What Is An IPO? What Are The Eligibilities For An IPO Listing?

Updated: Friday, December 24, 2021, 18:42 [IST]

An Initial Public Offering is commonly known as IPO in the equity markets. IPO is a process by which a private company offers its shares to the public, or common investors through a new stock issuance, for the first time. An IPO is issued for a company to raise capital, however, for the private company, the number of shareholders will be limited by law. This process of public offering is known as 'listing' in the equity markets.

IPO approval

A private company has to meet the requirements of the existing exchanges and the Securities and Exchange Commission (SEC) to get approval for an IPO. After a company gets a unicorn status or reaches a private valuation of around $1 billion, the company realizes that it can start applying for getting IPO approval. However, it is not mandatory because companies can prove better credibility and future potential along with fundamentals to get listed. Competition in the markets will matter on that ground.

Before getting the IPO approval, a company's shareholders are generally the founders, family, friends, and venture capitalists. But, a public offering means, common citizens' money will be involved with the company. So, keeping the money safe is highly important for the SEC and the exchanges. With an IPO listing, the earlier investors can also exit from their investments.

Eligibility for IPO

As eligibility for an IPO, SEBI mentioned, the net tangible assets of at least Rs. 3 crore in each of the preceding 3 full years of which not more than 50% are held in monetary assets. However, the limit of 50% on monetary assets shall not be applicable in case the public offer is made entirely through offer for sale. Minimum of Rs. 15 crore as average pre-tax operating profit in at least three years of the immediately preceding 5 years. The net worth of at least Rs. 1 crore in each of the preceding 3 full years. If there has been a change in the company's name, at least 50% of the revenue for the preceding 1 year should be from the new activity denoted by the new name. Lastly, the issue size should not exceed 5 times the pre-issue net worth.

IPO listing with NSE

There are multiple eligibility criteria for an IPO applicant who desires listing of its securities with NSE. They must fulfill the following pre-requisites, - "The paid-up equity capital of the applicant shall not be less than 10 crores, and the capitalization of the applicant's equity shall not be less than 25 crores. The applicant desirous of listing its securities should satisfy the exchange on the following: Details of pending investor grievances against Issuer, listed subsidiaries, and top 5 listed group companies by Market Cap, and, arrangements or mechanism evolved for redressal of investor grievances including through SEBI Complaints Redress System," NSE officially mentioned.

Equity value and company growth

The number of shares and the share price will generate the new shareholders' equity value. Shareholders' equity still represents shares owned by investors when it is both private and public; with an IPO the shareholders' equity increases significantly with cash from the primary issuance.

An IPO listing generally gives a company a better scope for growth and expansion in the market. With this possible opportunity for growth, there will come more need for credibility and transparency. A company will hire investment banks for marketing, to gauge demand, to set the IPO rate and date, etc.