Initial Public Offer on a Main Board
An Initial Public Offer (IPO) on the Main Board means the first time a company offers its shares to the public and gets listed on the main stock exchange platform.
In India, the “Main Board” refers to the regular listing platform of stock exchanges like:
National Stock Exchange of India (NSE)
BSE Limited (BSE)
Key features of a Main Board IPO:
An IPO on the main Board is usually undertaken by medium or large companies.
It requires compliance with the Securities and Exchange Board of India (SEBI) regulations for main board listings.
It has higher disclosure and governance requirements.
The Minimum application size for investors is generally lower than SME IPOs.
Shares are traded in normal market lots after listing.
Regulation 4. Reference Date
When a company wants to make an IPO of specified securities, it must satisfy all the eligibility conditions of that Chapter at two different points of time.
The issuer must satisfy the conditions:
(a). On the date when the draft offer document is filed with the Securities and Exchange Board of India (SEBI).
(b). Again on the date when the final offer document is filed with the Registrar of Companies (ROC).
So , essentially:
A company cannot qualify at the draft stage and then lose eligibility later.
The eligibility requirements must continue to remain fulfilled till the final filing stage as well.
Example:
Suppose a regulation requires:
Minimum net worth.
No regulatory disqualification.
Proper promoter eligibility.
Minimum operational track record.
Then the company must satisfy these conditions when it files the DRHP with SEBI, and again when it files the RHP/Prospectus with the ROC.
So if between these two dates
the promoter becomes disqualified,
the company defaults materially,
or eligibility conditions stop being fulfilled,
Then the issuer may not proceed with the IPO unless the issue is resolved.
Clarification:
If a specific provision elsewhere in that Chapter gives a different timing rule, that special rule will prevail over this general rule.
Regulation 5. Entities not eligible to make an initial public offer
5(1).
A company cannot come out with an IPO if:
Certain important persons connected with the company are prohibited by SEBI from participating in the securities market.
(a).
An issuer is not eligible to make an IPO if any of the following persons are debarred from accessing the capital market by SEBI:
The issuer company itself.
Any promoter.
Any member of the promoter group.
Any director.
Any selling shareholder.
Understanding Debarred from accessing the Capital market
SEBI may pass an order prohibiting a person from:
Buying or selling securities.
Dealing in the securities market.
Raising money from the public.
Participating in the capital market for a certain period.
This usually happens due to:
Fraud.
Insider trading.
Market manipulation.
Disclosure violations.
Other securities law violations.
(b).
An issuer cannot make an IPO even if its own promoters/directors are not personally debarred, but:
They are connected with another company that has been debarred by Securities and Exchange Board of India (SEBI).
So , An IPO is not allowed if:
Any promoter of the issuer, or
Any director of the issuer
is also a promoter, or a director in another company that has been debarred from accessing the capital market by SEBI.
(c).
A company cannot make an IPO if the company itself, or its promoters or directors, are classified as a wilful defaulter or a fraudulent borrower.
These classifications are generally made by banks or financial institutions under the framework of the Reserve Bank of India (RBI).
So , An IPO is not permitted if:
The issuer company itself; or
Any promoter; or
Any director
is a wilful defaulter or a fraudulent borrower.
Wilful Defaulter:
A person/entity is called a wilful defaulter when it has the ability to repay a loan but intentionally does not repay it.
Common situations include:
Deliberately not repaying bank dues despite having funds.
Diverting loan money for other purposes.
Siphoning off borrowed funds.
Disposing of secured assets without lender permission.
Fraudulent Borrower
A Fraudulent Borrower is a borrower involved in fraud relating to bank loans or credit facilities
It could include activities like:
Submitting fake documents for loans.
Falsifying financial statements.
Creating fake securities/collateral.
Cheating lenders.
(d).
A company cannot make an IPO if any of its promoters or directors is declared a Fugitive Economic Offender (FEO).
This concept comes under the Parliament of India enacted law called the Fugitive Economic Offenders Act, 2018.
So:
If any promoter of the issuer, or any director of the issuer has been declared a fugitive economic offender by a competent court, then:
The issuer becomes ineligible to make an IPO.
Fugitive Economic Offender
A fugitive economic offender is generally a person who:
Has committed certain major economic offences involving large amounts of money; and
Leaves India to avoid criminal prosecution; or
Refuses to return to India to face legal proceedings.
Examples of economic offences may include:
Large-scale fraud.
Money laundering.
Bank fraud.
Cheating financial institutions.
Explanation:
Past SEBI debarment does not permanently disqualify a person or company from participating in an IPO.
The restriction will not apply if:
The person/entity was debarred earlier by Securities and Exchange Board of India (SEBI); and
The debarment period has completely expired before the date of filing the draft offer document with SEBI.
These restrictions apply for 5(1)(a) & 5(1)(b).
For 5(1)(a):
Suppose:
A promoter was barred by SEBI from accessing the capital market for 2 years.
The debarment ended in January 2025.
The company files its DRHP in June 2025.
In this case , The old debarment will not make the issuer ineligible.
For 5(1)(b):
Suppose:
A director of the issuer is also a director in another company.
That other company was previously debarred by SEBI.
But the debarment period ended before the DRHP filing date.
In this case , The issuer will not be disqualified merely because of that past debarment.
5(2).
A company generally cannot proceed with an IPO if:
There are still pending instruments or rights that can later convert into equity shares of the company.
