Initial Public Offering: A Strategic Path For Listing Shares In India Under The Aegis Of SEBI And Stock Exchanges

I. Introduction

An Initial Public Offering (IPO) is a transformative event that marks a company's transition from private ownership to public listing, offering a unique opportunity to raise capital and enhance visibility. In India, the IPO process is primarily governed by the Companies Act, 2013 (hereinafter referred to as "the Companies Act"), SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (hereinafter referred to as "ICDR Regulations"), SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Securities Contracts (Regulation) Act, 1956, and rules made thereunder. The Securities and Exchange Board of India (hereinafter referred to as "SEBI") oversees the entire process to ensure regulatory compliance and safeguard investor interests.

This article delves into the legal considerations, procedural intricacies, and key regulatory factors involved in launching an IPO.

II. Qualification Criteria for a Company, i.e., an Issuer¹, w.r.t. launching IPO

As per Regulation 6 of the ICDR Regulations, an issuer shall be eligible for offering shares to the general public post fulfilling the following pre-requisites-

• The issuer company must possess net tangible assets amounting to at least INR 3 Crore, calculated on a restated and consolidated basis, for each of the last three full financial years (each consisting of twelve months). Additionally, no more than 50% of these assets should be in the form of monetary assets, such as cash and bank balances, trade receivables, loans and advances, deposits with banks (FDs), investment in debt instruments (mutual funds, bonds), inter corporate deposits, etc.
  Note - The restriction on the proportion of monetary assets will not apply if the IPO is solely conducted through an offer for sale².
• The issuer company must demonstrate an average operating profit³ of no less than INR 15 Crore, calculated on a restated and consolidated basis⁴, over the last three years (each of twelve months), with operating profit being reported in each of these years.
• Additionally, the issuer company must have a net worth⁵ of at least INR 1 Crore in each of the last three full financial years (each consisting of twelve months), calculated on a restated and consolidated basis.

III. Exception to the above Qualification Criteria

In relation to start-up companies, the ICDR Regulations provide specific exemptions aimed at enhancing their ability to raise capital during the initial phases of growth. These exemptions are designed to ease the eligibility criteria exclusively for start-ups, thereby strengthening their financial position. Accordingly, a start-up issuer that does not fulfill the standard eligibility requirements may still proceed with an IPO, subject to the condition that the offering is made through the book-building process⁶. Furthermore, such an issuer must allocate a minimum of 75% of the net offer to qualified institutional buyers and furnish an undertaking to refund the entire subscription amount in the event this threshold is not achieved.

IV. General Requirements for IPO

As per Regulation 7 of the ICDR Regulations, the following general conditions shall be adhered to by the issuer company besides complying with Regulation 6 of the ICDR Regulations.

• application for in-principle listing approval from one or more stock exchanges, with a designated exchange selected,
• agreement with a depository (i.e., CDSL or NSDL) for dematerialization of securities,
• promoters must ensure that their securities are held in dematerialized form prior to the filing of the offer document; however, in the case of private companies that are neither producer companies nor classified as small companies as of 31st March, 2023, compliance with the dematerialization requirement shall be achieved by 30th June, 2025.
• existing partly paid-up shares are either fully paid-up or forfeited,
• the issuer must demonstrate confirmed financial arrangements to cover at least 75% of the funding required for the specific project, excluding the capital raised through the public offering or any pre-existing internal funds. Additionally, the amount allocated for general corporate purposes must not exceed 25% of the total funds raised.

