In an effort to increase bank loan availability for both individuals and businesses, the Reserve Bank of India (RBI) recently announced a number of significant measures. In addition to loosening limitations on lending against shares and debt securities, the central bank has chosen to permit banks to finance acquisitions by Indian corporations.
Following the Monetary Policy Committee (MPC) meeting, Governor Sanjay Malhotra declared that the RBI would establish an enabling framework to assist banks in lending money for acquisitions.
Commenting on the development, Kresha Gupta, Director & Fund Manager, Steptrade Capital stated, “Raising the IPO financing limit per individual investor from INR 10 lakh to INR 25 lakh: – Indian primary market is buzzing, with almost one new issue opening every day. For investors, the calculation is simple: the interest on loans looks small compared to the returns IPOs are delivering. The higher limit enables retail and HNI participants to bid for larger allocations and actively participate in multiple IPOs, rather than being constrained by capital.”
Adding further, he stated, “Enhancing the loan limit against shares from INR 20 lakh to INR 1 crore and removing the ceiling on lending against listed debt securities:- Earlier, even investors with large stock portfolios could borrow only up to INR 20 lakh from banks. With the new limit raised to INR 1 crore, they can now access far greater liquidity by pledging their shares. In addition, by removing the ceiling on loans against listed debt securities such as bonds and debentures traded on exchanges, investors can borrow money on the debt securities also.”
RBI Gave a Nod to SBI’s Proposal
The action was taken in response to a request for such financing from the State Bank of India. Malhotra added that the regulatory cap on lending against listed debt securities has been lifted by the central bank. The loan ceiling against shares was raised from INR 20 lakh to INR 1 crore per person at the same time. The cap on IPO financing has been increased from INR 10 lakh to INR 25 lakh per individual.
High net worth individuals (HNIs) will benefit most from this move, which takes effect on October 1, 2024, as it will enable them to apply for higher amounts in public offerings.
Spree of New Initiatives Initiated by RBI
Additionally, the RBI has chosen to lower the cost of loans for infrastructure projects. It will lower the risk weights associated with loans to reputable infrastructure projects from non-banking financial organisations (NBFCs). A 2016 rule that prohibited lending to big borrowers with bank exposure over INR 10,000 crore has also been revoked by the regulator.
It is anticipated that this will increase the system’s total credit availability. Regarding regulatory timetables, Malhotra stated that banks will have ample time to adapt, as the Basel 3 capital structure and the expected credit loss (ECL) framework will take effect in 2027.
According to experts, the RBI’s actions are intended to promote corporate acquisitions, increase bank lending, increase IPO participation, and facilitate the availability of capital for infrastructure and company expansion.
Quick Shots
•RBI has raised the IPO loan limit from INR 10 lakh
to INR 25 lakh per individual, effective October 1, 2024, boosting
participation, especially from HNIs.
•The cap on loans against shares increased from INR
20 lakh to INR 1 crore per person.
•RBI has removed the regulatory cap on lending
against listed debt securities.
•Banks are now allowed to finance corporate
acquisitions, following a proposal from State Bank of India (SBI).
•Risk weights on loans to high-quality infrastructure
projects via NBFCs will be reduced to lower borrowing costs.
The Securities and Exchange Board of India (SEBI) announced a number of initiatives on 18 June to promote more companies listing on the stock exchanges after reverse flipping to India.
These new initiatives lessen the burden of compliance in the stock market ecosystem, and permit increased foreign investment in government bonds.
The rule that prevents start-up founders and promoters from holding Employee Stock Options (ESOPs) and other share-based rewards when they file their draft red herring prospectus (DRHP) for a public share offering was also abandoned by the market watchdog.
While SEBI has prohibited new ESOP issuances in the lead-up to the filing, it has permitted promoters to retain existing ESOPs that were issued a year before the filing of their DRHP.
Scrapping the Rule for Compulsorily Convertible Securities
The Board also eliminated a requirement mandating investors in fully paid-up Compulsorily Convertible Securities (CCS) to retain shares resulting from the conversion of such securities for at least a year during its meeting, which was chaired by Tuhin Kanta Pandey.
