The IPO Markets — Part 1

Why do businesses need capital from strangers?

Every successful business hits a point where its appetite for growth exceeds the cash its own operations generate. Reliance in its first decade financed expansion from a textile mill in Naroda; by the 1990s the scale of the petrochemicals expansion demanded outside money. Infosys did the same in 1993, raising ₹13 crore at its IPO — a number that would buy roughly 30 minutes of trading volume today, but in 1993 it bought the company a global footprint.

Growth needs capital. Capital comes from one of three places: profits ploughed back (organic), debt (banks, bonds), or equity (selling part of the company). Each has trade-offs. Profits are slow. Debt locks in fixed obligations that hurt if growth disappoints. Equity dilutes ownership but carries no fixed repayment and shares the risk with shareholders.

The funding ladder before IPO

Stage 1 — Founder capital + friends, family, fools (FFF). The cheque is small (₹5-50 lakh) and the valuation is whatever the founder talks the relatives into.

Stage 2 — Angel + Seed. Angel investors and seed funds write ₹50 lakh to ₹5 crore cheques in exchange for 8-15% of the company. Investors are individuals and small funds; instruments are SAFE notes, convertible notes, or preference shares.

Stage 3 — Series A through D (VC). Venture capital funds — Sequoia, Accel, Nexus, Matrix, Lightspeed in India — write ₹10-200 crore cheques. By Series C the company is usually post-revenue, sometimes post-profit, and the valuation can be in thousands of crores. Each round dilutes earlier shareholders but expands the cash runway.

Stage 4 — Late-stage growth / Pre-IPO. Private equity, sovereign wealth funds (Temasek, GIC, ADIA), and growth funds enter. Cheques of ₹500 crore+ at unicorn-stage valuations.

Stage 5 — IPO. The company sells shares to the public, lists on NSE/BSE, and unlocks daily liquidity. From here on, market cap is a live, observable number.

Why go public?

To raise large amounts of capital. An IPO can raise thousands of crores in a single shot — far more than any private round.

To give existing investors an exit. Angels, VCs, and PE funds have a 7-10 year fund life. The IPO is how they convert paper gains into cash, recycle into new investments, and return capital to their LPs.

To build employee wealth. ESOPs become tradeable. Many engineers became crorepatis when Zomato, Nykaa, Mamaearth, and others listed.

To use stock as currency. Public companies acquire other companies using their own shares as payment. Cash isn’t always available; stock is.

To gain prestige and visibility. Listed status confers credibility with customers, suppliers, lenders, and prospective employees.

To establish a market-tested valuation. Daily price discovery replaces the once-a-year private-round mark.

The costs of going public

IPO costs are real. Merchant banker fees (1-3% of issue size), legal, auditing, listing fees, marketing, roadshows, and ongoing compliance (quarterly results, audit committee, SEBI listing obligations) add up to crores. Once listed, executive time goes to investor relations, analyst calls, and disclosure scrutiny. Some companies discover they were happier private.

Plus there’s loss of control. Quarterly result pressure can push management toward short-termism. Activist shareholders, proxy advisors, and hostile takeovers all become possibilities. India hasn’t had many hostile takeovers thanks to high promoter holdings, but proxy advisors like IiAS and SES routinely flag governance issues that promoters used to ignore.

The pre-IPO checklist

Before SEBI lets a company file, it must meet:

• Track record of three profitable years, OR meet the QIB book-building route (75% of issue to QIBs).
• Minimum net tangible assets of ₹3 crore in each of the preceding 3 years.
• Net worth of at least ₹1 crore in 3 of the last 5 years.
• Audited financials prepared under Ind AS, with no qualifications.
• A working board with the right committees — audit, nomination, stakeholder relationship.
• No pending criminal cases, RBI defaults, or wilful defaulter status.

Companies that don’t meet the profit test can use the QIB route — letting institutional buyers do the diligence — but at 75% to QIBs versus 50% in the standard route, the issue becomes much more institutional than retail.