Regulation 2(1)(w) of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 defines the expression ‘initial public offer’ an offer of specified securities by an unlisted issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holders of such specified securities in an unlisted issuer.
Chapter II of the regulations provides the procedure for initial public offer. Part I of Chapter II provides the eligible requirements for the initial public offer.
Issuer
Regulation 2(1)(aa) defines the term ‘issuer’ as company or a body corporate authorized to issue specified securities under the relevant laws and whose specified securities are being issued and/or offered for sale in accordance with these regulations;
Non eligible entities
The following shall not be eligible to issue Initial Public Officer (‘IPO’ for short)-
- any of its promoters, promoter group or directors or selling shareholders are debarred from accessing the capital market by the Board.
- any of the promoters or directors of the issuer is a promoter or director of any other company which is debarred from accessing the capital market by the Board.
- the issuer or any of its promoters or directors is a willful defaulter or a fraudulent borrower
- any of its promoters or directors is a fugitive economic offender.
Eligibility requirements
To make an IPO, the issuer shall fulfill the following requirements-
- Minimum net tangible assets shall be Rs.3 crore; if more than 50% of the net tangible assets are held in monetary assets, the issuer has utilized or made firm commitments to utilize such excess monetary assets in its business or project; the limit of 50% on monetary assets shall not be applicable in case the IPO is made entirely through an offer for sale.
- Average operating profit shall be at least Rs. 15 crores during the preceding 3 years with operating profit in each of these preceding 3 years.
- It shall have a net worth of at least Rs.1 crore in each of the preceding three full years (of twelve months each), calculated on a restated and consolidated basis.
- If it has changed its name within the last one year, at least 50% of the revenue, calculated on a restated and consolidated basis, for the preceding one full year has been earned by it from the activity indicated by its new name.
- If an issuer not satisfying the condition stipulated above shall be eligible to make an IPO only if the issue is made through the book-building process and the issuer undertakes to allot at least 75% of the net offer to qualified institutional buyers and to refund the full subscription money if it fails to do so.
- If an issuer has issued SR equity shares to its promoters/ founders, the said issuer shall be allowed to do an initial public offer of only ordinary shares for listing on the Main Board subject to compliance with the provisions of this Chapter.
Conditions
An issuer making an initial public offer shall ensure that-
- it has made an application to one or more stock exchanges to seek an in-principal approval for listing of its specified securities on such stock exchanges and has chosen one of them as the designated stock exchange;
- it has entered into an agreement with a depository for dematerialization;
- all its specified securities held by the promoters are in dematerialized form prior to filing of the offer document;
- all its existing partly paid-up equity shares have either been fully paid-up or have been forfeited;
- it has made firm arrangements of finance through verifiable means towards 75% of the stated means of finance for a specific project proposed to be funded from the issue proceeds, excluding the amount to be raised through the proposed public issue or through existing identifiable internal accruals.
The amount for general corporate purposes-
- shall not exceed 25% of the amount being raised by the issuer. The amount in the draft offer document shall not exceed 75% of the amount being raised by the issuer:
- the amount raised for shall not exceed 25% of the amount being raised by the issuer.
- Such limits shall not apply if the proposed acquisition or strategic investment object has been identified and suitable specific disclosures about such acquisitions or investments are made in the draft offer document and the offer document at the time of filing of offer documents.
Additional conditions
Additional conditions are imposed for an offer for sale which are as below-
- Only such fully paid-up equity shares may be offered for sale to the public, which have been held by the sellers for a period of at least one year prior to the filing of the draft offer document.
- Such one year is not required in case of an offer for sale 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 the infrastructure sector; 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. such equity shares not being issued by utilization of revaluation reserves or unrealized profits of the issuer.
The conditions for an offer for sale under book building process are prescribed as below-
- shares offered for sale to the public by shareholder(s) holding, individually or with persons acting in concert, more than 20% of pre-issue shareholding of the issuer based on fully diluted basis, shall not exceed more than 50% of their pre-issue shareholding on fully diluted basis;
- shares offered for sale to the public by shareholder(s) holding, individually or with persons acting in concert, less than 20% of pre-issue shareholding of the issuer based on fully diluted basis, shall not exceed more than 10% of pre-issue shareholding of the issuer on fully diluted basis;
- for shareholder(s) holding, individually or with persons acting in concert, more than 20% of pre-issue shareholding of the issuer based on fully diluted basis, provisions of lock-in for a period of 6 months from the date of allotment in the initial public offer, and relaxation from lock-in as provided under clause (c) of regulation 17 of these regulations shall not be applicable.
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