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SEBI Guidelines for IPO: Requirements and Compliance

Introduction to IPO (Initial Public Offering)

Initial Public Offering or IPO is a unique process of converting any private company into a public company by issuing shares. Issuance of shares to the public provides an opportunity for the company to capitalize and for the general public to earn a return on investment. If we talk about the initial phase, a private company makes its initial investment in the initial phase only with the founders and hit holders. When any company comes to know about its stability like that company has achieved a specific target where the management comes to know that they are able to handle the rules of SEC (Securities and Exchange Commission) and use the money of general public. Stake holding is provided to the public through shares in the company. 

Any corporation can raise equity funding from the general public through IPO. The process of issuing shares of new stock to the public for the first time in a private firm is called Initial Public Offering or IPO. IPO basically enables public investors to participate in the sale. IPO is a process in which any company which has not been listed on any stock exchange before issuing new technologies or offers its existing securities for sale to the general public for the first time. The main goal of an initial public offering is to help the company secure listing on a stock exchange.

Advantages of Initial Public Offering (IPO)

If any company goes public through Initial Public Offering then it gets many advantages which are as follows: 

  1. Expansion Opportunities: Going public helps a company access a significant source of funding and that money can be used for business expansion, product development or entry into new markets. This investment of capital provides the necessary legal support to effectively implement strategic development plans.

  1. Capital Acquisition: IPO provides a way to raise capital in a streamlined and cost-effective manner. This allows the company to secure funds required for its projects as well as its operations from a wide range of investors including retail investments.

  1. Liquidity for Stakeholders: The opportunity to convert their ownership stake into tradable shares comes only after going public. Directors, employees and angel IPO applicants can convert their stake into shares of Trade Yoga by going public. It is this liquidity that allows you to realize the value of your investments. Its function is to attract early-stage investors and potentially top talent. 

  1. Access to Equity Market: Publicly traded companies have constant access to the equity market. If we talk about future capital requirement then it can be very beneficial for the same as the company can also issue additional shares or additional securities to raise funds if needed without going through the complexity of private financing.

Some Stringent provisions governing the SEBI guidelines for Initial Public Offering

  1. Securities Contract Regulation Act 1957

    The Act provides comprehensive legal frameworks for the securities market in India.
  1. Securities Contracts (Regulation) Rules 1957

    These rules provide specific guidelines and procedures for carrying out transactions within the securities market.
  1. Companies Act 2013

    All the provisions related to issuance of securities by companies are included in the Companies Act 2013. Provisions related to public offering are also included in this. 

SEBI Guidelines for IPO (Initial Public Offering)

All the guidelines for IPO are divided into two different processes, the first process is the guidelines for unlisted companies and the second process is the guidelines for listed companies. These guidelines serve to dictate various requirements and compliance measures that any company must follow while planning and executing an IPO. It involves many aspects like pricing of securities openly to investors, issuance of prospectus and role of intermediaries.

SEBI Guidelines for Unlisted Companies for Public Corporation

There are many options for organizing your initial public space, even for unlisted companies, to comply with the guidelines; these options are defined by specific routes, each with its own requirements. Following are the SEBI guidelines for unlisted companies for IPO:

A) Profitability Pathway – Entry Criteria I

There are certain criteria involved for IPOs in the profitability path governed by SEBI guidelines, which are mandatory for any company to fulfill in order to go public. These criteria include financial parameters and performance benchmarks over a specified period.

  • The issuer must have a minimum net worth of more than Rs 1 crore
  • The issuer's net worth should exceed Rs 3 crore each year, of which not more than 50% should be in the form of monetary assets during the preceding three years.
  • The average turnover profit of the company should be more than Rs 15 crore in at least 3 years.
  • Issue size should not exceed 5 times the pre issue network.
  • In case of change, at least 50% of the previous year's revenue should be generated from activities carried out under the new name.

SEBI has introduced two alternative routes for companies unable to meet its requirements and to facilitate the IPO processes by providing them access to the primary market for their public offerings.

B) QIB Route – Entry Criteria II

“SEBI” provides an option under its Guidelines for QIB Route IPO to companies which fail to meet the conditions of profitability route due to their insufficient capital to ensure their adequate capital base. This route allows companies to access public interest through a book building process with specific allocation to institutional buyers.

  • 75 percent of the company's net offering must be mandatorily allocated to qualified institutional buyers to the public.
  • If for any reason you fail to attain the minimum membership of QIB, the Company is liable to refund the membership fees.

