Process and Eligibility Criteria of IPO

Process and Eligibility Criteria of IPO

An Indian company qualifies for a mainboard IPO under two SEBI ICDR routes — the profitability route (net tangible assets ≥ ₹3 crore, average operating profit ≥ ₹15 crore in any three of the last five years) or the QIB route (75% of net offer mandatorily allotted to institutional buyers). SME platforms — NSE Emerge and BSE SME — serve companies with post-issue paid-up capital up to ₹25 crore. From DRHP filing to T+3 listing, a well-prepared company completes the end-to-end process in 10–14 months.

SEBI ICDR Eligibility: The Two Mainboard Routes

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 — universally called SEBI ICDR — are the primary rulebook for every mainboard IPO in India. Regulation 6 prescribes two distinct eligibility paths, and you must satisfy one of them completely before your DRHP can be filed.

The Profitability Route (Regulation 6(1))

This is the conventional path for established, revenue-generating businesses. Your company must satisfy all four of the following conditions as of the DRHP filing date:

1. Net tangible assets of at least ₹3 crore in each of the three preceding full financial years — of which not more than 50% may be held in monetary assets, unless the issuer has provided firm commitments to deploy those monetary assets
2. Net worth of at least ₹1 crore in each of the three preceding full financial years
3. Average pre-tax operating profit of at least ₹15 crore — computed on a restated and consolidated basis — in any three of the immediately preceding five financial years
4. Aggregate issue size (current issue plus all prior issues in the same financial year) must not exceed five times the pre-issue net worth per the last audited balance sheet

There is also a name-change condition: if the company has changed its name in the last one year, it must derive at least 50% of its revenue in the preceding full year from the activity indicated by the new name.

What does "restated" mean in practice? Your auditors prepare restated financial statements under SEBI ICDR Schedule VI — adjusting for changes in accounting policies, prior-period errors, and reclassifications — for the last three full years plus the interim stub period. These differ meaningfully from your published statutory accounts. Preparing them correctly is one of the most time-intensive pre-filing tasks, and errors in restatement directly attract SEBI observations.

The QIB Route (Regulation 6(2))

High-growth startups, companies with historical losses, or pre-profit technology businesses that fail the profitability test can still access the public market through the QIB (Qualified Institutional Buyer) route. The trade-off is structural: at least 75% of the net offer must be allotted to QIBs — domestic mutual funds, FPIs, insurance companies, banks, and Category I/II AIFs.

If QIB subscriptions fall below 75% of the net offer, the issue cannot proceed on the original terms. This makes QIB-route IPOs fundamentally dependent on institutional appetite, which is why companies using this route spend disproportionate effort on pre-marketing to FIIs and domestic funds.

The remaining allocation under the QIB route is: retail individual investors (RII) — minimum 10% and non-institutional investors (NII/HNI) — minimum 15%. This differs from the profitability route, where the retail tranche is larger: QIB ≥ 50%, NII ≥ 15%, RII ≥ 35%.

SME IPO: NSE Emerge and BSE SME Eligibility

The SME IPO framework is governed by SEBI ICDR Chapter IX alongside individual exchange criteria set by NSE and BSE. Critically, the DRHP for an SME IPO is filed with the relevant exchange — not with SEBI directly — though disclosure standards remain SEBI-aligned.

Key eligibility parameters applicable in FY 2026-27:

• Post-issue paid-up equity capital: Between ₹3 crore and ₹25 crore. Companies above ₹25 crore must list on the mainboard.
• Operating profit: Following SEBI's September 2024 circular tightening SME IPO norms, issuers must demonstrate operating profit from core operations of at least ₹1 crore in at least two of the three preceding financial years.
• Net worth: Positive net worth as per the latest audited balance sheet.
• Underwriting: 100% of the issue must be underwritten. The merchant banker (BRLM) must underwrite at least 15% from its own books — creating real skin-in-the-game accountability that does not exist on the mainboard.
• Market making: A designated market maker must maintain two-way quotes for at least three years post-listing, ensuring minimum liquidity for a scrip with lower free-float trading volume than a mainboard stock.

