SEBI Guidelines for IPO: Regulatory Framework, Process, and Compliance

The Securities and Exchange Board of India (SEBI) is the regulatory authority overseeing securities markets in India. One of its key roles is to regulate Initial Public Offerings (IPOs) to ensure transparency, protect investor interests, and maintain market integrity. SEBI issues specific guidelines that companies must follow before, during, and after launching an IPO. This article provides a comprehensive understanding of SEBI’s guidelines for IPOs, including eligibility criteria, procedural requirements, and compliance obligations.

Eligibility Criteria for IPO

Before a company can go public, it must meet certain eligibility criteria set by SEBI. These include:

1. Net Tangible Assets – The company must have net tangible assets of at least INR 3 crore in each of the preceding three years.
2. Net Worth Requirement – The net worth should be a minimum of INR 1 crore in each of the last three years.
3. Operating Profits – The company should have reported an operating profit of at least INR 15 crore in any three of the last five years.
4. Minimum Paid-up Capital – The post-issue paid-up capital of the company should be at least INR 10 crore.
5. Offer to Public – At least 25% of post-issue equity must be offered to the public unless the company meets the SEBI-specified exemptions.

SEBI IPO Process and Compliance Requirements

The IPO process under SEBI guidelines involves multiple stages:

1. Appointment of Intermediaries

• Companies must appoint merchant bankers, underwriters, registrars, and other key intermediaries to manage the IPO.
• SEBI mandates that at least one lead merchant banker be registered with SEBI.

2. Draft Red Herring Prospectus (DRHP) Filing

• Companies must submit a Draft Red Herring Prospectus (DRHP) to SEBI.
• The DRHP should disclose all material facts, financial statements, risks, and business operations.
• SEBI reviews and provides observations, which the company must address before proceeding.

3. Approval and IPO Registration

• Once SEBI grants approval, the company can file the Red Herring Prospectus (RHP) with the Registrar of Companies (ROC).
• The RHP contains details about the issue size, share price band, and IPO schedule.

4. Price Band and Book Building Process

• SEBI allows Fixed Price Issues and Book Building Issues.
• In book building issues, the price band must be disclosed at least two days before the issue opens.

5. Subscription and Allotment Process

• The IPO subscription period typically lasts 3-5 days, during which investors can bid for shares.
• The company must allot shares within 6 working days after issue closure.
• A minimum 35% of shares must be reserved for retail investors in book-built issues.

6. Post-IPO Listing and Lock-in Period

• The company’s shares must be listed on the stock exchange within 6 working days of IPO closure.
• SEBI mandates a lock-in period of one year for promoters holding pre-IPO shares to prevent market manipulation.

Disclosure and Transparency Norms

SEBI ensures transparency in IPOs through stringent disclosure requirements:

1. Financial Statements – Audited financial statements for the last three years must be included in the DRHP.
2. Risk Factors – Companies must disclose potential risks, including financial, operational, and regulatory risks.
3. Utilization of IPO Proceeds – The prospectus must specify how the company plans to use the raised funds.
4. Promoter Holding – The promoters’ shareholding before and after the IPO must be disclosed.
5. Legal Compliance – Any ongoing litigation or regulatory disputes must be mentioned in the prospectus.

Investor Protection Measures by SEBI

To safeguard investor interests, SEBI has introduced several protective measures:

1. ASBA (Application Supported by Blocked Amount) – Investors’ funds remain blocked until the allotment process is complete.
2. Grievance Redressal – SEBI has set up an Investor Protection Fund and online complaint resolution mechanism.
3. T+3 and T+6 Settlement Cycle – Ensures timely refunds and share allocations.
4. Price Stabilization via Market Making – Certain IPOs require market makers to stabilize post-listing price fluctuations.

Penalties for Non-Compliance

SEBI has strict penalties for companies that violate IPO regulations, including:

1. Monetary Fines – Heavy fines can be imposed for non-compliance.
2. Suspension or Cancellation of IPO – SEBI can halt an IPO if the company provides misleading information.
3. Legal Action – Fraudulent activities may result in criminal proceedings against promoters and directors.
4. Investor Refunds – Companies may be required to refund investors in case of false disclosures.

Recent Amendments and Updates to SEBI IPO Guidelines

SEBI regularly updates its regulations to enhance transparency and investor protection. Some recent changes include:

1. Increased Retail Quota – To encourage retail participation, SEBI raised the retail investor quota in certain IPOs.
2. Mandatory Lock-in Period for Anchor Investors – Anchor investors must hold at least 50% of their allocation for 90 days.
3. Stricter Due Diligence for Merchant Bankers – SEBI has made it mandatory for merchant bankers to conduct thorough background checks before filing DRHP.
4. Enhanced Disclosures for Startups & Tech IPOs – Startups seeking IPOs must disclose detailed financial and business models.

SEBI’s IPO guidelines provide a structured framework to ensure fair market practices, investor protection, and transparency. Companies planning to go public must adhere to SEBI’s strict eligibility criteria, disclosure norms, and procedural requirements. By enforcing these guidelines, SEBI maintains the credibility of India’s capital markets and protects investors from financial malpractice. Understanding these regulations is crucial for both companies and investors to navigate the IPO process successfully.