According to the Board, this has prevented some investors from taking part in the public offering of the offer for sale. Companies considering reverse flipping—the practice of shifting a company’s domicile from a foreign country to India in order to allow domestic listing—will benefit from these regulatory changes.
Additionally, SEBI permitted shares owned by public financial institutions, alternative investment funds (AIFs), and overseas ventures to be included in the minimum promoter contribution needed for a public offering.
SEBI chairman Pandey stated that the regulator has established a working group to investigate the unbundling of charges by clearing corporations, despite the fact that clearing firms were not formally on the board’s agenda.
The head of SEBI stated that these fees must be revealed to investors and cannot be a “black box”.
In contrast to the previous position, when the regulator had considered separating clearing firms from parent exchanges, he stressed that the ownership structure of clearing corporations will remain unchanged.
Easing Out Other Rules Making a Wider Road For Startups
Additionally, SEBI has loosened the regulations governing the delisting of public sector enterprises (PSUs) with more than 90% government ownership. According to Pandey, the exemption will help around five listed PSUs and won’t apply to banks, NBFCs, or insurance businesses.
A distinct category for foreign portfolio investors (FPIs) to invest in government securities (gsecs) was also introduced by the market regulator. KYC rules for these investors will be eased, much like the RBI’s. Additionally, these FPIs will receive a longer period of time to notify major changes and respite from making granular disclosures.
Additionally, SEBI authorised modifications to the rules regulating angel funds, started talks on loosening accreditation, and permitted Category-I and -II AIFs to create co-investment vehicles. Furthermore, the board retracted its December 2024 ruling that mandated merchant bankers and other regulated firms divide their non-core or non-regulated activity into distinct entities.
It will be possible for merchant bankers to carry on with their operations that are governed by other financial authorities. However, if the aforementioned conduct is unregulated, like in an unlisted market, merchant bankers will have to tell their clients.
A payment plan for brokers implicated in the National Spot Exchange (NSEL) scam has also been approved by the SEBI board. Furthermore, a venture capital fund settlement plan has been unveiled.
Additionally, before the DRHP was filed, the market regulator required that the shares of several important shareholders, including senior management, be dematerialised.
The eligibility requirements for listing on social stock exchanges and other standards for investment advisors and real estate investment trusts were also loosened by SEBI. Additionally, the market regulator made disclosure paperwork easier to understand for portfolio managers.
Mamaearth is an Indian company engaged in selling Health, Wellness and Fitness products. The company was founded by Varun and Ghazal Alagh in the year 2016 and is headquartered in Gurgaon. It grew exponentially and reached a net worth of INR 115 crore in just four years.
Mamaearth is the flagship brand of Honasa Consumer Limited, which started as a digital-first consumer brand. Its other brand portfolio includes brands such as BBlunt and Aqualogica. The brand is planning to launch an IPO and has filed the Draft Red Herring Prospectus (DHRP) with the Securities and Exchange Board of India (SEBI) on December 20, 2022.
The company has proposed an IPO worth INR 2900 crores. The IPO will consist of a fresh issue of shares worth INR 400 crores and an Offer For Shares (OFS) of approximately 46.8 million shares. The funds raised through the IPO will primarily be used for improving brand visibility and advertising as well as opening exclusive brand outlets.
The company’s founders Varun and Ghazal Alagh along with other investors like Sofina, Fireside Ventures, Evolvence India, Stellaris and angel investors like Kunal Bahl, Rohit Bansal, Rishabh Mariwala and actor Shilpa Shetty will sell a part of their stakes in the company through the OFS.
Mamaearth’s Shareholding Pattern and the Angel Investments in the Startup
The list below gives a detailed view of the angel investments in Mamaearth.
