Throughout its existence, a company may require additional funds beyond its initial capital, and so there is need to raise capital through various available options. The capital market plays a crucial role in maintaining a balanced flow of funds in the economy, enabling companies to acquire funds in a secure and regulated manner.
One significant option for companies to raise funds is by issuing shares in the primary market and inviting the public to become shareholders and this is known as going public. This method of releasing a company’s securities is carefully regulated by the Securities Exchange Board of India. In this blog, we shall see the diverse SEBI guidelines for IPO or Initial Public Offer in India.
Understanding Public Issue/Offer
Before seeing what are the SEBI guidelines for IPO, let us first understand its meaning. Public Issue or Public Offer refers to the process of issuing securities by a company to new investors, thereby incorporating them into the company’s group of shareholders. Public Offerings are broadly categorised into two main types: Initial Public Offer or IPO and Further Public Offer FPO.
Initial Public Offer (IPO)
An Initial Public Offer, commonly known as an IPO, is a process in which a company that hasn’t been listed on any stock exchange before issues new securities or presents its existing securities for sale to the general public for the first time. The main objective of this process is to help the company secure a listing on a stock exchange.
Further Public Offer (FPO)
A Further Public Offer, often referred to as an FPO or Follow-On Offer, is a unique form of public offering. It takes place when a company already listed on a stock exchange chooses to issue more securities or put existing ones up for sale to the public. The primary goal of an FPO is to boost the company’s financial reserves and meet changing capital needs, all while allowing current shareholders the chance to sell their holdings if they opt to do so.
Advantages of Public Offer or Going Public
Going public, through a public offer, offers several advantages to a company, including:
1. Expansion Opportunities:
Going public enables a company to access a significant source of funds, which can be used for business expansion, product development, or entering new markets. This infusion of capital provides the financial support necessary to execute strategic growth plans effectively.
2. Capital Acquisition:
A public offering provides a streamlined and cost-effective method for raising capital. The company can choose to get it from a wide range of investors, including institutional and retail investors, for securing the funds needed for its operations as well as projects.
3. Liquidity for Stakeholders:
Going public offers an avenue for directors, employees, and pre-IPO investors to convert their ownership stakes into tradable shares. This liquidity allows them to realise the value of their investments, potentially attracting top talent and early-stage investors.
4. Access to Equity Market:
A publicly traded company gains continuous access to the equity market. This can be advantageous for future capital needs, as the company can issue additional shares or securities to raise funds, when necessary, without undergoing the complexities of private financing.
Laws Governing SEBI Guidelines for IPO or Initial Public Offer in India
The Securities Exchange Board of India plays a pivotal role in regulating the Indian corporate securities market. Established in 1988, SEBI has evolved to become the primary authority overseeing market operations.
In addition to SEBI ICDR Regulations, other laws governing SEBI guidelines for IPO include:
1. Securities Contract (Regulation) Act, 1957: This Act provides the overarching legal framework for the securities market in India.
2. Securities Contract (Regulation) Rules, 1957: These rules offer specific guidelines and procedures for conducting transactions within the securities market.
3. Companies Act, 2013: The Companies Act of 2013 contains provisions pertaining to the issuance of securities by companies, including those related to public offerings.
What are the SEBI Guidelines for IPO?
SEBI guidelines for IPOs are bifurcated into two distinct processes, catering to unlisted and listed companies. These guidelines dictate the various requirements, disclosures, and compliance measures that companies must adhere to when planning and executing an IPO. They encompass aspects such as the issuance of prospectuses, pricing of securities, disclosures to investors, and the role of intermediaries, among others.
SEBI Guidelines for IPO for Unlisted Companies
Unlisted companies in India have several options to conduct their initial public offerings in adherence to SEBI guidelines. These options are defined by specific routes, each with its own set of requirements. The SEBI guidelines for IPO for unlisted companies are:
Profitability Route – Entry Norm 1
The Profitability Route, governed by SEBI guidelines for IPO, entails certain criteria that companies must meet to go public. These criteria encompass financial parameters and performance benchmarks over a designated period:
1. The issuer must have a minimum net worth exceeding INR 1 Crore in each of the previous three years.
2. The net tangible assets of the issuer must exceed INR 3 Crores each year, with no more than 50% held in the form of monetary assets during the previous three years.
3. The average operating profit (before tax) of the company must surpass INR 15 Crores in at least three out of the last five years.
4. The issue size must not exceed five times the pre-issue net worth.
5. If the company has undergone a name change, a minimum of 50% of the revenue in the previous year must be generated from activities carried out under the new name.
To facilitate easier IPO processes for companies unable to meet the Profitability Route requirements, SEBI has introduced two alternative routes, granting access to the primary market for their public offerings.
