What Are the IPO Requirements in India?

All organisations listed as public companies in the Indian stock market follow several guidelines set by stock market authorities including SEBI and the stock exchanges. These authorities have several eligibility criteria in place that decide if an IPO can proceed.

As per market standards, IPOs are usually meant for private companies with relatively large and established businesses. By listing as a public company, they can raise enough capital for expansion and other corporate purposes.

Besides fulfilling these requirements, companies issuing IPOs must maintain transparency and make full disclosures of their businesses and the public issue. 

Several guidelines are put in place for all participants to follow in the share market. Follow the information given below to learn about the requirements of launching an IPO in India.

What Is the Meaning of an IPO?

An Initial Public Offering (IPO) is the process of conversion of a private company to a public company through the allotment of newly declared shares to public investors through a specific application process. An IPO can also involve the sale of existing shares held by company founders or other early investors through a process known as an offer for sale (OFS).

Companies introduce new shares to the public in exchange at an issue price, to collect funds from investors to accomplish new business ventures. Primary investors on the other hand purchase a lot of shares by applying for allotment through brokers. When the shares are listed on stock exchanges, they can be traded mutually amongst the investors as per the liquidity available.

How Does an IPO Work?

Let’s take an in-depth look at how IPOs work:

• When a company requires additional funds to accomplish a business objective, it turns to the stock market to raise public funds.
• To enter the stock market, a company must transition from private to public, allowing eligible investors to buy its shares.
• A private company has limited shareholders, including promoters, employees, and managing directors.
• Upon becoming public, all public investors can legally invest in and trade the company’s stock.
• In India, a private company must announce an IPO to raise funds and list as a public company.
• The first step for a company is to hire investment banks for the underwriting process, involving auditing the company and its financials to create an underwriting document.
• Next, the company must register for an IPO by creating a Draft Red Herring Prospectus (DRHP), containing all details as per SEBI guidelines.
• This DRHP must be submitted to the Registrar of Companies, SEBI, and stock exchanges.
• After receiving approval, the company can market its IPO to the public through roadshows, often using large institutional investors to generate interest.
• The company will then announce a date for the IPO and the share price.
• An IPO typically remains open for 3-5 working days for subscription.
• Investors submit bids within a specified price band, after which a cut-off price is determined for share allotment.

What Is SEBI’s Role in IPO Listing in India?

SEBI is a regulatory body under the Government of India responsible for monitoring and regulating all stock market-related activities in the country. SEBI was formed to focus on security and fair practice in the financial markets in India. It ensures the interests of investors and enforces several guidelines on public companies, stock brokers, and other participants.

This is a body that is:

• Responsible for verifying the credibility of publicly listed companies in the share market.
• Ensures companies have appropriate equity dilution capacity and accurate asset valuation.
• Aims to protect companies from being non-credible sellers and investors from unnecessary risks.
• Tracks and records the activities of all market participants.
• Ensures controlled and screened entry into the stock market for comprehensive data assessment of a company’s performance.
• Oversees the equal and fair distribution of IPO allotments to all eligible investors.

What Are the Eligibility Criteria for Companies to List as an IPO?

As explained above, SEBI mandates a set of guidelines for companies to follow to launch an IPO in India. These guidelines ensure a safe and transparent trading process and a justified fund acquisition from investors. The list of criteria for companies under SEBI is given below.

• The company should be at least 3 years old. It should remain a registered business for more than 3 years.
• The company’s net worth on a consolidated basis for each of the past 3 years should be a minimum ₹1 crore.
• Its net tangible asset value should be around ₹3 crore for each of the past 3 full years; not more than 50% should be in cash or cash equivalent.
• From the total net asset value of ₹3 crore.
• There should be no default on a loan on any other credit line on this company’s behalf.
• Before issuing an IPO, the value of a company’s total issue size should not be more than 5 times its net worth.
• In case a company has incorporated a new name, 50% of their total revenue earned in the last year should be earned after the incorporation of this new name.
• An average operating profit of a minimum ₹15 crore calculated on a consolidated basis should be available annually for the previous 3 years.

What Are the Prerequisites for IPO Mandated by NSE and SEBI?

The National Stock Exchange (NSE) is one of the two primary stock exchanges in India. To list as a public company in NSE, a company must follow these prerequisites:

• Its paid-up equity capital should not be less than ₹10 crore, with a minimum capitalization on equity being issued of ₹25 crore.
• The company should not be referred to the National Company Law Tribunal (NCLT) or National Company Law Appellate Tribunal (NCLAT).
• Companies must submit their annual reports for the 3 previous fiscal years to NSE.
• The company’s net worth should not have been washed out by its losses, resulting in negative net worth.

Additional Prerequisites of SEBI:

• SEBI also guides companies and their promoters with these requirements.
• Promoters must own individually or collectively at least 20% of the total shares after the IPO distribution and be in this area of business for at least 3 years.
• Draft Red Herring Prospectus (DRHP) is mandatory for companies to prepare and submit to SEBI.
• SEBI can reject a company’s DRHP if:
• The promoters are associated with companies barred by SEBI from the stock market, unless the promoters disassociate themselves.
• The company or its promoters are associated with fugitives or offenders as per the Fugitive Economic Offenders Act, 2018.
• The company, its directors, or promoters are flagged as wilful defaulters by any financial banks.
• Any promoter has had disciplinary action taken against them by SEBI. If a promoter is restricted from the market, the company cannot proceed with its IPO.

What Are the Eligibility Criteria for Investors to Apply for an IPO?

Similar to companies, even investors need to complete certain criteria to be able to invest in an IPO in India. SEBI mandates that investors follow these guidelines to apply for IPOs:

• Investors must be above the age of 18 years to apply for an IPO in India. 
• They must have a functional bank account and sufficient balance to purchase an IPO in India.
• An investor must have a Demat account with any DP (Depository Participant) registered under Indian stock depositories.
• It is also important to have a trading account to sell IPO shares.
• The bank account linked with the Demat account should have internet banking and enabled UPI and ASBA services.
• An investor must have a Permanent Account Number (PAN) to be eligible to invest in an IPO.

It is important to have the above-mentioned requisites to be eligible to apply for an IPO in India. Application Supported by Blocked Amount (ASBA) is a transaction system introduced by SEBI to purchase IPOs in India seamlessly.

Final Word

SEBI is the authorisation body for capital markets in India. It is responsible for ensuring transparency and security for all trades and activities in the market. Hence, to launch an IPO companies need to fulfil all the requisites mandated by SEBI.

SEBI has set such guidelines to ensure a safe platform for all parties involved and they should be strictly followed. Companies should strictly comply with prerequisites set by NSE and other entities involved in the market as well.

Frequently Asked Questions