C) Assessment Pathway – Entry Criteria III 

The appraisal route involves appraisal participation of the project or public offer by financial institutions or scheduled commercial banks with a minimum of 10% contribution from appraisers with a minimum of 15%:

  • Minimum face value capital should be Rs 10 Crore or less after Mandatory Market Making Corporation for 2 years
  • A minimum of 1000 potential allottees is required to meet all three entry criteria for the issuing company being a public corporation.

SEBI Guidelines for Listed Companies for Public Corporation:

All listed companies wishing to organize SPA in India will have to follow specific guidelines mentioned by SEBI. These guidelines given by SEBI are related to the norms related to change of company name and corporation size.

  1. Condition of change of name:

    If any company has changed its name within the last year, at least 50% of the total revenue of the company must be generated from activities mandatorily conducted under its new name. 
  1. Issue management:

    The size of the FPO should not be more than 5 times the free issue net worth as per the company's audited balance sheet of the previous year.

General SEBI Guidelines in India for IPO:

Companies planning to make a public offering in India must follow the following general guidelines for IPOs in India:

  1. No Association with Similar Role: 

    Motorola or other key management personnel shall not hold similar positions in any other company at the direction of any company.
  1. No Restriction from Primary Market: 

    Those who exercise control over the company, such as directors, promoters or key management personnel, should not be prevented from accessing the primary market.
  1. Application for Listing: 

    If any company wishes to list its shares in India with a recognized stock exchange then it must submit an application.
  1. Depository Arrangement: 

    To dematerialize a specific issue, any company will have to enter into a legal agreement with the depository.
  1. Fully Paid up Equity Shares: 

    It is very important for any company's partially paid up equity shares to be fully paid up before the IPO.
  1. Minimum Public Shareholding: 

    It is mandatory for any listed company to maintain at least 25% public shareholding. If for any reason the company is unable to meet this requirement, it has one year to comply with this requirement.
  1. Source of Funds: 

    Any company must arrange its financial resources from reliable and verifiable sources except the allotted amount and issue of new shares.
  1. Draft Offer and Red Herring Prospectus: 

    If an IPO is to be done for more than Rs 50 lakh, the process starts with the company filing a draft offer in the form of a draft red herring prospectus with SEBI.
  1. Should not be involved in Economic Offences: 

    The directors or promoters of the company should not be guilty of any economic offense under any circumstances.
  1. Not Willful Defaulters: 

    No company should classify its promoters or directors as willful defaulters.
  1. Disclosure of Shares to SEBI: 

    Any issuer company has to disclose the number of shares to SEBI only between the date of filing of its draft red hearing prospectus and the date of issue of specified securities.
  1. Big IPO Pre-Submission: 

    Any company planning to float a public corporation of more than Rs 100 crore must submit a draft offer document with the regional office of SEBI before proceeding with the IPO.
  1. Independent Board Members: 

    It is mandatory to have at least 50 percent independent investors on the board of directors of any company.
  1. No liability towards Promoters: 

    50% of the board of director’s members should not have any liability towards the company or towards any promoter.

Exempted Entities for IPO under SEBI Guidelines:

The Securities and Exchange Board of India has identified certain entities that are exempted from the entry norms applicable to public corporations. The entities exempted from typos under the KA guidelines are as follows -

  1. Private and Public Sector Banks: 

    Private and public sector banks have been exempted from the above mentioned entry criteria for forming a public corporation. It is free from the constraints of the standards applicable to public corporations.
  1. Infrastructure companies with Appraisal Projects: 

    Infrastructure companies whose projects are appraised by a public financial institution such as IL&FS or IDFC or a bank which was earlier a PFI and have received less than 5% of their project cost from any of these institutions in funding are exempted from the norm. Has been.

Conclusion:

SEBI Guidelines for IPOs prove to be very helpful in India in ensuring market transparency, efficient flow of capital and investor protection. Public issue classification, legal compliance, prior wishes etc. for both unlisted and listed companies are included in these guidelines, which are mandatory for listed companies to follow. It also plays a key role in strengthening market integrity. These fully detail the responsibilities and responsibilities of selling shareholders.

It is mandatory for any company to follow the guidelines issued by SEBI, by following these guidelines companies and investors contribute significantly to a reliable and strong capital market. They also play a key role in supporting and promoting economic growth and increase investor confidence in the IPO process to a higher level. These rules are the basis of a well regulated and dynamic financial system in the country. SEBI has different guidelines for both unlisted and listed companies which the companies have to follow.

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