SEBI Guidelines for IPO – Guidelines for Making Public Offer

When a company decides to go public and offer its shares to the public for the first time, it launches an Initial Public Offering (IPO). In India, IPOs are strictly regulated by the Securities and Exchange Board of India (SEBI) to protect investors and ensure transparency. SEBI has set certain rules and guidelines that every company must follow before it can list its shares on the stock market.

In this post, we’ll break down SEBI’s guidelines for making a public offer in simple and easy-to-understand language.

SEBI Guidelines for Making a Public Offer

1. Eligibility Criteria:
   Before a company can go public, it must meet certain conditions:
   • The company should have net tangible assets of at least ₹3 crore over the last three years.
   • The company must have made profits in at least three out of the last five years.
   • At least 50% of the shares must be offered to Qualified Institutional Buyers (QIBs), such as banks and financial institutions.
   • The company should have a positive net worth (assets minus liabilities) for the past three years.
2. Promoter Contribution:
   The company’s promoters (the people or entities who founded or control the company) are required to own a portion of the company even after it goes public. SEBI requires promoters to hold at least 20% of the post-IPO capital. This ensures that promoters have a vested interest in the company’s success.
3. Lock-in Period for Promoters:
   After the IPO, promoters cannot sell their shares immediately. SEBI enforces a lock-in period of three years for the minimum 20% contribution, and the rest of the promoter’s shares are locked in for one year. This helps build investor confidence by showing that promoters are committed to the company’s future.
4. Draft Red Herring Prospectus (DRHP):
   Before launching an IPO, the company must file a Draft Red Herring Prospectus (DRHP) with SEBI. This document provides all the important details about the company—its business model, financial performance, risks, and future plans. The DRHP is meant to give potential investors a clear picture of what they are investing in.
5. Appointing Merchant Bankers:
   To manage the IPO process, the company must appoint merchant bankers (also called lead managers). These bankers handle important tasks such as preparing the DRHP, marketing the IPO to investors, and ensuring all regulatory requirements are met.
6. Pricing the Shares:
   Companies have two options for setting the price of their shares during an IPO:
   • Fixed Price: The price is set beforehand and known to all investors.
   • Book Building: Investors can bid within a price range, and the final price is determined by demand.
7. Minimum Subscription:
   For the IPO to be successful, at least 90% of the shares must be bought by investors. If the company fails to get 90% subscription, the IPO is considered unsuccessful, and all investors must be refunded.
8. Underwriting:
   SEBI requires that every IPO be underwritten, which means that if not enough shares are sold, underwriters (usually banks or financial institutions) will buy the unsold shares. This guarantees that the company will raise the required funds even if the IPO does not fully subscribe.
9. Disclosure and Transparency:
   SEBI insists on transparency during the IPO process. Companies must provide detailed information about their financials, risks, management, and business strategies to help investors make informed decisions.
10. Allotment and Listing:
    After the IPO, the company must allot shares to investors within 10 days, and the company should list its shares on the stock exchange as soon as possible. Once listed, the shares can be traded freely in the open market.

Conclusion

SEBI Guidelines for IPO are in place to ensure that companies are transparent and accountable when offering shares to the public. These rules help protect investors, encourage transparency, and create trust in the market. By following these guidelines, companies can raise capital while maintaining investor confidence.

For companies, launching an IPO can be a great way to raise money and grow the business. For investors, understanding SEBI’s rules helps ensure they are making informed decisions when participating in IPOs.

SEBI’s guidelines make the process fair and secure for everyone involved, allowing companies and investors to thrive in a well-regulated market.