So , Before going public, the company’s share capital structure should be clear and settled.
There should not be uncertain future claims for additional equity shares.
Convertible Securities
These are instruments that can later be converted into equity shares.
Examples:
Convertible debentures.
Convertible preference shares.
Warrants.
Employee stock options (in some contexts).
Convertible notes.
Any contractual or legal right that allows a person to obtain equity shares in future.
So , convertible securities are when a person has a future entitlement or choice to obtain shares of the company.
Exceptions
Normally a company cannot make an IPO if there are outstanding rights/options that can later convert into equity shares.
However, there are some exceptions to these restrictions.
These exceptions are as follows:
(a). Employee - Stock options
The company is allowed to have outstanding ESOPs at the time of the IPO.
These options may be held by:
Current employees.
Even former employees who have already left the company.
These outstanding options will not make the company ineligible for an IPO.
But this exception is available only if the ESOP scheme is properly compliant with:
The Companies Act, 2013.
Applicable Guidance Notes.
Accounting standards issued by the Institute of Chartered Accountants of India (ICAI).
Outstanding options are options have already been granted but:
The employee has not yet exercised them to receive shares.
(b). Stock Appreciation Rights (SARs)
A Stock Appreciation Right gives an employee the benefit of increase in the company’s share value over time.
In some cases, SARs may be settled by issuing equity shares.
SEBI allows such SARs to exist before an IPO, but only subject to certain conditions.
The SARs will be exempted only if these conditions are met:
The SARs must be granted to employees under a Stock Appreciation Right Scheme.
The SARs must be fully exercised for equity shares before:
Filing of the Red Herring Prospectus (RHP) in a book-built issue; or
Filing of the Prospectus in a fixed price issue.
By the time the final offer document is filed, the conversion into shares must already be completed.
No pending SAR conversion rights should remain after that stage.
The company must disclose in the Draft Offer Document and Offer Document, the following details:
Existence of the SAR scheme.
Details of the SARs.
Total number of equity shares arising from exercise of those SARs.
(c). Certain Convertible Securities
Certain convertible securities to remain outstanding temporarily, provided they are compulsorily converted into equity shares before the critical IPO filing stage.
These are exempted only if the following conditions are met.
The convertible securities must be:
Fully paid-up.
Required to be converted into equity shares on or before:
Filing of the Red Herring Prospectus (RHP) in a book-built issue; or
Filing of the Prospectus in a fixed price issue.
The holder must have already paid the full amount payable on those securities.
No unpaid or partly-paid conversion instruments are allowed under this exception.
The conversion should not remain optional or uncertain indefinitely.
The securities must mandatorily convert into equity shares before the specified IPO stage.
Regulation 6. Eligibility requirements for an initial public offer
6(1).
An issuer shall be eligible only if:
(a).
The company must have net tangible assets of at least ₹3 crore.
This calculation must be done on a restated basis. & on a consolidated basis.
The requirement must be satisfied in each of the preceding 3 full financial years.
Each of those years must be a complete 12-month period.
Out of the total net tangible assets, not more than 50% can be held in monetary assets.
Example:
Net Tangible Assets means: Tangible Assets − Liabilities.
Intangible assets are excluded.
Tangible assets include:
Land.
Building.
Plant & machinery.
Furniture.
Inventory.
Investments.
Cash.
Bank balance.
A restated basis means:
The old financial statements are Reworked/Revised according to SEBI ICDR requirements so that:
All years become comparable.
Accounting errors are corrected.
Accounting policies become uniform.
Corporate changes are properly reflected.
The company does not merely use the originally published accounts.
The figures are restated by auditors in the offer document.
Suppose:
Original Financials in the year 2023 was ₹2.7 crore
Original Financials in the year 2024 was ₹3.4 crore.
Original Financials in the year 2025 was ₹4 crore.
At first glance, 2023 fails the ₹3 crore requirement.
Later, auditors discover:
Depreciation was wrongly charged.
Inventory valuation was incorrect.
Accounting policy changed.
After restatement:
Restated financials for the year 2023 is ₹3.2 crore.
Restated financials for the year 2024 is ₹3.5 crore.
Restated financials for the year 2025 is ₹4 crore.
Now all 3 years satisfy the requirement.
So eligibility is checked using the restated numbers, not merely the old reported numbers.
A Consolidated basis means:
The financial statements of the holding company, and all its subsidiaries are combined together and treated as one economic entity.
So SEBI looks at the group position, not just standalone parent-company numbers.
(b).
The company must have average operating profit of at least ₹15 crore
The calculation must be on a restated basis, and on a consolidated basis
The period considered is:
The preceding 3 full financial years.
Each year must be a complete 12 months.
The company must have operating profit in each of those 3 years & no loss from operations in any year.
Operating profit means profit earned from normal business operations.
It excludes:
Interest income.
Extraordinary gains.
Sale of assets.
Investment profits.
Non-operating income.
It is generally: Revenue from Operations− Operating Expenses
(c).
The company must have a net worth of at least ₹1 crore.
This requirement must be satisfied in each of the preceding 3 full financial years.
The calculation must be on a restated basis, and on a consolidated basis.
Net worth represents the shareholders’ funds of the company.
Under company law/accounting principles, it generally means:
Paid-up Share Capital + Free Reserves + Securities Premium − Accumulated Losses − Deferred Expenditure − Miscellaneous Expenditure.
