Initial Public Offering (IPO)

Initial Public Offering is an offering of either a fresh issue of securities or an offer for sale of
existing securities, or both by an unlisted company for the first time to the public. 1 IPO
enables listing and trading of the issuer’s securities. A follow-on public offering (FPO) is an
offering of either a fresh issue of securities or an offer for sale to the public by an already
listed company through an offer document. Investors participating in these offerings take
informed decisions based on its track record and performance.

In an IPO, credible information on a company’s past performance is often limited, creating

information asymmetry that can lead to moral hazard and adverse selection. To protect
investors, SEBI prescribes strict entry norms. The SEBI has laid down eligibility norms for
entities raising funds through an IPO and an FPO. Private and Public sector banks, some infra
companies and rights issue by listed company do not require adherence to these norms.

Entities not eligible to make an IPO include (Reg 5)

 Issuers, promoters, promoter groups, directors, or selling shareholders debarred by SEBI

from accessing the capital market.
 Issuers whose promoters or directors are also associated with another company
debarred by SEBI.
 Issuers, promoters, or directors classified as wilful defaulters or fraudulent borrowers.
 Issuers whose promoters or directors are declared fugitive economic offenders.
 An issuer shall not be eligible to 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 of the issuer.

If debarred on the date of filing draft offer with Board, then permitted.

Eligibility Requirements (Regulation 6):

It is commonly known as ‘Profitability Route.’ The company desiring to tap the primary
market Net tangible assets of atleast Rs. 3 crores for three full years, of which not more than
50 per cent is held in monetary assets. N/A in case IPO is made entirely through offer for
sale.

1
“initial public offer” means 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;
 Operating profits in atleast three out of the preceding five years and an average operating
profit of atleast Rs. 15 crores during preceding three years.
 Net worth of atleast Rs. 1 crore in preceding three years.
 If there is a change in the company’s name, atleast 50% revenue for preceding one year
should be earned from the new activity.

If issuer is not able to fulfil above requirements, then issue can only be made through the
book-building process + the issuer must undertake 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.

General Conditions (Regulation 7):

An issue has:

 made an application to one or more stock exchanges to seek an in-principle approval for
listing of its specified securities on such stock exchanges and has chosen one of them as
the designated stock exchange.
 entered into an agreement with a depository for dematerialisation of the specified
securities already issued and proposed to be issued.
 dematerialized all securities held by promotor.
 all its existing partly paid-up equity shares have either been fully paid-up or have been
forfeited.
 secured at least 75% of the finance for the specific project proposed to be funded from the
issue proceeds through verifiable means, excluding funds from the proposed public issue
or internal accruals.

Minimum promoters’ contribution and lock-in (Regulation 14 and 16):

 Promoters must contribute at least 20% of post-issue capital, locked in for 3 years, while
remaining pre-issue capital is locked in for 1 year. Promoters’ excess participation is
treated as preferential allotment, and pledged shares cannot count toward the minimum
contribution.

Others (Regulation 23):

 The issuer shall appoint one or more merchant bankers, which are registered with the
Board, as lead manager(s) to the issue. The responsibility and obligation of each manager
will be disclosed in draft offer document as specified in Schedule I.
 At least one manager not associated – the one associated must be disclosed.
 Schedule II – agreement b/w issuer and manager.

Disclosure in draft offer (Regulation 24):

The draft and final offer documents must provide true, adequate disclosures as per the
Companies Act, 2013 and Schedule VI. Lead managers must ensure due diligence, verify
disclosures, enforce obligations of issuers/promoters/selling shareholders, and confirm that
financial information is not older than six months from the issue opening date.

Filing of the draft offer document and offer document (Regulation 25):

 Prior to IPO, issuer shall file 3 copies of the draft offer document with SEBI (as per
Schedule IV), along with fees as specified in Schedule III, through the lead manager.
 The issuer shall also file the draft offer document with the stock exchange(s) where the
specified securities are proposed to be listed.
 The Board may specify changes or issue observations, if any, on the draft offer document
within thirty days from the later of the following dates.
 The draft offer document filed with the Board shall be made public for comments, if any,
for a period of at least twenty one days from the date of publication of the public
announcement.
 The issuer shall, within two working days of filing the draft offer document with the
Board, make a public announcement in English, Hindi and regional newspaper.

