Published: 04-Sep-2021
Annual loss (2020-21) at time of IPO:
- Zomato: ₹816cr
- Paytm: ₹1,701cr
How are loss-making startups able to IPO in India? This question stems from the general knowledge that SEBI (India's financial regulator) has a rule that only companies that are profitable for at least 3 years of the preceding 5 years can IPO. Not just that, the profit must be at least ₹15 crores ($2M).
The logic for this profitability rule is fairly clear - it is to protect retail investors (individual investors like you and me) from fishy companies. SEBI operates under the assumption that the average retail investor is not very financially savvy and hence can be fooled by companies.
But SEBI realized (or was made to realize) that many legitimately good companies were being held back from doing an IPO because of this strict profitability rule. So they gave a back-door access for loss-making companies to IPO. How?
When a profitable company does an IPO, the shares on sales are reserved in this manner
- 50% : Qualified Institutional Buyers/QIBs (institutional investors like mutual funds, insurance companies, pension funds).
- 15% : High Networth Individuals/HNIs (super-rich folks who have to invest a minimum of ₹2 lakhs)
- 35% : Retail investors (individuals)
As you can see, a significant share is kept aside for retail investors since this is seen as a relatively safe company.
For a loss-making company that is IPO-ing, SEBI changes the reservation amounts to the following:
- 75% : QIBs
- 15% : HNIs
- 10% : Retail investors
You can see, the retail portion is reduced drastically. This is done to protect the retail investors. And QIBs get a larger reservation since SEBI assumes they are smart enough to figure out which loss-making is good and which isn't. By sticking to this allocation, a loss-making company can IPO in India.
If you want to know more about the IPO process, you can read the Simplanations I wrote (linked below).
I first published this as a thread on Twitter.