SME-to-mainboard migration: The moment your paid-up capital crosses ₹25 crore — whether through IPO proceeds or subsequent capital raises — you are required to migrate to the mainboard and comply with full SEBI LODR (Listing Obligations and Disclosure Requirements) obligations. Build this threshold into your five-year capital plan before you set the issue size.

Choosing Between Mainboard and SME: A Practical Decision Framework

The SME route is faster and lighter on governance — but the investor base is more concentrated and secondary-market liquidity is structurally weaker. Companies with a clear mainboard trajectory should not linger on SME platforms beyond the point of necessity; migration disrupts investor relations and requires fresh compliance build-out.

The IPO Process: From Corporate Restructuring to Listing Day

Step 1: Pre-IPO Preparation (18–24 Months Before Filing)

This phase determines whether the DRHP you eventually file is credible. The work includes:

• Corporate restructuring: Convert from private to public company under Section 18 of the Companies Act, 2013. Reconstitute the board to include independent directors. Adopt SEBI-compliant Articles of Association.
• Financial reporting: Migrate to Indian Accounting Standards (Ind AS) if not already done. Engage a SEBI-registered Peer Review Accountant to prepare restated consolidated financial statements.
• Governance infrastructure: Constitute the audit committee, nomination and remuneration committee (NRC), and stakeholder relationship committee (SRC). Adopt an insider trading code under SEBI (Prohibition of Insider Trading) Regulations, 2015. Establish a Structured Digital Database (SDD) to record access to unpublished price-sensitive information (UPSI).
• Balance-sheet clean-up: Resolve outstanding inter-company loans, undisclosed related-party transactions, pledged promoter shares, and legacy tax or litigation exposure.

SEBI's due diligence is retrospective. A promoter-group company that received an unsecured loan three years ago and repaid it last month will still appear in the DRHP — and still draw observations unless the arrangement is fully explained. Begin clean-up the moment IPO planning starts.

Step 2: Appoint Intermediaries

A mainboard IPO requires the following SEBI-registered professionals:

1. Book Running Lead Manager (BRLM) — drives the entire process; one or more depending on issue size and complexity
2. Registrar to the Issue (RTI) — manages applications, allotment, ASBA coordination, and refunds
3. Peer Review Accountant / Auditor — signs off on restated financials, comfort letters, and working capital certificate
4. Domestic Legal Counsel — SEBI ICDR, Companies Act, and FEMA compliance
5. Bankers to the Issue — ASBA-enabled scheduled commercial banks
6. Advertising agency and PR firm — road-show logistics, issue advertising, and media management

Step 3: DRHP Preparation and Filing

The Draft Red Herring Prospectus is the foundational disclosure document. SEBI ICDR Schedule I specifies its contents in detail. The sections that most commonly invite scrutiny:

• Objects of the issue: Each object must be backed by a cost estimate, a deployment timeline, and (above a prescribed threshold) an independent appraisal report. "General Corporate Purposes" (GCP) is explicitly capped at 25% of gross issue size by SEBI.
• Basis for issue price: The DRHP does not disclose the price band (that appears in the RHP), but it must describe the methodology — EPS multiple, NAV, DCF, peer comparison — with supporting calculations.
• KPIs: SEBI's 2022–24 ICDR amendments require every issuer to disclose Key Performance Indicators tracked by management and reconcile them to audited financial statement line items. Unreconciled KPIs are a red flag.
• Weighted Average Cost of Acquisition (WACA): The offer price must be justified against the WACA of equity acquired by promoters and selling shareholders over the preceding three years, including off-market transactions.

File the DRHP on the SEBI Intermediary Portal (siportal.sebi.gov.in) and simultaneously with both NSE and BSE (for mainboard listings).

