eligibilitycritiria of sebi ipo

7/27/2019 eligibilitycritiria of sebi ipo

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Eligibility Criteria for Initial Public Offers

1.0 Objective

This memorandum seeks to modify the eligibility criteria for Initial Public Offers

(IPOs) namely (i) enabling IPOs through Offer for Sale (OFS) when more than 50% of

net tangible assets are held in monetary assets (based on a reference from

Department of Disinvestment, Government of India) (ii) profitability criteria to be met on

both stand alone and consolidated basis, thus making it more stringent.

2.0 Present Requirement

2.1 Regulation 26 of SEBI (Issue of Capital and Disclosure Requirements) Regulations,

2009 (hereinafter referred to as ICDRR) lists out the conditions for IPOs. There are

5 sub-regulations to Regulation 26. An issuer has to satisfy all 5 conditions to be

eligible to make an IPO under this regulation (profitability route) and if not, the issueris

required to make the issue under Regulation 26 (2) through compulsory book built or

appraisal route. The compulsory book built route requires at least 50%

subscription by Qualified Institutional Buyers and the appraisal route requires 15%

participation in the project by scheduled commercial banks or public financial

institutions.

2.2 Relevant extract of Regulation 26 of ICDRR prescribing eligibility conditions for

issuer companies to come out with IPOs is placed at Annexure. Regulation 26(1) (a) is

about net tangible assets requirement and Regulation 26 (1) (b) is about track record

of profitability. The proposal is to amend these two sub-regulations which are

discussed below.

3.0 Net tangible assets requirement

3.1 Regulation 26 (1) (a) provides that an issuer should have net tangible assets of at

least Rs.3 crore in each of the preceding three full years of which not more than

50% are held in monetary assets. Proviso to Regulation 26(1)(a) requires that ifmore

than 50% of the net tangible assets are held in monetary assets, the issuerought to

have firm commitments to utilize such excess monetary assets in its business

orproject.

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3.2 The rationale behind regulation 26(1) (a) is that if a company has unutilised

monetary assets on its books which is not earmarked for specific use, it must first

utilise those monetary assets to fund its requirements, before venturing to raise

money through a public issue. This may hold good in case of IPO through issuance of

fresh equities where the issue proceeds go to the issuer who is already cash rich.

3.3 Whereas, in an IPO through pure offer for sale (OFS), issue proceeds go to the selling

shareholders. The present provisions do not differentiate between IPOs through

fresh issue of equities and IPOs through pure OFS with the result a company

which is otherwise eligible under regulation 26 except for the limit on monetary

assets has to necessarily follow Regulation 26(2) which interalia requires

atleast 50% allotment to QIBs. This, limits the issuers ability to reserve more than

35% of the issue size to retail individual investors.

3.4 Proposal forconsideration

In view of the above, it is proposed to amend to Regulation 26(1)(a) suitably to

enable IPOs through OFS even if more than 50% of net tangible assets are held in

monetary assets.

4.0 Track record ofprofitability

4.1 Regulation 26(1)(b) of SEBI (ICDR) Regulations provides that an issuer may make an

IPO if it has a track record of distributable profits in terms of Section 205 of the

Companies Act, 1956, for atleast three out of the immediately preceding five years,

provided that extra-ordinary items shall not be considered for calculating

distributable profits. The Regulations are silent on whether the said profitability

criterion is to be applied on stand alone or consolidated basis.

4.2 The offer document requires disclosure of financials on both stand alone and

consolidated basis. From the said disclosures, it was observed that some

companies are able to satisfy the profitability criteria on standalone basis but show

huge losses on a consolidated basis. Since the regulations are silent, such issuers

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claim eligibility for making an issue via voluntary book built route [Regulation 26 (1)].

4.3 Whereas if a view is taken that issuer companies should satisfy profitability criteria on

both stand alone and consolidated basis, they would be eligible to make an issue

only under mandatory book built route [Regulation 26(2)], which require that at least

50% of the offer is to be allotted to QIBs. The rationale behind the said requirement is

that QIBs being large, well-informed investors are better equipped to analyze the

financial credentials of such companies and when they repose faith by subscribing to

at least fifty percent of the issue despite the issuer not satisfying profitability track

record, it gives some guidance to retail investors. It was, therefore, felt that the

application of the criterion under Regulation 26(1) needs to be more stringent.

4.4 Consideration by SCODA

The issue was deliberated by SCODA. After deliberations, SCODA recommended

that the eligibility condition may be modified to provide that the issuercompany shall

have net profits on consolidated basis also for atleast three out of the

immediately preceding five years; in cases where the company did not have

subsidiaries in all the immediately preceding five years but had subsidiary/

subsidiaries for a period lesser than five years, then it shall have net profits on a

consolidated basis in atleast one or more of the years for which consolidated

accounts are prepared.

4.5 SEBIs views and proposal forconsideration

The above recommendation of the SCODA intends to make the eligibility criteria for

issuer companies coming out with IPOs more stringent by mandating that the track

record of profitability be complied with by companies on stand-alone as well as

consolidated basis. It is, therefore, proposed that the recommendation of

SCODA be accepted.

