How can a company in India initiate an IPO? Is it easy to launch IPO? What are the eligibility criteria a company needs to fulfill in order to file for IPO? What are the restrictions kept by the securities and exchange board of India (SEBI) for companies to get listed in the stock exchanges? Is it obligatory for a company or business to be profitable to do an IPO? I believe you are aware of the Stock market and what is meant by an IPO, If you do not know then please click here to read more about it. Well, the process of promoters raising funds from the common people by selling a portion of the company is called an initial public offering.
Let us discuss qualifications for listing Initial Public Offerings (IPO) In India:
The first criteria, paid-up equity capital of the applicant shall not be less than 10 crores. Now, what is paid-up capital? Its the initial amount invested by the promotors of the company or Paid-up capital is the amount of money a company has received from shareholders in exchange for shares of stock.
Second, the minimum market capitalization, i.e the overall valuation of the company should be at least 25 crores. i.e. the number of paid-up shares multiplied by the issue price of a single share.
Third criteria, the people or the promotors, the board of directors running the company should be clean, they should not be the ones blacklisted by the securities and exchange board of India which means they should not be involved in any financial fraudulent activities and there shouldn’t be any disciplinary actions against any of the promoters. Also, the promoters should be in this type of business for at least a convincible amount of time with multiple years of acceptable track records. I believe you are getting a general idea about the reasons behind these norms.
Now imagine there is a company that fulfills these criteria, Should that company be profitable in order to do an IPO? we know that a lot of Indian tech companies like Flipkart, Paytm are still not profitable, Can these companies do IPO? The answer is YES.
If the business is profitable, The company can do an IPO through the conventional/profitable route. If the business is still at loss, but there is immense growth potential in the future, the company can still do IPO through the new norms introduced by SEBI called the new QIB route.
Let us dive deep into these two routes and their eligibility criteria that will sum up our objective
Profitability Route Eligibility Criteria.
- There should be a minimum net worth of 1 crore each for the preceding three years, net worth is calculated by subtracting the liabilities from assets.
- There should be a minimum net tangible asset of 3 crores in each preceding three years, not more than 50% of which are held in monetary assets. Tangible assets are physical assets like infrastructure, machinery, other equipment, etc.
- In the last five years, minimum rs 15 crores average operating profit in any 3 years, I’m talking about before-tax profit.
So these are the tight rules and restrictions kept by SEBI for profitable companies to apply for IPO.
QIB Route Eligibility Criteria
- The tightest rule here is that 75% of the shares offered to the public should be mandatorily bought by qualified institutional buyers. The retail community will be offered very little i.e 25% of shares as there are possibilities of it continues to make a loss. Recently listed Zomato is a good example of this category of business.
What is QIB, Qualified institutional buyers are Domestic Institutional investors and Foreign institutional investors, they can be mutual fund houses, hedge funds, Alternate investment funds, etc. The main motive of SEBI is to protect the interest of retails people and to safeguard them from any fraudulent acts. Also, SEBI knows the QIBs will do a thorough analysis before investing in loss-making businesses, and it’s easy for them to hedge positions as they are cash-rich.
So I believe the eligibility criteria are clear for both profitable and non-profitable companies and it is also to make you understand that the money you are putting in is safe as any ordinary company has no eligibility even to apply for IPO. Still choosing the right business is really important as anything can happen in the stock market we can see the examples of Vodafone Idea, Yes Bank, Reliance Power, etc. Read our fundamental analysis article to get a better understanding of analyzing business and choose the right investment options to acquire long-term wealth creation and financial freedom.
As Indians, we know there are a huge number of small and medium scale enterprises or SMEs are present in our country. Something which got recently started in India is SME IPO. What is SME? Small and medium enterprise. Small companies are which got a turnover ranging from 5-50 crores and medium scale enterprise are companies which got a turnover from 50-100 crores. All these companies contribute a lot to the Indian economy and their presence is really valuable considering multiple factors like 40% of India’s export is carried out by the SME sector, Employment, etc. By analyzing these features NSE, BSE, and finance ministry opened a route for SMEs to do IPO, but they are not listed either on National Stock Exchange (NSE) or Bombay Stock Exchange(BSE). There are special exchanges for these SME types of companies to get listed. BSE SME exchange is called BSE SME Exchange and NSEs SME exchange is called NSE Emerge. Hope you got to know some new information.