IPO Requirements

IPO requirements include being a legal entity, providing audited financials, good governance, a detailed prospectus, and regulatory approval.
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What are the Eligibility Criteria to Apply for an IPO?
OPEN ACCOUNT
3 mins read
25-February-2025

A company aiming to go public must adhere to regulations set by government bodies like SEBI and stock exchanges such as BSE and NSE. To initiate an IPO, the company must fulfill specific approval criteria and norms outlined by these entities. These rules ensure that the company meets financial and operational standards, providing transparency and security for investors before listing its shares on the market.

1. Mainboard IPO requirements

A Main Board IPO is when a large, established company (with a paid-up capital of at least ₹10 crores) goes public for the first time. These IPOs are listed and traded on major stock exchanges like the NSE and BSE, following the listing standards and eligibility criteria outlined in the SEBI ICDR Regulations 2018.

2. SME IPO requirements

SME IPOs (Initial Public Offerings) are specifically designed for small and medium-sized enterprises. SMEs often need capital for growth but may find it challenging to secure funding from traditional institutions or through regular IPOs due to their limited track record. To address this, the NSE and BSE have created dedicated SME platforms—NSE Emerge and BSE SME, respectively—for listing and trading. SEBI has relaxed some IPO regulations for SMEs compared to Main Board IPOs. A company pursuing an SME IPO must have a post-issue paid-up capital not exceeding ₹25 crores.

While other eligibility criteria for directors, promoters, and investors (such as not being defaulters or disqualified from the capital markets) remain similar to regular IPOs, SMEs must also fulfill additional exchange-specific requirements. These criteria are detailed further below.

Eligibility criteria for IPO application as mandated by SEBI

The Securities and Exchange Board of India (SEBI) is the top regulatory body that governs IPOs in India. It has set numerous guidelines for the eligibility criteria for IPO, which companies must access before requesting SEBI to allow them to launch an IPO. When companies launch their IPOs to offer their shares to the general public for the first time, they may be either profitable or non-profitable. The IPO eligibility criteria are different for a profitable and a non-profitable company.

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Criteria for IPO if the company is profitable

  • The company must have a minimum net worth of Rs. 1 crore in each of the previous three years.
  • The value of the company's net tangible assets must have been at least Rs. 3 crore in each of the last three years. Out of the Rs. 3 crore, the company must have not more than 50% (Rs. 1.5 crores) as cash or cash equivalents such as money in investment accounts, bank accounts or cash receivables. However, the 50% cash equivalent rule is not applicable if the IPO is through an Offer for Sale (OFS).
  • If the company has changed its official name, it must have earned 50% of the total revenue in the last year from business operations after attaining its new name.
  • The company must have an average pre-tax operating profit of a minimum of Rs. 15 crore in at least three of the last five years.
  • The value of the IPO issue size must not be more than five times the company's total net worth before launching the issue.

Criteria for IPO if the company is non-profitable

  • Non-profitable companies must take the Qualified Institutional Buyers (QIB) route to launch an IPO.
  • The IPO must be launched using the book-building IPO method.
  • The company must allot a minimum of 75% of the total issue size to QIBs.
  • The company must refund the total IPO subscription amount if the minimum allotment requirement to QIBs is not fulfilled.

Prerequisites mandated by NSE and SEBI for IPO application apart from eligibility norms

Eligibility norms for an IPO are crucial as they are set by authorities such as the NSE (National Stock Exchange) and SEBI. However, apart from these eligibility criteria for an IPO, there are other prerequisites mandated by the NSE and SEBI. These are:

  • To launch an IPO, the company must submit its annual financial reports for the last three years to the NSE.
  • The company should not have been referred or have any pending cases in the National Company Law Appellate Tribunal (NCLAT) or National Company Law Tribunal (NCLT).
  • The company must not have a negative net worth because of constant losses before the IPO.
  • The company must have a minimum paid-up equity capital of Rs. 10 crore. The equity capitalisation on the equity being issued during the IPO must be at least Rs. 25 crore.
  • The founders and selling shareholders must not have any prior or pending disciplinary action against them by SEBI, and its directors must not have been banned from entering the securities markets.
  • The directors or promoters of a company launching an IPO must not be directors or promoters of another company barred from the securities market. Only if the other company has passed its limitation period is the IPO for the requesting company allowed with the same directors and promoters.
  • The company must not have been mentioned as a willful defaulter by any bank, consortium (a group of financial institutions), or individual financial institution. In such a case, the company must pay off the debt before being allowed to launch an IPO.
  • Under the Fugitive Economic Offenders Act 2018, no promoter or director of the company must have been classified as an offender or fugitive.