QIB Route – Entry Norm II
For companies necessitating a substantial capital base but failing to meet Profitability Route conditions, the QIB Route offers an alternative under the SEBI guidelines for IPO. This route allows companies to access the public interest through the book-building procedure, with a specific allocation to Qualified Institutional Buyers:
- 75% of the company’s net offer to the public must be compulsorily allotted to Qualified Institutional Buyers.
- Failure to achieve the minimum subscription of QIB renders the company liable to refund the subscription fee.
Appraisal Route – Entry Norm III
The Appraisal Route involves the appraisal and participation of the project or public offer by Financial Institutions or Scheduled Commercial Banks, contributing a minimum of 15%, with at least 10% from the appraisers:
- The minimum post-issue face value capital must be INR 10 crores or mandatory market-making for at least two years.
- All three entry norms also stipulate a requirement of a minimum of 1000 prospective allottees for the issuer company’s public issue.
SEBI Guidelines for Public Issue for Listed Companies
Listed companies in India seeking to conduct a FPO must adhere to specific guidelines outlined by the SEBI. These guidelines pertain to criteria related to company name changes and issue sizing:
1. Name Change Condition:
If the company has undergone a name change within the past year, a minimum of 50% of the company’s revenue for the previous year must be generated from activities conducted under its new name.
2. Issue Size Restriction:
The size of the FPO must not exceed five times the pre-issue net worth, as per the company’s audited balance sheet from the last financial year.
Exempted Entities under SEBI Guidelines for IPO
The Securities and Exchange Board of India has identified certain entities that are exempted from the standard entry norms applicable to public issues. The exempted entities under SEBI guidelines for IPOs are:
1. Private and Public Sector Banks
Private and public sector banks are exempted from the entry norms outlined for making a public issue.
2. Infrastructure Companies with Appraised Projects
Infrastructure companies that have had their projects appraised by a Public Financial Institution like IDFC or IL&FS, or a bank that was previously a PFI, and have received at least 5% of their project cost in funding from any of these institutions are exempt from the standard entry norms.
General SEBI Guidelines for IPO in India
Companies planning to make a public offer in India must adhere to the following general SEBI guidelines for IPO in India:
1. No Association with Similar Role: Directors, promoters, or other Key Management Personnel of the company must not hold similar positions in any other company.
2. No Debarment from Primary Market: Those with control over the company, such as directors, promoters, or key management personnel, must not be debarred from accessing the primary market.
3. Listing Application: The company must submit an application to list its shares with a recognised stock exchange in India.
4. Depository Arrangement: The company must enter into legal contracts with a depository to dematerialise its specific securities.
5. Fully Paid-up Equity Shares: Partly paid-up equity shares must be fully paid-up before the IPO.
6. Minimum Public Shareholding: A listed company must maintain a minimum public shareholding of 25%. If not met, the company has one year to comply with this requirement.
7. Source of Funds: The company must arrange its financial resources from trustworthy and verifiable sources, excluding the amount allocated to issue new company shares.
8. Draft Offer and Red Herring Prospectus: For IPOs exceeding INR 50 lakhs, the process begins with the company filing a draft offer in the form of a Draft Red Herring Prospectus (DRHP) with SEBI.
9. Final Offer Document: After the review and receipt of the final observation letter from SEBI, the company must file the final offer document or Red Herring Prospectus with the Registrar of Companies (ROC).
10. Book Building Process: Companies may opt for the book-building process under Entry Norm II, and in such cases, the IPO process must be completed within one year from the date of receiving the final observation letter from SEBI.
11. Independent Board Members: At least 50% of the company’s Board of Directors must consist of independent investors.
12. No Obligations to Promoters: The same 50% of the Board of Directors must have no obligations to the promoters or the company.
13. No Involvement in Economic Offences: Directors or promoters of the company must not be guilty of any economic offences.
14. Not a Wilful Defaulter: The company, its promoters, or directors must not be classified as wilful defaulters.
15. Disclosure of Shares to SEBI: The issuer company must disclose the number of shares or the number of shares to SEBI between the date of filing its draft Red Herring Prospectus and the issuance of specified securities.
16. Large IPO Pre-submission: If a company plans to go for a public issue exceeding INR 100 crores, it must submit a draft offer document with the regional office of SEBI before proceeding with the IPO.
Final Thoughts
The SEBI guidelines for IPOs in India are instrumental in ensuring market transparency, investor protection, and the efficient flow of capital. These guidelines encompass diverse aspects, such as public issue categorisation, legal compliances, and prerequisites for both unlisted and listed companies. Moreover, they extend to the responsibilities and disclosures of selling shareholders, reinforcing market integrity.
By adhering to these SEBI guidelines, companies and investors contribute to a robust and trustworthy capital market, supporting economic growth and fostering investor confidence in the IPO process. These regulations are the basis of a well-regulated and dynamic financial system in the country.
