Can a Proprietorship firm/Partnership firm bring an IPO?
It has been observed that Proprietorship and Partnership firms lack the separate legal identity and structure necessary for raising funds through IPO. However, these firms have opportunities of further expansion and growth but their limited access to funding poses a hurdle to their growth.
If a sole proprietorship or a partnership requires capital, the owner typically relies on personal funds, loans, or other forms of financing. If a business owner wishes to have the ability to raise funds through the sale of shares to the public, they may consider converting the business structure to a limited company that can issue shares and go public. This decision involves legal and regulatory considerations, and professional advice should be sought to ensure compliance with applicable laws and regulations.
So the answer to this question is YES, a proprietorship firm can bring its IPO. It needs to follow certain steps to be eligible to become a listed company through Initial Public Offer. Let’s discuss how a proprietorship firm can bring its IPO?
1) As per the eligibility criteria of BSE and NSE (SME platform), only a limited company can raise IPO hence a proprietorship firm has to be converted into a limited company (pls note it’s a two-step process, first it is converted to private limited and then public limited). Link to article How to convert into a private limited company?
Now as per the SME IPO Eligibility Norms, the applicant company seeking listing should have a track record of operations of at least three years. Now, the question arises do you have to wait for 3 years to get the company listed? No, that’s not the case. When the applicant company is formed or takes over any proprietorship firm/partnership firm/ LLP then the track record together with such firm should be at least three years.
Provided that the applicant company seeking listing should have a track record of operations of at least one full financial year and audited financial results for one full financial year. Hence it can be summarized that after forming a company and fulfilling the 3 years track record condition, a company can bring its IPO only after completion of one full financial year.
2) Sometimes it may be the case that the 3 years track record condition is not satisfied then the BSE eligibility criteria states that the project for which IPO is being proposed should be appraised and funded by NABARD, SIDBI, Banks (not cooperative banks) or any financial institution. However, the applicant company should have a track record of operation of one full financial year and thus have full audited financial statements for one full financial year.
Hence a proprietorship firm/partnership firm/LLP can also bring its IPO on satisfaction of above conditions.
Can a proprietorship firm directly be converted into a public limited company?
No, a proprietorship firm cannot directly convert into a public limited company. A proprietorship has to first convert into a private limited company as per the Companies Act, 2003. Basically, a business takeover agreement (BTA) is made in which all the assets and liabilities of a proprietorship firm are transferred to a company. This BTA is a tax exemption agreement for transfer of shares and the proprietor has to maintain 50% ownership for a period of 3 years to avoid any capital gain tax liability. After the conversion to a private limited company, it has to be converted into a public limited company and this two-step process takes around 1.5-2 months.
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