Eligibility to Apply for an IPO

An Initial Public Offering (IPO) marks an important phase for companies looking to raise capital by selling shares to the public for the first time. For investors, it is an opportunity to buy shares of a company at an early stage. However, not everyone can apply for an IPO without meeting certain eligibility criteria. Know about the eligibility to apply for an IPO in India, the requirements companies must meet to launch an IPO, and how investors can ensure their applications are accepted.

IPOs play a crucial role in the capital markets by enabling companies to access public funds for expansion, debt repayment, and working capital. Simultaneously, they provide retail and institutional investors a chance to participate in a company’s growth journey.

However, participation in IPOs requires adherence to regulations set forth by the Securities and Exchange Board of India (SEBI), stock exchanges, and related authorities. These regulations define the eligibility of companies issuing shares and the investors who can apply, ensuring transparency, investor protection, and orderly market functioning.

The Indian IPO market segments investors into multiple categories based on investment capacity and type:

Retail Individual Investors (RIIs)

Retail investors are individuals who invest a limited amount, typically up to ₹2 Lakhs per IPO application. RIIs form the largest participant base in IPOs and receive a reserved allocation to protect their interests.

Qualified Institutional Buyers (QIBs)

QIBs include mutual funds, banks, insurance companies, and other institutional investors with significant Assets Under Management (AUM). They usually have reserved allocations in IPOs and participate with large bids.

Non-Institutional Investors (NIIs)

This category includes investors other than RIIs and Qualified Institutional Buyers (QIBs) who invest amounts exceeding ₹2 Lakhs but are not classified as institutional entities. NIIs typically comprise high net-worth individuals (HNIs), corporate bodies, trusts, and certain foreign investors.

Non-Resident Indians (NRIs) and Foreign Investors

NRIs and certain foreign investors can apply for IPOs, subject to regulatory and procedural conditions.

Not all companies can launch an IPO. SEBI and the Companies Act define clear eligibility norms companies must fulfill:

• Financial Performance: The company must have a minimum net tangible asset value of ₹3 Crores (excluding intangible assets like goodwill) for each of the preceding 3 years and a minimum net worth of ₹1 Crore for each of the preceding 3 years.

• Operating History: A track record of operations of at least 3 years is typically required to establish business stability.

• Compliance: Full compliance with the Companies Act, SEBI’s Issue of Capital and Disclosure Requirements (ICDR) regulations, and other applicable laws.

• No Bankruptcy or Insolvency: Companies under insolvency proceedings or with serious defaults may be disqualified.

• Promoter and Management Track Record: The background of promoters and directors is scrutinised for integrity and regulatory compliance.

• Disclosure: Adequate and truthful disclosure of business risks, financials, and related party transactions must be made.

• Profitability: The company should have an average operating profit of at least ₹15 Crores over the last 3 financial years.

To apply for an IPO, investors must meet basic eligibility and documentation standards:

• KYC and PAN Compliance: Investors must complete Know Your Customer (KYC) procedures, including submitting valid identity proof such as PAN card, Aadhaar, passport, or voter ID.
  

• Demat Account: A dematerialised account is mandatory for holding shares electronically. Without a demat account, investors cannot receive or trade IPO shares.
  

• Bank Account: A bank account linked to the demat account is necessary for payment and refund purposes.
  

• Minimum Investment Amounts: Retail investors can apply for a minimum lot (usually a few thousand rupees), while HNIs and institutional investors have higher minimum limits.
  

• Bid Lot Sizes and Pricing: Investors must apply in multiples of the specified bid lot size and within the price band fixed by the company.

SME IPOs, aimed at Small and Medium Enterprises, have more relaxed eligibility criteria compared to mainboard IPOs:

• SMEs require a shorter track record and lower net worth benchmarks.
  

• SME platforms on exchanges like NSE EMERGE and BSE SME facilitate listings for smaller companies.
  

• Investors must meet similar eligibility requirements but often face lower minimum application amounts.

Applications may be rejected due to:

• Incomplete or incorrect KYC or PAN details.
  

• Lack of a valid demat account.
  

• Mismatch between application details and linked bank account.
  

• Non-fulfillment of bid size or price band requirements.
  

• Duplicate applications or oversubscription.
  

• Regulatory restrictions on certain investor categories.

Here are some steps:

• Keep KYC documents updated and verified.
  

• Maintain an active demat and bank account linked correctly.
  

• Apply within prescribed bid sizes and price bands.
  

• Use the ASBA(Applications Supported by Blocked Amount) facility to block funds securely during application.
  

• Double-check all application details before submission.

Eligibility to apply for an IPO is governed by clear regulatory norms to protect investors and ensure orderly markets. Understanding these criteria, both for issuers and investors, empowers participants to engage effectively in IPOs. Meeting KYC, demat, and financial requirements, alongside complying with SEBI and exchange rules, is essential to participate successfully and benefit from IPO opportunities in India’s dynamic capital markets.

This content is for educational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

1. Bajaj Finserv Markets – Eligibility to Apply for IPO
   

2. Securities and Exchange Board of India (SEBI)
   

3. National Stock Exchange (NSE)
   

4. Bombay Stock Exchange (BSE)
   

5. Investopedia – IPO Eligibility
   

6. Zerodha Varsity – IPO Process