Angels
Invested
YOI
Valuation
Suhail Sameer
₹15 lakh
2016
$2 million
Vijay Nehra
₹15 lakh
2016
$2 million
Shashank Shekhar
₹15 lakh
2016
$2 million
Kunal Bahl
₹69.6 lakh
2017
$5.16 million
Rohit Bansal
₹69.6 lakh
2017
$5.16 million
Shilpa Shetty
₹75.1 lakh
2018
$4.85 million
The Grey Area
There are several concerns floating on social media regarding the high valuation of Mamaearth. The company which was valued at INR 120 crore in January 2022, is seeking a higher valuation of INR 300 crore through its IPO. This target valuation is almost a thousand times higher than its registered profits.
Mamaearth’s Financials in FY22
The company does not have a consistent record of profitability. While it posted a revenue of INR 932 crores with a net profit of INR 14 crores at the end of FY22, it registered a loss of INR 1332 crores in FY21 and INR 428 crore in FY20. In the six months ending September 2022, Honasa Consumer posted a revenue of INR 722 crore with a net profit of INR 3.6 crore. Apart from this, Honasa has also recorded a high advertising spend. In FY22, the company spend approximately INR 391 crore on advertising, which is 40% of its revenue. It has spent a similar percentage of its revenue on advertising in FY21, FY20 and the six-month period that ended in September 2022.
All this information has led to a lot of speculation about the price MamaEarth will set for its IPO.
Sunil Damania, Chief Investment Officer of MarketsMojo says – “We doubt that management will go ahead with the higher price because there has been a lot of backlash on social media, especially given the amount of money Mamaearth is asking; whether you look at the market cap to sales ratio or the price to earnings ratio, which appears to be a little high.”
Tech stocks globally are witnessing a downturn and many IPOs in the recent past have failed to maintain their initial high valuations, falling significantly since their listing. Some prime examples include Zomato, Paytm and Nykaa.
Sunil Damania continues – “Something similar could occur if Mamaearth opts for such a high valuation. However, these are all speculative at the moment because neither the merchant banker nor the company has confirmed that they will proceed with this pricing.”
Anirudh Damani, Founder of Artha Group has a different take. He says – “I am jittery about all IPOs where more than 25% of the money getting raised does not go to the business i.e., it is an OFS from early investors and celebrity backers of the platform. I have understood that almost 80% of this IPO will go towards OFS which does not bode well for public market investors. It will be challenging to see any upside in the stock price with so many questions on super-premium valuation that will primarily provide exits to current shareholders.”
How an IPO Is Valued or Priced?
An Initial Public Offering or IPO listing is when a private company issue shares publicly in the stock market for the first time. This is done either to raise more funds for expansion or to recover from losses or debts. An audit is conducted for the company where all data regarding the company’s financials is carefully scrutinized. This data includes the company’s assets, liabilities, revenue generation, market performance, etc.
There are several methods in the IPO valuation process to define share value. These methods are
Relative Valuation through which the company’s share value is measured by considering the value of similar companies
Absolute Valuation that measures the strength and financial status of the company
Discounted Cash – Based Valuation that analyses expected cash flows, future performance, investment, potential revenue sources and more
Economic Valuation considers various parameters like the business’s residual income, debts to be paid, assets value owned and liabilities, risk-bearing potential, etc.
Price-to-Earning Multiple Valuation that compares the company’s market capitalization to its annual income.
There are various factors that affect the price of shares offered in an IPO. In relation to Mamaearth, these factors are:
Financial Performance Over the Past Few Years
Mamaearth’s financial performance has been erratic and it has not been in sustainable stable growth.
Share Market Trends
Most of the tech stocks have failed to maintain their high valuations and have seen sharp declines in the recent past.
Number of Stocks Issued by an IPO by a Particular Company
The biggest concern is the OFS offer which is being seen as an exit strategy by many of the promoters of the company.
Company’s Potential Growth Rate
The amount raised from the IPO will be used to increase brand awareness and advertising but there is no clear direction.
Company’s Business Model
Mamaearth is primarily a digital-first company. Its Return on Ad Spends (ROAS) has not improved in the last three years suggesting it has very few returning consumers.