Generally , to put it simple it just means Assets−Outside Liabilities.
(d).
Under circumstances , the company has changed its name within the last 1 year before filing the IPO documents then:
At least 50% of its revenue during the preceding one full financial year must come from the business/activity suggested by the new name.
This 50% requirement is calculated on a restated and consolidated basis.
Suppose there is a company called Altech Infra Limited:
Thereafter , the company changes its name to Altech Renewable Energy Limited.
Then under such circumstances:
50% of the company’s revenue must be from the renewable energy sector and should be derived from such businesses.
6(2).
Under circumstances the issuer does not meet the financial eligibility requirements like:
Minimum net tangible assets,
Operating profit,
Net worth, etc.
It can still make an IPO, but only if:
The IPO is made through the book-building process.
At least 75% of the net offer is allotted to Qualified Institutional Buyers (QIBs),
If the company fails to allot 75% to QIBs it must refund the entire subscription money to all applicants.
6(3).
If a company has issued SR equity shares to its promoters/founders, then the company can still undertake an IPO.
That said , the IPO can consist only of ordinary equity shares,
The company must comply with the special SEBI conditions applicable to SR structures.
These conditions are as follows:
(i).
The company issuing the IPO must be heavily dependent on:
Technology.
Intellectual property.
Data.
innovation.
Digital platforms.
Advanced scientific processes.
for creating value in its business.
The technology should not be incidental and should have a substantial value addition.
It must significantly contribute to:
Revenue generation.
Business model.
Scalability.
Operational efficiency.
Customer value.
Technology must be central to the business, not merely supportive.
(ii).
There is a limit on the personal net worth of the SR shareholder.
SR shareholder means the promoter/founder holding Superior Rights (SR) equity shares.
To use the SR share structure the SR shareholder’s net worth must not exceed ₹1000 crore,
This net worth must be determined by a Registered Valuer.
SEBI intended SR structures mainly for:
Startup founders,
Innovation-driven entrepreneurs,
Founder-led technology companies.
It did not want:
Extremely wealthy business groups.
Already dominant promoters.
to excessively concentrate control through SR shares.
So SEBI imposed a ₹1000 crore cap.
Explanation:
While calculating the net worth of the SR shareholder investments/shareholding in other listed companies are included.
However, the shareholder’s investment/shareholding in the issuer company is excluded.
Therefore:
Shares held in other listed companies are counted.
Shares held in the IPO company itself are not counted.
The objective is that:
Start-up founders may own very valuable shares in their own company,
IPO valuation may artificially inflate their net worth.
SEBI did not want founders to become ineligible merely because their own start-up became valuable.
So the founder’s stake in the issuer company is ignored.
(iii).
SR shares can be issued only to promoters or founders of the company.
Such promoters/founders must hold an executive position in the issuer company.
Therefore, SR shares cannot be issued to:
Passive investors.
Non-executive promoters.
Institutional investors.
Relatives not involved in management.
Executive position means the person is actively involved in management or day-to-day affairs of the company.
Examples of executive positions:
Managing Director (MD).
Chief Executive Officer (CEO).
Whole-time Director.
Executive Director.
(iv).
Before issuing Superior Rights (SR) equity shares:
The company must obtain shareholders’ approval through a special resolution passed in a general meeting.
Further, the notice convening that meeting must clearly disclose certain specific details relating to the SR shares.
The objective is that the shareholders can make an informed decision.
The company cannot issue SR equity shares casually through only a board resolution.
Because SR shares give disproportionate control, shareholders must expressly approve:
The extent of control being granted.
The duration of such control.
The exact rights attached to those shares.
(a). Size of issue of SR equity shares
The notice must disclose:
How many SR shares will be issued, or
What proportion of capital they will represent.
(b). Ratio of voting rights of SR shares vis-à-vis ordinary shares
The notice must state the voting multiple attached to SR shares compared with ordinary shares.
Example
Ordinary share - 1 vote
SR share - 10 votes
So the voting ratio is 10:1.
This allows shareholders to understand the degree of control being conferred.
(c). Rights relating to differential dividends, if any
The notice must disclose whether SR shareholders will receive:
The same dividend as ordinary shareholders, or a different dividend entitlement.
Example
Ordinary shareholders receive normal dividend.
SR shareholders may receive:
Equal dividend,
Lower dividend,
Higher dividend.
If there is any difference, it must be specifically mentioned.
(d). Sunset provisions
The notice must state the duration for which SR shares will remain valid.
A sunset clause ensures that superior voting rights do not continue indefinitely.
Example:
The SR equity shares shall automatically convert into ordinary equity shares after 5 years.
This prevents perpetual concentration of control.
(e) Matters where SR shares will have the same voting rights as ordinary shares.
Even though SR shares generally carry higher voting power, on certain important matters they must vote on a one-share-one-vote basis, similar to ordinary shares.
The notice must specify these matters.
Typically, such matters include:
Appointment/removal of independent directors.
Related party transactions.
Voluntary winding up.
Changes affecting SR shareholder rights.
(v).
SR equity shares must be issued before the filing of the Draft Red Herring Prospectus (DRHP).
Further, the SR shares must be held for at least: 3 months before filing the Red Herring Prospectus (RHP).
Therefore, SR shares cannot be created immediately before the IPO merely to obtain superior voting rights.
(vi).
SR equity shares must carry higher voting rights compared to ordinary shares.
