IPO

Conditions for initial public offer.

26. (1) An issuer may make an initial public offer, if:
(a) it has net tangible assets of at least three crore rupees in each of the
preceding three full years (of twelve months each), of which not more than fifty
per cent are held in monetary assets: Provided that if more than fifty per cent.
of the net tangible assets are held in monetary assets, the issuer has made firm
commitments to utilise such excess monetary assets in its business or project;
(b) it has a minimum average pre-tax operating profit of rupees fifteen crore,
calculated on a restated and consolidated basis, during the three most profitable
years out of the immediately preceding five years.
(c) it has a net worth of at least one crore rupees in each of the preceding three
full years (of twelve months each);
(d) the aggregate of the proposed issue and all previous issues made in the same
financial year in terms of issue size does not exceed five times its pre-issue net
worth as per the audited balance sheet of the preceding financial year;
(e) if it has changed its name within the last one year, at least fifty per cent. of
the revenue for the preceding one full year has been earned by it from the
activity indicated by the new name.
26. (2) An issuer not satisfying the condition stipulated in sub-regulation (1) may
make an initial public offer if the issue is made through the book-building process
and the issuer undertakes to allot, at least seventy five percent of the net offer to
public, to qualified institutional buyers and to refund full subscription money if it
fails to make the said minimum allotment to qualified institutional buyers.
26. (3) An issuer may make an initial public offer of convertible debt instruments
without making a prior public issue of its equity shares and listing thereof.
26. (4) An issuer shall not make an allotment pursuant to a public issue if the
number of prospective allottees is less than one thousand.
26. (5) No issuer shall make an initial public offer if there are any outstanding
convertible securities or any other right which would entitle any person with any
option to receive equity shares:
Provided that the provisions of this sub-regulation shall not apply to: (a) a public
issue made during the currency of convertible debt instruments which were
issued through an earlier initial public offer, if the conversion price of such
convertible debt instruments was determined and disclosed in the prospectus of
the earlier issue of convertible debt instruments; (b) outstanding options granted
to employees pursuant to an employee stock option scheme framed in
accordance with the relevant Guidance Note or Accounting Standards, if any,
issued by the Institute of Chartered Accountants of India in this regard. 50[(c)
fully paid-up outstanding convertible securities which are required to be
converted on or before the date of filing of the red herring prospectus (in case of
book-built issues) or the prospectus (in case of fixed price issues), as the case
may be.]

26. (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 the sellers for a period of at least one year prior to the filing of draft offer
document with the Board in accordance with subregulation (1) of regulation 6:
Provided that in case equity shares received on conversion or exchange of fully
paid-up compulsorily convertible securities including depository receipts are
being offered for sale, the holding period of such convertible securities as well as
that of resultant equity shares together shall be considered for the purpose of
calculation of one year period referred in this sub-regulation: Provided further
that the requirement of holding equity shares for a period of one year shall not
apply: (a) in case of an offer for sale of specified securities of a government
company or statutory authority or corporation or any special purpose vehicle set
up and controlled by 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 invested capital which had been in existence
for a period of more than one year prior to such approval51[;] 52[(c) if the
specified securities offered for sale were issued under a bonus issue on securities
held for a period of at least one year prior to the filing of draft offer document
with the Board and further subject to the following, - (i) such specified securities
being issued out of free reserves and share premium existing in the books of
account as at the end of the financial year preceding the financial year in which
the draft offer document is filed with the Board ; and (ii) such specified securities
not being issued by utilization of revaluation reserves or unrealized profits of the
issuer.] 53[(7) An issuer making an initial public offer may obtain grading for
such offer from one or more credit rating agencies registered with the Board.]

FPO
Conditions for further public offer. 27. An issuer may make a further public offer
if it satisfies the conditions specified in clauses (d) and (e) of sub-regulation (1)
of regulation 26
(d) the aggregate of the proposed issue and all previous issues made in the same
financial year in terms of issue size does not exceed five times its pre-issue net
worth as per the audited balance sheet of the preceding financial year;
(e) if it has changed its name within the last one year, at least fifty per cent. of
the revenue for the preceding one full year has been earned by it from the
activity indicated by the new name.
and if it does not satisfy those conditions, it may make a further public offer if it
satisfies the conditions specified in sub-regulation (2) of regulation 26.
An issuer not satisfying the condition stipulated in sub-regulation (1) may make
an initial public offer if the issue is made through the book-building process and
the issuer undertakes to allot, at least seventy five percent of the net offer to
public, to qualified institutional buyers and to refund full subscription money if it
fails to make the said minimum allotment to qualified institutional buyers.

In order to enable more number of listed companies to raise further capital using the fast-track route,
the Sebi Board has reduced the minimum public holding requirement to Rs 1000 crore in case of
FPO.