Grounds of rejection by DRHP by SEBI

Every company is required to submit a Draft Red Herring Prospectus (DRHP) to SEBI detailing all information about the company and the potential IPO. However, SEBI can reject the DRHP for the following reasons:

  • The company is raising funds for a cause not mentioned in the DRHP or is unclear to SEBI.
  • There is no public information about the company's promoters.
  • The company’s business model is highly complex, and it intends to deceive investors by making it difficult to understand the associated risks with the company’s future.
  • The company’s business increased suddenly just prior to the potential IPO listing time, and the company has not communicated with SEBI the exact reason for the unexpected business surge.
  • The company is going through litigation (legal action), and the litigation’s result could decide the company’s future existence.

Conclusion

IPOs are fundamental to a company’s future existence as they allow companies to raise funds for a range of business purposes. However, before launching an IPO, a company must ensure that it fulfils all the IPO requirements and, most importantly, the eligibility criteria for IPOs. Furthermore, it is vital that the company adheres to all other set guidelines by NSE or SEBI to avoid IPO rejection.

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Frequently asked questions

What is the eligibility to apply for an IPO?

While companies themselves have eligibility requirements to launch an IPO, there are also criteria for investors who want to participate. Here's what you'll need to be eligible to apply for an IPO in India:

Demat account: You'll need an active Demat account linked to your bank account for IPO applications.

Bank account with sufficient funds: Ensure your linked bank account has sufficient funds to cover the cost of the IPO shares.

PAN card: A Permanent Account Number (PAN) card is required for all financial transactions in India, including IPO applications.

Age requirement: You must be at least 18 years old to invest in the Indian stock market and participate in IPOs.

What is the eligibility qualification for an open IPO?
You must have at least Rs 1.67 lakh in fully paid securities or cash in the account you use to enter the open IPO. The application must be for a minimum of 100 shares.
Who are eligible for IPO?

Individuals who are Indian residents and have a Demat account can participate in IPOs. Foreign investors may also be eligible under certain conditions.

What is the eligibility criteria for IPOs in India?

The eligibility criteria for IPOs in India generally include being an Indian resident, having a demat account, and meeting any specific requirements set by the issuing company or the Securities and Exchange Board of India (SEBI).

Can a normal person buy an IPO?
Anyone over 18 years old, legally able to enter into a contract, can invest in IPOs. The only prerequisites are a Permanent Account Number (PAN) from the Income Tax Department and a Demat account.

 

What is the minimum turnover to apply for IPO?

The minimum average daily turnover requirement for an IPO on the main board of the NSE is INR 10 lakhs during the last 6 months. Additionally, there's a requirement for a minimum average daily number of trades, which is 50, during the same period.

Who is not eligible for IPO?

An issuer is ineligible to launch an initial public offering (IPO) under the following circumstances:

(a) The issuer, any of its promoters, promoter group, directors, or selling shareholders are barred from accessing the capital market by the Securities and Exchange Board of India (SEBI).

(b) Any of the issuer's promoters or directors is also a promoter or director of another company that SEBI has barred from accessing the capital market.

(c) The issuer or any of its promoters or directors is a declared willful defaulter.

(d) Any of its promoters or directors is a designated fugitive economic offender.

What are the new rules for IPO?

SEBI has limited the funds allocated to general corporate purposes (GCP) in SME IPOs to a maximum of 15% of the total funds raised or ₹10 crore, whichever is less. Additionally, SME IPO proceeds cannot be used to repay loans owed to promoters, promoter groups, or related parties.

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