In this blogpost Shivam Anand, a 3rd year student of DSNLU, Vishakhapatnam, writes about Business going public, pre- requisites for a company to be eligible to opt for IPO and the steps involved in opting for IPO in India
Understanding “Initial Public Offering.”
It can be referred to as the first sale of stock by a private company to the public. A private company is not listed on any exchange and thus it’s difficult to raise capital as it is completely dependent on private funding. The main advantage of a public company over a private company is that they can harness the financial market by selling up their equity and bonds to raise capitals in the case of urgency. A private company is not liable to file disclosure agreements or disclose the financial information which is mandatory in case of a public company as it trades stock on the stock exchange.
Benefits for private companies in issuing IPO:
- Raising Capital- One of the most beneficial aspect of IPO is raising fund through issuing of more stocks. The very purpose of raising capital may vary from the expansion of the company to paying off the existing debts.
- Getting listed on the stock exchange create a sense of trust in the company as a private company has to comply with various disclosure agreements and are answerable to their shareholders thus it helps them to attract various investors like the hedge funds which further helps them in attracting more capital.
- Exit Strategy for venture capitalist- Many a time venture capitalist invest in a private company, which may turn out to be million or billion dollars worth company in future, but it’s not easy to sell shares when a company remains private as compared to a public company. Thus, IPO becomes an exit strategy for such venture capitalist to have access to their wealth.
Disadvantages of issuing IPO
- Disclosures are most important aspects in issuing IPO because it helps the investor to make informed investment decisions. But many a times the information or disclosures provided in the IPO prospectus may not be adequate and may be selective disclosure which can be used by the insiders of the company to make money, jeopardizing the public investment.
- The burden of extra cost for the company to look into the accounting, auditing, preparing of Draft Red Herring Prospectus, Also, the burden to keep in account assuring that all the information so provided in the prospectus are true, as strict penalties may be charged by SEBI.
In a recent case, DLF was charged Rs. 85 crores for not disclosing certain material information and facts in its IPO document. In another case, SEBI cleared telecom tower firm Bharti Infratel’s public offer only after adequate disclosures were made in its IPO prospectus to address the issues raised by the market regulator itself and in the complaints received with regard to the offer.
PRE-REQUISITES FOR A COMPANY TO BE ELIGIBLE TO OPT FOR IPO WITH RESPECT TO SECURITIES EXCHANGE BOARD OF INDIA:-
Under SEBI Disclosure and Investor Protection Guidelines 2009, guidelines have been provided that regulate the public issues by unlisted companies. For unlisted companies in order to opt for Initial Public Offerings:
An issuer may make an initial public offer, if:
(a) They have a net tangible assets of at least three crore rupees in each, of the preceding three full years (of twelve months each), of which not more than fifty percent are held in monetary assets ( A monetary asset is an asset whose value is stated in or convertible into a fixed amount of cash. Thus, the term can be more tightly defined to exclude any assets that cannot be readily converted into cash such as long-term investments or notes receivable) also provided that if more than fifty percent of the net tangible assets are held in monetary assets, the issuer has made firm commitments to utilise such excess monetary assets in its business or project;
(b) it has a track record of distributable profits (which is portion of company’s accumulated realized profits, net of realized losses that are available for dividend distribution) in terms of Section 205 of the Companies Act, 1956 (Section 123 of the Companies Act 2013) which deals with dividends to be declared or paid by a company for any financial year only out of profits, for at least three out of the immediately preceding five years: Provided that extraordinary items shall not be considered for calculating distributable profits;
(c) It has a net worth of at least one crore rupees in each of the preceding three full years
(of twelve months each);
(d) The aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year;
(e) If it has changed its name within the last one year, at least fifty percent of the revenue
for the preceding one full year has been earned by it from the activity indicated by the new name.
STEPS INVOLVED TO OPT FOR IPO
The major steps for Initial Public Offering(IPO) are of given below in brief:-
- Appointing a Merchant Bank:-
A bank that deals with international finance, long term loans for companies and underwriting. These banks do not provide regular banking services to the general public. It should have valid SEBI registration to be an eligible merchant banker. There are other intermediaries such as registrar to the issue who provides administrative support to issue process, bankers to the issue who do a collection of application forms and money and broker to the issue who provide marketing support, underwriting support and help with the investors.
- Registration of Offer Documents
For registration, 10 copies of the draft prospectus should be filed with SEBI. The draft prospectus filed is treated as a public document. Any amendments to be made in the prospectus should be done within 21 days of filing the offer document. Thereafter the offer document is deemed to have been cleared by SEBI.
- Marketing of issue:-
Proper evaluation of timing of issue should be done. Many a time during recession public would be unwilling to invest in the IPO so it may be a business of loss for the company.
- Other Activities
Last but not the least after the closure of the subscription list, the merchant banker should inform, within 3 days of the closure, whether 90% of the amount has been subscribed or not. If it is not subscribed up to 90%, then the underwriters should bring the shortfall amount within 60 days. In case of over-subscription, the shares should be allotted on a pro-rata basis, and the excess amount should be refunded with interest to the shares holders within 30 days from the date of closure. Also there are several rules and regulation which should be adhered to with respect to disclosures as provided by SEBI. It should be complied with for successful completion of the intial public offering.
With the enhancement of various laws on the basis of making India reach the epitome of “Ease of doing business” rank list of countries IPO for unlisted private companies has become a good option for raising capital. This article focused on the understanding the basics of making your business public and opting for IPO.
 Chapter iii provisions as to public issue, ICDR regulations of SEBI, 2009
 Ibid. 7. Pg 4