Regulation 26 - Conditions for initial public offer - Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009

Conditions for initial public offer. 26. (1) An issuer may make an initial public offer, if: (a) it has net tangible assets of at least three crore rupees in each of the preceding three full years (of twelve months each), of which not more than fifty per cent. are held in monetary assets: Provided that if more than fifty per cent. of the net tangible assets are held in monetary assets, the issuer has made firm commitments to utilise such excess monetary assets in its business or project; 1 [Provided further that the limit of fifty per cent. on monetary assets shall not be applicable in case the public offer is made entirely through an offer for sale.] 2 [(b) it has a minimum average pre-tax operating profit of rupees fifteen crore, calculated on a restated and consolidated basis, during the three most profitable years out of the immediately preceding five years.] (c) it has a net worth of at least one crore rupees in each of the preceding three full years (of twelve months each); (d) the aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year; (e) if it has changed its name within the last one year, at least fifty per cent. of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name. 3 [(2) An issuer not satisfying the condition stipulated in sub-regulation (1) may make an initial public offer if the issue is made through the book-building process and the issuer undertakes to allot, at least seventy five percent of the net offer to public, to qualified institutional buyers and to refund full subscription money if it fails to make the said minimum allotment to qualified institutional buyers.] (3) An issuer may make an initial public offer of convertible debt instruments without making a prior public issue of its equity shares and listing thereof. (4) An issuer shall not make an allotment pursuant to a public issue if the number of prospective allottees is less than one thousand. 4 [(5) No issuer shall make an initial public offer if there are any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares:] Provided that the provisions of this sub-regulation shall not apply to: (a) a public issue made during the currency of convertible debt instruments which were issued through an earlier initial public offer, if the conversion price of such convertible debt instruments was determined and disclosed in the prospectus of the earlier issue of convertible debt instruments; (b) outstanding options granted to employees pursuant to an employee stock option scheme framed in accordance with the relevant Guidance Note or Accounting Standards, if any, issued by the Institute of Chartered Accountants of India in this regard. 5 [(c) fully paid-up outstanding convertible securities which are required to be converted on or before the date of filing of the red herring prospectus (in case of book-built issues) or the prospectus (in case of fixed price issues), as the case may be.] (6) Subject to provisions of the Companies Act, 1956 and these regulations, equity shares may be offered for sale to public if such equity shares have been held by the sellers for a period of at least one year prior to the filing of draft offer document with the Board in accordance with sub-regulation (1) of regulation 6: Provided that in case equity shares received on conversion or exchange of fully paid-up compulsorily convertible securities including depository receipts are being offered for sale, the holding period of such convertible securities as well as that of resultant equity shares together shall be considered for the purpose of calculation of one year period referred in this sub-regulation: Provided further that the requirement of holding equity shares for a period of one year shall not apply: (a) in case of an offer for sale of specified securities of a government company or statutory authority or corporation or any special purpose vehicle set up and controlled by any one or more of them, which is engaged in infrastructure sector; (b) if the specified securities offered for sale were acquired pursuant to any scheme approved by a High Court under sections 391-394 of the Companies Act, 1956, in lieu of business and invested capital which had been in existence for a period of more than one year prior to such approval 6 [;] 7 [(c) if the specified securities offered for sale were issued under a bonus issue on securities held for a period of at least one year prior to the filing of draft offer document with the Board and further subject to the following, - (i) such specified securities being issued out of free reserves and share premium existing in the books of account as at the end of the financial year preceding the financial year in which the draft offer document is filed with the Board ; and (ii) such specified securities not being issued by utilization of revaluation reserves or unrealized profits of the issuer.] 8 [(7) An issuer making an initial public offer may obtain grading for such offer from one or more credit rating agencies registered with the Board.] Explanation: For the purposes of this regulation: (I) net tangible assets mean the sum of all net assets of the issuer, excluding intangible assets as defined in Accounting Standard 26 (AS 26) issued by the Institute of Chartered Accountants of India; (II) project means the object for which monies are proposed to be raised to cover the objects of the issue; (III) In case of an issuer which had been a partnership firm, the track record of distributable profits of the partnership firm shall be considered only if the financial statements of the partnership business for the period during which the issuer was a partnership firm, conform to and are revised in the format prescribed for companies under the Companies Act, 1956 and also comply with the following: (a) adequate disclosures are made in the financial statements as required to be made by the issuer as per Schedule VI of the Companies Act, 1956; (b) the financial statements are duly certified by a Chartered Accountant stating that: (i) the accounts and the disclosures made are in accordance with the provisions of Schedule VI of the Companies Act, 1956; (ii) the accounting standards of the Institute of Chartered Accountants of India have been followed; (iii) the financial statements present a true and fair view of the firm s accounts; (IV) In case of an issuer formed out of a division of an existing company, the track record of distributable profits of the division spun-off shall be considered only if the requirements regarding financial statements as provided for partnership firms in Explanation III are complied with; (V) bid-ask spread means the difference between quotations for sale and purchase; (VI) The term infrastructure sector includes the facilities or services as specified in Schedule X. ******** 1 Inserted by SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2011, w.e.f. 23.09.2011. 2 Substituted by SEBI (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2012, w.e.f. 12.10.2012. Prior to its substitution, clause (b) read as under: (b) it has a track record of distributable profits in terms of section 205 of the Companies Act, 1956, on both stand-alone as well as consolidated basis for at least three out of the immediately preceding five years;] Provided that extraordinary items shall not be considered for calculating distributable profits; Provided further that an issuer who had subsidiary/ subsidiaries for a period lesser than five years, shall have net profits on a consolidated basis in atleast one year for which consolidated accounts are prepared. 3 Substituted for the existing sub-regulation (2) by SEBI (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2012, w.e.f. 12.10.2012. Prior to its substitution, sub-regulation (2) read as under: (2) An issuer not satisfying any of the conditions stipulated in sub-regulation (1) may make an initial public offer if: (a) (i) the issue is made through the book building process and the issuer undertakes to allot at least fifty per cent. of the net offer to public to qualified institutional buyers and to refund full subscription monies if it fails to make allotment to the qualified institutional buyers ; or (ii) at least fifteen per cent. of the cost of the project is contributed by scheduled commercial banks or public financial institutions, of which not less than ten per cent. shall come from the appraisers and the issuer undertakes to allot at least ten per cent. of the net offer to public to qualified institutional buyers and to refund full subscription monies if it fails to make the allotment to the qualified institutional buyers; 4 Substituted by the SEBI (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2010, w.e.f. 12.11.2010. Prior to its substitution, sub-regulation (5) as amended by the SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2010, w.e.f. 13.04.2010, read as under : (5) No issuer shall make an initial public offer if as on the date of registering the prospectus with the Registrar of Companies there are any outstanding convertible securities or any other right which would entitle any person any option to receive equity shares after the initial public offer: 5 Inserted by the SEBI (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2010, w.e.f. 13.04.2001. 6 Substituted for . by the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2014, w.e.f 25.08.2014. 7 Inserted by the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations 2014, w.e.f. 25.08.2014. 8 Substituted by the SEBI (Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2014, w.e.f. 4-2-2014. Prior to its substitution, sub-regulation (7) read as under : (7) No issuer shall make an initial public offer, unless as on the date of registering prospectus or red herring prospectus with the Registrar of Companies, the issuer has obtained grading for the initial public offer from at least one credit rating agency registered with the Board.