Why In News?

Jio Platforms Ltd (JPL) launched and completed India's largest-ever Initial Public Offering (IPO) worth ₹30,213 crore.

What is an IPO?

Definition: An Initial Public Offering (IPO) is the process through which an unlisted company offers shares to the public for the first time, becoming eligible for listing on a recognised stock exchange.

• Fresh Issue: The company issues new shares to raise capital for expansion, debt repayment, capital expenditure or R&D.

• Offer for Sale (OFS): Existing shareholders, such as promoters or private equity investors, sell their shares; the proceeds go to the selling shareholders, not the company.

Objectives of an IPO

• Capital Formation: Mobilises equity funds for business expansion, infrastructure, technology and research.

• Investor Exit: Provides liquidity to founders, promoters and early-stage investors.

• Market Valuation: Establishes a market-based valuation through investor demand and price discovery.

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• Transparency: Introduces stronger disclosure, governance and regulatory compliance requirements.

• Public Participation: Enables retail and institutional investors to participate in corporate growth.

How Does an IPO Work? — Lifecycle

• Appointment of Intermediaries: The company appoints Book Running Lead Managers (BRLMs), legal advisers, auditors and other intermediaries to conduct due diligence and manage the issue.

• DRHP Filing: The Draft Red Herring Prospectus discloses the company's business, financial statements, risk factors and proposed use of funds; it is filed with SEBI and the relevant stock exchanges.

• Regulatory Review: SEBI examines disclosures and issues observations; the company addresses them before proceeding with the offer.

• RHP and Price Band: The Red Herring Prospectus provides final offer details, including the issue period and price band, subject to the applicable issue structure.

• Anchor Investors and Bidding: Eligible institutional anchor investors may participate before the public issue opens; investors then bid during the subscription period.

• Investor Categories: The issue is divided into categories such as Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs) and Retail Individual Investors (RIIs), according to applicable rules.

• Price Discovery: Under book-building, the final issue price reflects the demand received within the specified price band.

• Allotment and Refund/Unblocking: Shares are allotted according to applicable allocation rules; blocked funds for unsuccessful or partially allotted applications are released.

• Listing: Allotted shares are credited to investors' demat accounts and begin trading on the recognised stock exchange.

Eligibility Criteria for an IPO

An unlisted company in India must satisfy the statutory eligibility requirements set by the Securities and Exchange Board of India (SEBI) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 to launch an Initial Public Offering (IPO) on the mainboard. 

SEBI provides two primary pathways for companies to qualify: Regulation 6(1) (The Profitability Route) and Regulation 6(2) (The QIB Route). 

Route 1: The Profitability Route (SEBI Regulation 6(1))

To qualify through the standard financial track record route, a company must satisfy all of the following conditions:

• Net Tangible Assets: Must be at least ₹3 crore in each of the preceding 3 full years (calculated on a restated and consolidated basis), with not more than 50% held in monetary assets.  

• Operating Profit: Must have an operating profit (pre-tax) of at least ₹15 crore in at least 3 out of the immediately preceding 5 years.  

• Net Worth: Must have a net worth of at least ₹1 crore in each of the preceding 3 full years. 

• Name Change Condition: If the company changed its name within the last 1 year, at least 50% of the revenue for the preceding 1 full year must have been earned from the activity indicated by the new name.  

• Issue Size Limit: The proposed issue size (sum of fresh issue and offer for sale) cannot exceed 5 times the pre-issue net worth. 

Route 2: The Alternative QIB Route (SEBI Regulation 6(2))

If a company (such as a new-age tech startup or capital-intensive infrastructure firm) does not meet the strict historical profitability criteria under Regulation 6(1), it can still launch an IPO if it follows the institutional allocation route:

• Mandatory QIB Allocation: At least 75% of the net offer to the public must be allotted to Qualified Institutional Buyers (QIBs) through the book-building process.  

• Refund Mechanism: If the minimum 75% QIB subscription requirement fails, the company must refund the entire application money.  

Significance of an IPO

• Capital Formation: Converts public savings into equity capital for business expansion, productive investment and employment generation.

• Economic Growth: Supports capital expenditure, R&D, innovation and industrial capacity without creating a fixed repayment obligation like debt.

• Investment Opportunities: Allows retail and institutional investors to participate in corporate ownership and potentially earn dividends and capital gains.

• Liquidity and Exit: Creates a secondary market through which existing shareholders can sell their shares after listing, subject to market conditions.

• Corporate Governance: Strengthens disclosure, audit, reporting and regulatory compliance obligations for listed companies.

• Market Development: Deepens India's capital markets by broadening investor participation and improving price discovery.

Conclusion

An IPO connects corporate financing with public investment, but its success depends on credible disclosures, fair valuation, sound governance and informed investor participation.  

Source: FIRSTPOST