SEBI Guidelines for an IPO: Rules and Requirements

SEBI's IPO framework regulates public fundraising by companies and sets requirements for the public issue process. The main objectives include:

• Ensuring adequate disclosure to investors
• Preventing misrepresentation and fraudulent practices
• Promoting transparency in the capital market
   

Companies must comply with the applicable requirements from the filing of offer documents through the public issue and listing process.

To launch an IPO in India, a company must meet one of the eligibility routes prescribed by SEBI:

Route 1: Profitability Route (Regulation 6(1))

• Net tangible assets of at least ₹3 crore in each of the preceding three full years. Not more than 50% of these assets may be held in monetary assets, unless the excess is committed for use in the business or project. This limit does not apply if the public offer is made entirely through an offer for sale.

• Minimum average pre-tax operating profit of ₹15 crore, calculated on a restated and consolidated basis, during the three most profitable years out of the immediately preceding five years.

• Net worth of at least ₹1 crore in each of the preceding three full years.

• The company must satisfy the applicable conditions relating to its name, pre-issue capital and other requirements under the SEBI ICDR Regulations.

Route 2: QIB Route (Regulation 6(2))

• Companies that do not meet the Regulation 6(1) conditions may proceed through the book-building process, subject to applicable requirements, including allocation of at least 75% of the net offer to Qualified Institutional Buyers (QIBs).
   

The offer document must disclose the objects of the issue and the proposed use of the issue proceeds, along with the applicable details and regulatory requirements. 

Read More: Eligibility Criteria for IPO Application

The IPO process involves the following stages:

1. Draft Red Herring Prospectus (DRHP): The issuer files the DRHP with SEBI for review and observations.

2. SEBI Observations: SEBI reviews the DRHP and issues observations, which the issuer must address before proceeding with the public issue. SEBI does not approve, endorse, or vouch for the issue.

3. Book-Building Process: Book building is a pricing mechanism that allows investors to bid within a specified price band.

4. Listing Requirements: The issuer must fulfil the applicable criteria prescribed by stock exchanges for listing the shares after the issue.

5. Listing Timeline: SEBI's T+3 listing framework provides for listing within three working days from the issue closure date. It is mandatory for public issues opening on or after 1 December 2023, pursuant to SEBI Circular SEBI/HO/CFD/TPD1/CIR/P/2023/140 dated 9 August 2023.

See IPO Allotment Guidelines for the full timeline, from issue closure through to listing.

Pricing for an IPO in India can follow a book-building or fixed-price mechanism, subject to SEBI's ICDR Regulations:

• Book Building: The issuer, in consultation with the merchant bankers, specifies a price band with a floor price and a cap price. The cap of the price band cannot be more than 20% above the floor price. Investors bid within this band, and the final issue price is determined through the book-building process based on the bids received.
• Fixed Price Issue: The issuer sets a single, fixed price for the issue upfront rather than inviting bids across a price band. Applicants subscribe to the issue at the specified price.
   

Once the price band or fixed price is finalised and disclosed in the offer document, the allotment process (detailed below) determines how shares are allocated among applicants at the applicable issue price.

The SEBI ICDR Regulations prescribe different allocation requirements depending on the eligibility route followed by the issuer. For issues under Regulation 6(1), not more than 50% of the net offer may be allocated to QIBs, while not less than 15% is available to NIIs and not less than 35% to RIIs, subject to applicable conditions. For issues under Regulation 6(2), at least 75% of the net offer is required to be allocated to QIBs, with the applicable NII and RII portions subject to the limits prescribed under Regulation 32.

See IPO Allotment Guidelines for the full allotment process, including the lottery and proportionate methods used within each category.

SEBI prescribes lock-in requirements for specified promoter and anchor investor shareholdings, restricting the transfer of shares during the applicable lock-in period:

• Promoter Lock-in: Specified promoter shareholding is subject to lock-in requirements under the SEBI ICDR Regulations. The applicable period and extent of lock-in depend on the nature of the promoter's holding and the relevant regulatory provisions.
• Anchor Investor Lock-in: Anchor investors, a sub-category of Qualified Institutional Buyers (QIBs), are subject to a staggered lock-in on their allotted shares. 50% of the shares allotted to anchor investors are locked in for 90 days from the date of allotment, while the remaining 50% are locked in for 30 days from the date of allotment, as prescribed under Schedule XIII, Part A of the ICDR Regulations.
  
  

See QIB Participation in IPOs for more on the role of anchor investors within the QIB category.

Applicants must follow SEBI's rules for IPO applications, which include:

• ASBA (Application Supported by Blocked Amount): The application amount is blocked in the investor's bank account and is debited only to the extent required upon allotment.

• UPI Mandate: UPI is mandatory for individual investors applying for up to ₹5 lakh through the applicable intermediary route. This includes Retail Individual Investors (up to ₹2 lakh) and individual Non-Institutional Investors applying above ₹2 lakh and up to ₹5 lakh. The RII category limit remains ₹2 lakh.

• PAN Requirement: PAN is required for an IPO application. Multiple applications that are treated as duplicate applications may be rejected under the applicable rules.

SEBI periodically updates the regulatory framework governing IPOs. Applicable provisions include:

• Anchor Investor Lock-In: A staggered lock-in applies to shares allotted to anchor investors, with 50% locked in for 90 days and the remaining 50% for 30 days from the date of allotment, as prescribed under Schedule XIII, Part A of the ICDR Regulations.

• T+3 Listing Timeline: Listing is required within 3 working days of issue closure for issues opening on or after 1 December 2023, as prescribed by SEBI circular SEBI/HO/CFD/TPD1/CIR/P/2023/140 dated 9 August 2023.

• UPI Payment Limit: The UPI application limit for individual investors was increased to ₹5 lakh.

• Price Band Rules: In a book-built issue, the cap of the price band cannot be more than 20% above the floor price.

• Disclosure Norms: The offer document contains disclosures relating to the objects of the issue, risk factors, promoter details, and other information prescribed under the applicable regulations.
   

These provisions establish requirements relating to IPO applications, pricing, allocation, disclosure, and listing.

SEBI regulates IPOs in India through requirements covering company eligibility, disclosures, pricing, application procedures, allotment, listing, and compliance. These regulations establish a framework for disclosures, investor participation, and the conduct of public issues in the securities market.