1. Corporate Governance Norms

• Minimum Subscription – As per Regulation 45 of the ICDR Regulations and Section 39 of the Companies Act, the minimum subscription required for the issue shall be at least 90% of the offered amount as stated in the offer document, except in the case of an offer for sale of specified securities. If the minimum subscription is not met, the application money must be refunded to the applicants within 4 (four) days of the issue's closure.
  It should also meet the requirements of Regulation 47 of the ICDR Regulations, which stipulate that the application amount must be at least 25% of the issue price.
  Exemption in case of Under-Subscription⁷
  To mitigate the risk of under-subscription in an IPO (other than through the book building process), the issuer has the strategic option to enter into an underwriting agreement with SEBI-registered merchant bankers or stockbrokers before filing the prospectus. This agreement ensures that, in case of under-subscription or rejection of applications, the underwriters will subscribe to the unsubscribed portion at a price not less than the issue price, either directly on their own or by procuring investors.
• Minimum Promoters' Contribution (as per Regulation 14 of the ICDR Regulations)– Promoters must hold at least 20% of the post-issue capital through equity shares (including SR equity shares⁸) or convertible securities, one day prior to the issue opening. If their holding drops below 20%, specified entities (e.g., AIFs, FVCIs, banks, insurance companies, certain public shareholders, or promoter group entities owning at least 5% of the post-issue capital) may bridge the gap up to 10%, without being classified as promoters. If the required contribution exceeds ₹100 crore and the IPO includes partly paid shares, promoters must contribute ₹100 crore upfront, with the remainder paid before subsequent calls.
• Minimum Public Shareholding – The following table mandates the adherence to the minimum public shareholding to be offered by the issuer company to the public in pursuance of Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957-
  

  S. No.	Post-Issue Capital	Minimum Public Offer Requirement
  1.	Less than or equal to Rs. 1,600 crores	At least 25% of each class/kind of equity shares or convertible debentures
  2.	More than Rs. 1,600 crores and Less than or equal to Rs. 4,000 crores	At least that percentage of each class/kind equivalent to Rs. 400 crores in value
  3.	More than Rs. 4,000 crores and Less than or equal to Rs. 1,00,000 crores	At least 10% of each class/kind of equity shares or convertible debentures
  4.	More than Rs. 1,00,000 crores	At least such percentage of each class/kind equivalent to Rs. 5,000 crore and minimum 5% of each such class/kind

  If the post-issue capital exceeds ₹1,00,000 crores (as stipulated in point 4 of the table), the issuer must increase public shareholding to at least 10% within two years and 25% within five years from the date of listing, as per SEBI's prescribed manner. If the post-issue capital is more than Rs. 1,600 crores but less than or equal to Rs. 4,000 crores or is more than Rs. 4,000 crores but less than or equal to Rs. 1,00,000 crores (as stipulated in points 2 and 3 of the table), the issuer must raise public shareholding to 25% within three years from the date of listing, in line with SEBI guidelines.

2. Lock-in period - Minimum Promoters' Contribution (including by AIFs, FVCIs, scheduled commercial banks, PFIs, IRDAI-registered insurers, non-individual shareholders with 5% or more post-issue capital, or promoter group entities excluding promoters) shall be locked-in as follows:

1. Locked in for 18 (eighteen) months from IPO allotment.
2. If majority of issue proceeds (excluding OFS) is for capital expenditure, lock-in extends to 3 (three) years.

Promoters' Holding beyond Minimum Contribution shall be locked-in as follows:

1. Locked in for 6 (six) months from IPO allotment.
2. If the majority of issue proceeds (excluding OFS) is for capital expenditure, lock-in extends to 1 (one) year.

The pre-issue capital for non-promoters is subject to a 6-month lock-in from the IPO allotment date, with exceptions for employee ESOPs, shares from ESOP trusts, and shares held by VCF, AIF, or FVCI.

3. Miscellaneous – Some of the other key requirements include the following:

1. A Private Company must be converted into a Public Company before initiating the IPO due diligence process, ensuring compliance with Board composition and KMP appointments.
2. As per Regulation 7 of the ICDR Regulations:
   
   • Partly paid shares must be forfeited or fully paid; promoter holdings dematerialized before DRHP filing. General corporate purposes and unidentified acquisitions/investments are capped at 35% of the issue size, with a 25% limit on unidentified acquisitions. However, the 25% limit does not apply if specific targets are disclosed in the offer documents.
   • Issuer must maintain records (e.g., meeting minutes, returns, filings, statutory registers, shareholding details) for the past five financial years.
   • All public communications must comply with Schedule IX—truthful, clear, and consistent with the draft offer document.

4. Foreign Investment Norms

The Foreign Exchange Management Act, 1999 and the accompanying FEM (Non-Debt Instrument) Rules, 2019, and Foreign Direct Investment Policy govern the sectoral caps, investment conditions and the permissible route (government/automatic) for foreign investment in India. The Issuer shall adhere to the sectoral caps and the permissible route for such an investment made in IPO by a foreign investor, along with complying with the disclosure and reporting requirements prescribed by Reserve Bank of India (RBI).

