A company might require additional funds beyond its initial capital throughout its existence and it should raise capital via different means. The capital market assures a healthy flow of funds throughout the economy so that businesses can get money in a regulated and safe way.
A significant way that companies raise funds is through issuing shares in the main market and inviting people to become shareholders (going public). This method of issuing securities of an enterprise is governed by the Securities Exchange Board of India. Let us see different SEBI guidelines for IPO or SEBI guidelines for issue of shares in India in this blog.
What is a Public Issue/Offer?
Before seeing what are the SEBI guidelines for issue of securities, let us first understand its meaning. Public Issue or Public Offer is the issue of securities by a company to brand new investors thereby adding them to the company’s shareholders. Public Offerings may be categorised broadly into two kinds: First Public Offer or IPO & Further Public Offer FPO.
Initial Public Offer (IPO)
An Initial public Offer (IPO) is a procedure where a business which hasn’t been listed on any stock exchange initially issues new securities or provides its current securities on the market to the public the very first time. This process aims to help the company get listed on a bourse.
Further Public Offer (FPO)
A Further public offering, commonly called an FPO or Follow On Offer, is a kind of public offering. It occurs when a business listed on a stock market issues extra securities or sells existing securities to the public. The purpose of an FPO would be raising the company’s economic reserves and meet up with evolving capital needs while permitting existing shareholders to sell their holdings in case they decide to do so.
Advantages of Public Offer/Going Public
To go public with a public offer has several benefits for a business, for example:
- Expansion Opportunities: Going public enables a company a chance to access a big pool of cash to expand the company, produce a product or even enter a brand new market. This injection of capital provides the financial backing to execute effective growth plans.
- Capital Acquisitions: A public offering can be a simplified and inexpensive method to raise capital. The company can get it from a number of investors – both retail and institutional – to finance its projects and operations.
- Liquidity for Stakeholders: Going public gives employees, and directors the chance to transform ownership into tradable shares. This liquidity enables them to realise the value of their investments and attract early investors and talent.
- Access to Equity Market: A publicly listed company keeps access to the equity market. This might be helpful for potential capital needs because the company could issue additional securities or shares to raise extra funds when required without needing to participate in private financing.
Laws regulating SEBI Guidelines for IPO or Initial Public Offer in India
The Securities Exchange Board of India governs the Indian corporate Securities market. Established in 1988, SEBI functions as the principal authority regulating market operations.
Some other laws associated with SEBI guidelines for IPO besides SEBI ICDR Regulations are:
- Securities Contract (Regulation) Act 1957: This Act forms the wider legal framework for the securities market in India.
- Securities Contract (Regulation) Rules, 1957: These rules specify guidelines and methods for dealing in securities.
- Companies Act, 2013: The Companies Act of 2013 addresses certain matters including the issuance of securities by companies, which includes public offerings.
What are the SEBI Guidelines for IPO?
SEBI guidelines for IPOs have been divided into unlisted and listed businesses. These guidelines define what requirements, disclosures and compliance measures businesses must take when conducting and planning an IPO. They consist of issues involving prices and prospectuses for stocks, disclosures to buyers and also the role of intermediaries.
SEBI Guidelines for IPO for Unlisted Companies
Unlisted companies in India can conduct their initial public offerings in conformity with SEBI guidelines. These options are defined by particular routes with particular requirements. SEBI guidelines for IPO for unlisted firms are the following :
Profitability Route – Entry Norm 1
The Profitability Route, as per SEBI guidelines for IPO, imposes some conditions which companies have to meet before going public. These criteria could include financial parameters and performance benchmarks for a defined period:
- The issuer must have a net worth over INR 1 Crore within the prior 3 years.
- Net tangible assets of the issuer can’t exceed INR 3 Crores a year and never over 50% of which should be in the form of monetary assets for the last 3 years.
- The company’s average operating profit (before tax) must be over INR 15 Crores in 3 of the final five years.
- Issue size may not exceed five times pre-issue net worth.
- When the company has changed its name, at least 50% of the revenue in the prior year needs to originate from activities done under the brand new name.
For companies unable to satisfy the Profitability Route requirements, SEBI has provided two alternate routes to access the primary market for their public offerings to facilitate easier IPO processes.
QIB Route – Entry Norm II
For companies requiring a large capital base, however, not meeting Profitability Route conditions, QIB Route provides an alternative under SEBI guidelines for IPO. This route enables companies access to the public interest via the book-building procedure with a certain allocation to Qualified Institutional Buyers:
- 75% of the company’s net offer to the public must be compulsory allocable to Qualified Institutional Buyers.
- Failure to reach the minimum subscription of QIB allows the company to refund the subscription fee.
Appraisal Route – Entry Norm I
The appraisal Route involves the Appraisal and participation of Financial Institutions or Scheduled Commercial Banks in the project or public offer with a contribution of a minimum of 15%, which includes 10% from the appraisers:
- Minimum post-issue face value capital INR 10 crores or even mandatory market-making for two years.
- All three entry norms also set a minimum number of 1000 prospective allottees for the issuer company’s public issue.
