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What does an IPO involve?
An IPO involves preparation of an offer document (in draft and final forms) containing disclosures about the company to be listed, engagement with the capital markets regulator and exchanges, merchant bankers to advise on marketing and positioning, legal counsel to assist with diligence and drafting and auditors for preparation of financial statements. As always, though, the devil is in the detail – in this case, most importantly, the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (SEBI ICDR Regulations). This is a prescriptive set of regulations that, among other things, sets down eligibility criteria for companies looking to go public, and prescribes detailed disclosure requirements on matters ranging from identification of persons in control of the company, its history and ongoing legal proceedings, to the use of funds to be raised in the IPO.
A listing is a fairly involved process and typically takes 10-12 months from start to finish. Unlike some other jurisdictions, the first draft filing with the regulator is a public document and is also open to review and comment from the public at large. An overview of the standard IPO timeline is below:
The SEBI ICDR Regulations also permit an issuer to follow a confidential process where the initial filing is not made available publicly. This route offers the advantage of first incorporating inputs from the regulator and then releasing the draft offer document for public scrutiny, that too for a shorter period of time. However, it does add to the overall transaction timeframe with the differences in the two processes depicted below:
Who can conduct an IPO in India?
The SEBI ICDR Regulations prescribe certain eligibility conditions for an unlisted public company to undertake an IPO. These are split into two broad categories – financial and non-financial/regulatory criteria.
Financial eligibility criteria
The financial criteria determine what proportion of the offering can be allocated to retail shareholders. A company can proceed with an IPO and allocate up to 50% of the IPO shares to retail investors provided it satisfies the following:
• Net tangible assets of at least INR 30 million in each of the preceding 3 full years (prior to filing its draft offer document with SEBI), of which not more than 50% is held in monetary assets;
• An average operating profit of INR 150 million during the preceding 3 full years, with an operating profit in each year;
• A net worth of INR10 million in each of the preceding 3 full years; and
• In the event that the issuer has changed its name in the last year, at least 50% of the revenue for the last full year should have been earned from activity indicated by the new name.
If a company does not meet the thresholds outlined above, it may still proceed with an IPO. However, in such cases, at least 75% of the shares offered must be allocated to qualified institutional buyers (QIBs). This requirement acts as protection for retail investors, shielding them from investing in businesses that are not fully mature in terms of financial performance. QIBs are regarded as sophisticated investors more able to ascertain the risks associated with such companies.
Non-financial / regulatory eligibility criteria
The regulatory criteria are absolute prohibitions on undertaking an IPO. A company is deemed ineligible to undertake an IPO in the following circumstances:
• If the issuer company, its promoter(s), any member of the promoter group, or the issuer company’s directors or any of the selling shareholders in the IPO are debarred by SEBI from accessing the capital markets;
• If any promoter or director of the issuer company is also a promoter or director of any other company that is debarred by SEBI from accessing the capital markets;
• If the issuer company, or any of its promoters or directors is classified as a wilful defaulter or a fraudulent borrower;
• If any of the issuer company’s promoters or directors is a fugitive economic offender;
• If any person has any right entitling them to an option to receive equity shares of the issuer company (including by way of outstanding convertible securities), provided that ESOPs are excluded from this category.
Other prescribed conditions include a minimum post-issue capitalization, minimum offer size, minimum number of allottees and the establishment of corporate governance norms.
Criteria applicable to selling shareholders
In addition to the issuer company’s eligibility, conditions are also prescribed for selling shareholders in an IPO. Selling shareholders must meet the following criteria:
• Shares offered should have been held for at least one year prior to filing of the DRHP; and
• If the shares are held in the form of convertible securities, that holding period will also be considered only if they are fully paid-up.
In addition, where the issuer company does not satisfy the prescribed financial thresholds above, there are certain restrictions on the percentage of their holding that shareholders can sell in the IPO. Broadly speaking, a shareholder holding more than 20% of the issuer company can offer half their shares, while a shareholder holding less than 20% can offer up to 10% of the company in the IPO.
Who is the “promoter” of the issuer and what is required of them?
The SEBI ICDR Regulations require an issuer company to identify whether it has a “promoter” – essentially, the person or entity exercising control over the issuer company. This is akin to the concept of a “sponsor”, but with additional obligations and liabilities. Control may be exercised through shareholding, management control or contractual agreements.
While the determination is in some ways a subjective judgment, the exchanges have prescribed certain guidelines to be applied when determining the promoter of an issuer company. Based on this feedback, the following persons or entities should also be evaluated by an issuer for identifying its promoters.
As indicated above, identification of the promoter and promoter group early in the process is key, as it impacts the assessment of eligibility of the Indian company to undertake an IPO. In addition, detailed disclosures about the promoter must be made in the offer document.
Can a company be “promoter-less”?
In the event that it can be shown that no person or entity is in control of the issuer company and it is operated by a professional management set up, a company may call itself “promoter-less” or “professionally managed” and proceed with an IPO without a promoter. However, this requires careful examination of all the guidelines prescribed by the exchanges and the company’s management set up along with its shareholding pattern.
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