5. Intermediaries involved in IPO

As per Regulation 23 of the ICDR Regulations, specific SEBI-registered intermediaries must be appointed for IPOs.

• Lead Managers:
  A SEBI-registered merchant banker/lead manager appointed by the issuer to manage the issue, conduct due diligence, file offer documents, and ensure post-issue compliance. In a book-built issue, they act as book-running lead managers. At least one lead manager must be independent and in case of an associate, he may only handle marketing with disclosure.
• Other Intermediaries:
  The issuer, in consultation with lead managers, must appoint other SEBI-registered entities such as underwriters, bankers to the issue, and depository participants. A SEBI-registered Registrar to an Issue (RTA) must also be appointed who shall be responsible for application processing, allotment, refunds, and coordinating with depositories. Additionally, issuers must engage an independent valuer, compliance officer (e.g., Company Secretary), and experts like legal advisors, auditors, and advertising agencies. The compliance officer handles investor grievance redressal and ensures regulatory compliance.

V. Types of Prospectus

Section 28(2) of the Companies Act stipulates that any document through which an offer for sale is made to the public shall be treated as a prospectus. Prospectus refers to a document including a notice, circular, advertisement, or other document inviting offers from the public for the subscription or purchase of any securities of a company. It is a formal legal document that provides details about the securities being offered to enable investors to make informed decisions.

Some of the types of prospectus are as follows:

1. Deemed Prospectus (in case of offering of securities through intermediaries): Under Section 25(1) of the Companies Act, a document issued by an intermediary offering a company's securities to the public is treated as a deemed prospectus and is subject to the same regulations as a standard prospectus.
2. Draft Red Herring Prospectus (DRHP): A preliminary version of the Red Herring Prospectus submitted to SEBI for review and public comment. It excludes price and quantity details but includes key company information and is made available on SEBI and stock exchange websites.
3. Red Herring Prospectus: Section 32 of the Companies Act defines a red herring prospectus as a preliminary prospectus that specifies a price band but omits the final price and quantity, which are disclosed later before the issue opens.
4. Shelf Prospectus (if multiple offers are planned): Defined under Section 31 of the Companies Act, it allows multiple issues over time without filing a new prospectus for each tranche, suitable for companies planning several public offerings.
5. Abridged Prospectus: As per Section 2(1) of the Companies Act, it is a concise version of the prospectus containing key disclosures, as prescribed by SEBI, provided to investors along with the application form.
6. Final Prospectus: The complete offer document issued after price determination, incorporating all final details, and filed with the Registrar of Companies.

VI. Approvals/Formalities before IPO launch

In accordance with Part A of Schedule VI of the ICDR Regulations, the red-herring prospectus and the prospectus w.r.t the IPO must disclose general company details, capital structure, objects of the issue, business and financial information, legal and statutory disclosures, offering information such as Terms of the issue, undertaking by the issuer, utilization of issue proceeds, description of equity shares and terms of AOA , information w.r.t issue procedure such as Application process, basis of allotment, shareholders' agreements, interest of Directors, statement ensuring compliance with corporate governance and listing details.

Further, Section 26 of the Companies Act mandates specific disclosures in the prospectus, and that all information in the red herring prospectus and prospectus must be current, not older than six months from the issue opening date.

Compliance in case of advertisement of prospectus: As per Section 30 of the Companies Act, in case of any advertisement of the prospectus, the issuer must disclose key memorandum details, including the company's objectives, capital structure, and subscriber information.

Under Regulation 25 of the ICDR Regulations, the issuer (through the lead manager) must file three copies of the draft offer document with SEBI, along with a confirmation of the issuer-lead manager agreement and a due diligence certificate. The issuer must also file the draft with proposed stock exchanges and submit promoter identification details, such as PAN, bank account, and passport numbers for individual promoters, and PAN, bank account, registration number, and ROC address for corporate promoters.

If SEBI provides observations, the draft must be updated, highlighted, and resubmitted to SEBI. The final offer document is then filed with the ROC, SEBI, and stock exchanges.