Pricing:

 The disclosure about the face value of equity shares shall be made in the draft offer
document, offer document, advertisements and application forms, along with the price
band or the issue price in identical font size.
 The issuer may determine the price of equity shares, and in case of convertible securities,
the coupon rate and the conversion price, in consultation with the lead manager(s) or
through the book building process, as the case may be.
 The issuer shall undertake the book building process in the manner specified in Schedule
XIII.
Allocation in net offer:

 35% to retail individual investors

 15% to non-institutional investors
 50% to qualified institutional buyers (5% of which shall be allocated to mutual funds)

IPO Grading (Regulation 39):

 The issuer has to get IPO grading done by atleast one credit rating agency, before filing
the offer documents with SEBI or thereafter.
 The prospectus/Red Herring Prospectus must contain the grade/s given to the IPO by all
credit rating agencies.

Procedural:

 Companies must file a draft prospectus with SEBI through a merchant banker 30 days
before filing with the ROC/SEs; SEBI’s changes must be complied with. The draft is
open for 21 days on SEBI’s website for public comments. Merchant bankers must ensure
compliance with disclosure and investor protection (DIP) guidelines.
 Offer documents must disclose EPS, P/E ratios, NAV before and after issue, return on net
worth, risks, credit ratings, funding plan, dividend policy, underwriting details, statutory
disclosures, and major developments.
 SEBI extended IPO/rights issue validity to one year (from 3 months). IPO grading by
credit agencies is mandatory, and grades must be disclosed. Companies have free pricing
but must justify it in the prospectus, using either the fixed price or book building method.
Book building involves a floor/price band, with final price discovered via bidding (cut-off
price). Differential pricing is allowed only if firm allotment securities are priced higher
than the public issue; retail investors may get up to 10% discount.
 Final prospectus with issue price and size is filed with ROC. Post-issue, allotments are
categorized into firm allotment, QIBs, NIIs, and retail investors. Firm allotments apply to
institutions (mutual funds, FIIs, banks, employees, etc.) with SEBI-prescribed limits.
Reservations may also be made for employees or shareholders of promoter/group
companies. Retail investors may not bid above ₹1,00,000; others are NIIs. PAN is
mandatory for all investors.

Regulation 44 to 47 (from perplexity):

Opening of the Issue:

 A public issue must open within 12 months of SEBI’s observations.

 Issue opens at least 3 working days after filing the red herring prospectus (book-built)
or prospectus (fixed price) with the ROC.

Minimum Subscription

 At least 90% of the offer (excluding offers for sale) must be subscribed.

 Subject to allotment of minimum securities under SCRR, 1957.

 If not achieved, application money must be refunded within 4 days of issue closure.

Period of Subscription

 IPO to remain open for 3–10 working days.

 Price band revision requires a minimum 3-day extension.

 Force majeure or similar events allow a minimum 1-day extension, if recorded in

writing.

Application and Minimum Application Value

 No investor can apply for more securities than those available in the public portion.

 Non-institutional investors cannot apply beyond total securities minus QIB allocation.

 Minimum application size: securities worth ₹10,000–₹15,000, with applications

invited in multiples.

 At least 25% of issue price payable on application (100% in case of offer for sale).

Miscellaneous:

 A company cannot make a public or rights issue of debt instruments (whether convertible
or not), unless it fulfills the following two conditions:
o Obtains an investment grade rating or higher from atleast two SEBI registered
credit rating agencies
o it should not be in the list of wilful defaulters of the Reserve Bank.
 It should not have defaulted payment of interest or repayment of principal for a period of
more than six months.
 An unlisted company cannot make a public issue of equity or convertibles if shareholders
still hold rights or instruments that allow them to get equity after the IPO.

Follow- on Public Offering (FPO)

It is an offer of sale of securities by a listed company. FPO is also known as subsequent or

seasoned public offering. SEBI (DIP) Guidelines define a listed company as a company
which has any of its securities offered through an offer document listed on a recognised stock
exchange and also includes public sector undertakings whose securities are listed on a
recognised stock exchange. Listed companies issue FPOs to finance their growth plans.

 For listed companies, total issue size in a financial year (offer document + firm allotment
+ promoters’ contribution) cannot exceed 5 times pre-issue net worth.

 If company name changed in past year, new activity must contribute at least 50% of total
revenue in the preceding full year.

 Companies not meeting these conditions can issue via QIB route or appraisal route (as in
IPOs).

 Promoters must contribute at least 20% of post-issue capital or issue size; excess
participation follows preferential allotment pricing rules if issue price is lower.

 SEBI introduced Fast Track Issues (FTI) for compliant, well-established listed
companies, enabling quicker FPOs/rights issues by filing only the RHP/prospectus or
letter of offer, without draft review by SEBI, since information is already public.
Rights Issue

Rights issue is an offer of new securities by a listed company to its existing shareholders on a
pro-rata basis.2 Rights issue is the issue of new shares in which existing shareholders are
given pre-emptive rights to subscribe to the new issue on a pro-rata basis. The right is given
in the form of an offer to existing shareholders to subscribe to a proportionate number of
fresh, extra shares at a pre-determined price.