Layering
186. (1) Without prejudice to the provisions contained in this Act, a company
shall unless otherwise prescribed, make investment through not more than two
layers of investment companies: Provided that the provisions of this sub-section
shall not affect, (i) a company from acquiring any other company incorporated
in a country outside India if such other company has investment subsidiaries
beyond two layers as per the laws of such country; (ii) a subsidiary company
from having any investment subsidiary for the purposes of meeting the
requirements under any law or under any rule or regulation framed under any
law for the time being in force.
Investment made through layers
A company shall make investment through not more than two layers of
investment companies. There was no such provision in Section 372A of
Companies Act, 1956. In relation to a holding company, layer means its
subsidiary or subsidiaries.
Non-Applicability
However, the above provisions shall not affect:
(i) a company from acquiring any other company incorporated in a country
outside India if such other company has investment subsidiaries beyond two
layers as per the laws of such country;
(ii) a subsidiary company from having any investment subsidiary for the
purposes of meeting the requirements under any law or under any rule or
regulation framed under any law for the time being in force.
IPO Exit Restrictions
3.2.2 Restrictions on exit through public offering Indias complex set of
regulations also limit a PE firms exit opportunities. Before a PE firm can list an
Indian company on a foreign exchange, the SEBI guidelines require that it list the
company on a domestic exchange (Jain and Manna, 2009). This dual listing
requirement makes it difficult for PE firms that are executing an LBO to exit
through a foreign listing. Further, if the company is restricted from listing on an
Indian stock exchange, the PE firm will be precluded from an exit via a public
offering on a foreign exchange.
Market factors as well as the legal limitations discussed play an important role in
exiting an LBO. If the companys operations are located solely in India, an IPO in
Indian markets would be most lucrative. However, if the company operates
predominantly overseas or has a major export aspect to its business, an offering
in foreign capital markets is likely to be more profitable.
A number of SEBI regulations add complexity to a public market exit and make it
clear that PE investors engaged in an LBO of an Indian company cannot exit
cleanly through an IPO. According to the SEBIs listing requirements, Indian
companies must identify the promoters of the listing company for purposes of

minimum contributions and the promoter lock-in. In an IPO, the promoters must
own at least 20% of the post-offering stock. All other public offerings require the
promoters to purchase 20% of the proposed issuance or ensure that they own
20% of the shares post-offering. Moreover, the SEBIs guidelines stipulate lock-in
requirements on promoters shares to ensure that the control and management
of the company is consistent after the public offering. The minimum contribution
of 20% that promoters make will be locked in for three years. If the promoters
contribution is over 20%, the additional contribution is locked in for one year. In
addition, there is a one year lock-in period for the pre-offering share capital and
the shares issued on a firm allotment basis.
Modes of exits IPO This is the traditionally preferred route. An IPO is not an exit in
itself. Private equity investors will have a right to offer their shares for sale under
an IPO and then exit. To ensure that the investor can effectively achieve this,
investment documents typically specify the following: first, the management
must exercise voting rights to pass IPOrelated resolutions; second, the investor
must have an enforceable right to offer and enforce the offer for sale; and
third, the investor must not be a promoter, in order to make certain that
provisions on promoter lock-in post IPO do not apply. Several private equity
investors invest as SEBI registered foreign venture capital investors (FVCI) or
venture capital funds (VCFs) for various reasons: one, the lock-in requirement
post IPO for non-promoter investors does not apply to FVCIs/VCFs so long as they
were holding equity shares for at least 1 year pre-IPO, second, the pricing
regulations do not apply both at entry and exit and third, that FVCIs and VCFs
qualify as qualified institutional buyers (QIBs). QIB benefits include the fact
that the price of shares issued to QIBs on preferential basis are calculated on the
average of the weekly high and low of the closing prices of the related shares
quoted on a stock exchange during the 2 weeks preceding the relevant date as
against a 6 month period that apply to others; hence the odds against the pricing
of QIB shares being adversely affected by any radical change in prices over a
period of time are lesser.
Issues
Private equity players, which comprise the largest group of foreign direct investors, will be forced to
don the promoter's hat in many companies a condition that is not going down well with them.
PE investors will be identified as promoters not only when they have a majority stake but also in
companies where their holdings are higher than the original promoters. This will require PE investors
(who are identified as promoters) to come out with a string of disclosures and postpone their exit once
the companies go public. As promoters, PE funds could be tied to a three year lock-in after the listing
of the company.
Accepting the role of a promoter as they would have had to reveal their fund structure, limited partners
(the investors in a fund), and information on companies where they own more than 10%.

For Start-ups

Some of the relaxed requirements include reducing the lock-in period for investors in
start-ups to six months, compared with three years for regular initial public offerings
(IPOs). Disclosure norms for start-ups listing in the alternative trading platform will also
be diluted.

After the issue, no individual entity can hold more than 25 per cent stake in a company
and there is a six-month lock-in for all shareholders. No institutional investor can hold
more than 10 per cent of the issue.