What are IPO Requirements in India?

In India, a company can offer its shares to the general public for the first time through an Initial Public Offering (IPO), if it satisfies certain conditions.  The Securities and Exchange Board of India (SEBI) sets the IPO requirements. These requirements include clear and honest information about a business’s operations and company finances. Moreover, this also serves as a protection against investors’ loss and enables them to make informed decisions. By following these regulations, companies can access funds while promoting transparency and fairness in the market. In this blog, you will understand the IPO eligibility, requirements, and consequences of not following the regulations.

Key Highlights

• A company must remain in business for three years minimum before it can consider going an Initial Public Offer (IPO) in India. They should also generate profits for at least two years.

• Companies should have a net worth of Rs. 3 crores or more; otherwise, they will be disqualified. 

• SEBI can reject an IPO application if the Draft Red Herring Prospectus (DRHP) has inaccuracies or if the company fails to comply with legal requirements.

• Companies that do not follow IPO regulations may face fines, legal penalties, and reputational damage, impacting their ability to raise funds in the future.

IPO Requirements in India

The IPO eligibility criteria must be met by companies who wish to go public through an IPO in India. This is done to make sure that the companies are financially stable and transparent. Therefore, one of the most important conditions for getting permission from a body like SEBI is meeting the rules and regulations. Let’s discuss some of the regulations in brief:

• The company should be in business for at least three years.

• It must have earnings for a minimum of two years within the period.

• The firm should have a net worth amounting to at least Rs. 3 crores.

• There should be at least a twenty per cent share trading available to the public.

Besides this, there are other financial and legal obligations which need to be fulfilled. For example, the merchant banker registered with SEBI should audit the financial records of the company.

Eligibility Criteria for IPO Application as Mandated by SEBI

In India, SEBI creates a set of rules that companies must follow to launch an IPO. These rules safeguard investors against any manipulation during the trading process. It also facilitates proper funding from investors to justify their investments. So, let’s discuss the eligibility for IPO set by SEBI in brief:

• The company should be registered as a legal entity for more than three years.

• The consolidated net tangible asset value of the company should be a minimum of ₹1 crore over the last three financial statements.

• Only one-third of the assets should be in cash or similar liquid forms, and they should not be more than ₹3 crore over the last three years.

• It should have some net asset value of ₹3 crores.

• There should be no defaults like loans, credit, etc. by any means of the company.

• Any IPO should not exceed the total issue size calculated at 5 times its net worth. 

• A company that has incorporated a new name should earn 50% of its total revenue earned in the previous year after the new name is incorporated.

• The minimum average operating profit should be ₹15 crore each year, on a consolidated basis, for the past three years.

Grounds for Rejection of Draft Red Herring Prospectus (DRPH) by SEBI

The Draft Red Herring Prospectus (DRHP) can be rejected by SEBI if it doesn’t meet their strict standards. Non-disclosure of important information, wrong financial data, or not meeting statutory requirements are common reasons for its rejection. So let’s discuss in brief why SEBI can reject a DRHP:

• There have been significant changes done in the fiscal statements or any other data contained in the DRHP, and no alteration report has been submitted.

• The board of directors was changed without approval from SEBI.

• Changes have been made to the management of the company without obtaining prior approval from SEBI.

• Any non-compliance with any applicable laws, rules, or regulations of India or other countries.

• Any alterations have taken place regarding the company’s ownership structure without notifying SEBI.

• Any change regarding the name of the company.

• Any modification made concerning the address registered with authorities.

• Amendments concerning objects and intents for which a public offering may be proposed.

• Any other material change.

What Would Happen if a Company Fails to Comply with the Regulations?

The failure of a business to follow through with regulations may result in serious consequences. Let’s discuss these consequences in brief:

• If the firm is found in violation of civil laws or decides to indulge in crimes like tax evasion, its officers may be subjected either to imprisonment or a fine as punishment. After some time, it might even be banned from selling stocks altogether.

• Moreover, failure to meet IPO requirements would adversely impact people’s perception of this business entity and limit its future financing avenues.

• In recent times, several IPOs have collapsed due to exaggerated prices set for their shares and a lack of sound strategic plans.

Conclusion

Meeting the IPO requirements given by SEBI is essential for companies who want to go public in India. This is because these regulations ensure transparency, financial stability, and fairness in the marketplace. To become eligible for an IPO, these companies have to be operational for at least three years, making profits all along, and fit certain standards of finances. Moreover, they should give foolproof information on their financial status to guard against investors’ exploitation and keep them trusting their businesses. However, not following these rules can lead to serious penalties by law and loss of name. Therefore, understanding such requirements could aid in capital raising and promoting a stable environment for financial markets.

FAQs on Eligibility for IPO