Recent Market Price of Companies Listed on the Stock Exchange
Tech companies like Paytm, Zomato and Nykaa have all failed to sustain their stock prices.
Conclusion
MamaEarth is showing great courage by announcing an IPO at a time when tech stocks are witnessing a global slump. However, rising digital penetration, high disposable income, as well as growing awareness in the beauty and personal care segment give the company room for growth and expansion in the future.
FAQ
What is an IPO?
IPO [Initial Public Offering] takes place when a private company issues share publicly for the first time in the stock market. Once the company declares an IPO, the stocks no longer remain private and are collectively owned by all shareholders.
What are the Factors Affecting IPO Valuation?
Here are several major factors that affect the price of the shares offered in an IPO
Company’s financial performance over the past few years
Share market trends
Number of stocks issued in an IPO by a particular company
Company’s Potential Growth Rate
The Recent Market Price of Companies Listed on the Stock Exchange
How can you tell if an IPO is good or not?
Thoroughly review the company’s business model, management credentials, and historical performance. A good starting point when evaluating the best IPO to buy is the red herring prospectus. It contains most of the information you need to evaluate the company.
Is Mamaearth a private company?
Yes, it is a Gurugram-based D2C babycare and skincare unicorn. Mamaearth could be converted into a public company as it readies for an IPO.
Most companies focus on IPO (Initial Public Offering) only after they have attained unicorn status. But, is it actually the criteria for it? After all, this is one of the best measures to generate funds for your company.
In this blog, we will discuss the various aspects of IPO and how you can determine whether your company is ready for IPO status.
Initial Public Offering or IPO is the process through which a private corporation offers its shares to the public for the first time, in new stock issuance. 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 their investments. Sometimes it also works as an exit strategy for the earlier investors or founders by fully realizing their gains. It provides the opportunity for the company to obtain capital through their primary market by offering its shares.
Usually, the companies hire investment banks to help with the market demand and set the price for IPO.
How IPO works?
Total Value of IPOs in Public Markets of India from 2015 to 2021
A company before IPO is considered a private firm. It only comprises of a few shareholders including the founders, cofounders, or professional investors like angel investors or venture capitalists.
IPO does not just allow the company to gather capital but, it also provides an opportunity to expand and grow faster. As stated earlier, typically the companies that have acquired unicorn status i.e., have reached the valuation of 1 billion, advertise their interest in going public.
However, private companies that have proven their calibre for profitability and have well-built fundamentals can also qualify for an IPO. A company should reach the maturity stage where it is able to stand up to the rules and regulations of the Securities and Exchange Commission (SEC).
Also, it should be able to take care of the benefits of the shareholders and its responsibility towards them. Overall the market competition and the company’s ability to deal with the list of requirements make it eligible for starting the IPO process.
When a company decides to go public, its previously private shares are converted into public shares. The worth of the shares already existing with the previous private shareholders becomes equal to the public trading price.
Now, every individual who is interested in investing in the company has the opportunity to contribute towards the company’s shareholders’ equity. Therefore, the new value of the company’s shareholders’ equity depends upon the number and price of shares it sells.
The IPO process is divided into two parts, the premarketing phase and the actual initial public offering. A company first advertises to underwriters, these are the individuals responsible for evaluating and assuming the company’s risk for payment.
These underwriters are requested for private bids after which the company chooses one or more of them to lead their IPO process. There can be several underwriters responsible for managing different parts of the process viz. filing, marketing, document preparation, etc.
The various steps included in the IPO process are as follows:
Proposals
After the company’s advertisement, underwriters submit their proposals describing their services, offering prices, share amount, as well as the time duration for the market offering.
Underwriter selection
The Company goes through the proposals and then chooses the underwriter and an underwriting agreement with terms is prepared.
Team formation
A team comprising of underwriters, lawyers, SEC experts, and Certified Public Accountants (CPA) is formed to lead the process.
