Initial Public Offer (IPO) – Definition | Process | Key Insights

Public Issue of shares means the selling or marketing of shares for subscription by the public by issue of prospectus. For raising capital from the public by the issue of shares, a public company has to comply with the provisions of the Companies Act, 2013, the SCR Act, 1956 including the Rules & Regulations made there under and the guidelines and instructions issued by the concerned Government Authorities, Stock Exchanges and SEBI etc.

A company can raise funds from the primary market through different methods as given below –

• Public Issue – When company issues securities to new investors for becoming part of shareholders family of the issuer it is called a public issue. Public issue can be further classified into following two categories –

1. 1. Initial Public Offer (IPO) – When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO.
   2. Further Public Offer (FPO) or Follow on Offer – When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called a FPO.

• Right Issue – When an issue of securities is made by an issuer to its existing shareholders it is called a rights issue.
• Bonus Issue – When the company issue securities to its existing shareholders without any consideration it is called a bonus issue. Such shares are issued generally by capitalizing the company’s profit & loss account, free reserve or securities premium account.
• Private Placement – When an issuer makes an issue of securities to a select group of persons it is called private placement. However, issue of securities by way of private placement cannot be made to more than 49 persons. Private placement of securities can be of following three types –

1. 1. Preferential Allotment – When a listed issuer issues shares or convertible securities, to a select group of persons it is called a preferential allotment.
   2. Qualified Institutions Placement (QIP) – When a listed issuer issues equity shares or securities convertible in to equity shares to selected Qualified Institutions Buyers (QIBs) it is called Qualified Institutions Placement.
   3. Institutional Placement Programme (IPP) – When a listed issuer makes a further public offer of equity shares, or offer for sale of shares by promoter to QIBs. IPP can only be used to raise minimum public shareholding requirements to 25%.

Offer Document – Offer document means a prospectus, red-herring prospectus or shelf prospectus and information memorandum in terms of Section 31 of the Companies Act, 2013 in case of a public issue. In case of a rights issue, ‘letter of offer’ is offer document.

An offer document covers all the relevant information to help an investor to make his investment decision.

Red-herring prospectus – Red herring prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities offered.

Provisions of red-herring prospectus are applicable to all companies except those are covered under shelf prospectus. The provision is mainly applicable for book building.

A company proposing to issue a red-herring prospectus shall file it with the ROC at least 3 days prior to the opening of the subscription list and the offer.

A red-herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red-herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

In fixed price process the issue price known in advance to the investors while in book building process the issue price is not known in advance to the investors as only price band is offered.

‘Fixed price process’ and ‘book-building process’ are pricing mechanisms in the issue of shares in public issue.

Book building means a process undertaken to elicit demand and to assess price for determination of the quantum or value of specified securities or Indian Depository Receipts (IDR). Book Building is basically a process used in IPO for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

Following are the main points of difference between fixed price process & book building process –

QIBs are investment institutions who buy the shares of a company on a large scale. Qualified Institutional Buyers are those Institutional investors who are generally perceived to possess expertise and the financial proficiency to evaluate and to invest in the Capital Markets.

Qualified Institutional Investors [Regulation 2(1)(zd)] – Qualified Institutional Investors comprises of –

1. Mutual Fund, Venture Capital Fund, Alternative Investment Fund & Foreign Venture Capital Investor registered with the SEBI.
2. Category-I & Category-II Foreign Portfolio Investor registered with the SEBI.
3. Public Financial Institution.
4. Scheduled Commercial Bank.
5. Multilateral and bilateral development financial institution.
6. State industrial development corporation.
7. Insurance Company registered with the IRDA.
8. Provident Fund with minimum corpus of ` 25 Crore.
9. Pension Fund with minimum corpus of ` 25 Crore.
10. National Investment Fund.
11. Insurance Funds set-up and managed by army, navy or air force of the Union of India.
12. Insurance Funds set-up and managed by the Department of Posts, India.
13. Systemically Important NBFC.

Thus, only above stated institutional buyer are QIB and not other institutional buyers.

Draft Offer Document [Regulation 2(1)(n)] – Draft offer document means the draft offer document filed with the SEBI in relation to a public issue under the SEBI (ICDR) Regulations, 2018.

Draft Offer document means the offer document in draft stage.

• The draft offer documents are filed with SEBI, at least 30 days prior to the filing of the Offer Document with ROC or designated stock exchange.
• SEBI may specify changes in the Draft Offer Document and the Issuer or the Lead Merchant Banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC or designated stock exchange.
• The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the filing of it with SEBI.

