Eligibility Criteria for IPO

The Securities and Exchange Board of India (SEBI) has established comprehensive guidelines to ensure transparency and investor protection in the Initial Public Offer (IPO) process. This article provides an in-depth analysis of the eligibility criteria for IPOs under Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, focusing on both Main Board and SME IPOs.
SEBI regulation (ICDR) for Main Board IPO:
Eligibility Criteria for an Initial Public offer (Regulation 6)
Financial conditions:
1. As issuer shall be eligible to make an initial offer only if, it has. (Entry – 1)
The entity must meet all the below requirements.
a. Net tangible assets of at least 3 crores, of which not more than 50% are held in monetary assets. However, if more than 50% are held in monetary assets (cash & Cash equivalents), then issuer has either utilised or made firm commitments to utilise such excess monetary assets in its business or project. This shall not apply to the IPO is made entirely through an offer of sale. (OFS)
b. Average operating profit of 15 crores or more. – (Pre-Tax)
c. Net worth of 1 crore or more every year.
The above shall be calculated on a restated and consistent basis, in each of the preceding 3 full years (of 12 months each)
d. If it has changed its name within the last one year, at least 50% of the revenue, for the last 1 full year has been earned by it from the activity indicated by its new name.
2. An issuer not satisfying the above conditions shall be eligible for IPO, if. (Entry-2) This is an alternative route for entities if conditions mentioned in Entry-1 are not met.
a. Issue made through the book-building process. (compulsory)
b. The issuer undertakes to allot at least 75% of the net offer to QIB’s.
c. Refund the subscription money it fails to allot 75%.
General Conditions:
a. It has made an application to NSE/BSE to seek an in-principal approval for listing of its securities on such stock exchanges.
b. It has to enter into an agreement with CSDL/NSDL for such securities.
c. All the securities held by the promoters are in dematerialised. (physical share warrants are converted into electronic form).
d. All existing partly paid-up shares are either fully paid-up or forfeited.
e. Firm arrangements of finance have been made through verifiable means towards 75% of the stated means of finance. (Have a backup option for 75% of the funds from arrangements for the project -shall be in writing.)
f. Amount for general corporate purposes in objects of the issue shall not be more than 25% – (Maximum 25% of funds from the issue can be used for working capital management)
Additional conditions for an offer for sale:
a. The shares have to be fully paid-up shares.
b. Such shares shall be held by the seller (existing holders) for a period of one year prior to filing the draft offer document.
Entities not eligible to make an Initial Public offer (regulation 5)
An issuer shall not be eligible to make IPO if:
a. Issuer, its promoter/Director or selling shareholders (OFS) are not facing any disciplinary actions imposed by SEBI for irregularities.
b. Any promoter/Director of issuer is Promoter/Director of any other company which is barred from SEBI.
c. Issuer or its promoter/Director is a wilful defaulter or a fraudulent borrower.
d. Any of its promoter/Director is a fugitive (eloped outside India) economic offender. An issuer is not eligible if there is an outstanding convertible securities or outstanding right issue.
Provided that the provisions of e shall not apply to:
1. Outstanding ESOPS
2. Fully paid up outstanding convertible securities on or before date of filing prospectus.
How much shareholding can be offered through OFS?

Shareholding
Permitted OFS

1. More than 20 % of pre-issue shareholding of the issuer based on fully diluted basis
2. Less than 20 % of pre-issue shareholding of the issuer based on fully diluted basis
1. Not more than 50% of their pre-issue holdings.
2. Not more than 10% of the company’s pre-issue holdings.