The voting rights ratio must be minimum: 2:1 and maximum: 10:1.
So, 1 SR share can give between 2 and 10 votes, while 1 ordinary share gives 1 vote.
The ratio must be in whole numbers only & fractions are not allowed.
(vii).
The nominal (face) value of each Superior Rights (SR) equity share must be identical to the face value of each ordinary equity share.
The company cannot assign a different face value merely because the share carries superior voting rights.
Face value and voting rights are separate concepts:
Face value = nominal capital value of the share.
Voting rights = number of votes attached to the share.
Under the SR framework: Voting rights may differ, but face value must remain the same.
(viii).
The company can issue only a single category/class of Superior Rights (SR) equity shares.
The issuer cannot create multiple SR share classes with different voting powers or different rights.
The company may have:
Ordinary equity shares.
One class of SR equity shares.
But it cannot have:
Class A SR shares with 10:1 voting rights & Class B SR shares with 5:1 voting rights.
Only one uniform SR class is permitted.
(ix).
SR equity shares are treated the same as ordinary equity shares in all respects.
The only difference is: SR shares have superior voting rights.
Therefore, except voting power all other rights remain identical.
Regulation 7. General Conditions
7(1).
An issuer should ensure the following:
(a).
Before making the public issue, the issuer must:
Apply to one or more stock exchanges for in-principle approval to list its specified securities.
Choose one of those stock exchanges as the designated stock exchange in accordance with Schedule XIX.
The company must submit listing applications to stock exchanges where it wants its securities to be listed.
These exchanges may include:
BSE Limited.
National Stock Exchange of India Limited.
The application is made before the IPO/open issue.
“In-principle approval” is a preliminary approval granted by the stock exchange stating that:
The company broadly satisfies listing requirements, and
The exchange has no objection in principle to listing the securities, subject to fulfillment of final conditions.
It is not the final listing permission.
Specified securities generally include:
Equity shares.
Convertible securities.
Rights entitlements, or other securities specified under SEBI regulations.
(b).
The issuer company must enter into an agreement with a depository so that:
The securities already issued by the company, and
The securities proposed to be issued in the public issue
can exist and be traded in dematerialised (demat) form.
(c).
All its specified securities held by:
(i). The promoters.
(ii). The promoter group.
(iii). The selling shareholder(s).
(iv). The directors.
(v). The key managerial personnel.
(vi). The senior management.
(vii). Qualified institutional buyer(s).
(viii). Employees.
(ix). Shareholders holding SR equity shares.
(x). Entities regulated by Financial Sector Regulators.
(xi). Any other categories of shareholders as maybe specified by the Board from time to time.
are in the dematerialised form prior to the filing of the draft offer document.
Explanation:
(i).
For the purposes of this clause , employee means:
A person designated as an employee by the issuer.
The person must be exclusively working in India.
Employees of the issuer’s holding company are included.
Employees of the issuer’s subsidiary company are included.
Employees of the issuer’s associate company are included.
(ii).
For the purposes of this clause: A “financial sector regulator” means:
An authority or body created under a law in force.
It regulates financial sector services or financial transactions.
It includes:
Reserve Bank of India (RBI).
Securities and Exchange Board of India (SEBI).
Insurance Regulatory and Development Authority of India (IRDAI).
Pension Fund Regulatory and Development Authority (PFRDA).
International Financial Services Centres Authority (IFSCA).
Insolvency and Bankruptcy Board of India (IBBI).
Any other authority specified by SEBI.
(d).
The issuer must not have any existing partly paid-up equity shares before the issue.
All partly paid shares must either be converted into fully paid-up shares, or be forfeited.
“Fully paid-up” means the shareholder has paid the entire amount due on the shares.
“Forfeited” means the company cancels the shares due to non-payment of calls or unpaid amounts.
(e).
When the public issue proceeds are intended to fund a specific project then:
The issuer must already have firm finance arrangements for at least 75% of the project cost.
These arrangements must be through verifiable means.
“Verifiable means” includes evidence
such as:
Sanctioned bank loans.
Financial institution approvals.
Binding funding agreements.
Committed investments.
While calculating the 75%:
The amount proposed to be raised through the public issue is excluded.
Existing identifiable internal accruals are also excluded.
7(2).
The amount allocated for GCP in the draft offer document and offer document cannot exceed 25% of the total issue size.
General corporate purposes (GCP) means issue proceeds used for unspecified general business needs.
The remaining amount must be earmarked for specific identified objects such as:
Project funding,
Repayment of loans,
Acquisition,
Working capital,
Capital expenditure, etc.
“General Corporate Purposes” (GCP) refers to a portion of the issue proceeds that:
The company may use for its general business and operational requirements, without tying the money to one specific identified project.
GCP commonly covers:
Administrative expenses.
Business expansion opportunities.
Marketing and branding.
Meeting operational expenses.
Strengthening liquidity.
Strategic initiatives.
Office expenses.
Routine corporate requirements.
Explanation:
For the purposes of Regulation 6 & Regulation 7:
(I). Project
A “project” refers to a specific purpose or objective.
The issuer company raises money from investors.
The money raised is meant to be used for certain stated purposes.
These purposes are called objects of the issue”.
Any such purpose/object for which funds are being raised is treated as a “project”.
(II).
The issuer company may earlier have existed as:
A partnership firm, or
A Limited Liability Partnership (LLP).