Draft Offer Document to be made public – The draft offer document filed with SEBI shall be made public for comments for a period of 21 days from the date of filing with SEBI by hosting it on the websites of the SEBI, recognized stock exchanges and merchant bankers associated with the issue.

After a period of 21 days, the Lead Merchant Bankers shall file with SEBI a statement giving information of the comments received during that period and the consequential changes to be made in the draft offer document.

Anchor Investor – Anchor investor means a qualified institutional buyer who makes an application for a value of at least ` 10 Crore in a public issue on the main board made through the book building process in accordance with these regulations or makes an application for a value of at least ` 2 Crore for an issue made by Small & Medium Enterprises (SME).

Allocation to anchor investors on Main Board – Allocation to Anchor Investors on Main Board shall subject to the following:

1. For first ` 10 Crore – Maximum 2 anchor investors shall be permitted for allocation.
2. For above ` 10 Crore and up to ` 250 Crore – Minimum 2 and maximum 15 anchor investors shall be permitted for allocation subject to minimum allotment of ` 5 Crore per anchor investor.
3. For above ` 250 Crore – Minimum of 5 such investors and a maximum of 15 such investors for allocation up to ` 250 Crore and an additional 10 such investors for every additional ` 250 Crore or part thereof, shall be permitted, subject to a minimum allotment of ` 5 Crore per such investor.

Allocation to anchor investors on SME Exchange – Allocation to Anchor Investors on SME Exchange shall subject to the following:

• For first ` 2 Crore – Maximum 2 anchor investors shall be permitted for allocation.
• For above ` 2 Crore and up to ` 25 Crore – Minimum 2 and maximum 15 anchor investors shall be permitted for allocation subject to minimum allotment of ` 1 Crore per anchor investor.
• For above ` 25 Crore – Minimum of 5 such investors and a maximum of 15 such investors for allocation up to ` 25 Crore and an additional 10 such investors for every additional ` 25 Crore or part thereof, shall be permitted, subject to a minimum allotment of ` 1 Crore per such investor.

Eligibility requirements for an initial public offer: [Regulation 6(1)] – An issuer shall be eligible to make an Initial Public Offer (IPO) only if it meets all the following conditions –

(1) Assets Criteria – The issuer has net tangible assets of at least ` 3 Crore, calculated on a restated and consolidated basis, in each of the preceding three full years (of 12 months each), of which not more than 50% are held in monetary assets.

However, if more than 50% of the net tangible assets are held in monetary assets, the issuer has utilized or made firm commitments to utilize such excess monetary assets in its business or project. The limit of 50% on monetary assets shall not be applicable in case the IPO is made entirely through an Offer for Sale (OFS).

(2) Profit Criteria – The issuer has an average operating profit of at least ` 15 Crore, calculated on a restated and consolidated basis, during the preceding 3 years (of 12 months each), with operating profit in each of these preceding 3 years.

(3) Net-worth Criteria – The issuer has a net worth of at least ` 1 Crore in each of the preceding 3 full years (of twelve months each), calculated on a restated and consolidated basis.

(4) Name Criteria – If the issuer has changed its name within the last 1 year, at least 50% of the revenue, calculated on a restated and consolidated basis, for the preceding one full year has been earned by it from the activity indicated by its new name.

Alternative Norms [Regulation 6(2)] – An issuer not satisfying above conditions shall be eligible to make IPO only if the issue is made through the book-building process and the issuer undertakes to allot at least 75% of the net offer to Qualified Institutional Buyers (QIB) and to refund the full subscription money if it fails to do so.

Initial Public Offer (IPO) – Initial Public Offer means an offer of specified securities by an unlisted issuer to the public for subscription and which includes fresh issuance of shares by the company or includes an Offer for Sale (OFS) of specified securities to the public by any existing holder of such securities in an unlisted issuer. In order to qualify as an Initial public offer, the offer of securities must be by an unlisted issuer company and such an issue shall be made to the public and not to the existing shareholders of the unlisted issuer company or to selected group of investors.

Eligibility requirements for an initial public offer: [Regulation 6(1)] – An issuer shall be eligible to make an Initial Public Offer (IPO) only if it meets all the following conditions –

(1) Assets Criteria – The issuer has net tangible assets of at least ` 3 Crore, calculated on a restated and consolidated basis, in each of the preceding three full years (of 12 months each), of which not more than 50% are held in monetary assets.

