What Are the IPO Requirements in India?

All organisations listed as public companies in the Indian stock market follow several guidelines set by stock market authorities including SEBI and the stock exchanges. These authorities have several eligibility criteria in place that decide if an IPO can proceed.

As per market standards, IPOs are usually meant for private companies with relatively large and established businesses. By listing as a public company, they can raise enough capital for expansion and other corporate purposes.

Besides fulfilling these requirements, companies issuing IPOs must maintain transparency and make full disclosures of their businesses and the public issue. 

Several guidelines are put in place for all participants to follow in the share market. Follow the information given below to learn about the requirements of launching an IPO in India.

What Is the Meaning of an IPO?

An Initial Public Offering (IPO) is the process of conversion of a private company to a public company through the allotment of newly declared shares to public investors through a specific application process.

Companies introduce new shares to the public in exchange at an issue price, to collect funds from investors to accomplish new business ventures. Primary investors on the other hand purchase a lot of shares by applying for allotment through brokers. When the shares are listed on stock exchanges, they can be traded mutually amongst the investors as per the liquidity available..

How Does an IPO Work?

When a company requires additional funds to accomplish a business objective, it turns to the stock market to raise a public fund. To enter the stock market, a company has to turn from private to public and allow eligible investors to buy its shares.

When a company is private, it can only have a limited number of shareholders who have partial ownership. Such shareholders include promoters, employees, and managing directors. However, when companies turn public, all categories of public investors can legally invest and trade a company’s stock at their will.

In India, a private company needs to first announce and launch an IPO in order to collect funds and list as a public company. To get started, a company must first hire investment banks for the underwriting process. This involves auditing the company and its financials to create an underwriting document.

Following this step, the company must register for an IPO by creating a Draft Red Herring Prospectus (DRHP) , a document that contains all the required details under SEBI guidelines. It must submit this document to the Registrar of Companies, SEBI (Securities and Exchange Board of India), and stock exchanges.

Only after approval from these authorities a company can get on with marketing its IPO to the public through roadshows.Most companies use large institutional investors to create hype for their public issues and attract potential investors. 

After this, it will announce a set date for the IPO along with an issue price at which investors can purchase shares. An IPO usually stays open for 3-5 working days for a subscription. After investors put in bids within a specific price band, a cut-off price will be finalised based on which shares are allotted to investors.

What Is SEBI’s Role in IPO Listing in India?

SEBI is a regulatory body under the Government of India, responsible for monitoring and regulating all stock market-related activities in the country.

SEBI was formed to focus on security and fair practice in the financial markets in India. It ensures the interests of investors and enforces several guidelines on public companies, stock brokers, and other participants.

Therefore, when a company is listed as a public company in the share market, SEBI is responsible for ensuring its credibility, equity dilution capacity, asset valuation, etc. This is to ensure that a company is a credible seller in the market and that investors are not exposed to unnecessary risks.

In addition, SEBI also tracks and records all activities of every participant in the stock market. By ensuring a controlled and screened entry to the market, SEBI ensures that it has all the data it needs to understand a company’s performance. SEBI also looks after the equal and fair distribution of IPO allotment to all eligible investors.

What Are the Eligibility Criteria for Companies to List as an IPO?

As explained above, SEBI mandates a set of guidelines for companies to follow in order to launch an IPO in India. These guidelines ensure a safe and transparent trading process and a justified fund acquisition from investors. The list of criteria for companies under SEBI is given below.

• The company should be at least 3 years old. It should remain a registered business for more than 3 years.
• The net worth of the company on a consolidated basis  for each of the past 3 years should be  a minimum ₹1 crore.
• Its net tangible asset value should be around ₹3 crore for each of the past 3 full years.not more than 50% should be in cash or cash equivalent.
• From the total net asset value of ₹3 crore.
• There should be no default on a loan on any other credit line on this company’s behalf.
• Before issuing an IPO, the value of a company’s total issue size should not be more than 5 times its net worth.
• In case a company has incorporated a new name, 50% of their total revenue earned in the last year should be earned after the incorporation of this new name.
• An average operating profit of minimum ₹15 crore calculated on consolidated basis should be available for the previous 3 years annually.

What Are the Prerequisites for IPO Mandated by NSE and SEBI?

Apart from the above eligibility criteria, the stock exchanges have their own criteria for companies to issue their IPOs in the stock market. These additional eligibility criteria are as follows:

1. Prerequisites of NSE

National Stock Exchange (NSE) is one of the two primary stock exchanges in India. All listed company stocks are traded through this platform in India. All brokers operate through this exchange and provide you with the platform to participate in the stock market.

