An Initial Public Offering (IPO)

Context: Jio Platforms debuted on the BSE and NSE, following its historic ₹30,213-crore Initial Public Offering (IPO) that generated an unprecedented ₹7.3 lakh crore in bids.

About An Initial Public Offering (IPO):

What it is?

• An Initial Public Offering (IPO) is the primary-market mechanism through which an unlisted, privately held corporation sells newly issued shares (Fresh Issue) and/or existing shares held by promoters/promoter groups (Offer for Sale – OFS) to the institutional and general public for the first time, transitioning into a publicly traded company.

Aim:

• Raises long-term equity funds from public and institutional investors for business expansion, capital expenditure, debt repayment and R&D.
• Establishes transparent market-based valuation and provides liquidity and exit opportunities for founders, venture capital and private equity investors.
• Strengthens transparency, regulatory compliance and investor confidence through mandatory disclosures, improving creditworthiness and brand reputation.

How an IPO Works (Life Cycle)?

1. Appointment of Merchant Bankers: The company engages Book Running Lead Managers (BRLMs) and legal advisors to conduct due diligence, structure the issue, and underwrite the offering.
2. Filing Draft Red Herring Prospectus (DRHP): The company submits the DRHP to the Securities and Exchange Board of India (SEBI) and stock exchanges, disclosing business operations, risk factors, financial statements, and planned fund deployment.
3. Regulatory Clearance & RHP: Following SEBI comments and clearance, a final Red Herring Prospectus (RHP) is filed containing issue dates, lot size, and the designated price band (or fixed price).
4. Anchor Book & Public Bidding: Institutional anchor investors bid ahead of the opening date. The public bidding window opens for 3–5 working days across three quotas:
   • Qualified Institutional Buyers (QIBs)
   • Non-Institutional Investors (NIIs/HNIs)
   • Retail Individual Investors (RIIs)
5. Price Discovery & Allotment: Based on book-building demand, the final issue cut-off price is determined. The registrar finalizes share allotment via lottery for oversubscribed categories, and funds blocked under ASBA (Application Supported by Blocked Amount) are unblocked for unallocated applicants.
6. Stock Exchange Listing: Allotted equity shares are credited to investors’ demat accounts, and secondary market trading commences on the stock exchanges (BSE/NSE).

Eligibility Criteria for an IPO (SEBI ICDR Regulations, 2018):

Under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, a company listing on the main board must satisfy either the Profitability Route or the alternate QIB Route:

• Profitability Track (Regulation 6(1)):
  • Net Tangible Assets: At least ₹3 crore in each of the preceding three full financial years (of which not more than 50% are held in monetary assets).
  • Operating Profitability: Minimum average operating profit of ₹15 crore across the three most profitable years out of the immediately preceding five years.
  • Net Worth: Minimum net worth of ₹1 crore in each of the preceding three full financial years.
• Alternative / QIB Track (Regulation 6(2)):
  • If a company (such as high-growth tech firms or startups) cannot meet the profitability criteria, it can still go public provided the issue is conducted strictly via the book-building mechanism, with at least 75% of the net issue size allocated to Qualified Institutional Buyers (QIBs).

Significance:

• Channels household savings and foreign investments into productive enterprises, promoting economic growth, industrial expansion and employment.
• Enables retail and institutional investors to share in corporate growth through equity ownership, dividends and capital gains.