As per Regulation 26, the draft must be made public for 21 (twenty-one) days via the issuer's, SEBI's, stock exchanges', and lead managers' websites. Within 2 (two) days of filing, a public notice must be published in widely circulated English, Hindi, and regional newspapers. All public comments and subsequent changes must be submitted to SEBI by the lead manager.

VII. Formalities during IPO

1. Compliance w.r.t Price Band

If the issuer chooses not to disclose the floor price⁹ or price band¹⁰ in the red herring prospectus, it must be announced at least 2 (two) working days before the issue opens, in the same newspapers within which announcement w.r.t. filing of draft offer document and public feedback is published.

The announcement must include key financial ratios for both ends of the price band and highlight the "basis of issue price" section. It should be disclosed on stock exchange websites and pre-filled in application forms available.

2. Abridged Prospectus and Applications Supported by Blocked Amount (ASBA) requirements

The abridged prospectus must include only the disclosures outlined in Part E of Schedule VI of the ICDR Regulations and exclude any unrelated information. Every application form issued in connection with the offer must be accompanied by a copy of the abridged prospectus. Additionally, all bids shall be accepted exclusively through the ASBA facility availed from a bank, as prescribed by SEBI.

3. Allocation of Net Offer

The issuer shall adhere with the percentage of net offer¹¹ allotted to various categories of investors in accordance with Regulation 32 of the ICDR Regulations.

• IPO via Book-Building under Regulation 6(1) of ICDR Regulations (Profit Track Record Route):
  
  1. Retail Individual Investors (RIIs):
     
     • A minimum of 35% of the net offer must be reserved.
  2. Non-Institutional Investors (NIIs):
     
     • A minimum of 15% of the net offer must be reserved.
  3. Qualified Institutional Buyers (QIBs)¹²:
     
     • A maximum of 50% of the net offer, out of which 5% is reserved for mutual funds.
  4. Reallocation Clause:
     
     • Any unsubscribed portion in retail or NII categories can be reallocated to other eligible categories, such as QIB.
• IPO via Book-Building under Regulation 6(2) (QIB Route / Loss-making Companies):
  
  1. Retail Individual Investors:
     
     • A maximum 10% of the net offer.
  2. Non-Institutional Investors:
     
     • A maximum 15% of the net offer.
  3. Qualified Institutional Buyers:
     
     • A minimum of 75% of the net offer, with 5% reserved for mutual funds.
  4. Reallocation Clause:
     
     • Any unsubscribed portion in retail or NII categories can be reallocated to other eligible categories, such as QIB.
• IPOs through Non-Book-Building Route (Fixed Price Method):
  
  1. Retail Individual Investors:
     
     • A minimum 50% of the net offer must be allocated.
  2. Remaining Allocation:
     
     • To other individuals (non-retail) and institutional/corporate investors.
  3. Reallocation Clause:
     
     • Any unsubscribed portion may be reallocated among these investor categories.

4. Period of Subscription

As per Regulation 46 of the ICDR Regulations, an IPO must remain open for a minimum of 3 (three) working days and a maximum of 10 (ten) working days from the date on which the IPO opens for public subscription, i.e., the opening date of the issue. If the price band is revised due to force majeure events, banking strike or any other circumstance that may disrupt the bidding process, the issuer must extend the bidding period disclosed in the red herring prospectus by at least 3 (three) working days.

VIII. Post-IPO Approvals and Formalities

1. Allotment Procedure and Basis of Allotment

The issuer shall not proceed with allotment in a public issue if the number of prospective allottees is fewer than one thousand. Each retail individual investor shall be allotted no less than the minimum bid lot¹³, while non-institutional investors shall receive at least the minimum application size¹⁴.

As per Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the issuer company shall also be obliged to file E-Form PAS-3 within 30 (thirty) days from the date of allotment of securities.

Allotment in case of Over-Subscription

As per Regulation 49 of the ICDR Regulations, in case of over-subscription, the issuer can allot up to 1% of the net offer to round off to the minimum lot size, in consultation with the stock exchanges. Allotments to non-retail investors are made proportionately, and retail investors receive at least the minimum bid lot, with the remaining shares allotted proportionally. If shares are not allotted or application monies are not refunded within the specified time, the issuer must pay 15% annual interest on the refund amount.