Hence, to list as a public company in NSE, a company has to follow a few prerequisites which are given below.

1. Its paid-up equity capital should not be less than ₹10 crore. ₹25 crore should be the minimum capitalisation on equity being issued.
2. NSE mandates that a company should not be referred to the National Company Law Tribunal (NCLT) or National Company Law Appellate Tribunal (NCLAT).
3. Companies must submit their annual reports for 3 previous fiscal years to NSE.
   
4. Additional Prerequisites of SEBI

Other than business fundamental eligibility, SEBI also guides companies and their promoters to take some necessary steps to be listed on the stock market. Follow the list of requirements mentioned below.

1. Promoters are company shareholders who must own individually or collectively at least 20% of the total shares after the IPO distribution. These individuals are considered promoters if they are in this area of business for at least 3 years.
2. Draft Red Herring Prospectus (DRHP) is an offer document which is mandatory for companies to prepare through their underwriters (merchant bankers). Companies must submit their DRHP to SEBI to get a clear chit to float their IPO.

This document is a statement which clarifies a company’s objectives related to an IPO and its potential to perform in the near future. In addition, it also requires details of promoters and other factors related to the company to create a complete picture. It is referred to by investors to understand the potential of investing in an IPO.

SEBI can reject the DRHP of a company if it fails to meet certain prerequisites that are mentioned below.

• If the promoters of a company are associated with other companies that are barred from participating in the stock market by SEBI, in that case, the company will not be allowed to launch its IPO or file its DRHP unless the promoters are disassociated with the company.
• To successfully float its IPO a company cannot be associated with promoters who are fugitives or offenders as per the Fugitive Economic Offenders Act, 2018.
• As per SEBI, companies must have a clean chit from all financial banks with regard to defaulting. It is not required to collect a clarifying document. However, no bank should have a negative record against a company and all its directors and promoters, stating they are wilful defaulters.

In case any promoter in the company is flagged as a wilful defaulter, the company must remove them from the position in order to be granted an IPO listing.

• Lastly, no promoters in a company individually should have any disciplinary action taken against them by SEBI. As the management decides a company’s identity, if any promoter is restricted from the market then the company cannot proceed as well.

What Are the Eligibility Criteria for Investors to Apply for an IPO?

Similar to companies, even investors need to complete certain criteria to be able to invest in an IPO in India. SEBI mandates that investors follow these guidelines to apply for IPOs:

• Investors must be above the age of 18 years to apply for an IPO in India. 
• They must have a functional bank account and sufficient balance to purchase an IPO in India.
• An investor needs to have a Demat account with any DP (Depository Participant) registered under Indian stock depositories.
• It is also important to have a trading account to sell IPO shares.
• The bank account linked with the Demat account should have internet banking and enabled UPI and ASBA services.
• An investor must have a Permanent Account Number (PAN) to be eligible to invest in an IPO.

It is important to have the above mentioned requisites to be eligible to apply for an IPO in India. Application Supported by Blocked Amount (ASBA) is a transaction system introduced by SEBI to seamlessly purchase IPOs in India.

Final Word

SEBI is the authorisation body for capital markets in India. It is responsible for ensuring transparency and security for all trades and activities in the market. Hence, to launch an IPO companies need to fulfil all the requisites mandated by SEBI.

SEBI has set such guidelines to ensure a safe platform for all parties involved and they should be strictly followed. Companies should strictly comply with prerequisites set by NSE and other entities involved in the market as well.

Frequently Asked Questions

How much does it cost a company to go public in India?

In India, companies need to follow an extensive process and prepare lots of paperwork to launch an IPO. The approximate cost for a company to go public in India is ₹2 crore to ₹5 crore.

What is the best time for a company to file for an IPO in India?

As there are several requirements to fulfil before a company can launch its IPO, it should focus on finding a convenient time. Therefore, the best time to file an IPO is after preparing all requirements and ensuring there are no factors that can be a reason for rejection.

How long does it take to complete an IPO process?

Launching an IPO and listing as a public company in India is an extensive process which is completed in different steps. However, an approximate time frame for a company to file its DRHP and finally list as a public company takes from 6-9 months.

Which is the primary stock exchange in India other than NSE?

NSE and BSE are the two primary stock exchanges in India. These two platforms represent the stock market as a whole. After launching an IPO all companies get listed in either or both of these stock exchanges.