Documentation
The primary document for IPO filing is the S-1 Registration Statement which is divided into two parts viz. the prospectus and the privately held filing information. This document also includes information regarding the expected filing date. It undergoes multiple revisions throughout the pre-IPO process.
Marketing & Updates
New stock of issuance is pre-marketed by the underwriters and executives to estimate the market demand for deciding the final offering price of the shares. Throughout the marketing process, underwriters revise the financial analysis based on market response. This might also include changing the issuance date or even the price of the IPO. The SEC as well as exchange listing requirements are well taken care of by the companies.
Board & Processes
A Board of Directors is formed to look after the financial and accounting information as per the audit requirements for quarterly reporting.
Issuance of Shares
The Company issues the shares on the pre-decided date. The primary shareholder issuance is received as cash and is recorded in the balance sheet as stakeholder’s equity.
Post-IPO
There are certain post-IPO provisions. The underwriters also have the opportunity to buy additional shares within a specified time duration.
The key objective of an IPO is to raise additional capital for a company. It also benefits the company through increased prestige and exposure amongst the public which may boost sales and profits. Moreover, IPO can help a company lower the cost of capital for both equity and debt.
Every year several companies start their journey as an IPO. India saw an IPO boom in 2021 with around 125 companies making their debut in the market.
Although the highest number of IPOs were registered in 2017 reaching a mark of 172, the capital raised was highest in 2021. These 125 companies raised around 18 billion USD in comparison to 10 billion USD by 170 companies in 2017.
Other than earning handsome returns, the companies listed in the IPO have also experienced strong gains in listings as well as an increased number of subscribers. Zomato and Tatva Chintan Pharma are an example of this.
But, what does it take for a company to be IPO-ready? In this section, we will discuss the factors that differentiate an IPO company from others.
The process to become IPO-ready is long and tedious. It isn’t so that a company thinks of it and makes an announcement the next day. A number of things have to be managed.
The process of getting IPO ready begins at least 12˗18 months before the actual announcement. Some of the major factors looked after during this time frame include:
Influential Board of Directors
When you are thinking of bringing your company to the public for funding, having a board comprised of members well recognized for their potential and decisions is always a good idea.
This plays a significant role in establishing your firm as a reputed and confident organization. This is why most companies focusing on getting IPO-ready look for admired experts from different sectors.
There are a number of examples in the market to prove this fact. For example, ixigo is an AI-based travel portal. Just sometime before the company filed for IPO they hired former IRCTC Chairman, Mahendra Pratap Mall as one of the board members.
Similarly, former HDFC MD, Aditya Puri joined API holdings, PharmEasy’s parent company, before their announcement of being an IPO contender.
Restructuring the Business
Internalrestructuring mightbe required by some businessesto put theirbest arm to work. However, just like the board, these decisions must also be taken well in advance before the IPO process begins.
For example, in Nuvoco Vistas, the cement arm of Nirma group, internal restructuring was undertaken before IPO. As a part of it, the Rajasthan cement unit was brought under the hold of the firm. The company had a 5000 crore IPO.
Physical or Digital
The experts claim that the coming time would make it mandatory for Indian businesses to work in both physical and digital ways. Taking this into caution, many deals are being made, where a digital business acquired a physical one and vice versa.
These deals are majorly done for scaling up, by filling in the gaps in the portfolio and strengthening different verticals of the company.
For example, Pharmeasy, an online pharmacy startup acquired a 66.1% stake in diagnostics chain thyrocare technologies, for Rs 4,546 crore, to diversify its business.
Experts believe that more such omnichannel transactions will follow in the coming time and such deals will soon become a part of pre-IPO requirements.
Executive Support
Another important but often ignored aspect of IPO is finance function. While most businesses focus on a board full of influential directors there is the least attention paid to the finance division.
The fact is that during the entire IPO process the company face a number of stumbling blocks. That is why they need a team who can back them up during their stresses.
Considering an experienced Chief Finance Officer (CFO) for the company is a great step to include in the IPO process. After going public, the CFO has to face challenges such as greater reporting, governance, regulatory, and audit standards.
