With so many fintech startups like Paytm, Ola, Flipkart etc going public this year, one of the key questions that every investor is asking is what are the eligibility criteria for an IPO in India. Basically, An Initial Public Offering( IPO) is a route through which a company raises funds through the market.
The Indian markets saw 60 companies opting for IPO’s in FY 20-21 in order to get themselves listed on the country’s two primary exchanges, the BSE (Bombay Stock Exchange) and NSE ( National Stock Exchange) including SME’s.
But as open these exchanges may be for companies to apply and get listed on them there are still requirements a company has to meet in order to be considered eligible to be listed. Today, we take a look at the eligibility criteria for an IPO in India.
Here, we’ll look into financial requirements and other legal & compliance norms that a company has to meet for an IPO.
Eligibility Criteria for an IPO: What makes a company ready for an IPO?
1. Paid-up Capital
The paid-up capital of a company is the amount of money it receives from shareholders in exchange for shares in an IPO. according to the eligibility requirements, it is necessary that the company has a paid-up capital of at least 10 crores.
In addition to this, it is also necessary that the capitalization (Issue Price * No. of equity shares post issue) of the company should not be less than 25 crores.
2. Offering to be made in IPO
If the minimum requirements are met then based on the post IPO equity share capital the minimum percentage to be offered in an IPO is decided.
- If the post IPO equity share capital is less than Rs. 1600 crore then at least 25% of each class of equity shares must be offered.
- If the post IPO equity share capital is more than Rs. 1600 crore but less than Rs. 4000 crore then a percentage of equity shares equivalent to Rs. 400 crore rupees must be offered.
- If the post IPO equity share capital is more than Rs. 4000 crore then at least 10 percent of each class of equity shares must be offered.
Companies that do not meet (a) and satisfy (b) and (c) are required to increase the public shareholding to at least 25% within 3 years of the securities being listed on the exchange.
3. Financial requirements of a company
- The company must have a net worth (assets – liabilities) of at least 1crore for each of the last 3 years.
- The company must have tangible assets of at least Rs. 3 crore in each of the 3 preceding years. Out of these assets, a maximum of 50% must be held in monetary assets.
- The average operating profit for each of the last three years must be at least Rs.15 crore.
- If the company has changed its name in the last one year it must have earned at least 50% of the revenue for the preceding full year from the activity indicated by the new name;
- The existing paid-up share capital of the company must be fully paid or forfeited. This means that the company looking for an IPO should not have partly paid-up shares as a part of its equity.
4. Other requirements for the company
The company looking to get listed on a stock exchange must provide the annual reports of the 3 preceding financial years to the NSE. It can go ahead with the listing requirements if
- The company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).
- The net worth of the company has not been wiped out by the accumulated losses resulting in negative net worth.
- The company has not received any winding up petition admitted by a court.
5. Promoters/Directors Requirements
The next set of requirements are pertaining to the promoters, directors, selling shareholders of the company. Promoters here are people who have experience of a minimum of 3 years in the same line of business.
In order to be considered a promoter, they also have to hold at least 20% of the post IPO equity share. This 20% can be held either individually or severally.
It is necessary that these promoters/directors/selling shareholders (henceforth individuals)
- Do not have any disciplinary action taken against them by the SEBI. i.e. they should not have been debarred from accessing the markets. If these individuals are still serving their debarred period then the company cannot go ahead with the IPO with them as promoters/directors. But if the period of debarment is already over at the time of filing a draft offer prior to IPO then this restriction is not applicable.
- If these individuals were prior to the IPO also promoters/ directors of another company that is debarred from accessing the markets then the company cannot go ahead with the IPO with them as promoters/ directors. But if the period of debarment is already over for the other company at the time of filing a draft offer prior to IPO then this restriction is not applicable.
- If these individuals have been classified as wilful defaulters by any bank or financial institution or consortium then the company can not go ahead with the IPO with them as promoters/ directors. A willful defaulter is one who has not met repayment obligations like loans to these banks, financial institutions, etc.
- It is necessary that none of the promoters/ directors have been categorized as a fugitive economic offender under the Fugitive Economic Offenders Act 2018.
Note on Statutory Lock-in:
It is also necessary to note that after the IPO the post-IPO paid-up capital of the promoters is subject to a one-year lock-in period. After one year at least 20% of post-IPO paid-up capital must be locked in for at least 3 years (Since the IPO).
This, however, is not applicable to venture capital funds or alternative investment funds (category I or category II) or a foreign venture capital investor that has invested in the company.
If the post IPO shareholding is less than 20 per cent, alternate investment funds, foreign venture capital investors, scheduled commercial banks, public financial institutions, or IRDAI registered insurance companies may contribute for the purpose of meeting the shortfall.
This contribution, however, is subject to a maximum of 10% post issue paid-up capital. This 20% statutory lock-in is not applicable if the issuer does not have any identifiable promoters.
6. Other factors that SEBI considers in an IPO Verification
The SEBI may also reject the draft offer document for the IPO for any of the following reasons.
- The ultimate promoters are unidentifiable;
- the purpose for which the funds are being raised is vague;
- The business model of the issuer is exaggerated, complex, or misleading, and the investors may be unable to assess risks associated with such business models;
- There is a sudden spurt in business before the filing of the draft offer document and replies to the clarification sought are not satisfactory; or
- Outstanding litigation that is so major that the issuer’s survival is dependent on the outcome of the pending litigation.
In this article, we discussed the Eligibility Criteria for an IPO in India. After going through the requirements one would realize that these requirements hover around the financial and litigations faced by the company its directors and promoters. These requirements are put in place to ensure quality companies are offered to investors.
These requirements also go a step further to protect investors by ensuring that the company and the people managing it are credible. These restrictions filter out financially weak companies and companies that are run by those that have the potential of swindling investors of their money.
Most importantly the restrictions play an important role in ensuring the quality of the Indian stock markets.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.