The Indian stock market offers numerous options to investors for making good returns. Initial Public Offerings (IPOs) are one of the most popular avenues for hefty and quick gains. However, not all companies can launch their IPOs at their convenience.There are eligibility criteria for IPOs to ensure that only legitimate companies can offer their shares to the general public.
Eligibility criteria for IPO application as mandated by SEBI
TheSecurities and Exchange Board of India (SEBI) is the top regulatory body that governs IPOs in India. It has set numerous guidelines for the eligibility criteria for IPO, which companies must access before requesting SEBI to allow them to launch an IPO. When companies launch their IPOs to offer their shares to the general public for the first time, they may be either profitable or non-profitable. The IPO eligibility criteria are different for a profitable and a non-profitable company.
Criteria for IPO if the company is profitable
- The company must have a minimum net worth of Rs. 1 crore in each of the previous three years.
- The value of the company's net tangible assets must have been at least Rs. 3 crore in each of the last three years. Out of the Rs. 3 crore, the company must have not more than 50% (Rs. 1.5 crores) as cash or cash equivalents such as money in investment accounts, bank accounts or cash receivables. However, the 50% cash equivalent rule is not applicable if the IPO is through anOffer for Sale (OFS).
- If the company has changed its official name, it must have earned 50% of the total revenue in the last year from business operations after attaining its new name.
- The company must have an average pre-tax operating profit of a minimum of Rs. 15 crore in at least three of the last five years.
- The value of the IPO issue size must not be more than five times the company's total net worth before launching the issue.
Criteria for IPO if the company is non-profitable
- Non-profitable companies must take the Qualified Institutional Buyers (QIB)route to launch an IPO.
- The IPO must be launched using the book-building IPO method.
- The company must allot a minimum of 75% of the total issue size to QIBs.
- The company must refund the total IPO subscription amount if the minimum allotment requirement to QIBs is not fulfilled.
Also read: Apply for an IPO
Prerequisites mandated by NSE and SEBI for IPO application apart from eligibility norms
Eligibility norms for anIPO are crucial as they are set by authorities such as the NSE (National Stock Exchange) and SEBI. However, apart from these eligibility criteria for an IPO, there are other prerequisites mandated by the NSE and SEBI. These are:
- To launch an IPO, the company must submit its annual financial reports for the last three years to the NSE.
- The company should not have been referred or have any pending cases in the National Company Law Appellate Tribunal (NCLAT) or National Company Law Tribunal (NCLT).
- The company must not have a negative net worth because of constant losses before the IPO.
- The company must have a minimum paid-up equity capital of Rs. 10 crore. The equity capitalisation on the equity being issued during the IPO must be at least Rs. 25 crore.
- The founders and selling shareholders must not have any prior or pending disciplinary action against them by SEBI, and its directors must not have been banned from entering the securities markets.
- The directors or promoters of a company launching an IPO must not be directors or promoters of another company barred from the securities market. Only if the other company has passed its limitation period is the IPO for the requesting company allowed with the same directors and promoters.
- The company must not have been mentioned as a willful defaulter by any bank, consortium (a group of financial institutions), or individual financial institution. In such a case, the company must pay off the debt before being allowed to launch an IPO.
- Under the Fugitive Economic Offenders Act 2018, no promoter or director of the company must have been classified as an offender or fugitive.
Grounds of rejection by DRHP by SEBI
Every company is required to submit a Draft Red Herring Prospectus (DRHP) to SEBI detailing all information about the company and the potential IPO. However, SEBI can reject the DRHP for the following reasons:
- The company is raising funds for a cause not mentioned in the DRHP or is unclear to SEBI.
- There is no public information about the company's promoters.
- The company’s business model is highly complex, and it intends to deceive investors by making it difficult to understand the associated risks with the company’s future.
- The company’s business increased suddenly just prior to the potential IPO listing time, and the company has not communicated with SEBI the exact reason for the unexpected business surge.
- The company is going through litigation (legal action), and the litigation’s result could decide the company’s future existence.
Conclusion
IPOs are fundamental to a company’s future existence as they allow companies to raise funds for a range of business purposes. However, before launching an IPO, a company must ensure that it fulfils all the IPO requirements and, most importantly, the eligibility criteria for IPOs. Furthermore, it is vital that the company adheres to all other set guidelines byNSE or SEBI to avoid IPO rejection.
