The year 2021 has been a special year for the Initial Public Offering (“IPO”) market in India, with the Indian market witnessing several new age technology-led IPOs including Zomato, PolicyBazaar, Nykaa and Paytm to name a few. There has been a huge buying interest from both Retail Investors and Foreign Portfolio Investors. The Investors that have pumped money into listed equities and IPOs will look back at 2021 with fondness—they would have seen a 25 percent gain in the Nifty50 and, as per data, a 38 percent return if they had invested in all the IPO offerings. Figures for the year 2021 has shown that a total of 63 Indian companies have raised an all-time high of Rs 1,18,704 crores which is a first in the history of India for any calendar year. This year also showed a record number of filings with Securities and Exchange Board of India (SEBI). As many as 115 companies filed their offer document with SEBI for approval which has been the highest in the past three years. The IPO market is an opportunity for both foreign portfolio investors and private companies alike.
Guides and Procedures
An IPO is carried out by a privately held company, or a company owned by the government desirous of raising funds by offering shares to the public or to new investors. Following the IPO, the company is listed on the stock exchange and is called a Public Company.
IPOs are governed under the legal framework as prescribed by the Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations, 2009 commonly known as the “ICDR Regulations” and “Listing Agreement”. As per the Regulations, certain percentages are allocated to three categories of investors such as institutional (50%), non-institutional (15%) and retail investors (35%).
Under the said regulations a Company should have the net worth of INR 10 million in each of the previous 3 years. Usually, the time taken from start to completion is about seven to eight months depending on the size of the IPO.
At the beginning of the IPO, the private company is required to appoint financial advisors such as Investment Bankers and Underwriters to act as intermediaries between the company and its investors. Thereafter, legal experts shall be appointed to carry out a due diligence on the Company for an overall compliance check. A Draft Red Herring Prospectus (“DRHP”) shall be drafted by the legal and financial experts and filed with the SEBI. DRHP is one of the most important documents as it acts as a source of information helping investors decide on whether they should invest in the company or not. A DRHP is then vetted by SEBI after which it is approved if there are adequate disclosures made and no errors found. Once the document is approved, the Company is required to submit a final Red Herring Prospectus (“RHP”) at least 3 days before the offer is made available to the public for bidding.
Once the RHP is filed, the Company along with its team of Merchant Bankers and financial experts advertise the IPO in order to garner the attention of potential investors.
The pricing of the IPO is carried out by either of the following 2 methods, Fixed Price method or a Book Building Issue. In the Fixed Price method, the companies offer a fixed price of a share that is usually approved by SEBI. In a Book Building Issue, a price band is usually fixed, known as a “IPO floor price” or minimum price and a “IPO Cap price” or maximum price within which an investors can bid.
The Final Procedure
For a period of 5 working days the RHP and application forms for the subscription of shares are made available to the public both on the SEBI website and off-line. Once the IPO price is finalised, the company along with the underwriters will determine the number of shares to be allotted to each investor. In the case of over-subscription, partial allotments will be made, and the remaining shareholders shall be refunded. The IPO stocks are usually allotted to the bidders within 10 working days of the last bidding date. The shares are allotted in the dematerialised (Demat) account of the investor.
Taxation of Capital Assets in India
In the context of investing in the public marketspace and listed companies, it is of interest to many investors to consider domestic capital gains, as well as dividend taxes applied on the sale of capital assets in India.
Generally speaking, capital gains tax is a type of taxation which is levied on the profit realized from an investment that is incurred at the sale of the investment. For example, when shares or other taxable assets are sold, the capital gains are considered realized, and thus the gains are subject to capital gains tax. In the majority of the jurisdictions worldwide, the capital gains tax does not apply to unrealized gains.
In India, gains from the sale of capital assets are classified as either
- Short-Term Capital Gains (STCG)
- Long-Term Capital Gains (LTCG)
Generally, STCG tax is applied to profits realized from holding a capital asset for no longer than 3 years, while LTCG tax is applied to profits realized from holding a capital asset for longer than 3 years. However, in case of publicly listed equity shares and units in mutual funds investing in publicly listed equity shares, a STCG tax is applied to profits realized from holding an asset for no longer than 1 year. In this context, LTCG tax is applied to gains from holding an asset longer than 1 year.
The STCG tax on publicly listed equities is set at a 15% flat rate. Naturally, the intention here is to encourage investors who invest long-term in Indian companies and the Indian economy and discourage those who want to realize quick profits by speculating in the market.
LTCG tax on the sale of publicly listed securities is set at 10% of the amount which exceeds RS 100,000 (~USD 1,300). In other cases, it is set at 10% for non-residents (without cost inflation adjustment) and 20% for residents (with cost inflation adjustment). The non-resident investors may benefit further in cases of tax treaties between India and the resident country.
Finally, the dividends withholding tax rate is set at 10% in India on dividend income from shares and units of mutual funds. For non-resident investors, the withholding tax on dividends is set at 20%. Similar to capital gains tax, non-resident investors may benefit from applicable tax treaties.
There are many key advantages and disadvantages of listing an IPO. Some of the major advantages are that the company can access investments from an array of investors and can obtain funds from the public at large which in turn leads to the stability of business and greater brand value, however, disadvantages include the cumbersome process of disclosing information and the fluctuation in share price. Irrespective of the above disadvantages, the IPO market is certainly booming and more and more companies are opting for IPOs as the advantages are clearly outweighing the disadvantages.