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5.0 Proposal

The Board is requested to -

o consider and approve the proposal contained in Para 3.4 and 4.5 of the

memorandum.

o authorize the Chairman to take necessary steps to give effect to the decisions by

making suitable amendments to the SEBI (ICDR) Regulations.

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26. (1)An issuer may make an initial public offer, if:

Annexure

(a) it has

nettangi

bleasset

s ofat

leastthree

crorerupe

es in

eachof the

precedingthreefullyears

(oftwelv

emont

hseach)

, ofwhic

h notmore

thanfifty

percent.

areheld

in

monetary

asset

s:

Provid

ed

that if

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more than fifty per cent. of the net tangibleassets are held in monetary assets, the

issuer has made firm commitments to utilisesuch excess monetaryassets in its business

orproject;

(b) it has a track record of distributable profitsin terms of section 205 of the Companies

Act, 1956, for at least threeout of the immediately

preceding five years:

Provided that extraordinary items shall not

be considered for calculating distributable

profits;

(c) it has a net worth of at least one crorerupees in each of the preceding three fullyears

(oftwelvemonthseac

h);

(d) the aggregate of the proposed issueand all previous issues made in the

same financial year in terms of issue sizedoes not exceed five times its pre-issue net

worthas per

theaudite

d

balancesheet

of theprece

dingfinanci

al

year;

(e) if it

haschanged its

name

withinthe

last

oneyear,

atleast

fiftyper

cent.of the

revenue for

theprece

dingone

full

yearhasbeen

earned by it

fromthe

activit

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y indicated bythe newname.

(2) An issuer not satisfying any of theconditions stipulated in sub-regulation (1)

maymake an initial public offerif:

(a) (i) the issue is made through the bookbuilding process and the issuer

undertakes to allot at least fifty per cent.of the net offer to public to qualified

institutional buyers and to refund fullsubscription monies if it fails to make

allotment to the qualified institutionalbuyers ;

or

(ii) at least fifteen per cent. of the cost of

the project is contributed byscheduledcommercial banks or public financial

institutions, of which not less than ten percent. shall come from the appraisers and

the issuer undertakes to allot at least tenper cent. of the net offer to public to

qualified institutional buyers and torefund fullsubscription monies if it failsto make the allotment to the qualifiedinstitutional buyers;

(b) (i) the minimum post-issue face valuecapital of the issuer is ten crore rupees;

or

(ii) the issuer undertakes to provide market-making for at least two years from the

date of listing of the specified securities,subject to the following:

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(A) the market makers offer buy and sell quotes for a minimum depth ofthree hundred specified securities and ensure that the bid-ask spread fortheirquotes does not, at any time, exceed ten percent.;

(B) the inventory of the market makers, as on the date of allotment of the

specifiedsecurities, shall be at least five per cent. of the proposed issue.

(3) An issuer may make an initial public offer of convertible debt instrumentswithoutmaking a prior public issue of its equity shares and listingthereof.

(4)An issuer shall not make an allotment pursuant to a public issue if the numberofprospective allottees is less than one thousand.

(5) No issuer shall make an initial public offer if 12[as on the date of registeringthe prospectus with the Registrar of Companies] there are any outstanding

convertible securities or any other right which would entitle any person any optionto receive equityshares after the initial publicoffer:

Provided that the provisions of this sub-regulation shall notapplyto:

(a) a public issue made during the currency of convertible debt instrumentswhich were issued through an earlier initial public offer, if the conversion price of

such convertible debt instruments was determined and disclosed in theprospectus ofthe earlier issue of convertible debtinstruments;

(b) outstanding options granted to employees pursuant to an employee stock

option scheme framed in accordance with the relevant Guidance Note orAccountingStandards, if any, issued by the Institute of Chartered Accountantsof India in this regard.

(6) Subject to provisions of the Companies Act, 1956 and these regulations, equity

shares may be offered for sale to public if such equity shares have been held by thesellers foraperiod of at least one year prior to the filing of draft offer document with

the Boardin accordance with sub regulation (1) of regulation 6:

Provided that in case equity shares received on conversion or exchange of fullypaid-

up compulsorily convertible securities including depository receipts are being offered

forsale, the holding period of such convertible securities as well as that of resultant

equityshares together shall be considered for the purpose of calculation of one yearperiod referredin this sub-regulation:

Provided further that the requirement of holding equity shares for a period of one

yearshall notapply:

(a) in case of an offer for sale of specified securities of a government companyor statutory authority or corporation or any special purpose vehicle set up and

controlledby any one or more of them, which is engaged in infrastructure sector;

(b) if the specified securities offered for sale were acquired pursuant to any

scheme approved by a High Court under sections 391-394 of the Companies

Act, 1956, in lieu of business and


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invested capital which had been in existence for a period of more than oneyearprior to such approval.

(7) No issuer shall make an initial public offer, unless as on the date ofregisteringprospectus or red herring prospectus with the Registrar of Companies,

the issuerhas obtained grading for the initial public offer from at least onecredit rating agencyregistered with the Board.

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