Later, it may have been converted into a company.
The issuer may want to use the past operating profit history of:
The partnership firm, or
The LLP
for IPO eligibility requirements.
This past operating profit track record will be accepted only if certain conditions are satisfied.
Old partnership/LLP financial statements cannot be used as they are.
They must be:
Revised,
Reformatted,
Aligned with company-format financial statements.
The format must match the requirements applicable to companies under the Companies Act, 2013.
(a).
The revised financial statements must contain proper disclosures.
These disclosures should be the same as those required for companies under Schedule III of the Companies Act, 2013.
This includes disclosures relating to:
Assets.
Liabilities.
Revenue.
Expenses.
Related parties.
Contingencies.
Borrowings.
Notes to accounts.
(b).
The financial statements must be certified by the statutory auditor.
(i).
Auditor must confirm that accounts are prepared properly,
He must also confirm that disclosures comply with Schedule III requirements.
(ii).
Auditor must certify that proper accounting standards were applied.
(iii).
Auditor must confirm that the statements accurately reflect the financial position and performance of the firm/LLP.
The accounts should not be misleading.
(III).
If the issuer is formed by spinning off a division of an existing company:
A division spin-off refers to the transfer of a particular business division of an existing company into a separate company.
The track record of distributable profits earned by the spun-off division may be considered for determining the issuer's eligibility.
Such profits can be considered only if the prescribed conditions are satisfied.
The spun-off division must comply with the financial statement requirements applicable to partnership firms or Limited Liability Partnerships (LLPs) as specified in Explanation (II).
So , the financial statements of the division must be prepared and presented in the manner required under Explanation (II) to establish a reliable financial track record.
If these financial statement requirements are not complied with, the distributable profits of the spun-off division cannot be considered for determining the issuer's eligibility.
Example:
ABC Ltd. has three divisions:
Cement Division
Steel Division
Renewable Energy Division.
ABC Ltd. decides to separate its Renewable Energy Division into a new company called ABC Renewables Ltd.
ABC Renewables Ltd. now plans to launch an IPO and becomes the issuer.
Since ABC Renewables Ltd. is a newly incorporated company, it does not have an independent history of distributable profits.
Therefore, it seeks to rely on the past distributable profits earned by the Renewable Energy Division while it was part of ABC Ltd.
Explanation III permits this:
But only if the financial statements of the Renewable Energy Division satisfy the requirements prescribed under Explanation (II) for partnership firms or Limited Liability Partnerships (LLPs).
If the financial statements of the Renewable Energy Division comply with those requirements then:
The division's past distributable profits can be treated as the profit track record of ABC Renewables Ltd. for IPO eligibility.
If the required financial statements are not available or do not comply with Explanation (II) then:
ABC Renewables Ltd. cannot rely on the division's past distributable profits, even though the business itself had been operating before the spin-off.
7(3).
The regulation puts a combined limit on certain vague or unspecified uses of issue proceeds.
The combined amount under:
(i). General Corporate Purposes (GCP), and
(ii). Objects where acquisition/investment targets are not identified.
The issuer company is raising money through an IPO or issue of securities.
In the “Objects of the Issue” section, the company explains how it plans to use the money raised.
Some proposed uses may involve acquisitions, or investments.
However, at the time of filing the company has not yet identified:
The specific company to acquire, or
The specific investment target.
These unspecified uses are disclosed in:
The Draft Offer Document / DRHP, and
The final Offer Document / RHP or Prospectus.
The money is proposed for future acquisitions or investments, without naming the exact target entity cannot exceed 35% of the total amount being raised through the issue.
Restriction on Unidentified Acquisition or Investment Targets
There is a restriction on how much IPO money a company can raise for:
Future acquisitions or investments where the exact target has not yet been identified.
So , If the company wants to use IPO proceeds for:
Future acquisitions.
Investments.
Inorganic growth opportunities.
Strategic investments.
Expansion through purchase of businesses/assets.
but has not yet decided the exact company, business, asset, or target, then:
Such unspecified amount cannot exceed 25% of the total issue size.
Exception to the 25% Limit for Unidentified Acquisitions/Investments
If acquisition/investment targets/strategic investment are not identified, then the amount raised for such purposes cannot exceed 25% of the issue size.
That said:
If the acquisition target, or the strategic investment target, has already been identified then:
The issuer company must clearly disclose:
Who the target is.
Nature of acquisition/investment.
Purpose.
Amount proposed.
Other relevant details.
These disclosures must be made in:
The Draft Offer Document (DRHP), and
The final Offer Document / RHP / Prospectus.
The disclosures must exist at the time of filing the offer documents.
The 25% limit will NOT apply if BOTH these conditions are satisfied:
The acquisition or investment target is identified.
Proper disclosures are made in:
Draft Offer Document (DRHP).
Offer Document/RHP.
Regulation 8. Additional conditions for an offer for sale
Only fully paid-up equity shares that have been held by the sellers for at least one year before the filing of the Draft Offer Document (DOD) can be offered for sale to the public.
The shares being offered for sale must be fully paid-up.
The shareholder must have paid the entire issue price of the shares.
Partly paid-up shares are not eligible to be offered for sale through an Offer for Sale (OFS).
The selling shareholder must have owned the shares for a minimum period of one year.
The one-year holding period is calculated up to the date of filing the Draft Offer Document (DOD) with SEBI.
