Eligibility Requirements for Initial Public Offering (IPO) on the Main Board of Recognized Stock Exchange

1. Entities Ineligible for Making an Initial Public Offer:

According to Regulation 5(1) & 5(2) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR), certain entities are restricted from making an IPO:

• Debarment by SEBI: If the issuer, any of its promoters, promoter group, or selling shareholders are debarred from accessing the capital market by SEBI, they are not eligible to make an IPO.
• Cross-Company Directors/Promoters: If any of the promoters or directors of the issuer is a promoter or director of another company that is debarred from accessing the capital market by SEBI, the issuer is also ineligible.
• Willful Defaulter: If the issuer or any of its promoters or directors is identified as a willful defaulter, they cannot proceed with an IPO.
• Fugitive Offender: If any of the promoters or directors of the issuer is classified as a fugitive offender, the issuer is ineligible for an IPO.
• Convertible Securities: If there are outstanding convertible securities or any other rights that would allow any person to acquire equity shares of the issuer, they are disqualified from an IPO.

Note: Restrictions related to debarment by SEBI do not apply if the debarment period has already concluded at the time of filing the draft offer document with SEBI.

2. Eligibility Requirements for an Initial Public Offer:

As Per Regulation 6(1) & 6(2) of the SEBI (ICDR), 2018, the following conditions must be met for an IPO:

• Net Tangible Assets: The issuer must have net tangible assets of at least ?3 crores, calculated on a restated and consolidated basis, in each of the preceding three full years (12 months each). Additionally, no more than 50% of these assets should be held in monetary form.

  • If over 50% of the net tangible assets are in monetary form, the issuer must have utilized or committed to utilizing this excess in its business or projects. The 50% limit does not apply if the IPO is entirely an offer for sale.

• Operating Profit: The issuer should have an average operating profit of at least ?15 crores, calculated on a restated and consolidated basis, during the preceding three years, with profits in each of those years.

• Net Worth: The issuer must have a net worth of at least ?1 crore in each of the preceding three full years, calculated on a restated and consolidated basis.

  • If the issuer has changed its name within the last year, at least 50% of its revenue for the preceding year, on a restated and consolidated basis, must come from the activity indicated by the new name.

3. Non-compliance with Eligibility Conditions:

• If the issuer does not satisfy the aforementioned conditions, they can still make an IPO if it is conducted through the book-building process, provided that at least 75% of the net offer is allotted to Qualified Institutional Buyers (QIBs). If this condition is not met, the issuer must refund the full subscription money.

4. General Conditions for an IPO:

Under Regulation 7 of the SEBI (ICDR), 2018, the issuer must fulfill the following general conditions:

• Stock Exchange Application: The issuer must apply to one or more stock exchanges for in-principle approval for listing its specified securities and choose one as the designated stock exchange.

• Dematerialization Agreement: The issuer must enter into an agreement with a depository for the dematerialization of the specified securities already issued and those proposed to be issued.

• Promoters’ Securities: All securities held by the promoters must be in dematerialized form before filing the offer document.

• Partly Paid-up Shares: All existing partly paid-up equity shares must either be fully paid up or forfeited.

• Finance Arrangements: The issuer must make firm financial arrangements through verifiable means for at least 75% of the stated means of finance for a specific project, excluding the amount to be raised through the public issue or internal accruals.

• General Corporate Purposes: The amount allocated for general corporate purposes in the draft offer document must not exceed 25% of the amount being raised.

5. Additional Conditions for Offer for Sale:

Under Regulation 8 of SEBI (ICDR), 2018, the following additional conditions apply to an Offer for Sale:

• Fully Paid-up Shares: All shares must be fully paid-up.
• One-Year Holding Period: Shares must be held by the sellers for at least one year before filing the draft offer document.
• Convertible Securities: The holding period of convertible securities, including depository receipts and resulting equity shares, must also meet the one-year requirement.

Exemptions: The one-year holding period requirement does not apply in certain situations, including:

• Offers for sale by a government company, statutory authority, or special purpose vehicle engaged in the infrastructure sector.
• Equity shares acquired under a court-approved scheme under the Companies Act, provided the invested capital existed for over one year before the scheme's approval.
• Equity shares issued under a bonus issue from securities held for at least one year, provided they are issued out of free reserves or share premium, excluding revaluation reserves or unrealized profits.

6. Promoters’ Contribution in an IPO:

Under Regulation 14 of SEBI (ICDR), 2018, the following guidelines are provided for promoters' contribution:

• Minimum Contribution: Promoters must hold at least 20% of the post-issue capital. If this is not met, the shortfall can be covered by Alternative Investment Funds (AIFs), Foreign Venture Capital Investors (FVCIs), Scheduled Commercial Banks (SCBs), Public Financial Institutions (PFIs), or insurance companies registered with the IRDAI, up to 10% of the post-issue capital, without being identified as promoters.

  • The minimum promoters’ contribution requirement does not apply if the issuer has no identifiable promoter.

• Securities Ineligible for Contribution: Securities acquired in the preceding three years under certain conditions are ineligible for minimum promoters’ contribution. This includes securities acquired for consideration other than cash, securities resulting from a bonus issue utilizing revaluation reserves, or securities acquired at a lower price than the public offer price.

7. Lock-in and Transferability Restrictions:

Under Regulation 16 of SEBI (ICDR), 2018, the following lock-in and transferability restrictions apply:

• Minimum Promoters’ Contribution: Locked in for 18 months from the date of allotment in the IPO. If the majority of issue proceeds are for capital expenditure, the lock-in period extends to three years.
• Excess Promoters’ Contribution: Any contribution beyond the minimum requirement is locked in for six months from the date of allotment.
• Superior Rights (SR) Equity Shares: These shares are locked in until conversion into equity shares with standard voting rights or for the period specified in the regulation, whichever is longer.

8. Lock-in Period for Pre-issue Capital:

Under Regulation 17 of SEBI (ICDR), 2018, the entire pre-issue capital held by persons other than the promoters is locked in for six months from the date of allotment in the IPO.

"Unlock the Potential of Legal Expertise with LegalMantra.net - Your Trusted Legal Consultancy Partner”

Article Compiled by:-

~Neel Lakhtariya

+91 9582627751

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.