IPO Eligibility

This chapter covers the IPO norms for Mainboard and SME IPO, their requirements and pre-IPO eligibility criteria.

1. Mainboard IPO Requirements

A Main Board IPO is an initial public offering of large and established companies with a paid-up capital of at least Rs 10 crores. A Main Board IPO is a regular IPO listed and traded on the stock exchange platforms of the NSE/BSE.

The listing standards and eligibility requirements for Mainboard IPOs are set out in the SEBI ICDR Regulations 2018.

1. SEBI IPO Eligibility Criteria

SEBI has prescribed two routes by which a company can qualify as an issuer of IPOs.

1. Profitability Route (Entry Norm I)

The companies must meet all the following conditions in terms of profit standards to be eligible for an IPO through this route:

• The company should have net tangible assets of at least Rs 3 crores in each of the three preceding years.
• For fresh issues (not OFS), of the above Rs 3 crores of tangible assets, not more than 50% should be cash or cash equivalent.
• The company should have an average operating profit (before tax) of at least Rs 15 crore in any of the three years out of the last five years.
• In case of a name change, 50% of the revenue generated in the previous year should be from the business carried on under the new name.
• The issue size should not exceed five times the net worth of the company before the issue (pre-issue).

2. QIB Route (Entry Norm II)

The QIB route is an alternative route developed by SEBI for genuine, capable and legitimate companies that are unable to meet strict profitability parameters. The companies going for IPO through the QIB route have to ensure that:

• IPO through the book-building process.
• Allocate at least 75% of the net offering to qualified institutional buyers .
• Refund of IPO subscription money if the minimum allotment requirement is not met.

SEBI requirements for directors/promoters/founders/investors

• There is no disciplinary action against the company founders/promoters/directors/selling shareholders.
• The promoters/directors/founders/investors/issuing company should not be barred from accessing the capital markets . The company cannot apply for an IPO until the debarment period has expired.
• The promoters/managers/founders/investors should not be affiliated with another company that is excluded from access to capital markets.
• The promoters/directors/founders/investors should not be defaulters.
• The promoters/directors/founders/investors must not be classified as fugitive offenders as defined in the Fugitive Economic Offenders Act 2018.
• The promoters should individually or collectively own at least 20% of the equity after the IPO.

2. NSE IPO Eligibility Criteria

In addition to the IPO guidelines prescribed by SEBI, the NSE requires that the issuing company meet the following eligibility criteria:

• At least one promoter should have at least 3 years of experience in the same industry.
• The issuing company must submit to the NSE the annual reports for the last three fiscal years.
• The company has a positive net worth. (This clause is applicable to companies with an issue size of less than Rs 500 Cr).
• The post-issue paid-up equity of the company should be more than Rs 10 Cr.
• Market capitalization should be more than Rs 25 Cr.
• The company should provide the Exchange with a certificate confirming that:
  • There are no proceedings pending against the issuer under the Insolvency and Bankruptcy Law.
  • The company has not received a winding-up petition from the NCLT (National Company Law Tribunal).

3. BSE IPO Eligibility

Equity and market capitalization requirements are the same for the NSE and the BSE. According to BSE,

• The minimum paid-up capital of the issuing company after the issue should be Rs 10 Cr.
• The minimum issue size should be Rs 10 Cr.
• The minimum market capitalization of the issuing company should be Rs 25 Cr.

You need to follow the BSE Main Board IPO checklists below and submit the required documents and information at each stage.

• In principle Approval Stage
• Issue Opening Stage
• Basis of Allotment Stage
• Listing & Trading Approval Stage

Other IPO Requirements

• The company should obtain prior consent from the BSE to use the name of the BSE in its prospectus or offer-for-sale documents.
• The issuing company should file an application with one or more exchanges and designate one exchange as the Designated Stock Exchange.
• The issuer should have an arrangement with a depository (CDSL and NSDL) to take care of dematerialization before and after the issue.
• The promoter's shares should be in demat form before filing the offer document.
• The partly paid-up shares should either be fully paid up or forfeited before the filing of the offer document.
• The issuer should deposit 1% of the issue amount as a deposit with the designated stock exchange before the commencement of the issue.