Example:
Shares acquired: 10 July 2025
Draft Offer Document filed: 15 July 2026
Holding period: 1 year and 5 days
Eligible for Offer for Sale.
The one-year holding requirement applies to every person selling shares in the Offer for Sale.
Eligible selling shareholders may include:
Promoters
Promoter Group members
Existing investors
Private Equity (PE) investors
Venture Capital (VC) investors
Other eligible shareholders
The relevant date for determining the one-year holding period is the date of filing the Draft Offer Document, not:
The IPO opening date
The IPO closing date
The listing date
Once the shares satisfy the one-year holding requirement on the Draft Offer Document filing date, the condition is considered fulfilled.
Holding Period for Converted Equity Shares
If the equity shares being offered for sale were obtained through the conversion or exchange of fully paid-up compulsorily convertible securities then:
The holding period is calculated differently.
This rule applies to fully paid-up compulsorily convertible securities, including:
Compulsorily Convertible Preference Shares (CCPS)
Compulsorily Convertible Debentures (CCDs)
Depository Receipts that are compulsorily convertible into equity shares
The holding period of the convertible security and the resulting equity shares is combined to determine whether the one-year requirement has been satisfied.
The period for which the seller held the convertible security before conversion is counted towards the one-year holding period.
The period for which the seller held the equity shares after conversion or exchange is also counted.
Both holding periods are added together to calculate the total holding period.
Example:
CCDs acquired: 1 January 2025.
Converted into equity shares: 1 October 2025
Draft Offer Document filed: 15 February 2026
Holding period of CCDs: 9 months
Holding period of equity shares: 4.5 months
Total holding period: 13.5 months
So the shares are eligible for Offer for Sale.
Minimum 1 year Holding period
The minimum holding period of one year must be completed at the time of filing the Draft Offer Document (DOD).
The eligibility of the shares is determined on the DOD filing date.
If the shares have not completed one year of holding on the date the Draft Offer Document is filed:
They cannot be offered for sale, even if they complete one year before the IPO opens or before listing.
Completing the one-year holding period after the Draft Offer Document has been filed does not cure the non-compliance.
The one-year holding requirement must be fully satisfied before or on the date of filing the Draft Offer Document.
Example:
Shares acquired: 15 August 2025
Draft Offer Document filed: 10 August 2026
Holding period: 11 months and 26 days
Not Eligible for Offer for Sale.
Example:
Shares acquired: 15 August 2025
Draft Offer Document filed: 16 August 2026
Holding period: 1 year and 1 day
Eligible for Offer for Sale.
Explanation:
Conversion Before Filing the Offer Document
If the equity shares being offered for sale arise from the conversion or exchange of fully paid-up compulsorily convertible securities then:
The conversion or exchange must be completed before filing the Offer Document.
The equity shares must already be issued and in existence before the Offer Document is filed.
Conversion or exchange cannot take place after the filing of the Offer Document.
The requirement applies to the filing of:
Red Herring Prospectus (RHP) in a book-built issue, or
Prospectus in a fixed price issue.
The Draft Offer Document must contain complete disclosures regarding the terms of the conversion or exchange.
Such disclosures should include details such as:
The nature of the convertible security.
The conversion or exchange ratio.
The conversion or exchange date.
The terms and conditions governing the conversion or exchange.
Example:
CCDs converted into equity shares: 10 September 2026.
Red Herring Prospectus filed: 20 September 2026.
Eligible, provided full disclosures of the conversion are made in the Draft Offer Document.
Example:
Red Herring Prospectus filed: 20 September 2026
CCDs converted into equity shares: 25 September 2026
Not Eligible, since the conversion occurred after the Offer Document was filed.
One - year Holding Period Exemptions
The requirement of holding equity shares for a period of one year shall not apply:
(a).
When the Offer for Sale (OFS) involves shares of:
A Government Company,
A Statutory Authority,
A Statutory Corporation, or
A Special Purpose Vehicle (SPV) set up and controlled by one or more of them.
The Special Purpose Vehicle (SPV) must be established and controlled by the Government Company, Statutory Authority, or Statutory Corporation.
The company or SPV must be engaged in the infrastructure sector.
This provision recognizes that government-owned infrastructure entities often undergo restructuring or disinvestment before listing.
It provides a specific exception or relaxation under the IPO regulations for such entities, subject to the conditions prescribed in the regulations.
Examples of eligible entities may include:
Government-owned infrastructure companies.
Highway development corporations.
Metro rail corporations.
Port authorities.
Airport development companies.
Power transmission or distribution companies.
Infrastructure SPVs established for specific public projects.
(b).
If equity shares, or equity shares arising from the conversion of fully paid-up compulsorily convertible securities, are being offered for sale in an IPO.
The equity shares or convertible securities must have been acquired pursuant to a scheme approved by:
A High Court,
The National Company Law Tribunal (NCLT), or
The Central Government under Sections 230 to 234 of the Companies Act, 2013, as applicable.
The approved scheme may include:
Merger
Amalgamation
Demerger
Arrangement
Compromise
Reconstruction
The shares or convertible securities must have been issued in exchange for an existing business and its invested capital, and not as a fresh investment.
The business and invested capital being transferred under the scheme must have been in existence for more than one year before the scheme was approved.
The one-year existence requirement applies to the business and invested capital, rather than merely the newly issued shares.
Example:
Business established: January 2024
NCLT approves a merger scheme: March 2025
Shareholders receive equity shares under the scheme.
