How to Launch an IPO in India: The Required Steps

An Initial Public Offering (IPO) in India is when a private company first offers its shares for sale to the general public. This transforms a privately held entity into a publicly traded one, allowing it to list its securities on stock exchanges such as the National Stock Exchange (NSE) or BSE. For the issuing company, an IPO serves as a primary mechanism to raise capital for objectives including business expansion, debt reduction, or funding new projects. Going public also enhances a company’s visibility, credibility, and brand recognition. For investors, participating in an IPO offers the opportunity to acquire ownership and potentially benefit from future growth.

Eligibility Requirements

Companies launching an IPO in India must meet eligibility criteria set by the Securities and Exchange Board of India (SEBI) under its Issue of Capital and Disclosure Requirements (ICDR) Regulations. These regulations differentiate between companies listing on the Main Board and those on the SME (Small and Medium Enterprises) platform. The primary criteria focus on the company’s financial health and operational track record.

For a Main Board IPO, companies follow one of two routes: the profitability route (Entry Norm I) or the Qualified Institutional Buyer (QIB) route (Entry Norm II). Under Entry Norm I, a company must demonstrate net tangible assets of at least ₹3 crore in each of the three preceding full years. For a fresh issue of shares, not more than 50% of these net tangible assets should be held in monetary assets, unless committed for business use.

The company must also have an average operating profit before tax of at least ₹15 crore during any three of the preceding five years. A positive net worth of at least ₹1 crore in each of the three preceding full years is mandatory. If the company has undergone a name change within the last year, at least 50% of its revenue in the preceding year must have been generated from the business activity indicated by the new name.

If a company does not meet Entry Norm I, it can pursue the QIB route (Entry Norm II). This route requires the issue through book-building, with at least 75% of the net offer allotted to Qualified Institutional Buyers. If the minimum 75% allotment to QIBs is not achieved, the entire subscription money must be refunded.

For the SME platform, distinct criteria apply. The post-issue paid-up capital of the company must be less than or equal to ₹25 crore. The company should have a track record of operations for at least three years. If formed by converting a proprietorship, partnership firm, or Limited Liability Partnership (LLP), it must have existed as a company for at least one full financial year before filing the Draft Red Herring Prospectus (DRHP).

Recent regulations mandate SMEs demonstrate a minimum operating profit (EBITDA) of at least ₹1 crore in at least two of the last three financial years. A positive net worth in at least two of the three fiscal years is a prerequisite. The company must maintain a website and ensure no change in promoters for at least one year before the IPO application. All existing partly paid-up shares must be fully paid-up or forfeited, and all promoter-held securities must be in dematerialized form.

Pre-Filing Preparations

Before submitting an IPO application to SEBI, a company undertakes preparatory steps. This phase involves assembling a team of intermediaries, ensuring financial readiness, and documenting company information.

A key initial step is appointing intermediaries who guide the company through the IPO process. These include:

• Merchant Bankers (Book Running Lead Managers or BRLMs) advise on issue structure, valuation, and regulatory compliance.
• Legal counsel ensures adherence to corporate laws and securities regulations, drafting offer documents and contracts.
• Auditors prepare and certify financial statements, ensuring compliance with Indian accounting standards.
• Registrars to the Issue manage the application process, allotment, and refund procedures during the public offering.

Due diligence is another component of pre-filing preparations. This involves a thorough examination of the company’s legal, financial, and operational aspects by intermediaries. The process aims to identify and mitigate risks, verify disclosures, and ensure accuracy of information in offer documents.

The company must ensure financial statements comply with accounting standards and regulatory requirements. This often involves restating historical financial data to meet prescribed formats and disclosure norms. Financial figures, including net tangible assets, net worth, and operating profit, must demonstrate IPO eligibility. Any necessary corporate restructuring or reorganization for public listing is also undertaken.

These preparations culminate in drafting the Draft Red Herring Prospectus (DRHP). This preliminary offer document serves as the primary informational tool for SEBI and investors. The DRHP provides details about the company, including business operations, financial performance, management team, risk factors, and proposed offer details like issue size and objects. The DRHP is a draft and will undergo review and revisions based on SEBI’s observations.

Regulatory Approval Process

After pre-filing preparations, the company enters the regulatory approval process with SEBI. This phase centers on the submission, review, and approval of the Draft Red Herring Prospectus (DRHP).

The process commences with submitting the Draft Red Herring Prospectus (DRHP) to SEBI. This document contains information about the company and its proposed public offering. SEBI then reviews the DRHP to ensure compliance with ICDR Regulations and adequate disclosures for investor protection.

During the review period, typically two to four months for a Main Board IPO, SEBI may issue queries or observations. These observations often relate to discrepancies in financial disclosures, inadequate risk factor explanations, or non-compliance with specific regulatory provisions. The company, with its merchant bankers and legal counsel, must respond to these queries.

Addressing SEBI’s observations involves providing clarifications, submitting additional information, or amending the DRHP. This iterative process continues until SEBI is satisfied with the responses and the revised disclosures. Once observations are addressed, SEBI issues its observations letter or final approval for the IPO.

Upon receiving SEBI’s approval, the company files the updated Red Herring Prospectus (RHP) with the Registrar of Companies (RoC). The RHP is the final version of the offer document, incorporating all changes and clarifications made during SEBI’s review. It typically includes the price band and the issue size, which may not have been finalized in the DRHP. The RHP is the final offer document upon which investors will base their subscription decisions.

Public Offering and Listing

With SEBI’s approval, the company proceeds to the public offering and listing of its shares on stock exchanges. This phase involves marketing the issue, inviting investor subscriptions, allocating shares, and enabling trading on the secondary market.

The book-building process, common for Main Board IPOs, determines the final issue price. During this period, institutional investors, high-net-worth individuals, and retail investors place bids for shares within a specified price band. This mechanism helps gauge investor demand and facilitates price discovery. The company, with its merchant bankers, then sets the final issue price based on bids received.

Marketing efforts are undertaken to generate interest among investors. This includes roadshows, investor presentations, and media campaigns to highlight the company’s strengths and growth prospects. The offer document, now the final RHP, is widely disseminated to provide information to the public.

Once the price band and issue dates are finalized, the subscription period for investors commences, usually lasting a few days. Investors submit applications through various channels, including banks and brokers. After the subscription period closes, share allotment begins. Shares are allocated to successful bidders based on demand and the allocation methodology outlined in the RHP, ensuring fair distribution across investor categories as per SEBI guidelines.

Following allotment, shares are credited to the demat accounts of successful applicants. The IPO process culminates in the listing of the company’s shares on designated stock exchanges, such as the NSE or BSE. Once listed, shares begin trading on the secondary market, allowing investors to buy and sell them freely.

Post-listing, the company assumes continuous compliance obligations as a publicly traded entity. This includes adherence to corporate governance norms, timely disclosure of financial results, and reporting of material events to stock exchanges and SEBI. These ongoing requirements ensure transparency and protect the interests of public shareholders.