Although not seen everywhere but the food delivery company Zomato, opted for a new CFO well before its IPO process. They promoted their Corporate Development Head, Akshant Goyal, to the position of CFO.
Businesses should also look for experienced individuals for the posts such as executives, company secretaries, etc.
Financial Transparency
Irrespective of business size or model, financial transparency forms an essential aspect of the IPO process. This is also a part of the equity strategy of the IPO-bound company.
Generally, financial statements for the past 3 years before the IPO announcement are considered optimum. Yet, experts believe that preparing financial statements and subjecting them to review by the board must begin well in advance.
In many cases, the lack of quality financial statements becomes the reason for missing the IPO timelines while other such reasons maybe not be SEBI ready.
For a startup or any business going public means more responsibility, financial discipline, planning as well as its execution.
There is a tough road ahead so before you finally decide to have IPO, the following checklist must be marked:
Growth
Investors will only be interested in spending their money on a healthy and thriving business. With growth, here we mean revenues. Growing revenue is an indicator that the company has more new customers, or old customers buying more products and that the customer churn rate is low.
Experts believe that revenue growth of 30% for the last two years will ensure that the company will be able to stand against its competitors in the market.
Capital
Although gathering resilient capital is the main reason for any business to opt for IPO but going public at a time when the business really needs capital can be the worst decision.
There should be enough cash in your balance sheet not just to attract investors but also to make you appear trustworthy. Just like you, investors are also here for the money. They want to see that soon their investment will be able to provide them with good returns.
Market Size
Large market size is an indicator of opportunity and potential. This means the company is able to expand without much hassle.
Although calculating the exact market size can be tricky, it is traditionally done by gauging the revenues of the legacy players. Also, factors like high growth, scaling up, etc., are indicators of good market size.
Competitors
Direct or indirect, having a track of competitors is important. The investors would only want to spend their money on a winning bet. The overall IPO opportunity as well as the total addressable market depends upon the competitors.
A more crowded market tends to receive a lower valuation. Unless there is a clear differentiation between the company under question and other competitors in the market, it is difficult to bag the deal.
A systematic, dominant company with an already large market is preferred by public investors.
This refers to the analysis per product revenue and cost. This helps in isolating the core cost of the business and helps gauge how the business would perform at maturity. It also analyses the long-term margins.
Leadership
Good leadership inspires the trust of investors. The CEO and CFO are the faces of the company. The reputed and recognized faces help attract public attention as well as investment.
So before thinking about IPO, think about the board of directors, executives, and finance in charge of your company.
Legal Compliance
The company should be a law-abiding entity and must have all the required licenses and other necessary formalities completed as per law. Not having any legal issues pending strengthens the trust of the investors.
Therefore, it is also essential to get rid of any vetting issues. Any vetting issues must be managed with utmost concern before the company is listed for IPO
It is always good to have a legal team to guide you through the process. They may also be helpful in the preparation of documentation submitted during the time of IPO processing, ensuring that they are as per the rules and regulations of the Security and Exchange Commission. Moreover, the company should be apt with the tax payment and other legal responsibilities.
Conclusion
We have shared with you an extensive checklist while trying to cover major aspects of the IPO process and the necessary details that must be taken care of before deciding to go for it. Still, the IPO process is complex and always requires expert advice.
It is essential to go through every detail carefully while making the final decision. The legal, as well as financial issues, must be handled as a priority without ignoring the other related functions.
FAQs
What are the benefits of buying an IPO?
There are several benefits of buying shares in an IPO such as:
High growth potential
High chance of big returns in the long term
More price-related transparency
Shareholder ownership authority
Small investments may provide great profit
How can I buy shares in an IPO?
Buying shares in an IPO is a complicated task. This is the common procedure for buying shares in an IPO:
Choose the right IPO
You must have a Demat account/trading account and PAN card with a broker that offers IPO access
Arrangement of Funds
Bidding of Shares
Get an allotment of shares
How can I find the best IPO?
To find the best IPO you need to do the following things:
