Investments
IPO eligibility criteria
Going public through an initial public offering (IPO) represents a significant milestone for any company seeking to raise capital from the public. However, not all companies can immediately qualify for this process.
The Securities and Exchange Board of India (SEBI) has established comprehensive eligibility criteria for IPO applications under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). These rules ensure that only financially sound and well-governed companies are allowed to enter the public market, protecting investors and maintaining market integrity.
Understanding these requirements is crucial for companies planning their public market debut and investors looking to participate in upcoming offerings.
Eligibility Criteria for IPO Application as Mandated by SEBI
SEBI has established stringent eligibility criteria for IPOs under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations), to safeguard investor interests and maintain market integrity. These requirements ensure that only companies with proven financial stability and operational track records can access public funds.
Key IPO eligibility requirements:
- Paid-up capital: Companies must have a minimum paid-up capital of ₹1 crore to be eligible for an IPO. This is a fundamental requirement under SEBI ICDR Regulations.
- Net tangible assets (NTA): Companies must possess net tangible assets of at least ₹3 crores in each of the preceding three financial years, with no more than 50% held in monetary assets. If monetary assets exceed 50%, the excess must have been deployed for business operations.
- Profit criteria: Companies must have a positive pre-tax operating profit in at least three of the immediately preceding five years. SEBI does not mandate continuous profitability; however, losses must not be negative to qualify. SEBI allows certain loss-making companies to list under the “Innovators/Startups” or Special Purpose Issuance norms, but the standard eligibility requires positive pre-tax operating profit in at least 3 of the last 5 years.
- Net worth: Companies must maintain a positive net worth in each of the preceding three financial years. This ensures that the company has a financially sound foundation to enter the public market.
- Name change compliance: For companies that changed their name within the last year, at least 50% of revenue in the preceding year must come from the activity indicated by the new name.
- Issue size: The total issue size must not exceed five times the pre-issue net worth, ensuring companies don’t raise disproportionate amounts relative to their actual value.
- Promoter contribution: For listed companies, the promoter lock-in is 3 years for mainboard IPOs and 1 year for SMEs from the allotment date. The “commencement of commercial production” clause applies only to certain cases (e.g., manufacturing startups), not universally.
Mainboard IPO Requirements
The main board requirements for IPOs on national exchanges are more stringent than those for smaller platforms.
- SEBI requires pre-issue paid-up capital ≥ ₹10 crore and post-issue paid-up capital ≥ ₹10 crore.
- The minimum issue size should be at least ₹10 crores, and the company's market capitalisation should exceed ₹25 crores at the time of listing.
SME IPO Requirements
The small and medium enterprise (SME) platform offers a more accessible route to public listing for smaller companies.
- The eligibility for IPO application on the SME exchange includes a maximum post-issue paid-up capital of ₹25 crores, significantly lower than the mainboard requirements.
- SEBI requires positive net worth and operational track record, but cash accruals are not mandatory in all SME IPOs; the requirement is mainly for mainboard SMEs under certain conditions.
- Unlike mainboard IPOs, SME issues require mandatory underwriting, with the underwriter committing to at least 15% of the issue size.
Additionally, companies must arrange for market-making for a minimum period of three years from the listing date to ensure liquidity for investors in these typically less-traded securities.
Pre-requisites mandated by NSE and SEBI for IPO application, apart from the eligibility norms
1. Articles of Association (AoA) requirement
- Companies must include provisions for the dematerialisation of securities in their Articles of Association (AoA).
- This is because physical shares are not allowed for listed companies.
2. Corporate governance standards
- Companies must have independent directors making up at least one-third of the board.
- There must be at least one woman director on the board.
3. Mandatory committees
Companies must form the following committees:
- Audit committee: Manages financial operations
- Nomination and remuneration committee: Handles appointments and pay for directors
- Stakeholders' relationship committee:Deals with investor relations
- Risk management committee (for top 1000 companies):Manages business risks.
4. Internal financial controls & risk management
- Companies need to set up internal financial controls to ensure proper financial management.
- A risk management framework is also required to identify and manage potential risks.
5. Compliance officer appointment
- A compliance officer must be appointed to monitor regulatory compliance and address investor concerns.
6. Investor protection
- SEBI’s requirement is a minimum of 1,000 allottees (not participants) or 25% public holding, depending on issue type.
- After listing, 25% of the shares must be publicly held to ensure enough public participation and market liquidity.
Regarding disclosures, companies must provide comprehensive information in their DRHP, including business details, risk factors, capital structure, objects of the issue, financials, legal proceedings, and material contracts. Any misrepresentation or omission of material facts can lead to severe penalties and even cancellation of the IPO approval.
For individuals looking to invest in an IPO, having a Demat Account is essential for receiving and holding shares electronically. A Demat Account simplifies the share allotment process, making it quicker and more secure. It eliminates the need for physical share certificates, allowing easier tracking of your investments and seamless trading.
Grounds of rejection of DRHP by SEBI
SEBI rigorously scrutinises each DRHP submission and may reject applications that fail to meet the prescribed standards. Common grounds for rejection include inadequate disclosure of material information, misleading statements, or omissions that could influence investor decisions.
- Companies with ongoing regulatory investigations or significant pending litigation face potential rejection.
- SEBI also rejects applications from companies with a history of non-compliance with securities laws or those whose promoters or directors have been debarred from accessing capital markets.
- Inconsistencies in financial statements or qualified audit reports often trigger rejections. SEBI particularly scrutinises unusual accounting treatments or significant deviations from accounting standards.
- Applications may also be rejected if the proposed utilisation of IPO proceeds lacks clarity or appears questionable.
SEBI's rejection decisions aim to protect investor interests and maintain market integrity by ensuring only quality companies with transparent operations have access to public funds.
Conclusion
Understanding the IPO eligibility criteria is crucial for companies planning to go public in India. SEBI's comprehensive regulatory framework ensures that only financially sound and well-governed companies can access public capital. While these requirements may seem demanding, they ultimately strengthen market integrity and protect investor interests.
Companies aspiring to launch IPOs should begin preparations well in advance, ensuring they meet all financial thresholds, governance standards, and disclosure requirements. With proper planning and compliance with regulatory norms, the IPO journey can be navigated successfully, opening doors to significant growth opportunities and market recognition.
FAQs
Who is eligible for IPO?
Companies with a three-year operating history, minimum net tangible assets of ₹3 crores, average pre-tax operating profit of ₹15 crores for three years, and net worth of ₹1 crore in each of the preceding three financial years are eligible for IPOs. These are subject to additional governance and disclosure requirements.
What is the eligibility qualification for an open IPO?
Eligibility qualifications include meeting financial thresholds (net tangible assets, profitability, net worth), ensuring minimum promoter contribution of 20% with a three-year lock-in period, and complying with corporate governance norms.
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