Step 4: SEBI Review Cycle (30–75 Days in Practice)

SEBI issues an observations letter within 30 days of receiving a complete DRHP — the clock starts from SEBI's acknowledgement of receipt. In practice, SEBI raises informal queries before the formal letter, extending the effective review period to 45–75 days for most issuers.

Observations are not approval — they are SEBI's mandate to correct or enhance disclosures before the issue opens. Multiple rounds of queries are common for first-time issuers. The BRLM coordinates all responses.

Step 5: RHP Filing and Issue Launch

After SEBI observations are addressed and cleared, file the Red Herring Prospectus (RHP) with the Registrar of Companies (RoC) through the MCA V3 portal. The RHP discloses the price band — the information that was absent from the DRHP.

Anchor allocation happens one working day before the issue opens. Institutional investors qualifying as anchors commit at or below the upper band price, providing a pre-book before retail and HNI bidding begins.

The issue is then open for three to ten working days for public bidding. If 90% of the issue size is not subscribed, the issue cannot proceed and all application monies must be refunded promptly.

Step 6: ASBA, UPI Bidding, and T+3 Listing

Retail applications (up to ₹2 lakh) are mandatorily routed through UPI-ASBA: the applicant links their UPI ID, which blocks (not debits) the bid amount until allotment. HNI and institutional applications flow through ASBA via designated bank branches.

After issue closure, the registrar finalises the basis of allotment in coordination with the stock exchange. Under SEBI's T+3 listing timeline (effective December 1, 2023), shares are listed and trading begins just three working days after issue closure — down from the earlier T+6 — compressing the allotment, refund, and demat-credit window significantly.

Anchor Investors: Why They Matter More Than You Think

Anchor investors are QIBs who commit capital before the retail window opens. Their role is not ceremonial — a strong anchor book is the single most visible institutional endorsement of your IPO pricing.

Under SEBI ICDR:

• Anchors may be allocated up to 60% of the QIB portion
• Minimum application per anchor investor: ₹10 crore
• At least one-third of the anchor portion is reserved for domestic mutual funds
• Lock-in: 50% of allocated shares for 90 days from allotment; remaining 50% for 30 days

A company with ₹150 crore of anchor commitments in a ₹200 crore QIB tranche is signalling that the sharpest institutional analysts in the country have stress-tested the business model and accepted the pricing. That signal propagates directly into retail oversubscription. Conversely, anchors who demand sharp discounts or withdraw entirely are a pre-listing warning sign that BRLM teams monitor intensely.

Common Mistakes That Invite SEBI Observations

Objects are aspirational, not costed. Every object must have a line-item cost estimate. SEBI will issue an observation if you plan to "expand manufacturing capacity" without specifying land acquisition costs, civil construction estimates, plant and machinery quotes, and a commissioning timeline.

WACA computation is incomplete. Promoters who received shares at ₹5 face value ten years ago and are offering them in an OFS at ₹500 must document the full WACA chain — including off-market transfers, ESOPs converted, and bonus shares — with the resulting premium clearly explained. Omitting any leg of the chain triggers a formal observation.

Related-party arrangements are still live at filing. Transactions between the issuer and promoter-group entities at non-arm's-length pricing — even if disclosed — draw mandatory observations requiring either contractual termination or shareholder ratification.

Outstanding tax demands are undisclosed. Undisclosed income tax assessment demands — including faceless assessment orders under Section 144B of the Income-tax Act, 1961 — or GST show-cause notices above the board-defined materiality threshold will halt SEBI's clock until the disclosure is corrected.

Board and committees are not constituted at filing. SEBI expects full LODR-compliant board composition and statutory committees (audit, NRC, SRC) to be in place at DRHP filing date, not at listing. Last-minute independent director inductions create governance gaps on record that SEBI notes.

KPI definitions cannot be reconciled to financials. A management team citing "GMV of ₹400 crore" in the business overview that is not reconcilable to the ₹200 crore revenue in the P&L — with a clear, disclosed explanation of the gap — will face a direct SEBI query on disclosure adequacy.