IPO filed thereafter.
Eligible, since the transferred business and invested capital had existed for more than one year before the scheme was approved.
(c).
If the equity shares offered for sale were received through a bonus issue then:
The original securities on which the bonus shares were issued must have been held by the seller for at least one year before filing the Draft Offer Document (DOD) with SEBI.
The holding period is determined based on the original securities, not merely the date on which the bonus shares were allotted.
Bonus shares issued on long-held securities are treated as satisfying the eligibility requirement, subject to the prescribed conditions.
The following conditions must also be satisfied:
(i). Source of Bonus Issue
The bonus shares must be issued out of free reserves and share premium.
Such free reserves and share premium must have existed in the books of account as at the end of the FY immediately preceding the FY in which the DOD is filed.
(ii). No Utilisation of Revaluation Reserves or Unrealised Profits
The bonus shares must not be issued by utilising:
Revaluation reserves, or
Unrealised profits of the issuer.
Only realised and genuine reserves can be used for issuing bonus shares.
This prevents companies from artificially inflating their capital base before an IPO.
Example:
Original shares acquired: 1 June 2025
Bonus shares issued: 1 March 2026
Draft Offer Document filed: 15 July 2026
Original shares held for more than one year.
Bonus shares issued from free reserves and share premium, without using revaluation reserves or unrealised profits.
Eligible for Offer for Sale.
Regulation 8A. Additional conditions for an offer for sale for issues under Regulation 6(2).
8A.
(a).
For Issues, where the Draft Offer Document is filed under Regulation 6(2) of the ICDR Regulations then:
It applies to shareholders who individually, or together with Persons Acting in Concert (PACs), hold more than 20% of the issuer's pre-issue shareholding on a fully diluted basis.
Such shareholders cannot offer for sale more than 50% of their pre-issue shareholding through the IPO.
The 50% limit is calculated based on the shareholder's pre-issue shareholding on a fully diluted basis.
Fully diluted basis means the shareholding is calculated after considering all securities that are capable of being converted into equity shares, such as:
Compulsorily Convertible Preference Shares (CCPS)
Compulsorily Convertible Debentures (CCDs)
Warrants
Other convertible securities
The purpose of this restriction is to ensure that significant shareholders retain a meaningful stake in the company after the IPO, demonstrating continued commitment to the company.
Example:
Fully diluted basis means:
The company's shareholding is calculated assuming that all securities capable of being converted into equity shares have already been converted.
It represents the maximum possible number of equity shares that could exist if every convertible security is converted.
This provides a true picture of ownership by considering both existing equity shares and potential equity shares.
Securities considered while calculating the fully diluted share capital include:
Compulsorily Convertible Preference Shares (CCPS)
Compulsorily Convertible Debentures (CCDs)
Warrants
Employee Stock Options (if treated as dilutive under the applicable regulations)
Any other securities that are compulsorily convertible into equity shares
Example
Step 1: Existing Equity Shares
XYZ Ltd. currently has 100 lakh equity shares.
Step 2: Outstanding Convertible Securities
CCPS convertible into 10 lakh equity shares.
CCDs convertible into 15 lakh equity shares.
Warrants convertible into 5 lakh equity shares.
Step 3: Calculate the Fully Diluted Share Capital
Existing equity shares = 100 lakh
Shares on conversion of CCPS = 10 lakh
Shares on conversion of CCDs = 15 lakh
Shares on conversion of Warrants = 5 lakh
Fully diluted share capital = 100 + 10 + 15 + 5 = 130 lakh equity shares.
Calculating Shareholding on a Fully Diluted Basis
Suppose Promoter A currently holds 35 lakh equity shares.
If you look only at the existing equity shares: Shareholding = 35/100 = 35%
On a fully diluted basis:
Total shares become 130 lakh.
Shareholding = 35/130 = 26.92%
Although Promoter A still owns 35 lakh shares:
Their percentage holding reduces from 35% to 26.92% because the total number of shares has increased after assuming the conversion of all convertible securities.
(b).
For issues , where the Draft Offer Document is filed under Regulation 6(2) of the ICDR Regulations.
It applies to shareholders who individually, or together with Persons Acting in Concert (PACs), hold less than 20% of the issuer's pre-issue shareholding on a fully diluted basis.
Such shareholders cannot offer for sale more than 10% of the issuer's pre-issue shareholding through the IPO.
The 10% limit is calculated with reference to the issuer's total pre-issue shareholding on a fully diluted basis, and not the individual shareholder's holding.
The purpose of this restriction is to limit large exits by shareholders holding smaller stakes, thereby maintaining stability in the company's shareholding structure during the IPO.
Example:
Initial Shareholding of XYZ Ltd. (Fully Diluted Basis)
Total pre-issue share capital (fully diluted): 100 lakh equity shares.
Shareholding is as follows:
Promoter A – 45 lakh shares (45%)
PE Fund X – 30 lakh shares (30%)
Investor B – 15 lakh shares (15%)
Investor C – 5 lakh shares (5%)
Investor D – 5 lakh shares (5%)
Step 1: Identify the shareholders to whom the provision applies
The provision applies to shareholders who individually or together with Persons Acting in Concert (PACs) hold less than 20% of the issuer's pre-issue shareholding.
Therefore:
Promoter A (45%) → Not Covered.
PE Fund X (30%) → Not Covered.
