Everything About SEBI Guidelines For IPO Allotment – Latest 2024

When a private company chooses to become publicly traded, it is known as an Initial Public Offering (IPO). By selling shares to the general public, the company raises funds for growth and expansion. Initially, the company may be owned by founders and investors. However, as it matures and reaches certain milestones, it may decide to adhere to regulations set by authorities like SEC and make shares available to the public. This process follows SEBI guidelines for IPO allotment.

All About SEBI Guidelines For IPO Allotment – Latest 2024

Table of Contents

What is Public Issue or Public Offer?

When companies issue new shares to investors, they are known as public offerings. It allows investors to be shareholders in the company. There are two main types of public offer:

  • Initial Public Offering (IPO): It occurs when a company not previously listed on an exchange offers its shares to the public for the first time. This process also involves the listing of company on a stock exchange.
  • Further Public Offering (FPO): It involves a company that is already listed on an exchange issuing additional shares to the public. This helps the company raise additional funds and provides opportunities for existing shareholders to sell their shares.

Which Act Apply on IPO in India?

The Securities Exchange Board of India (SEBI) is primary stock market regulator of India. SEBI was established in 1988 to ensure market integrity. When it comes to SEBI guidelines for IPO allotment, SEBI enforces key laws: –

  • Securities Contract (Regulation) Act, 1957: This act outlines the framework for securities market operations in India.
  • Securities Contract (Regulation) Rules, 1957: This act provides more detailed regulations for securities transactions.
  • Companies Act, 2013: This act regulates the functioning of companies including their ability to issue securities during public offerings. These laws and SEBI’s regulations ensure fairness and transparency in IPO processes.

What are the SEBI Guidelines for IPO?

SEBI guidelines for IPO allotment are divided into three parts. These guidelines vary depending on whether the company is already listed or not and provide a framework for companies to follow during the IPO process. They specify requirements for the prospectus, stock pricing, investor disclosure, and the involvement of intermediaries. These guidelines serve as a guide for companies to ensure a transparent and organized IPO process.

SEBI Guidelines for IPO for Unlisted Companies

In India, companies not listed on stock exchanges have various methods, known as routes, for conducting their initial public offerings (IPO). Each route adheres to specific Securities and Exchange Board of India (SEBI) regulations. These SEBI guidelines for IPO allotment aim to facilitate fair and transparent public listings for companies. There are 3 routes for IPO of unlisted companies.

1. Profitability Route – Entry Norm I

The Profitability route under SEBI has specific criteria for companies issuing IPO:

  • The company must have a net worth of at least ₹1 Crore for the last 3 years.
  • The tangible assets of the company should be exceeding ₹3 crore per year, with less than 50% held in cash over the last 3 years.
  • The company must have an average operating profit exceeding ₹315 crore in 3 of the last 5 years.
  • The IPO size must not exceed 5 times the pre-issue net worth.
  • In case of change in name, at least 50% of revenue in the previous year must be from activities conducted under the new name.
  • SEBI has also introduced alternative routes for companies unable to meet the above requirements which makes IPO process easier for them.

2. QIB Route – Entry Norm II

The qualified institutional buyers (QIB) route is another option for companies seeking the significant capital but unable to meet the requirements of profitability route. This route allows companies to attract public interest through a book-building process where qualified institutional buyers get priority like below:

  • 75% of the shares offered to the public must go to Qualified Institutional Buyers.
  • If the company does not get enough interest from QIBs, they have to refund the subscription fees.

3. Appraisal Route – Entry Norm III

The Appraisal Route is another option for companies seeking to become publicly traded. This route involves financial institutions or banks appraising the project or offer. These are required to contribute at least 15%, with 10% coming from the appraisers themselves.

  • The company must have a minimum post-issue face value capital of INR 10 crore or commit to market-making for at least 2 years.
  • All routes also require a minimum of 1000 prospective investors for public issue of the company.

SEBI Guidelines for Public Issue for Listed Companies

Indian listed companies intending to conduct FPO are subject to certain guidelines established by SEBI. These guidelines include regulations pertaining to name changes and the size of the offering:

  • Name Change Rule: If a company has changed the name in last year, at least 50% of revenue in the previous year must be from activities conducted under the new name.
  • FPO Size Limit: The size of the FPO cannot exceed 5 times the pre-issue net worth of the company as determined by its audited balance sheet from the preceding financial year.

General SEBI Guidelines for IPO in India

When companies plan to go public, they need to follow certain SEBI guidelines for IPO allotment:

  • No Dual Roles: Directors, promoters, or key personnel shouldn’t hold similar positions in other companies.
  • No Bar from Primary Market: Those directors, promoters, or key management personnel in control of the company shouldn’t be banned from accessing the primary market.
  • Apply for Listing: The Company must apply to list its shares on a recognized Indian stock exchange.
  • Depository Agreement: The Company need to sign contracts with a depository to convert their securities into electronic form.
  • Fully Paid-up Equity Shares: Any partly paid-up shares must be fully paid before the IPO.
  • Minimum Public Shareholding: A Listed companies must have at least 25% public shareholding. If not, then the company has 1 year to fulfill this requirement.
  • Source of Funds: The Company must have trustworthy and clear sources of funds, excluding the amount allocated to issue new company shares.
  • Filing of Offer and Prospectus: The Company must file a draft offer in the form of a Draft Red Herring Prospectus (DRHP) with SEBI for IPOs exceeding INR 50 lakhs
  • Final Offer Document: Once SEBI review it and the company receives the final observation letter from SEBI, the final offer document is submitted to the Registrar of Companies by company.
  • Book Building Process: The Company may choose for book building process under Entry Norm II. The IPO using the book-building process must be completed within a year from date of SEBI’s final observation letter.
  • Independent Board Members: Minimum 50% of the board of directors must be independent investors.
  • No Obligations to Promoters: These independent board members must not have any obligations to the company or promoters of the company.
  • No Economic Offences: Directors or promoters of the company must not be involved in any economic offences.
  • No Defaulter: The Company, its directors or promoters must not be wilful defaulters.
  • Disclosure of Shares: The Company must disclose to SEBI about the number of shares issued and number of shares issued between date of filing DRHP and issuing securities.
  • Large IPO Pre-submission: For IPOs over INR 100 crore, a draft offer document must be submitted to SEBI’s regional office before proceeding with the IPO.

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An Initial Public Offering (IPO) allows a private company to become public by selling shares to the public. This raises capital for the company and gives investors the chance to make a return on their investment. Initially, investment of a private company comes from founders and key stakeholders. Once it reaches a certain level of stability, the company may feel confident in meeting Securities and Exchange Commission (SEC) regulations and using the public funds. For this, it offers shares to the public giving them a stake in that company.

Frequently Asked Questions (FAQ)

No, an individual is not eligible to qualify as a Qualified Institutional Buyer. QIBs are entities that handle substantial financial assets for external parties. These institutions generally possess high financial worth and adhere to specific standards set by regulatory agencies like SEBI in India and SEC in the US.

A Draft Red Herring Prospectus (DRHP) is a significant document that companies planning to issue Initial Public Offerings (IPOs) must file with regulatory authorities. It serves as an initial disclosure providing prospective investors with important information about the company.

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