Eligibility Criteria for an IPO

Eligibility Criteria for an IPO: Requirements for a company to Go Public!

An IPO is a public offering in which a firm transitions from private to public ownership. Only a few people own a private limited business, but everyone can acquire the company’s ownership in a public offer. Many people desire to earn money through an initial public offering (IPO), but many are unsure how to do so or what the IPO procedure in India entails.

An Initial Public Offering (IPO), is a SEBI-mandated process by which corporations raise funds from the general public. As a potential investor, you’ll want to gather relevant information and learn how to qualify for a loan. IPO issues are currently available through online trading platform in India, and it’s crucial to understand how you can buy shares in an IPO through these channels.

Before a company may participate in the IPO with the best trading platform, they must first meet the eligibility conditions and then answer a series of qualifying questions. The acquisition of new issue offerings is prohibited under FINRA rules for “restricted persons” (those who work in the financial services business).

What makes a company ready for an IPO?

Paid-up Capital

The amount of money a firm receives from shareholders in return for shares in an upcoming IPO is referred to as its paid-up capital. The firm must have a paid-up capital of at least 10 crores, according to the eligibility conditions. Furthermore, the company’s capitalisation (Issuance Price * No. of equity shares after issue) must not be less than 25 crores.

Offering to be made in IPO

If the minimal requirements are met, the minimum proportion to be issued in an IPO is determined based on the post-IPO equity share capital. There are certain considering factors such as –

  • when the post IPO equity share capital is less than Rs. 1600 crore, the company need to offers at least 25% of each class of equity shares
  • when the post IPO equity share capital is greater than Rs. 1600 crore but less than Rs. 4000 crore, then equity share percentage equivalent to Rs. 400 crore rupees need to be shared
  • with more than Rs. 4000 crore post IPO equity share capital, the company has to offer at least 10 percent of each class of equity shares

The companies which satisfy the last two points need to increase the public shareholding to at least 25% within 3 years of the securities being listed on the exchange.

Financial requirements of a company

  • For each of the previous three years, the company’s net worth (assets minus liabilities) must have been at least 1 crore.
  • In each of the previous three years, the company must have had tangible assets of at least Rs. 3 crore. A maximum of 50 percent of these assets must be held in monetary assets.
  • Each of the previous three years’ operating profit must have been at least Rs.15 crore.
  • If a corporation has changed its name during the last year, it must have earned at least half of its revenue from the activity specified by the new name for the previous full year.
  • The company’s existing paid-up share capital must be paid in full or it will be forfeited. This means that the company planning an IPO should not have any partially paid-up shares in its stock.

Other requirements for the company

It is mandatory for the companies that are planning to get listed on a stock exchange to provide annual reports of the three earlier financial years to the NSE. They can proceed with the listing requirements if –

  • The Board for Industrial and Financial Reconstruction has not been directed to the company (BIFR).
  • The company’s net value has not been wiped out by its losses, resulting in a negative net worth.
  • The corporation has not received any court-approved winding-up petitions.

Promoters/Directors Requirements

The promoters, directors, and selling shareholders of the corporation are subject to the next set of obligations. Promoters are those who have worked in the same line of business for at least three years. They must also own at least 20% of the post-IPO equity stake in order to be called a promoter. This 20% might be held by one person or numerous people. The following points must be taken care of –

  • They should not have been prevented from entering the markets because the SEBI took no disciplinary action against them. The company cannot proceed with the IPO with these individuals as promoters/directors if they are still serving their debarment period. This restriction does not apply if the period of debarment has already expired at the time of filing a draught offer prior to the IPO.
  • If these persons were also promoters/directors of another company that was forbidden from accessing the markets prior to the IPO, the firm would be unable to proceed with the IPO with them as promoters/directors. However, if the debarment period for the other company has already expired at the time of filing a draught offer prior to the IPO, this restriction does not apply.
  • If any bank, financial institution, or consortia has designated these persons as wilful defaulters, the firm cannot proceed with the IPO with them as promoters/directors. A willful defaulter is someone who has failed to repay debts to banks, financial institutions, and other financial entities.
  • The Fugitive Economic Offenders Act of 2018 requires that none of the promoters/directors be classified as fugitive economic offenders.

Note on Statutory Lock-in –

It’s also worth noting that the promoters’ post-IPO paid-up capital is subject to a one-year lock-in period following the IPO. At least 20% of post-IPO paid-up capital must be locked in for at least three years after one year (Since the IPO).

This does not apply to venture capital funds or alternative investment funds (category I or category II) that have invested in the company, or to a foreign venture capital investor.

Alternative investment funds, international venture capital investors, scheduled commercial banks, state financial institutions, or IRDAI registered insurance firms may contribute if the post-IPO shareholding is less than 20%.

Other factors that SEBI considers –

Depending on the following reasons, SEBI might reject the draft offer document for the IPO –

  • there are unidentifiable ultimate promoters
  • vague purpose for the fund raising
  • complex and unnecessarily complex business model
  • sudden rise in business after filling for IPO and with unclarified reasons
  • issuer’s survival is dependent on pending litigation’s result

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