Last Updated: 16 Oct 2024
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The realm of finance and capital markets presents several paths businesses might follow to get money. An initial public offering also known as an IPO is among the most powerful tools available. By giving private businesses the chance to issue shares to investors for the first time in history, this method assists them to become public. Whether one is a Small or a large company, one must understand the IPO criteria. We will go over IPO requirements in India; SMEs’ eligibility criteria and those of which several regulatory bodies—including the Securities and Exchange Board of India fit will be discussed.
An initial public offering is the procedure by which a private company raises money by distributing shares to the public for the very first time. For companies looking to restructure, increase their visibility, or grow, most of the time it is a necessary phase.
The Securities and Exchange Board of India, SEBI, includes some specific IPO requirements in India. Their primary criteria aim to protect investors while easing the listing process. In this regard, here are the most important eligibility criteria for an IPO:
As a rule, in India, the company must have operated for at least three years to be qualified for an IPO. Also, it must record profitability in at least two of the three latest fiscal years. This rule ensures that only stable companies with proven profitability track records are allowed to go public.
A minimum net worth requirement of ₹3 crore is necessary for a company to be permitted to come up for an IPO. The net worth merely calculates total assets minus total liabilities, thus proving the financial health of the organization.
At least 25% of the equity of the company has to be floated to the public. This is known as the “public float” and this provides liquidity as well as ensures that the market properly values the equities of the company.
A merchant banker with SEBI registration should audit the financial statements of the company. This will have transparency and credibility before offering shares to the public.
The company should not have pending legal suits against it which would adversely impact its operations. Red flags include pending litigation, and SEBI will not approve companies with major unresolved issues.
While large corporations normally rely on the IPO route, there are special channels for Small and Medium Enterprises too. However, the SME IPO requirements in India differ slightly from those of traditional IPOs.
On the other hand, for small and medium-sized enterprises, the minimum required net worth is lesser compared to big companies. As per the conditions of NSE SME IPO, paid-up capital should be at least ₹1 crore and net tangible asset value should be at least ₹3 crores.
An SME must have been in operation for three years and had a positive net worth for at least two years. This ensures that the SME can make financial decisions without the risk of failing since it is not a new entrant with lesser market exposure.
The company needs to demonstrate a clean record of audits, without any major defaults or legal cases
Besides the various guidelines of SEBI, SME IPOs also have some listing criteria under the stock exchange, including NSE and BSE. The NSE SME IPO criteria usually comprise a minimum offer size as well as a few mandatory disclosure requirements to protect investors.
Companies also have to fulfill the listing requirements of the stock exchange where they would issue an IPO. Her’s what you ought to know about IPO listing requirements:
The minimum paid-up share capital of the company shall not be less than ₹ 10 crore. That is, the company will be sound in financial terms before they enter the public market.
To qualify for the IPO listing, there must be at least seven shareholders in the company before the launch of the IPO.
The company’s financial statements for at least three consecutive years will be audited free from any negative comments and/or qualification in the audit report based upon Indian Accounting Standards (Ind AS).
SEBI is sent the draft red herring prospectus. A draft red herring prospectus, a DRHP clarifies the company’s financial soundness, business strategy, and IPO. It is also under examination by SEBI and gets to the decision that guides the investors to approve the DRHP.
The regulating power keeping the IPO process fair and transparent is SEBI. Ensuring businesses satisfy particular eligibility requirements and provide appropriate data to protect investor interests is the major goal SEBI aims at. Not only for IPO applications and listing processes, all the rules and regulations developed by SEBI ensure post-IPO compliance, hence preserving the integrity of Indian capital markets.
Below are the steps to file an IPO:
The Company gets a SEBI-registered merchant banker appointed by it to handle the IPO.
The Company files its DRHP with SEBI. It contains all information regarding its operations, financials, and the reason for filing the IPO.
SEBI studies the DRHP and approves it or asks it to be changed. The company has to effect these changes before moving ahead.
After SEBI grants its approval of the IPO, the company after discussion with the merchant banker decides on the price band and enters the IPO for the subscription by the public.
After the closure of the subscription period, the shares are allotted to the successful applicants, and the company is listed at the Stock Exchange.
Not all IPO applications get approval. Some of the reasons for rejecting them include:
Organizations having mistakes or inconsistencies in their financials would be rejected.
Those companies whose applications are under judicial scrutiny are liable to have their application rejected by SEBI.
In this case, the reason for the rejection will be that the shareholders have not offered at least 25% of the company’s shares to the public.
An IPO of a company will be debarred if the financial statements of that particular company are not audited by a SEBI-registered merchant banker.
An IPO is the most significant milestone of an enterprise in the entire process of most companies, now serving as a means to raise more capital and push their business further. However, it is also one of the very cumbersome procedures to be undertaken and has to be compliant with the rules for issuing an IPO as determined by SEBI in India. From eligibility standards, a financial check on the books of the company and finally satisfying the listing requirements for an IPO, every step, however small, has to be taken with utmost care. Whether you are a SME looking to go public or a big company, one must know the criteria and then collaborate with appropriate experts to ensure success.
With at least three years of business experience and profit generating in at least two out of the last three years, the company must have a minimum net value of ₹3 crore.
SME IPOs have a net tangible assets of ₹3 crores and a paid-up capital of at least ₹1 crore with three years of operating history.
SEBI regulates the process of an IPO. They check whether these companies meet eligibility criteria or not and that their financial statements are correctly filled and disclosure practices are properly followed.
The time taken in the IPO procedure in terms of filing DRHP, SEBI approval and final allotment typically ranges between six to eight months
If SEBI rejects a company’s Draft Red Herring Prospectus, it must fix mistakes, clear all the misunderstandings, and resubmit the prospectus once more for review.
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