Launching into the Stock Market: The IPO Blueprint for Startups

The Indian equities market experienced a remarkable resurgence in the year 2023, defying global uncertainties and macroeconomic challenges. Marked by a bullish sentiment in the broader market, the domestic IPO landscape witnessed a revival after the subdued atmosphere of 2022. Despite prevailing geopolitical tensions, the public offerings of new-age tech startups notably improved, distinguishing 2023 from the lackluster performance of the previous year.

In a glance at the overall IPO scenario, five new-age tech companies—ideaForge, Mamaearth, Yatra, Zaggle, and Yudiz—ventured into the market this year. One chose the SME platform, while the rest embraced the mainboard. Cumulatively, their IPOs surpassed Rs 3,600 Cr, a substantial increase from 2022's Rs 5,500 Cr, albeit below the remarkable Rs 50,000 Cr recorded in 2021.

Despite 10 startups delaying their IPO plans amid market volatility last year, experts foresee a surge in new-age tech IPOs in 2024. The Indian market's recent highs, influenced by political victories and dovish US Fed commentary, are anticipated to encourage more startups to explore public offerings in the coming year. As the nation approaches general elections in 2024, many companies are expected to await election results before finalizing their IPO timelines, showcasing a cautious yet optimistic outlook for the future.

How To Launch IPOs?

Stock Market! We all know that how unpredictable and volatile the stock market can be, making it a highly risky investment option. Stock prices can fluctuate rapidly due to series of events which are not under our control such as economic conditions, political events, and investor sentiment.

But, once a startup gets successful, the entrepreneurs are increasingly subjecting themselves to the ruthlessness of public markets, despite the risks involved. This move is motivated by several reasons, including the need for additional funding after the VC-funded well has dried up.

What are the benefits of going Public?

According to experts, one major advantage of going public is that it becomes easier for companies to raise debt. Private lenders place greater faith in listed companies. It becomes increasingly challenging to secure financing from private investors as the company grows larger.

Additionally, the board room gets in place when a company prepares to launch IPO. Public listing creates diversity of ownership. A startup by its very nature is controlled by a small group of investors. Going public is also a powerful signal for the investors as well as the B2B customers.

Listing as a public company also creates value for employees through stock options. The prospect of stock price appreciation makes the company more attractive to prospective employees, helping it to attract and retain top talent.

The public listing also makes mergers and acquisitions easier by providing companies with more flexibility in pursuing growth opportunities.

What is an IPO?

An Initial Public Offering (IPO) is a process by which a private company offers its shares to the public for the first time, thereby becoming a publicly-traded company. The purpose of an IPO is to raise capital for the company's growth and expansion plans. In an IPO, the company hires an investment bank to underwrite the offering and help determine the initial price range for the shares.

The private company offers shares to the public through a specific application process. In exchange for issuing new shares, the company raises funds from investors to undertake new business ventures. The shares are offered at an issue price, and primary investors can purchase them by applying for allotment through brokers. When the shares are listed on stock exchanges, they can be traded among investors.

How does an IPO work in India?

In India, all organizations listed as public companies in the stock market have to follow certain guidelines set by the Securities and Exchange Board of India (SEBI) as well as the stock exchanges. These authorities have established eligibility criteria that determine whether an IPO can proceed.

To register for an IPO, a company must create a Draft Red Herring Prospectus (DRHP) that includes all the necessary details according to SEBI guidelines. This document must be submitted to the Registrar of Companies, SEBI, and the stock exchanges for approval. Post SEBI approval, the document is called Red Herring Prospectus (RHP).

After obtaining approval, the startup can conduct roadshows to market its IPO to the public. To generate interest and attract potential investors, large institutional investors are often used in this process. The company will then reveal a specific date for the IPO and the issue price, which usually remains open for subscription for 3-5 working days. After investors place their bids within a certain price range, a cut-off price is determined, and shares are allocated to investors based on this price.

What are the eligibility criteria for companies to list as an IPO?

To launch an IPO in India, SEBI mandates a set of guidelines for companies to follow. Since it’s the public money at stake, these guidelines ensure a safe and a transparent trading process. 

According to the guidelines:

• • The company must have been registered and operating for a minimum of 3 years.
• • For each of the past 3 years, the company must have a consolidated net worth of at least Rs 1 crore.
• • The net tangible asset value for each of the past 3 full years should be around Rs 3 crore, with no more than 50% in cash or cash equivalent.
• • The company's total issue size of shares should not exceed 5 times its net worth before the IPO.
• • If a new name has been incorporated by the company, at least 50% of its total revenue earned in the last year should be earned after the incorporation of the new name.
• • There should be no default on loans or other credit lines taken on behalf of the company.

What are the criteria for startups to get onboard BSE and NSE?

In order to get listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), startups need to meet the following eligibility criteria:

• ·       The company should have a minimum net worth of Rs. 1 crore on a consolidated basis for the previous three years.
• ·       The company should have a track record of distributable profits for at least three out of the preceding five years.
• ·       The company should have a net tangible asset of at least Rs. 3 crore in each of the preceding three full years, with not more than 50% in the form of monetary assets.
• ·       The issue size of the company's shares should not exceed five times its pre-issue net worth.
• ·       The company should have a minimum of 200 shareholders, and no single shareholder should hold more than 75% of the total shares.
• ·       The company should have a paid-up capital of at least Rs. 1 crore at the time of listing.
• ·       The company should have a minimum public float of 25% of the total shares issued.
• ·       The company should not have been referred to the Board for Industrial and Financial Reconstruction (BIFR) or its equivalent.
• ·       The company should have a Redressal Mechanism of Investor grievances.
• ·       The company should have the arrangements or mechanism evolved for redressal of investor grievances including through SEBI Complaints Redress System.

These eligibility criteria are subject to change and are determined by the regulatory body Securities and Exchange Board of India (SEBI).

SEBI also guides companies and their promoters to take some necessary steps to be listed on the stock market. The promoters, who must own individually or collectively at least 20% of the total shares after the IPO distribution, are considered promoters if they are in this area of business.

Overall, while going public entails risks, successful startup entrepreneurs are increasingly drawn to the advantages that public listing offers in terms of fundraising, ownership diversity, signalling, employee value creation, and growth opportunities.

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