Eg:
1. A had 60 shares (out of 100) before IPO, he can maximum issue 50% of 60 shares as OFS (offer for sale)
2. A had 10 shares (out of 100) before IPO, he can maximum issue 10% of 100 Shares as OFS (offer for sale)
Promoters’ contribution:
a. Minimum Holding by promoters – 20% post issue capital- (20% shall be worked with inclusive of Pre-IPO proportion-20% has to be cumulative)
b. In case the above is not met, a maximum of 10% of the post-issue capital can be brough from the following to meet the shortfall if any
1. Alternative investment funds
2. Foreign venture capital investors
3. Scheduled commercial banks.
4. Public financial institutions
5. Insurance companies registered with IRDA.
Lock-in Period of Promoters contribution:
a. If more than 50% of money raised through IPO is used for CAPEX, then.
1. Minimum of 20 % shall be locked in for 18 Months.
2. promoters holding in excess of minimum requirement shall be locked in for 6 months.
b. If less than 50% of money raised through IPO is used for CAPEX, then.
1. Minimum of 20 % shall be locked in for 36 months.
2. promoters holding in excess of minimum requirement shall be locked in for 12 months.
Requirement to be listed on NSE as Main Board:
1. Paid up share capital post issue shall not be less than 10 crores (i.e., Minimum subscription of a company in an IPO should be equal or more than 10 Crores)
2. The total value of shares (number of equity shares post issue * issue price = Market Capitalisation) traded in the market shall not be less than 25 crores.
3. At least One promoter should have at least 3 years of experience in the same industry.
4. Company must be registered under companies act.
5. Furnish annual reports of 3 preceding financial years to NSE of either of the following:
a. The applicant applying for listing.
b. The promoters of the company, incorporated in or outside India.
SEBI regulation (ICDR) for Small and Medium Enterprises IPO:
SEBI relaxes IPO norms for SME IPO’s compared to Mainboard IPO’s. The other eligibility requirements for SME IPO company directors/promoters/Investors remain the same as of a regular IPO, where said persons shall not be defaulters, offenders or disqualified by SEBI.
Eligibility Criteria for an Initial Public offer – SME (Regulation 229)
a. An issuer shall be eligible to make an IPO only if its post -issue paid up capital is less than or equal to 10 Crore rupees.
b. An issuer whose post issue face value of capital is more than 10 crore rupees and upto 25 Crore rupees, may also issue securities.
General Conditions:
a. It has made an application to NSE/BSE SME segment to seek an in-principal approval for listing of its securities on such stock exchanges.
b. It has to enter into an agreement with CSDL/NSDL for such securities.
c. All existing partly paid-up shares are either fully paid-up or forfeited.
d. All the securities held by the promoters are in dematerialised. (physical share warrants are converted into electronic form).
e. Firm arrangements of finance have been made through verifiable means towards 75% of the stated means of finance. (Have a backup option for 75% of the funds from arrangements for the project -shall be in writing.)
f. Amount for general corporate purposes in objects of the issue shall not be more than 25% – (Maximum 25% of funds from the issue can be used for working capital management)
Entities not eligible to make an Initial Public offer-SME (regulation 228)
An issuer shall not be eligible to make an IPO if:
a. Issuer, its promoter/Director or selling shareholders (OFS) are not facing any disciplinary actions imposed by SEBI for irregularities.
b. Any promoter/Director of issuer is Promoter/Director of any other company which is barred from SEBI.
c. Issuer or its promoter/Director is a wilful defaulter or a fraudulent borrower.
d. Any of its promoter/Director is a fugitive (eloped outside India) economic offender.
Requirement to be listed on NSE as SME:
NSE Emerge platform lists the following eligibility criteria for a company to issue SME IPO:
a. The post issue paid up capital of the company (face value) shall not be more than Rs. 25 crores.
b. The company should be incorporated under the Companies Act 1956 / 2013 in India.
c. The company should have a track record (operations) of at least three years.
d. The promoters should individually or jointly hold at least 20% of the share capital after the issue.
e. One of the promoters should have at least three years of experience in the same industry.
f. The company should have operating profit and positive net worth in at least 2 out of 3 fiscal years.
g. There should be no pending Board for Industrial and Financial Reconstruction (BIFR), insolvency or bankruptcy proceedings against the company or promoters.
h. The company should not have received any winding-up petition from NCLT/Court No material regulatory or disciplinary action has been taken against the applicant company by any stock exchange or regulatory agency in the last three years.
The SEBI regulations for IPOs under ICDR are designed to ensure that only financially sound and compliant entities can enter the public markets. These stringent eligibility criteria and conditions for Main Board and SME IPOs protect investors and maintain market integrity. By adhering to these regulations, companies can achieve a successful IPO, fostering growth and transparency in the capital markets.