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startup ipo

Startup Ipo (New Update)

The Initial Public Offering (IPO) is a major milestone for any startup. Startup IPO is an important step for start-ups looking to raise capital and expand their businesses.  By going public, a startup also opens itself up to greater accountability, as it must now comply with stricter reporting requirements. While being publicly traded carries certain risks, IPOs have become increasingly popular among startups looking to take their business to the next level.

What is IPO?

The process by which a private corporation first issues new stock and makes its shares available to the general public is an initial public offering or IPO. It is also a measure for the company to raise capital from public investors.

It is one of the ways for private investors to fully realize the value of their investments.  It can also act as an exit strategy for previous investors and founders by fully realizing the gains. This provides the company with an opportunity to raise capital through the major markets by offering shares. Companies typically hire investment banks to help meet market demand and set prices for IPOs.

How does a startup benefit from an IPO?

An IPO can benefit a startup in the following ways:

  • It gives you access to massive funds that you can use to grow your business.
  • This creates diversity in the ownership of company shares. This ensures that large investors have a say in the company.
  • The startup receives positive publicity once the IPO is launched. This increases the probability of acquisitions and takeovers.
  • The company is now able to offer stock options to its employees after going public.
  • Being a publicly traded company makes it easier for companies to raise more capital.

When should a startup go for IPO?

It’s true that an IPO is the first opportunity for the general public to purchase shares of a company, but it’s also crucial to realize that one of the IPO’s goals is to enable early investors in the company to receive a return on their initial investments.

Other reasons companies seek an IPO is to raise funds or make their company visible:

  • Companies can raise additional capital by going public. Proceeds are to grow your business, fund research, and development, or pay off debt.
  • Other ways to raise money through venture capitalists, private investors, or bank loans can be too expensive.
  • A public offering can have a significant publicity impact on a company.
  • Companies may want the credibility and solemnity that comes with public companies, which also helps them get better terms from lenders.

An IPO can make it easier or cheaper for a company to raise capital, but it complicates many other issues. There are disclosure requirements, including the filing of quarterly and annual financial reports. They must be accountable to shareholders and have reporting requirements for stock transactions and other moves by management, such as asset sales or acquisition considerations.

How much turnover is required for IPO?

  1. Profit Norms

SEBI prescribes the following criteria for companies wishing to go public, based on the profitability of the company:

The company must have a tangible net worth of at least INR 300 crore in each of the last three years. Of that Rs. 3 crores, no more than 50% must be cash or cash equivalents such as money in accounts, cash receivables, or investment accounts. However, if the IPO is made through an offer by sale, this limit does not apply to 50% of the financial assets.

The company must have a net worth of at least one crore rupees in each of the last three years.

The company must have an average operating profit of at least INR 15 crores (before tax) for each of the last 3 years in the last 5 years.

If the company adopts a new name, 50% of the total revenue generated in the previous year must come from the company’s operations after adopting the new name.

The total value of the IPO issued by the company cannot exceed five times the net assets of the company before the IPO issuance.

Non-Profitability routes

To ensure that legitimate companies are not hindered by strict revenue standards and to give these companies the flexibility they need to access the primary market, SEBI will offer the QIB route. The QIB route requires his IPO to be issued in a book-building method, and he must allocate at least 75% of the issuance amount to QIB (Qualified Institutional Buyers). The company issuing the IPO must return all its IPO subscription money if this minimum quota requirement is not met.

What is the maximum limit for IPO?

SEBI classifies investors into three broad categories (RII, NII, and QIB). It also mandates companies to secure a certain percentage of IPOs in each category, as shown below:

  • RII – Retail Individual Investor – 35% of the IPO
  • NII – Non-Institutional Investor – 15% of the IPO
  • QIB – Qualified Institutional Bidder – 50% of the IPO

This was done to make sure that all types of investors had a chance to take part in an organization’s initial public offering (IPO). Based on their research, SEBI determined that the maximum investment a person can make to qualify as a retail investor is Rs. 2 lahks. The advantage of applying as a retail investor is that SEBI regulates the allocation method for this category and ensures that the maximum number of retail investors receives an allocation. On the other hand, allocation is proportional for NII and discretionary for QIB. To ensure that the shares reach the public, the amount is limited to Rs.200,000.

What if IPO is not fully subscribed?

Under subscription occurs when there aren’t enough investors buying the offered number of shares. Although there are many different reasons why this might occur, it usually does when a business is unknown or when there is unfavorable press about it. In this situation, the company might have to reduce the stock’s price to entice more buyers. In some cases, the company may even have to withdraw the offer altogether.

Once the IPO is subscribed, it may be valued lower than expected, resulting in losses for investors on day one. One of the implications of an IPO is that the company might have to sell its stock for less than it had originally anticipated. The company can experience a loss of revenue as a result, and it might find it challenging to raise capital in the future. In addition, shareholder investment may decrease if the share price falls below the price paid for their stock.

If the company is unable to raise sufficient funds through an IPO, it may be forced to borrow from banks. Banks are reluctant to lend money to companies with poor track records or financial difficulties, so they charge higher interest rates and fees on those loans.

What happens if IPO is not refunded?

If the requested amount is not calculated back to your amount, publish the expiry date of the mandate. If the problem persists, please check with your bank. If this is the case, please escalate the matter to her IPO registrar. A registrar is responsible for processing his IPO application, allocating shares, and processing refunds. If you have not received your refund within the specified deadline, please follow these steps:

  • You can go to the local registry office, but only if you live in the same city. 
  • The best way to contact them is to send a formal email to the email address listed in your IPO prospectus with your confirmation details.
  • The email should contain the subject, company name, application number, applicant name and the number of shares applied, applicable amount, Bank ID, DP ID, and Custodian ID.
  • If the IPO Registrar does not contact us, the last resort is his SEBI. File a complaint on the SEBI Score Portal.

Frequently Asked Questions (FAQs)

At what stage do startups IPO?

 An IPO is the culmination of a startup’s success. This occurs when the company’s stock is first offered for public offering.

Is investing in IPO always profitable?

There is no guarantee that the companies you invest in will be successful in the long term. It can bring you high-profit margins in the short term and increase your wealth in the long term.

Do we need to pay tax for the IPO amount?

If an investor received shares as part of her IPO allocation, no tax would apply. However, when investors sell these shares, they are taxable as capital gains. 

Long Term Capital Gain on shares sold after 12 months is taxable at 10% over INR 1 lac and Short Term Capital Gain on shares sold within 12 months is taxable at 15%.

Can I sell my IPO anytime?

IPO shares will be acquired within the mandatory vesting period of six months from the date of allotment.

Can we cancel IPO after the subscription?

A submitted IPO application can only be modified or canceled between 10:00 AM and 4:30 PM on trading days.

Wrapping Up

IPOs are beneficial to issuers as they can increase their share base. From an investor’s perspective, it offers investors the opportunity to earn substantial returns. With proper preparation and guidance, public offerings can offer start-ups the opportunity to reach their full potential.

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