2. Utilization of the Subscription Amount

The issuer shall govern the utilization of the subscription amount as per Section 40 of the Companies Act. The amount allocated for general corporate purposes and identified acquisitions or investments shall not exceed 35% of the total issue size; however, it shall be limited to 25% in the case of unidentified acquisitions.

Further, as per Section 29 of the Companies Act, the company shall not utilize any funds raised through the prospectus for purchasing, trading, or dealing in the equity shares of other listed companies.

3. Undertakings by the Issuer for Listing

A company applying for listing shall, as a condition precedent, undertake the following, as stipulated under Rule 19 of the Securities Contracts (Regulation) Rules, 1957:

• Allotment and Documentation: Issue allotment/rights letters, ensure proper documentation, and include necessary details like dividend calculation and renunciation forms.
• Securities and Receipts: Issue receipts for securities and manage split, consolidation, and renewal receipts without charges, accepting valid member discharges.
• Transfer and Legal Documentation: Endorse and register legal documents and issue certificates for transferred shares within 1 (one) month.
• Disclosures to Stock Exchange: Notify stock exchange of dividends, bonuses, material changes, new issues, and resolutions promptly.
• Transfer Book Closures: Close transfer books only for specific purposes with prior exchange notification and approvals.
• Shareholder Information and Rights: Submit annual return of top holders, grant renunciation rights, and allow at least four weeks for exercising rights.
• Redemption and Market Transparency: Notify on securities' redemption, cancellation, and provide timely information to prevent false market conditions.
• Compliance with Exchange Rules: Comply with all stock exchange rules, byelaws, and listing requirements.

4. Additional Compliance w.r.t Exchanges

a. Paid-up Capital – The paid-up capital of the issuer shall not be less than Rs. 10 crore and the capitalization of the issuer's equity shall not be less than Rs. 25 crores.

b. Track Record – The issuer must demonstrate a track record of at least three years, which may be met by:

• The applicant company itself, or
• Its promoters/promoting entity (whether incorporated in India or abroad), or

c. Investor Grievance and Payment Defaults –

The issuer must:

• Disclose pending investor complaints involving itself, listed subsidiaries, and top five listed companies by market cap.
• Outline redressal mechanisms, including SEBI's SCORES platform.
• Declare any defaults in interest/principal payments by itself, promoters, group or subsidiary companies.
• Listing will be deferred until all such dues are cleared.

d. Listing Fee

The prescribed initial listing fee must be paid by the issuer to the Stock Exchange where it is proposed to be listed at the time of filing the final listing application. For example, on the NSE, the initial listing fee is Rs. 50,000, and the annual listing fee starts at Rs. 3,00,000 for paid-up capital up to Rs. 100 crores, increasing for incremental changes in the paid-up capital, payable annually.

e. Permission to use Stock Exchanges' Name in Prospectus

Issuer companies seeking to list securities via public issue must obtain prior approval from Stock Exchange before using its name in the prospectus or offer document filed with the ROC.

f. Listing and Trading Approvals

Before the issue opens, the company allocates shares to Anchor investors. After the closure of issue, on the next working day, requisite documents are submitted, and the basis of allotment is completed. Within 2 (two) working days of issue closure, Listing Documents and Credit Confirmation are provided. The issuer shall comply with the obligations outlined in Rule 19(1) of the Securities Contracts (Regulation) Rules, 1957, by submitting the requisite documents together with its application to the stock exchanges.

Thereafter, in line with SEBI guidelines, the issuer after completing the listing formalities on all stock exchanges where it is seeking listing will get listed on the third working day of the closure of issue. At the end, the trading formalities must be completed by the company within 7 (seven) working days of finalization of the basis of allotment.

IX. Other Mandatory Adherences

1. Compliance with the Insider Trading norms w.r.t. Unpublished Price Sensitive Information (UPSI)

Insiders must not share or allow access to UPSI related to an issuer or its securities (listed or proposed to be listed) unless for legitimate purposes, legal obligations, or duties. Others are similarly barred from obtaining or inducing disclosure of such information. The board of a listed company must define "legitimate purposes" through a policy—covering routine dealings with business partners, advisors, or consultants—under the "Codes of Fair Disclosure and Conduct" as per Regulations 8 and 9 of the SEBI (Prohibition of Insider Trading) Regulations, 2015.

