Curious to know how loss making companies are coming with IPOs

We always used to believe that loss making companies can’t list on the exchanges in India.

Then how loss making startups like Zomato, Nazara technologies, Paytm, Cartrade etc are able to file for IPOs??

As per SEBI, there are 2 (two) entry norms for an entity to file for an IPO

1)Profitability route

If an entity wants to follow this route they are required to fulfil three major conditions:

• Net Tangible Assets of at least Rs. 3 Cr in each of the preceding 3 full years of which not more than 50% are held in monetary assets. Which simply means that they should have physical assets of more than Rs. 1.5 Cr and less than or equal to 1.5 Cr in cash & cash equivalent

-Minimum of Rs. 15 Cr as average pre tax operating profit in at least 3 of the immediately preceding 5 years. Here pre tax operating profit is nothing but what we call EBIT i.e. Earnings before interest & taxes

-Net worth of at least Rs. 1 Cr in each of the preceding 3 years. This is something which majorly most of these companies fulfils

Examples of some of the companies which went through this route are Kalyan Jewellers, Macrotech Developers (or Lodha group) etc. Where we could see that though in the last financial year they had incurred losses but if you see the previous 3 years before last fiscal, they had profitability.

2. QIB route (Qualified Institutional Buyer route)

Here as per SEBI, if you being an entity can raise more than or equal to 75% of the net offering through QIBs i.e. Qualified institutional investors then also you can come up with your IPO.

And this regulations’ recommendation was proposed in Union Budget 2012–13 citing that even if there are loss making companies but has good brand value or if they have good credibility then there should not be any hindrance for them to raise money easily through markets.

And that is where the regulatory body has enhanced certain conditions for them like in the Profitability route QIBs portion is generally 50% which in this route got increased to 75%.

This eventually increases the credibility of the company given that so many institutions are ready to infuse their money and the retail investor can invest with some confidence.

This is the reason that in the IPOs of loss making companies like Zomato, Nazara technologies, barbeque nation etc you would have observed that the QIB portion was greater than or equal to 75%.