Launching an Initial Public Offering (IPO) is a transformative step for companies aiming to raise capital and grow. However, not every business can go public overnight. The Securities and Exchange Board of India (SEBI) sets strict eligibility criteria to ensure transparency, protect investors, and maintain market integrity. This guide breaks down the eligibility requirements for launching an IPO in simple, easy-to-understand language.
What is an IPO?
An IPO is the process through which a private company offers its shares to the public for the first time, becoming a publicly traded entity. This allows the company to raise funds for expansion, debt repayment, or other corporate goals while giving investors an opportunity to own a stake in the business.
Key Eligibility Criteria to Launch an IPO
To qualify for an IPO in India, companies must meet the following conditions:
1. Financial Requirements
Net Tangible Assets: The company must have net tangible assets (assets minus liabilities) of at least ₹3 crore in each of the preceding three years. Cash and cash equivalents cannot exceed 50% of these assets unless the IPO is entirely through an Offer for Sale (OFS)
.
Profitability:
For profitable companies: An average pre-tax operating profit of ₹15 crore in three out of the last five years.
For non-profitable companies: Must use the book-building method and allocate at least 75% of shares to Qualified Institutional Buyers (QIBs).
Net Worth: Minimum net worth of ₹1 crore for each of the last three years.
2. Operational History
The company must have operated for at least three years.
If the company changed its name in the last year, 50% of its revenue must come from activities linked to the new name.
3. Promoter and Director Eligibility'
Promoters, directors, or selling shareholders must not be involved in SEBI disciplinary actions, wilful defaults, or criminal proceedings.
They cannot be classified as fugitive economic offenders under the Fugitive Economic Offenders Act.
4. Shareholding and Public Float
At least 25% of shares must be offered to the public (known as the "public float") to ensure liquidity and fair valuation.
Promoters must retain a minimum 20% shareholding post-IPO, with lock-in periods ranging from 6 to 36 months, depending on fund usage (e.g., capital expenditure vs. working capital).
5. Compliance and Documentation
Draft Red Herring Prospectus (DRHP): A detailed document submitted to SEBI, disclosing financials, business risks, and fund utilization plans. SEBI may reject applications with incomplete or misleading information.
Dematerialized Shares: All existing shares must be converted to electronic form (demat).
Special Criteria for SME IPOs
Small and Medium Enterprises (SMEs) have relaxed norms to encourage public listings:
Paid-Up Capital: Post-IPO capital must not exceed ₹25 crore.
Track Record: Three years of operations with a positive net worth in two of the last three years.
Listing Platform: SMEs can list on dedicated platforms like NSE Emerge or BSE SME with simplified compliance requirements.
Steps to Launch an IPO
Appoint a Merchant Banker: SEBI-registered bankers handle documentation, due diligence, and DRHP preparation.
SEBI Approval: Submit the DRHP for review. SEBI may request revisions or clarifications.
Stock Exchange Listing: Apply to exchanges like BSE or NSE, ensuring compliance with their listing norms (e.g., minimum paid-up capital of ₹10 crore).
Price Determination: Choose between a fixed price or book-building method (bidding within a price band).
Promotion and Allotment: Conduct roadshows to attract investors. Allot shares post-subscription, ensuring QIB quotas for non-profitable companies.
Common Reasons for IPO Rejection
Inconsistent financial records.
Pending litigation affecting business continuity.
Lack of clarity in fund utilization plans.
Promoters with unresolved regulatory issues.
Why Meet IPO Eligibility Criteria?
Investor Trust: Compliance with SEBI norms builds credibility.
Market Access: Public listing unlocks capital for expansion.
Liquidity: Shareholders can trade shares freely on exchanges.
Conclusion
Launching an IPO is a rigorous process, but meeting eligibility criteria ensures a smooth transition from private to public. By adhering to SEBI’s financial, operational, and compliance standards, companies can attract investors, secure funding, and achieve long-term growth. Always consult financial experts and merchant bankers to navigate complexities and avoid pitfalls.
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