SEBI Guidelines for Public Issue for Listed Companies
Listed companies in India wanting to conduct a FPO must follow certain SEBI guidelines. These SEBI guidelines on public issue address criteria for company name changes and issue sizing:
1. Name Change Condition:
In case the company changed its name within the last year, a minimum of 50% of the company’s revenue for the prior year have to be from activities conducted under its new name.
2. Issue Size Restriction:
The size of the FPO may not exceed 5 times pre issue net worth as per the company’s audited balance sheet for the last financial year.
Exempted Entities under SEBI Guidelines for IPO
The Securities and Exchange Board of India has identified some entities exempt from the normal entry norms applicable to public matters. Exempted entities under SEBI guidelines for IPOs are:
1. Private & Public Sector Banks
Private and public sector banks are exempt from the entry norms for making a public issue outlined above.
2. Infrastructure Companies with Appraised Projects
Infrastructure companies which have had their projects appraised by a Public Financial Institution like IDFC or IL&FS or a bank account which was a PFI and also 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 making public offer in India must follow general SEBI guidelines for IPO in India:
- No Association with Similar Role: Directors, promoters & other key management personnel of the company shall not hold equivalent roles in another company.
- No Debarment from Primary Market: People who control the company – presidents, key management personnel or promoters – mustn’t be barred from the main market.
- Listing Application: The company must apply to list its shares with a recognised stock exchange in India.
- Depository Arrangement: The company should legally contract with a depository to dematerialise its particular securities.
- Fully Paid up Equity Shares: Partly paid-up equity shares must be paid up totally by the IPO.
- Minimum Public Shareholding: A Listed company must have a minimum public shareholding of 25%. In case not met, the company has one year to fulfil the requirement.
- Source of Funds: The company must arrange its financial resources from verifiable and trustworthy sources except for the amount paid to issue new company shares.
- Draft Offer & Red Herring Prospectus: For IPOs over INR 50 lakhs, the company first files a Draft offer in the form of a Draft Red Herring Prospectus (DRHP) with SEBI.
- Final Offer Document: The company has to file the final offer document or Red Herring Prospectus with the Registrar of Companies (ROC) following review and receipt of the final observation letter from SEBI.
- Book Building Process: Companies may opt to undergo book-building under Entry Norm II and the IPO must be completed within one year from the date of getting the last observation letter from SEBI.
- Independent Board Members: More than one half of the company’s Board of Directors must be independent investors.
- No Obligations to Promoters: The same 50% of the Board of Directors shall have no obligations towards the company or the promoters.
- No Part in Economic Offences: No economic offence shall be committed by promoters or directors of the business.
- Not a Wilful Defaulter: The company, its promoters or directors must not be wilful defaulters.
- Shares Disclosure to SEBI: The issuer business should notify SEBI of the number of shares or amount of shares between the date of submitting its draft Red Herring Prospectus and the issuance of specific securities.
- Large IPO Pre-submission: Any company looking to take a public issue exceeding INR 100 crores should file a draft offer document with the regional office of SEBI before going for the IPO.
Final Thoughts
SEBI guidelines for issue of securities in India help in maintaining market transparency, investor protection & effective flow of capital. They include public issue categorisation, legal compliances and requirements for unlisted and listed companies. They also extend to the duties and disclosures of selling shareholders to reinforce market integrity.
Following these SEBI guidelines allows businesses and investors to have a healthy capital market which supports economic development and investor confidence throughout the IPO process. These regulations comprise the backbone of a well regulated finance system of the nation.
FAQs
What are key SEBI guidelines for an IPO (Initial Public Offering)?
The SEBI guidelines for an IPO include entry norms including Profitability Route, QIB Route and Appraisal Route for unlisted companies, min 1000 prospective allottees, issue size limitations, 25% minimum public shareholding, filing draft & final offer documents, arranging money from verifiable sources and following book building process under several norms.
How will SEBI regulate a public offer for IPOs?
SEBI regulates the public offer process through guidelines in SEBI ICDR Regulations and enactments such as Securities Contract (Regulation) Act 1957, Securities Contract (Regulation) Rules 1957 and Companies Act 2013. It sets up compliance requirements including pricing, prospectus disclosures, role of intermediaries, etc.
What are the eligibility criteria for companies to follow SEBI guidelines for IPOs?
Vital eligibility requirements are: net worth over Rs 1 crore in previous three years, total tangible assets not exceeding Rs 3 crore and average pre-tax operating profit over Rs 15 crore in three of the prior five years for the Profitability Route. Other routes require QIB allocations, FIs/bank participation and minimum post-issue capital.
What documentation is required under SEBI guidelines for IPOs?
The main set of documentation is a Draft Red Herring Prospectus (DRHP) filed with SEBI for problems exceeding Rs 50 lakh and a final Red Herring Prospectus filed with ROC following SEBI observations. Companies also must file listing applications with stock exchanges and conclude depository agreements for dematerialisation.
What are penalties for not complying with SEBI IPO guidelines?
In case of violations SEBI can inspect books, inquire, levy monetary penalty, institute prosecution and order in the interest of investors and securities market.
