Demystifying Mainboard IPO for Investors in Indian Stock Market

Are you a retail investor in India? If yes, it is essential to understand what is a Mainboard IPO ( Initial Public Offering) is and how it works. Most retail investors prefer Mainboard IPOs, instead of SME IPOs. SME IPOs are usually preferred by investors with a high-risk tolerance. Besides retail, institutional investors also remain interested in IPOs in India.

What is a Mainboard IPO?

Private companies in India cannot issue their shares to the public (retail and institutional investors). Founders, promoters, employees, strategic partners, and private investors hold equity shares. On the other hand, a public company listed on stock exchanges can raise capital from public investors. An established private company in India can become a public entity by launching a Mainboard IPO. Large corporations with an average operating profit of INR 15 crore for each of the past three years are allowed to launch Mainboard IPOs in India.

Many investors confuse Mainboard IPOs with SME IPOs. As discussed above, Mainboard IPOs are only meant for large corporations with a post-issue paid-up capital of INR 10 crores and above. On the other hand, SME IPOs are meant for small and medium-sized entities. These entities are not allowed to gather post-issue paid-up capital of more than INR 25 crores. When a company announces its  upcoming IPO, it will be the first instance of issuing shares to the public. One can say that IPOs in India allow companies to become public and get listed on stock exchanges.

How Does Mainboard IPO Work?

The working of a Mainboard IPO is different from that of SME IPOs. It all starts when a private company with a minimum net worth of INR 15 crore for each of the past three years decides to launch its IPO. Companies launching their IPOs usually partner with investment banks for underwriting. Underwriters help the company decide on the share price or price band (in case of book-building issues). The underwriter also helps the company file the IPO application with the Securities and Exchange Board of India (SEBI).

Companies must submit a Draft Red Herring Prospectus (DRHI) to SEBI. It is a mandatory document that contains information regarding the company’s financials, IPO  lot size, business operations, potential risks, and fundamentals. Corporations must file their DRHPs with SEBI.

After confirmation from SEBI, the company can issue its RHP. It is the final draft that contains information regarding the number of issued shares, issue price, price band, etc. The company also indulges in roadshows to attract investors, retail and institutional. The company notifies the investors regarding the IPO date, size, face value, and other details in advance.

While an IPO can remain open from 3 to 21 days, most IPOs last for 3 – 5 days. During the IPO period (also known as the subscription period), the company receives applications from different investors. Investors are not allowed to apply for an IPO after the subscription period ends. As per SEBI norms, around 25% of shares in a Mainboard IPO are reserved for retail investors. The issuer goes through all the IPO applications after the subscription period ends. Select applicants receive IPO shares in their respective demat account. The process of distributing IPO shares to selected investors is called allotment.

Mainboard IPOs Process

A company planning to raise capital from public investors (retail and institutional) appoints some advisors for proper planning. It includes the underwriters that help decide on the right IPO share price. Not to forget, underwriters also help the issuer file their DRHP with SEBI. After getting permission from SEBI, the company prepares for the upcoming IPO. It can include roadshows, advertisements, and other methods to woo investors.

The process will depend on the issue type. Companies launching fixed-issue IPOs have static share prices. Some companies might opt for a book-building issue, where the share price is not fixed. Book-building issues have a price band to accept bids from investors. After the completion of the IPO, the paid-up capital must be a minimum of INR 10 crores. Companies can use the capital collected from the IPO for expansion, R&D, marketing, operations, and other purposes.

Difference Between Mainboard IPOs and SME IPOs

Have you understood how a Mainboard IPO works in India? If yes, let us discuss the differences between Mainboard and SME IPOs in India: 

Mainboard IPO  SME IPO 

The eligibility criterion is complex for a Mainboard IPO. SEBI has a complex criterion to ensure that only competent firms can launch their IPOs. 

Eligibility rules are relaxed to support the growth of medium and small enterprises. 

After the IPO, the paid-up capital should be INR 10 crores or more. 

The paid-up capital after the issue cannot go beyond INR 25 crores. 

The DRHP is vetted by SEBI in a Mainboard IPO. 

Stock exchanges can check and approve DRHPs of small and medium enterprises.

Companies must show profitability records for the past three years to launch a Mainboard IPO. 

A company with the past two years (out of three years) of positive operating cash flows can launch an SME IPO. 

Reporting requirements include quarterly audited accounts. 

Companies have to submit half-yearly audited accounts. 

Pros and Cons of Mainboard IPO

IPO investments have several benefits and risks. New investors often jump to IPOs without understanding the pros and cons. As a result, there are high chances of poor investment decisions. For the same rationale, it is essential to understand the pros and cons of Mainboard IPOs and make informed decisions.

Pros of Mainboard IPOs

When a company launches its Mainboard IPO, it becomes a public entity. Before the IPO, all its shares were held by founders and promoters. By applying for IPO shares, you can become one of the first public investors in the company. Also, there is a high chance of capital appreciation. The company will use the funding generated from an IPO to improve its revenue and financial performance. As the company’s market cap increases, share prices will also rise. You can get high returns on your shares. 

Recommended Read: IPO Vs. OFS: Know the Benefits & Opportunities

After the completion of the IPO, the issuer’s shares are available on stock exchanges for trading. You can sell the IPO shares or purchase more stocks whenever needed. IPO investments are highly liquid in India. Retail investors have a great chance of allotment in Mainboard IPOs, as 25% of IPO shares are reserved for them. Besides benefitting the investors, a Mainboard IPO also helps the issuer secure funds for its future operations and expansion. 

Cons of Mainboard IPOs

Besides understanding the pros of Mainboard IPOs, it is essential to know the risks. Price volatility is one of the biggest risks for Mainboard IPO investors. Stock prices of newly listed entities tend to be highly volatile. Things might go haywire, and investors might experience losses due to price uncertainty. However, investors can avoid this issue by investing in companies with strong fundamentals. Try researching the company before investing in its Mainboard IPO. 

Some investors also complain about the lack of historical data for fundamental/technical analysis. Lock-up periods are another hassle for IPO investors. A company might prohibit investors from selling IPO shares during the lock-up period. Analyse all the risks before investing in Mainboard IPOs!