What is the eligibility to apply for an IPO?

Eligibility Criteria for IPO Application As Mandated By SEBI

Profit Norms

SEBI has mandated the following criteria based on the company's profitability for any company desirous of issuing an IPO.  

• The company should have at least Rs 3 crore in net tangible assets in each of the previous three years. Out of this 3 crore amount, not more than 50% should be cash or cash equivalent like money in an account, cash receivable or investment accounts. However, if the  Initial Public Offer is being made through offer through sale, this restriction of 50% on monetary assets is not applicable. 
• The company should have a net worth of at least one crore rupees in each of the previous three years. 
• The company should have an average operating profit of at least fifteen crore rupees (pre-tax) in each of any three years among the previous 5 years.    
• If the company has taken a new name, then 50% of the total revenue earned in the previous one year should have come from the activity performed by the company after assuming the new name. 
• The total value of the issue size of the IPO by the company should not be more than 5 times the net worth of the company before the issue of the IPO. 
• Non-Profitability routes

SEBI ensures that legitimate companies are not held back due to the stringent profitability norms, thus to provide the necessary flexibility to these companies to access the primary market, SEBI provides the QIB route.     

In the QIB route, the IPO must be issued through the book building method and out of the entire offer, a minimum of 75% of the issue size should be allotted to the QIBs (Qualified Institutional Buyers). The company issuing the IPO would be required to refund the entire IPO subscription money if this minimum allotment requirement is not attained. 

Criteria for IPO if the Company is Profitable

A profitable company planning to launch an IPO must meet certain financial and regulatory standards to ensure transparency, stability, and investor confidence. These criteria help determine whether the business is strong enough to access public markets and sustain long-term growth.

• Consistent profits for at least the last three years
• Positive net worth without any accumulated losses
• Minimum net tangible assets as required by SEBI
• Robust revenue track record supported by audited financials
• Clear business model with proven cash flows
• Compliance with SEBI’s disclosure and corporate governance norms
• No defaults on loans or major financial liabilities
• Appointment of eligible merchant bankers for the IPO process
   

Criteria for IPO if the Company is Non-Profitable

Even if a company is not yet profitable, it can still launch an IPO by meeting specific eligibility norms set by SEBI. These guidelines ensure that such companies maintain strong financial backing, adequate disclosures, and a stable operational foundation before entering the public market.

• Minimum net tangible assets as mandated by SEBI
• Strong investor backing, including qualified institutional buyers (QIBs)
• Minimum 75% of the issue to be allotted to QIBs (for companies without profitability track record)
• Robust business model with clear growth potential
• Adequate disclosures on risks, operations, and financials in the draft red herring prospectus
• No major defaults or unresolved financial liabilities
• Appointment of SEBI-registered merchant bankers to manage the issue

Prerequisites Mandated by NSE and SEBI for IPO Application Apart from Eligibility Norms

There are certain prerequisites mandated by the NSE and SEBI, which are apart from the eligibility criteria, but these also need to be fulfilled by the company before it can issue the IPO. These include: 

1. Mandatory Prerequisites by NSE

The NSE requires the annual reports of the previous three financial years from any company which desires to be listed on the stock exchange. The prerequisites include: 

1. The company should not have been referred to the NCLT (National Company Law Tribunal) or NCLAT (National Company Law Appellate Tribunal).
2. The company's net worth should not have been washed out by its losses, resulting in negative net worth.
3. The company should have a paid-up equity capital of not less than Rs. 10 crores. The capitalisation on the equity being issues should not be less than Rs 25 crores. 

2. SEBI's Prerequisites for Directors 

Promoters are individuals who have worked in the same line of business for at least three years. They must also own at least 20% of the post-IPO equity share to be considered a promoter. One person or many people can own this 20%.

The founders, directors, and selling shareholders of the company are subject to the next set of criteria 

• The SEBI must have taken no disciplinary action against them. The company cannot enter the markets if the directors have been denied entry to the markets. The organisation cannot proceed with the IPO with these individuals as promoters/directors during their debarment time, i.e. if these promoters or director are serving their debarment time mandated by SEBI, the DRHP of the company would not be accepted. This limitation does not apply if the date of debarment has already expired when filing a draft of the IPO with SEBI.
• The DRHP of the IPO will also be rejected if these individuals are promoters/directors of another corporation that has been barred from entering the markets. The company cannot proceed with the IPO with these people as promoters/directors if it wants to issue an IPO. The limitation is valid for the period the other company has been barred from entering the market.
• The company cannot proceed with the IPO if any bank, financial institution, or consortium has listed these individuals as wilful defaulters. A willful defaulter is someone who has failed to repay debts to banks, financial institutions, and other financial institutions. The company can either drop them as directors/promoters or get their debts fulfilled. 
• The company's DRHP will be accepted only if none of the promoters/directors has been classified as a fugitive or an offender under the Fugitive Economic Offenders Act 2018.

Grounds of Rejection of DRHP by SEBI

SEBI can reject the Draft Red Herring Prospectus for the IPO if:  

1. No one knows who the ultimate promoters of the company applying for the IPO are.
2. The company is collecting funds for a purpose that is not clear to SEBI or mentioned in DRHP.
3. The issuer's business model is exaggerated, complex, or deceptive, and investors cannot determine the risks associated with it, which makes it difficult to predict the risks associated with the company's future.
4. There is an unexpected surge in business prior to filing the draft offer paper, and the responses to the clarification requests for this sudden increase in business are inadequate.
5. A litigation concerning the company is going on, and the outcome of the litigation will judge the company's future existence.