Worked Example: Estimating IPO Costs for a ₹150 Crore Mainboard Issue

Consider a manufacturing company (FY 2025-26 operating profit: ₹22 crore) planning a ₹150 crore mainboard IPO — ₹80 crore fresh issue and ₹70 crore OFS by promoters — priced at ₹300 per share.

The fresh-issue component (₹80 crore) bears these costs proportionately; the OFS component (₹70 crore) is borne by the selling shareholders. If both share costs equally on a pro-rata basis, the company absorbs roughly ₹2.8 crore and promoters absorb roughly ₹2.4 crore.

Post-listing, annual LODR compliance — quarterly results filing, secretarial audit, BRSR, internal audit, investor relations — adds ₹25–50 lakh per year for a company at this scale. This is a permanent addition to your operating cost structure from Day 1 of listing.

Post-Listing LODR Obligations: What Changes on Day 1

From the moment your shares are listed, you are governed by SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The transition from a private company mindset to a LODR-compliant public company is abrupt and non-negotiable.

• Quarterly financial results: Submit within 45 days of each quarter-end for Q1, Q2, and Q3; within 60 days for Q4/annual results — directly on the exchange platform (NSE NEAPS or BSE Listing Centre)
• Continuous disclosure: Price-sensitive events — mergers, key regulatory orders, large contracts — must be disclosed within 30 minutes of occurrence. Other material events require disclosure within 24 hours
• Related-party transactions (RPTs): Every RPT above the board-defined materiality threshold requires audit committee pre-approval. RPTs exceeding 10% of annual consolidated turnover additionally require shareholder approval by ordinary resolution
• Board composition: Minimum one-third of board must be independent directors (or 50% if the chairperson is an executive or promoter-related)
• Insider trading code: Maintain an SDD of UPSI; pre-clear all trades by designated persons (directors, senior management, compliance team) before the trading window opens
• BRSR: The Business Responsibility and Sustainability Report is mandatory for the top 1,000 listed entities by market capitalisation. As your company grows in market cap, BRSR transitions from comply-or-explain to mandatory.
• Annual report: Must be filed with the exchange and dispatched to shareholders at least 21 days before the AGM

SME-listed entities follow a modified LODR framework with relaxed timelines and fewer committee mandates — but timely and accurate disclosure of material events applies without exception.

Key Takeaways

• Two paths to mainboard eligibility: The profitability route (net tangible assets, operating profit, net worth thresholds under Regulation 6(1)) and the QIB route (75% institutional allotment under Regulation 6(2)) — your financials, not ambition, determine which route you qualify for.
• Governance work must begin 24 months early: Board reconstitution under the Companies Act, 2013, Ind AS migration, related-party clean-up, and SDD setup cannot be expedited — SEBI's review is retrospective and will surface anything you left unresolved.
• DRHP objects must be specific and costed: Every object of the issue requires a line-item cost estimate and timeline; General Corporate Purposes is capped at 25% of gross issue size regardless of issuer preference.
• T+3 listing is the current standard: From issue closure to listing day is three working days — allotment, refunds, and demat credits all compress into this window; your RTI and banker coordination must be impeccable.
• Anchor quality predicts retail outcome: One-third of the anchor portion is reserved for domestic mutual funds; strong anchor commitments before the retail window opens are the most reliable predictor of oversubscription.
• All-in IPO cost is 3.5–10% of issue size: BRLM fees, legal, audit, registrar, exchange fees, and advertising are one-time; LODR compliance (₹25–50 lakh/year for mid-size issuers) is recurring and begins on listing day.
• LODR is immediate and enforceable: Quarterly results deadlines, 30-minute price-sensitive disclosures, RPT approvals, and the insider trading code apply from Day 1 of listing — non-compliance invites SEBI adjudication proceedings and public notices on exchange platforms.