The Regulatory Framework Governing IPOs in India

Posted in Finance Articles, Total Reads: 3542 , Published on May 08, 2015

An Initial public offering is the process by which a company goes public. It is a type of public issue by which an offer of securities is made to new investors for becoming a part of shareholders. To raise an IPO in India companies have to go through various rules and regulation. These rules and regulations are governed by SEBI. SEBI is a governing body of securities market in India which lays down rules to protect the interest of investors and assist the development of securities market in India.

ICDR regulations of SEBI, 2009 list down rules for IPO. An issuer is required to go through these regulations before listing for IPO.

ICDRR lists down following information in 20 regulations:

• Provisions and pricing for Public issue

• Eligibility criteria

• Contribution of Promoters

• Minimum offer that can be issued, offer document, reservation

• General obligations of issuers with respect to public

Regulation 26 contains five subsection (known profitability route) that any issuer has to satisfy but not mandatory. If any issuer is not able to satisfy these five conditions, it will have to make an issue of regulation 26 (2). This could be through compulsory book built route or an appraisal route.

In compulsory book built issue, issuer needs 50% of the issue through QIBs. In an appraisal route, commercial banks and/or public financial institutions should have 15% participation.

However, regulations are more comprehensive for profitability route. Hence for these regulations for this are laid down in two annexures.

Regulation 26(1) (a) is about net tangible assets required by the issuer

Regulation 26(1) (b) is about track record of issuer’s profitability

Regulations 30 - 31 deal with price band and pricing. An issuer needs to be cautious while deciding the price band and pricing of equity shares IPO. For example price band and floor price in RHP. According to this regulation, the floor price has to be announced at least two working days in advance before the bidding opens. There are many other rules mentioned in this regulation such as rules dealing the cap price, relation between cap price and floor price

Regulations 32- 48 deal with a minimum contribution that promoter has to make, lock period and exemptions.

• Promoters’ Contribution: For unlisted company, minimum 20% of the post issue capital. For listed company, either up to 20% of the issue of post issue holding of 20%.

• Lock-in period: 3 years of the lock-in period from the date of commencement or the date of allotment.

• Exemptions: In case of companies that are listed for more than three years and have a track of paying a dividend for at least three consecutive preceding years, or in case of right issues they are exempted from IPO.

Knowledge of these rules is not sufficient for companies to issue IPO. Besides, these rules companies have to have some intermediaries. These intermediaries issue public shares on the behalf of the company. Intermediaries are:

• Lead Managers: They are from Investment Banks who co-ordinates with the company. They assist the company in legal issues such as drafting offer documents, interacting with SEBI/BSE/NSE.

• International & Domestic Legal Counsels: Provide guidance in selling of shares in international markets.

• Auditors: Reviewing and auditing of financial statements that is a part of offer document.

• Registrars: They co-ordinate with the issuer and banks. They also help in allocation approval from NSE/BSE. Registrars are appointed four weeks before filling DRHP with SEBI.

Beside these parties company has to also looking into IPO grading, Depository (NSDL, CDSL), Printers, Advertisers, SCSB, etc. Issuer has to look into various legal documents such as Engagement letter, Escrow Agreement, Registrar MoU, BRLM MoU, Syndicate Agreement, Underwriting Agreement, Listing Agreement, etc. Issuer also has to get internal approvals from Board and private shareholders (if any).

Once the issuer has looked into these issues and legality, it has to work on book building issues with BSE/NSE.

This article has been authored by Kumar Keshav from IIM Udaipur


• ICDRR: issue of Capital and Disclosure requirement, • QIB: Qualified Institutional Buyers, • RHP: Red Herring Prospectus, • DRHP: Draft Red Herring Prospectus, • NSDL: National Securities Depository Limited, • CSDL: Centre Depository Services Limited, • SCSB: Self Certified Syndicated Bank, • BRLM: Book Running Lead Manager




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