment methods, and other important aspects.
- Section 32 of the Companies Act, 2013 states that a Red-Herring Prospectus is necessary to file with ROC (Registrar of Company). This prospectus would provide complete detail about the issuing company. After this, an application is made to the stock exchanges with which a company would like to list.
- Price determination in the IPO process is a complex and key step. To make an issue, two methods are used: The fixed floating method, and the book-building method. (For the QIB route, companies are obliged to use a book-building process only).
- In the book-building process, a book-runner opens a 20% range for the price band. Investors are allowed to make their bids until the bidding process is open. Generally, the book-runner opens a book for 3 days in which the retail and institutional investors send their bids for the price between cap value and floor value.
- After closing the bid period, the investment bank and book-runner determine the price for a stock. Usually, a price is decided to understand the effect of demand and supply of stock.
- After deciding a price for new shares, the company allows the shares to retail, institutional and qualified institutional investors through the primary market.
With these steps, a company can launch an IPO in the market. As a result of this process, the securities issued to the general public got listed on the registered stock exchanges.
In 2021, several companies have already filed their application to launch their IPOs. Apart from these companies, more than 15 upcoming IPOs are on the list, in which you can invest your funds.
Upcoming IPOs in India:
Following is the list of some IPOs that are going to launch in India:
- Seven Island Shipping
- Aadhar Housing Finance
- Ruchi Soya Industries FPO
- Go Airlines Ltd.
- Adani Wilmer
- Fincare Small Finance Bank
- Vijaya Diagnostic Center Ltd.
- ESAF small finance bank
- AMI organics
These are among the upcoming initial public offerings, in which you can invest and partake in the ownership of the company.