2. SME IPO Requirements

SME IPO means an initial public offering of small and medium-sized enterprises (SME). Like any other company, an SME needs capital to drive its business forward. However, since SMEs do not have an extensive track record, it is usually difficult for them to raise funds from financial institutions or conduct a regular IPO.

To give SMEs and startups an equal chance to raise funds from the general public, the NSE and the BSE have established a separate SME IPO platform, NSE Emerge and BSE SME, respectively, for the listing and trading of SMEs.

SEBI relaxes IPO norms for SME IPOs compared to mainboard IPOs. The post-issue paid-up capital of the company issuing SME IPO should not exceed Rs 25 crores. The other eligibility requirements for SME IPO company directors/promoters/investors remain the same as for a regular IPO, where the said persons should not be defaulters, offenders or disqualified from accessing the capital markets.

In addition to the above criteria, SMEs must also meet other eligibility requirements prescribed by the exchanges. The criteria for SME IPO are explained in detail below.

1. BSE SME IPO Eligibility

SMEs must meet the following criteria set by the BSE SME platform for issuing SME IPO.

BSE SME IPO Eligibility Requirements in Detail

• The company should have net worth of at least Rs. 1 crore for 2 preceding full financial years. If the formed company is the result of conversion of partnership firm, proprietorship or LLP, then the previous firm should have the required net worth of Rs 1 crore for 2 preceding financial years.
• The Net Tangible Assets of the company should be Rs. 3 crores in the last preceding financial year.
• The company should have a track record (operations) of at least three years. If not, the project for which IPO is being proposed should be appraised and funded by NABARD, SIDBI, Banks (other than co-operative banks), Financial Institutions.
• The company should have operating profit (i.e. Earnings before Interest, depreciation and tax) for 2 out of 3 latest financial years, of which the latest financial year should be mandatorily profitable. If the IPO project is funded by NABARD, SIDBI, Banks (other than cooperative banks), the company should have positive operating profit in the one last financial year.
• The leverage ratio of the company should not be more than 3:1. Note: The finance companies may get certain relaxation.
• There should not be any regulatory action of suspension of trading against any promoters or companies promoted by promoters.
• The company directors and promoters should not be the promoters or directors (other than independent directors) of the compulsory delisted companies or suspended from trading on account of non-compliance.
• The company director should not be debarred or disqualified by any of the regulatory authorities.
• There should be no pending defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders by the applicant company, promoters/ promoting company(ies), or subsidiary companies.
• In case of name change of the company in the last 1 year, 50% of the revenue for preceding full FY should be earned from the activity indicated by the new name. The revenue calculated should be based on a restated and consolidated basis.
• The company should have a website.
• The company should have an agreement with both Indian depositories CDSL and NSDL.
• The company should facilitate trading in Demat form.
• The list of promoters should not have changed in the preceding year from the date of applying to BSE for listing under the SME segment.
• The company should submit a certificate to BSE stating that the company is currently not under any Board for Industrial and Financial Reconstruction (BIFR) matter nor received any winding up petition against the company.

2. NSE SME IPO Eligibility

NSE Emerge platform lists the following eligibility criteria for a company to issue SME IPO:

• The company should be incorporated under the Companies Act 1956 / 2013 in India.
• The company should have a track record (operations) of at least three years.
• The promoters should individually or jointly hold at least 20% of the share capital after the issue.
• One of the promoters should have at least three years of experience in the same industry.
• The company should have operating profit and positive net worth in at least 2 out of 3 fiscal years .
• There should be no pending Board for Industrial and Financial Reconstruction (BIFR), insolvency or bankruptcy proceedings against the company or promoters.
• The company should not have received any winding-up petition from NCLT/Court.
• No material regulatory or disciplinary action has been taken against the applicant company by any stock exchange or regulatory agency in the last three years.