2. Actions Prohibited

Any person associated with the issue is prohibited from offering any direct or indirect incentive in cash, kind, services, or any other form to encourage applications in the IPO. Only genuine fees or commissions for services rendered in relation to the issue are permitted.

3. Debarment of the Issuer

According to Regulation 5(1) & 5(2) of the ICDR Regulations, certain entities are restricted from making an IPO, except where debarment period has already been concluded at the time of filing the draft offer document with SEBI:

• If the issuer, its promoters, promoter group, or selling shareholders are debarred by SEBI from accessing the capital market, they are ineligible to conduct an IPO.
• If any promoter or director of the issuer is also a promoter or director of an entity debarred by SEBI, the issuer becomes ineligible for an IPO.
• If the issuer or any of its promoters or directors is identified as a willful defaulter, they are prohibited from proceeding with an IPO.
• If any promoter or director of the issuer is classified as a fugitive offender, the issuer cannot proceed with an IPO.
• The issuer is disqualified from an IPO if there are outstanding convertible securities or other rights allowing any person to acquire equity shares.

X. IPO through Pre-filing of Draft Offer Document

With the introduction of Chapter IIA of the ICDR Regulations, an alternative IPO route as opposed to the standard process under Chapter II has been established, allowing issuers to pre-file draft offer documents with SEBI and stock exchanges. This enables early feedback and revisions before public issuance. The issuer must file 3 (three) copies of the draft with SEBI, pay applicable fees, and submit it to stock exchanges—without public disclosure at this stage. Lead managers must provide a due diligence certificate. Within 2 (two) working days, a public announcement must be made, clarifying that filing does not imply IPO approval. SEBI may suggest changes, after which an updated draft prospectus is published for public comments. Post-feedback, the final offer document is filed with the ROC, and the IPO proceeds only after SEBI's observations are addressed.

In conclusion, an IPO necessitates strict adherence to SEBI regulations, comprehensive disclosures, and meticulous planning. This ensures compliance, transparency, investor confidence, and drives the company for long-term growth.

Footnotes

1. The word "company" has been used interchangeably with the word "issuer" to denote the Company planning to launch an IPO.

2. Offer for sale means an offer of securities by existing members to the general public for subscription through an offer document.

3. Operating profit is the profit earned from a company's core business operations, excluding income from non-operating activities (such as interest income, dividend income, or profit/loss from sale of investments or fixed assets) and before accounting for interest and taxes.

4. Restated and consolidated basis means that the financial statements have been adjusted to ensure consistency across all reporting years (restated) and include the combined financial information of the company and its subsidiaries, presented as a single entity (consolidated), in accordance with applicable accounting standards.

5. Net worth refers to the aggregate of the company's paid-up capital, reserves created from profits, the securities premium account, and the balance in the profit and loss account, as per the audited balance sheet. From this amount, the values of accumulated losses, deferred expenditure, and other unadjusted expenses is deducted. It excludes reserves arising from asset revaluation, reversal of depreciation, and amalgamation.

6. Book building refers to the process of inviting and colleting investor bids to gauge demand and help determine the price or value of the specified securities, in accordance with the applicable regulations.

7. Under-subscription refers to a situation In a public issue where the total number of shares applied for by investors is less than the number of shares offered in the issue.

8. SR equity shares means the equity shares of an issuer having superior voting rights compared to all other equity shares issued by that issuer.

9. Floor price is the minimum price per equity share set by the issuer for a book-built public issue, below which investors cannot place bid.

10. Price band is a range of prices per equity share, consisting of a floor price (minimum) and a ceiling price (maximum), within which investor can bid in a book-built issue.

11. Net offer is the portion of the total issue that is available for subscription to the public, after excluding specific reserved portions.

12. A Qualified Institutional Buyer (QIB) includes mutual funds, venture capital funds, insurance companies, banks, and certain financial institutions with specific criteria.

13. Minimum bid lot refers to the minimum number of shares that a retail investor is allowed to apply for and is allotted in a public issue.

14. Minimum application size refers to the smallest value (in amount) or number of shares that an investor other than retail, non-institutional, or anchor investor, i.e., typically QIBs or other eligible investors must apply for in a public issue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.