However, if more than 50% of the net tangible assets are held in monetary assets, the issuer has utilized or made firm commitments to utilize such excess monetary assets in its business or project. The limit of 50% on monetary assets shall not be applicable in case the IPO is made entirely through an Offer for Sale (OFS).

(2) Profit Criteria – The issuer has an average operating profit of at least ` 15 Crore, calculated on a restated and consolidated basis, during the preceding 3 years (of 12 months each), with operating profit in each of these preceding 3 years.

(3) Net-worth Criteria – The issuer has a net worth of at least ` 1 Crore in each of the preceding 3 full years (of twelve months each), calculated on a restated and consolidated basis.

(4) Name Criteria – If the issuer has changed its name within the last 1 year, at least 50% of the revenue, calculated on a restated and consolidated basis, for the preceding one full year has been earned by it from the activity indicated by its new name.

Alternative Norms [Regulation 6(2)] – An issuer not satisfying above conditions shall be eligible to make IPO only if the issue is made through the book-building process and the issuer undertakes to allot at least 75% of the net offer to Qualified Institutional Buyers (QIB) and to refund the full subscription money if it fails to do so.

As per Regulation 6(1) of the SEBI (ICDR) Regulations, 2018, an issuer shall be eligible to make an IPO only if, in case the issuer has changed its name within the last one year, at least 50% of the revenue calculated on a restated and consolidated basis, for the preceding one full year has been earned by it from the activity indicated by the new name.

Hence, based on the above it can be concluded that as the Company has changed its name in the previous year, it would be eligible for an IPO, if at least 50% of the revenue calculated on a restated and consolidated basis, for the preceding one full year has been earned from its aeronautical designing business.

Regulation 6(2) provides that an issuer not satisfying above conditions shall be eligible to make IPO only if the issue is made through the book-building process and the issuer undertakes to allot at least 75% of the net offer to Qualified Institutional Buyers (QIB) and to refund the full subscription money if it fails to do so.

Therefore, Ultra Aero Technology Services Limited may also opt for this route if the conditions specified in Regulation 6(1) are not satisfied.

Warrants are securities that give the holder the right, but not the obligation, to buy a certain number of securities (usually the issuer’s common stock i.e. equity shares) at a certain price before a certain time.

Occasionally, companies offer warrants for direct sale or give them to employees as incentive, but the vast majority of warrants are “attached” to newly issued bonds or stock.

Issue of warrants [Regulation 13] – An issuer shall be eligible to issue warrants in an initial public offer subject to the following:

• Tenure of such warrants – The tenure of such warrants shall not exceed 18 months from the date of their allotment in the initial public offer.
• No. of warrants – A specified security may have one or more warrants attached to it.
• Price & Consideration – The price or formula for determination of exercise price of the warrants shall be determined upfront and disclosed in the offer document and at least 25% of the consideration amount based on the exercise price shall also be received upfront. However, in case the exercise price of warrants is based on a formula, 25% consideration amount based on the cap price of the price band determined for the linked equity shares or convertible securities shall be received upfront.
• Forfeiture of warrant – In case the warrant holder does not exercise the option to take equity shares against any of the warrants held by the warrant holder, within three months from the date of payment of consideration, such consideration made in respect of such warrants shall be forfeited by the issuer.

Similar provisions are also applicable for issue of warrants in right issue. [Regulation 67]

Accordingly, Minto Ltd. can issue warrants after complying with the aforementioned conditions.

Lock-in means promoters or other specified persons cannot sale the shares to others during prescribed period. The idea is that promoter should have stake in the company. Moreover, they are not expected to make profit by selling the shares which earlier they had.

Lock-in of specified securities held by the promoter’s (in case of IPO) [Regulation 16] – The specified securities held by the promoters shall not be transferable (“locked-in”) for the periods as stipulated hereunder –

(1) Lock-in for minimum promoter’s contribution – Minimum promoter’s contribution including contribution made by alternative investment funds or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance companies registered with IRDA, shall be locked-in for a period of 18 months from the date of allotment in IPO.

However, in case the majority of the issue proceeds excluding the portion of offer for sale is proposed to be utilized for capital expenditure, then the lock-in period shall be 3 years from the date of allotment in IPO.

(2) Lock-in for excess promoter’s contribution – Promoters holding in excess of minimum promoters’ contribution shall be locked-in for a period of 6 months.

However, in case the majority of the issue proceeds excluding the portion of offer for sale is proposed to be utilized for capital expenditure, then the lock-in period shall be 1 year from the date of allotment in IPO.