How to Meet the IPO Eligibility Criteria?

An Initial Public Offering (IPO), as the name suggests, is made when a company in India launches its shares to the public for the first time. However, SEBI has set forth a list of rules and regulations that companies have to follow. These rules are in place to ensure the company is ready and trustworthy enough for people to invest in. Let’s know about the IPO eligibility criteria in India and what SEBI considers in a company before approving it.

Eligibility Criteria for a Company to Go Public

Before a company launches its IPO for the first time, it must follow specific SEBI guidelines for IPO approval that make sure that only qualified companies enter the market. Depending on whether a company is profitable or not, the IPO eligibility criteria can change, especially when it comes to newer, smaller, or loss-making firms. This applies to both current IPOs available in the market and upcoming IPOs waiting for SEBI approval.

Mainboard IPO Requirements

For companies that want to be listed on the NSE or BSE’s mainboard, SEBI has strict checks in place that include,

SEBI IPO Eligibility Criteria: Companies must have a proven track record of profitability, a minimum net worth, and it should be compliant with disclosure norms.
NSE IPO Eligibility Criteria: Companies must meet the NSE’s financial requirements and submit a few documents like the Draft Red Herring Prospectus (DRHP), their board resolutions, and auditor reports.
BSE IPO Eligibility: Similar to the NSE, BSE checks the promoter’s background, lock-in period, business history, and accounting compliance.

SME IPO Requirements

Small and Medium Enterprises (SMEs) can also sell their shares to the public, but they fall under a different framework called the SME platform, for which SEBI and the exchanges have specific rules too. This includes:

BSE SME IPO Eligibility: The company should have a post-issue face value capital of at least ₹3 Crore, a track record of at least three years, and a positive cash flow from operations.
NSE SME IPO Eligibility: Companies must have a positive net worth, no wilful defaults, and a clear shareholding structure.

Both platforms follow SEBI guidelines for SME IPO, giving smaller companies a fair chance to raise public funds while still maintaining investor protection.

Other Requirements by NSE and SEBI for IPO Application Apart from Basic Eligibility Norms

Apart from the main eligibility criteria, some of the additional rules that every company must follow to meet IPO eligibility and get approved are:

Stock Exchange Approval: They must get prior consent from the exchange (like BSE) to use their name in the offer documents.
Application to Exchanges: The company must apply to one or more stock exchanges and choose a primary one.
Depository Agreement: They must have arrangements with NSDL or CDSL to dematerialise their shares.
Promoter Shareholding: The promoters’ shares must be in demat form before filing the DRHP.
Security Deposit: A deposit of 1% of the issue amount must be kept with the exchange.
No Legal Troubles: The company should have no pending bankruptcy claims or insolvency cases.
Operational Track Record: The company should be at least three years old, or be a converted partnership or LLP with a similar track record to that of the promoter.

Grounds of Rejection of DRHP by SEBI

SEBI doesn’t approve every IPO plan, even if they match the eligibility criteria outlined in the guidelines. This is SEBI’s way of making sure only genuine and trusted companies are listed in the market for the public to invest in. Some of the grounds upon which SEBI can reject a company’s Draft Red Herring Prospectus (DRHP) are:

Vague Fund Use: If the company is raising money for unclear reasons that are not mentioned in the DRHP.
Unknown Promoters: There is no reliable public information available about the company’s promoters.
Over-Complex Business: The business model is too complicated and/or hides the risks present in the business.
Sudden Growth: The company has unexplained sudden growth right before the IPO.
Litigation Risk: If the company is involved in serious legal battles, it could affect its future.

Eligibility Criteria for Applying for an IPO

To invest in an IPO in India, you need to meet a few basic requirements. Here’s a simple guide to make sure you’re eligible:

1. Open a Demat and Trading Account

First, open a Demat and trading account with a registered broker. These accounts are necessary to hold shares and trade stocks. Without them, you cannot apply for an IPO. If you do not have one, you can open a free Demat account with Findoc.

2. Be 18 Years or Older

You must be at least 18 years old to invest in an IPO. This is a legal requirement for all investors. If you are under 18, you would not be eligible to apply for IPO.

3. Have a Valid PAN Card

A PAN card is mandatory for investing in an IPO. It helps track your financial transactions. Make sure your PAN is active and linked to your Demat account before applying.

4. Bank Account with UPI for Retail Investors

Retail investors need a bank account with UPI (Unified Payments Interface) functionality. UPI is used to block the funds required for an IPO application, making the process quicker and easier.

5. Meet Financial Criteria for Some IPOs

Some IPOs may have financial eligibility requirements, especially for High Net-Worth Individuals (HNIs). This could involve a certain income level or net worth. Check the specific IPO details to see if you meet these requirements.

6. Resident or Non-Resident Indian (NRI)

Both Resident Indians and NRIs can invest in IPOs. NRIs must use NRO (Non-Resident Ordinary) or NRE (Non-Resident External) accounts. Make sure you meet the NRI criteria if applicable.

By meeting these requirements, you will be ready to apply for IPO and take advantage of new investment opportunities. Start your IPO journey today by opening a free Demat account with Findoc!

Conclusion

The eligibility criteria for IPOs in India are there to make sure that investors are protected, transparency is maintained, and market integrity is upheld. Whether a company is profitable or not, the process must follow any and all SEBI guidelines for IPO. If you’re planning to invest in a current IPO or preparing for an upcoming IPO, understanding these basics helps you know all the opportunities better and plan effectively.

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Frequently Asked Questions

1. Who qualifies for an IPO under SEBI rules?

Any company that meets the financial, operational, and legal eligibility norms outlined in SEBI guidelines for IPO can apply for a public offering.

2. Can a company launch multiple IPOs?

No. A company can only launch one IPO. After the IPO is listed, it can raise funds via FPOs or rights issues, but not multiple IPOs.

3. Is a public company allowed to issue an IPO?

Yes, but only if it hasn’t already been listed on a recognised stock exchange. An IPO is meant for the first public issue.

4. Can a private company go public through an IPO?

Yes. Private companies can go public via IPOs if they meet all IPO eligibility criteria set by SEBI.

5. What are the current IPO regulations?

The current SEBI guidelines for IPO cover financial disclosures, QIB allocation, issue caps, and transparency in the use of funds.

6. How can retail investors improve their chances of IPO allotment?

The best way for retail investors to improve their chances of IPO allotment is to apply early, use multiple UPI-linked accounts within the family, and make sure that their CIBIL score and KYC details are up to date.

7. Can individuals invest directly in an IPO?

Yes, absolutely. Individuals with a valid PAN card can invest in IPOs directly through their demat account using UPI, ASBA, or their preferred broker platform.