Rights issue means an issue of capital under Sub-section (1) of Section 81 of the Companies
Act,1956, to be offered to the existing shareholders of the company through a letter of offer.
As per Clause (a) of this section, the rights shares ‘shall be offered to the persons who, at the
date of the offer, are holders of equity shares of the company, in proportion, as nearly as
circumstances admit, to the capital paid-up on those shares at that date.’

Entities not eligible to make Rights Issue (Reg 61)

 Issuers, promoters, promoter groups, directors, or selling shareholders debarred by SEBI

from accessing the capital market.
 Issuers whose promoters or directors are also associated with another company
debarred by SEBI.
 Issuers, promoters, or directors is a fugitive economic offender.
 If the equity shares of the issuer are suspended from trading as a disciplinary measure as
on the reference date.

Companies offer shares on a rights basis to:

 expand, diversify, restructure their balance sheet or raise the promoter stake.
 get their issues fully subscribed to.
 to reward their shareholders.
 it is possible that the market price does not reflect a stock’s true worth or that it is
overpriced, prompting promoters to keep the offer price low.
 to hike their stake in their companies, thus, avoiding the preferential allotment route
which is subject to lot of restrictions.

Rights Issue is different from public issue:

2
“rights issue” means an offer of specified securities by a listed issuer to the shareholders of the issuer as on the
record date fixed for the said purpose;
 In a rights issue, new shares are offered to existing shareholders while in a public issue
shares are offered to public at large.
 In case of rights, shareholders can renounce their ‘rights entitlement’ (REs) while there is
no rights entitlement in case of public issue.
 Rights shares are allotted based on shareholding as on record date as against
‘proportionate allotment’ based on application size in public issues. All details of
shareholders on a record date is available with the company, other than those who have
purchased RE from the market and become eligible for rights issue subsequently.
 According to the SEBI guidelines, no listed issuer company shall make any rights issue of
securities, where the aggregate value of such securities, including premium, if any,
exceeds Rs. 50 lakh, unless a draft letter of offer has been filed with the SEBI, through a
merchant banker, at least 30 days prior to the filing of the letter of offer with the
designated stock exchange.
 secured at least 75% of the finance for the specific project proposed to be funded from the
issue proceeds through verifiable means, excluding funds from the proposed public issue
or internal accruals.

General Conditions (Regulation 62):

 Make application to stock exchange to be the designated stock exchange.

 No issuer shall make a rights issue of equity shares if it has outstanding fully or partly
convertible debt instruments at the time of making rights issue.

Pricing (Regulation 73):

 The issuer shall decide the issue price in consultation with the designated stock
exchange.
 The issue price shall not be less than the face value of the specified securities.
 The issuer shall disclose the issue price in the letter of offer filed with the Board and
the stock exchange(s).

Minimum Subscription (Regulation 86) - 90% of offer.

Options to shareholder – Allotment procedure (Regulation 90):

 A shareholder has four options in case of rights. The first is to exercise his rights, i.e., buy
new shares at the offered price, second is to renounce his rights and sell them in the open
 market, third is to renounce part of his rights and exercise the remainder, and lastly,
choose to do nothing.
 Thus, rights issue application form has three parts. Part A deals with application by the
shareholders (including request for additional shares), Part B deals with form of
renunciation to be filled in by the shareholders who desire to renounce their RE, and Part
C deals with application by renouncee(s). Also, shareholders can request for split
application forms wherein they want to renounce only a part of their entitlement and want
to apply for the rest of their entitlement or the shareholders want to renounce their
entitlement in favour of more than one person.

Eased norms:

 Rights issue market shrank from ₹15,000 crore to ₹1,500 crore due to lack of a proper
trading platform; OTC trading was inefficient.

 Shareholders often let unsubscribed rights lapse; process was also cumbersome with a 30-
day open period and stringent disclosure norms.

 SEBI eased norms: issuers now disclose only last year’s audited accounts and limited
reviewed financials, not 5 years’ restated data.

 Summaries of industry, business, past performance, and management discussion are no

longer required; disclosures simplified to focus on financials, litigation, and risks.

 SEBI reduced approval timeline from 109 days to 43 days; notice periods and issue
duration also shortened to cut costs and reduce market risk.

 Rights issue period cut to 15–30 days (from 30); post-issue activity completion reduced
from 42 to 15 days.

 In 2008, SEBI also enabled trading in Rights Entitlements (RE) on exchanges, with
separate ISINs for trading electronically and physically.