Initial Public Offering- Meaning, Types and Benefit

Initial Public Offering (IPOs) has emerged as one of the most sought-after sources to raise capital and unlock new growth opportunities. India’s IPO landscape is evolving, with clear distinctions between SME IPO and Mainboard IPO. Through IPO, the companies give an offer to buy its shares for the first time, investors get an opportunity to invest in the growth-oriented companies and participate in the earnings of the company. However, an investor shall do proper IPO review and IPO analysis to decide whether to apply for IPO or not.

Why do companies go for an IPO?

An Initial Public Offering (IPO) is the process through which a privately held company offers its shares to the public for the first time. Once listed, these shares are traded on stock exchanges like the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) in case of a mainboard IPO. NSE Emerge and BSE SME are the SME platforms for listing of SME companies.

Listing and IPO increases the transparency with regulatory compliance requirements, and unlocks liquidity for existing shareholders.

 Key Features of IPO:

•  Transition from Private to Public
  An IPO is a significant turning point for any company, marking its transition from privately held to publicly listed company. Once a company completes its IPO, its shares are made available for purchase by the general public on recognized stock exchanges. The company becomes accountable to a wide range of public shareholders and must adhere to strict regulatory norms, corporate governance standards, and financial disclosure requirements.

•   Regulatory Filings result in transparency
  Companies planning to launch IPO are required to comply with strict regulations set by the SEBI. As a part of regulatory compliance, companies must file key disclosure documents such as Draft Red Herring Prospectus (DRHP) and the Red Herring Prospectus (RHP). These documents provide detailed information about the company's financials, business operations, risks involved, objectives for raising funds, and background of the promoters and management. The mandatory disclosures ensure transparency, enabling investors to make informed decisions and fostering trust and confidence in the capital market.

•    Investment Opportunity for Investor
  An IPO provides both retail and institutional investors a chance to invest at the early stage of a company’s entry into the stock market. By participating in an IPO, investors get the opportunity to be part of the company’s growth journey from the beginning. If the company performs well after listing, investors may gain through an increase in share price (capital gains) or by earning dividends declared by the company in the future.

What are the strategic reasons behind a company opting for an IPO?

While capital-raising is the most visible reason for going public, the benefits of launching an IPO in India are multi-dimensional:

• Expansion and Growth: One of the major IPO objectives of a company is for business scalability, to enter new markets, investing in R&D, or acquire complementary businesses.
   
• Save Interest Costs- Equity fund- raise does not involve periodic payments which results in higher profitability.
  
  
• Liquidity for Existing Shareholders: Early-stage investors and promoters can partially exit and monetize their holdings, often unlocking wealth they helped build.
   
• Increased Credibility and Visibility: Public listing enhances the company’s reputation among vendors, customers, partners, and the general public. It sends a signal of corporate maturity.
   
• ESOPs and Employee Retention: Public companies can offer stock options that hold tangible market value, helping to attract and retain top talent.

What are the key types of initial public offerings in the market?

There are two types of IPO- SME IPO and Mainboard IPO. SME IPO is suitable for companies which are at a growing stage and smaller in operations as compared to a large scale company. These SME companies must be eligible for SME IPO as laid down under the SEBI ICDR Regulations (2018).

Key features of SME IPO in India

➤ SME companies: Companies with a post-issue paid-up capital between ₹1 crore and ₹25 crores.

➤ Listing Platforms: BSE SME or NSE Emerge. Each stock exchange has IPO Eligibility Criteria for Initial Public Offer and listing purposes.

➤ Compliance Requirements: Streamlined regulatory requirements compared to the Mainboard, including relaxed profitability norms and simplified disclosures.

➤ Investor Base: Primarily HNIs, institutional investors, and retail participants

➤ Migration to Mainboard: Listed SME companies can later shift to the Mainboard platform on fulfilling the criteria of Migration to Mainboard.

Mainboard IPO is for large scale companies that have grown with vintage. Large companies with strong financial track records, broader operations, and the ability to meet  regulatory requirements of SEBI can opt for Mainboard IPO.

A company has to fulfil the Mainboard Eligibility criteria for launching IPO on NSE and BSE stock exchanges of India. Under QIB route of Mainboard IPO, a loss making company is also eligible for IPO provided it fulfills the criteria.

Understanding the difference between these two types is essential not only for companies preparing to list, but also for investors evaluating risk and potential. Each route comes with its own set of eligibility criteria, regulatory compliance, investor expectations, and long-term implications.

 Key Features of Mainboard IPO in India

➤ Large Companies-  Companies with a minimum post-issue paid-up capital of ₹10 crore or more.

➤ Listing Platforms: BSE (Mainboard) and NSE (Mainboard).

➤ Compliance: Full SEBI listing obligations apply, including detailed disclosures, 3-year profitability records, governance norms, and corporate governance transparency.

➤ Investor Base: Includes retail investors, mutual funds, banks, FIIs, large institutions also known as QIBs.

What is the Difference between SME IPO and Mainboard IPO?

Before investing, it is important to understand that SME IPOs (Small and Medium Enterprises IPOs) and Mainboard IPOs serve different types of companies and investors. While both involve raising funds from the public, they differ in terms of company size, regulatory requirements, listing platforms, and investor eligibility.

Knowing these differences helps investors choose the right IPO based on their risk appetite and investment goals: