Eligibility to Apply for an IPO

When a private company offers its company shares to the general public for the first time, it is called an Initial Public Offering (IPO). To launch an IPO, it is important for the companies to meet specific eligibility requirements set by the Securities and Exchange Board of India (SEBI) and stock exchanges like the National Stock Exchange (NSE).

There are different types of investors eligible to apply for an IPO. This categorisation is done based on their investment amounts and characteristics.

• Retail Individual Investors (RIIs)

Retail Individual Investors are investors who can apply for shares with a total investment of up to ₹2 Lakhs in a single IPO application. Typically, a minimum of 35% of the total offer is reserved for RIIs if the company has been profitable in the last 3 years; otherwise, this quota may be reduced to 10%.

• Non-Institutional Investors (NIIs)

Non-Institutional Investors are individuals or entities that apply for shares worth more than ₹2 Lakhs. They generally have a reserved quota of around 15% of the total IPO issue size.

• Qualified Institutional Buyers (QIBs)

Qualified Institutional Buyers are investors like mutual funds, banks, insurance companies, and other financial institutions. These buyers meet the specific regulatory criteria from SEBI. These investors often get a significant portion, up to 50% of the IPO shares due to their ability to absorb large quantities of stock.

• Foreign Institutional Investors (FIIs)

Foreign Institutional Investors are established outside India. However, they wish to invest in Indian securities. However, they face restrictions on the total amount they can invest in Indian companies, usually based on sectoral caps.

Investors should meet the following eligibility criteria to apply for an IPO in India:

• Minimum age of the investors must be at least 18 years 

• A mandatory Permanent Account Number (PAN) card

• A functional bank account for the Application Supported by Blocked Amount (ASBA) process. This account allows funds to be blocked for the IPO application without being debited until shares are allotted.

• A Demat account, after allocation for holding and transacting in shares

• Know Your Customer (KYC) profile of the investor

The following documents are required to be submitted when applying for an IPO:

• PAN card 

• Demat account details- account number, name of the Depository Participant (DP)

• Bank account details

• Identity & Address proofs such as Aadhar card, passport etc. or even a bank statement

The IPO application process starts with hiring a book lead manager.

 

The process takes about

• 6-12 months to complete for mainboard companies

• 3-4 months for small and medium-sized enterprises (SMEs)

 

Besides, for the convenience of investors, SEBI came up with a facility called the Applications Supported by Blocked Amounts (ASBA). Under this facility, the designated amount is blocked in investors' accounts upon IPO application. 

 

Key Steps in the IPO Process:

1. Appoint a merchant banker to manage the IPO process

2. Get approval from SEBI by submitting a draft offer document 

3. Take in-principle approval from the stock exchange where the shares will be listed

4. The pricing is determined for the IPO, based on several factors, including market demand and the company's financials

5. Submit the final offer document to SEBI

6. Place bids for shares when the IPO bidding window opens

7. After the bidding period, shares are allotted to successful investors

8. Once the shares are allotted, the company’s shares are listed on the stock exchange

Eligibility to apply for an IPO is different through different platforms. Let's check out IPO eligibility criteria for various platforms:

Stock Exchanges (NSE, BSE)

When Applying for Mainboard IPOs

• Must have a paid-up equity capital of at least ₹10 Crores

• Market capitalisation must exceed ₹25 Crores

• Should have a net worth of at least ₹1 Crore in each of the last 3 years

 

When Applying for SME IPOs

• Post-issue paid-up capital must not exceed ₹25 Crores

• Should have positive net worth and meet specific revenue limits over recent years

• A minimum track record is required, typically 3 years

Brokerage Platforms (Traditional and Online)

• Must have a valid Demat account

• Bank account should be linked to the Demat account

• Should have ₹3 Crores of Net Tangible Assets as per the latest audited financial results

• Net worth and profit should be minimum ₹5 Crores each in any 2 out of 3 financial years or at least ₹25 Crores in any 3 out of 5 financial years

Creditworthiness and Financial Standing

Creditworthiness and financial standing affect eligibility of investors looking for larger investments. Usually, the investors having strong financial stability and credit history are more likely to qualify.

Being Non-Resident Indians (NRIs) and Overseas Citizens of India (OCI)

Non-Resident Indians (NRIs) and Overseas Citizens of India (OCI) are required to adhere to specific regulations. They can apply through designated banks that ease IPO investments. Apart from this, they need to ensure compliance with the Foreign Exchange Management Act (FEMA) regulations.

Restrictions on Company Insiders and Employees

Employees and insiders of the investing company need to follow some limitations to prevent any conflicts of interest. Those holding significant stakes in the company have limitations in selling their share percentages during the IPO process.

SEBI Guidelines

Investors need to follow the guidelines set by SEBI when applying for an IPO. Individual investors do not have specific minimum net worth or tangible asset requirements. However, they must ensure they have a valid Demat account and PAN. Whereas, companies making the IPO must have net tangible assets and profitability, as part of SEBI's entry norms.

 

Investors are also required to give detailed disclosures in their prospectus such as their financial history and their intentions when applying for an IPO. 

 

Besides, SEBI also monitors how the funds are being used. The way the raised funds are used should align with the objectives investors have given in the prospectus.

Investor Protection Measures

SEBI has implemented various investor protection measures to improve the transparency in the process. Companies are required to maintain a minimum public shareholding percentage after IPO to ensure adequate public participation.