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IPO Application: Criteria and Regulations

IPO is known as Initial Public Offering. A private limited company can go public by listing its shares on the stock market where the general public can purchase the shares. Also, when a company lists itself for the first time on the market and sells the shares it is known as IPO. By listing itself on the stock market, the company would aim to raise equity or funds that can be used for its business activities. The company can decide a pre-stipulated price at which it plans to issue the shares to the public at large.

Some of the leading companies around the world have listed their companies on the stock market for raising funds with the intent to diversify and grow their businesses, clear debts and others. India in 2021, saw a boom of IPO listing by new-age startups and eCommerce firms in India, there were companies from various categories and sectors that had gone public and listed. Some of the notable companies that had listed were Zomato, Nykaa, Paytm, Policy Bazaar and yet to be listed down the year are LIC, Ola, Pharmeasy, and others. A total of 100+ companies had gone for IPO listing in the year.

Eligibility norms for making an IPO: The Securities and Exchange Board of India is the regulatory body for securities and commodity market in India. SEBI has stipulated the eligibility norms for companies planning an IPO which are as follows:

1. Profitability Route: a) Net tangible assets of at least Rs. 3 crore in each of the preceding three full years of which not more than 50% are held in monetary assets. However, the limit of 50% on monetary assets shall not be applicable in case the public offer is made entirely through offer for sale. b) Minimum of Rs. 15 crore as average pre-tax operating profit in at least three years of the immediately preceding five years. c) Net worth of at least Rs. 1 crore in each of the preceding three full years. d) If there has been a change in the company’s name, at least 50% of the revenue for preceding one year should be from the new activity denoted by the new name e) The issue size should not exceed 5 times the pre-issue net worth To provide sufficient flexibility and also to ensure that genuine companies are not limited from fund raising on account of strict parameters, SEBI has provided the alternative route to the companies not satisfying any of the above conditions, for accessing the primary market, as under: 2. QIB Route: Issue shall be through book building route, with at least 75% of net offer to the public to be mandatory allotted to the Qualified Institutional Buyers (QIBs). The company shall refund the subscription money if the minimum subscription of QIBs is not attained.

Apart from the eligibility for norms for making an IPO. An applicant who desires listing of its securities with NSE must fulfil the following pre-requisites:

1. Paid up Capital: The paid-up equity capital of the applicant shall not be less than 10 crores and the capitalization of the applicant's equity shall not be less than 25 crores.

2. Conditions Precedent to Listing: The Issuer shall have adhered to conditions precedent to listing as emerging from inter-alia from Securities Contracts (Regulations) Act 1956, Companies Act 1956/2013, Securities and Exchange Board of India Act 1992, any rules and/or regulations framed under foregoing statutes, as also any circular, clarifications, guidelines issued by the appropriate authority under foregoing statutes.

3. The promoting company shall submit annual reports of three preceding financial years to NSE and also provide a certificate to the Exchange in respect of the following:

  • That the company has not referred to the Board of Industrial & Financial Reconstruction (BIFR) &/OR No proceedings have been admitted under Insolvency and Bankruptcy Code against the issuer and Promoting companies.

  • The company has not received any winding up petition admitted by a NCLT

  • The net worth of the company should be positive. (Provided this criteria shall not be applicable to companies whose proposed issue size is more than Rs.500 crores)

4. The applicant desirous of listing its securities should satisfy the exchange on the following:

  • Redressal Mechanism of Investor grievance

The points of consideration are:

  1. Details of pending investor grievances against Issuer, listed subsidiaries and top 5 listed group companies by Market Cap.

  2. Arrangements or mechanism evolved for redressal of  investor grievances including through SEBI Complaints Redress System.

  • Defaults in payment Defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders by the applicant, promoters/promoting company(ies), group companies, Subsidiary Companies shall also be considered while evaluating a company's application for listing. The securities of the applicant company may not be listed till such time it has cleared all pending obligations relating to the payment of interest and/or principal. Note: a) In case a company approaches the Exchange for listing within six months of an IPO, the securities may be considered as eligible for listing if they were otherwise eligible for listing at the time of the IPO. If the company approaches the Exchange for listing after six months of an IPO, the norms for existing listed companies may be applied and market capitalisation be computed based on the period from the IPO to the time of listing.

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