Investor B (15%) → Covered.
Investor C (5%) → Covered.
Investor D (5%) → Covered.
Step 2: Calculate the maximum Offer for Sale for Investor B
Investor B holds 15 lakh shares (15%).
The regulation provides that such shareholders cannot offer more than 10% of the issuer's pre-issue shareholding, not 10% of their own holding.
Total pre-issue shareholding of the issuer = 100 lakh shares.
Maximum OFS permitted = 10% of 100 lakh shares = 10 lakh shares.
Therefore:
Investor B can sell up to 10 lakh shares.
Investor B must retain 5 lakh shares.
Step 3: What if Investor B wants to sell all 15 lakh shares?
Shares proposed to be sold = 15 lakh.
Maximum permitted = 10 lakh.
Excess proposed sale = 5 lakh.
Result:
The Offer for Sale will not comply with Regulation 6(2).
Investor B must reduce the Offer for Sale to 10 lakh shares or less.
So , he cannot sell 15 lakhs of his shares.
Step 4: Example for Investor C
Investor C holds 5 lakh shares (5%).
Maximum permitted under the regulation = 10 lakh shares.
Since Investor C owns only 5 lakh shares, the investor can sell all 5 lakh shares.
The regulation prescribes a maximum ceiling, but a shareholder cannot sell more shares than they actually own.
Step 5: Example involving Persons Acting in Concert (PACs)
Assume the following persons are PACs:
Investor E – 8 lakh shares (8%)
Investor F – 6 lakh shares (6%)
Investor G – 4 lakh shares (4%)
Combined holding: 8 + 6 + 4 = 18 lakh shares (18%).
Since the combined holding is less than 20%, this provision applies.
Maximum shares the PAC group can collectively offer for sale:
10% of the issuer's pre-issue shareholding
10% × 100 lakh = 10 lakh shares.
Therefore:
Maximum OFS by the PAC group = 10 lakh shares.
The remaining 8 lakh shares must continue to be held by the PAC group.
(c).
With respect to shareholders who individually, or together with Persons Acting in Concert (PACs), hold more than 20% of the issuer's pre-issue shareholding on a fully diluted basis then:
Such shareholders are required to comply with the lock-in requirements prescribed under Regulation 17 of the ICDR Regulations.
Accordingly, the shares that remain with these shareholders after the IPO will be subject to the applicable lock-in period under Regulation 17.
The relaxation from lock-in available under Regulation 17(c) is not available to these shareholders.
Therefore, these shareholders cannot claim the exemption or reduced lock-in that may otherwise be available under Regulation 17(c).
Fully diluted basis means the shareholding is calculated after considering all securities that are capable of being converted into equity shares, such as:
Compulsorily Convertible Preference Shares (CCPS)
Compulsorily Convertible Debentures (CCDs)
Warrants
Other convertible securities
Explanation:
The limits prescribed under clauses (a) and (b) are calculated based on the shareholding existing on the date of filing the Draft Offer Document (DOD).
The shareholding on the DOD filing date becomes the reference point for determining the maximum number of shares that can be offered for sale.
Any increase or decrease in shareholding after the Draft Offer Document is filed does not change the applicable limit.
The prescribed limits are not calculated separately for different types of sales.
The limits apply cumulatively, meaning that all eligible share sales before the IPO are added together.
The following transactions are aggregated while calculating the limit:
Shares offered for sale to the public through the IPO (Offer for Sale).
Any secondary sale transactions undertaken before the IPO.
A secondary sale transaction means the sale of existing shares by one shareholder to another person, where:
The company does not issue any new shares.
The consideration is received by the selling shareholder.
The company's share capital remains unchanged.
The total of:
Shares sold through secondary sale transactions before the IPO, plus
Shares proposed to be sold through the Offer for Sale.
must remain within the applicable limit under clause (a) or clause (b).
A shareholder cannot circumvent the prescribed limits by:
Selling a portion of shares privately before the IPO, and
Selling additional shares through the Offer for Sale.
Every sale of existing shares before the IPO is considered while determining compliance with the prescribed limit.
Example 1 – Shareholder covered under Clause (a)
Total pre-issue shareholding of Promoter A = 40 lakh shares.
Maximum OFS permitted under clause (a) = 50% of 40 lakh = 20 lakh shares.
Before the IPO, Promoter A sells 5 lakh shares to another investor through a private secondary sale.
Remaining permissible sale through the Offer for Sale:
Maximum permitted = 20 lakh shares
Less: Secondary sale = 5 lakh shares
Balance available for OFS = 15 lakh shares
If Promoter A offers 18 lakh shares through the IPO:
Secondary sale = 5 lakh
OFS = 18 lakh
Total sale = 23 lakh shares
Since 23 lakh shares exceed the permitted limit of 20 lakh shares, the IPO will not comply with the regulations.
Example 2 – Shareholder covered under Clause (b)
Total pre-issue share capital of the issuer = 100 lakh shares.
Investor B holds 15 lakh shares (15%).
Under clause (b), the maximum sale permitted is 10% of the issuer's pre-issue shareholding, i.e., 10 lakh shares.
Before the IPO, Investor B privately sells 3 lakh shares.
Remaining shares that can be sold through the Offer for Sale:
Maximum permitted = 10 lakh shares
Less: Secondary sale = 3 lakh shares
Balance available for OFS = 7 lakh shares
If Investor B offers 8 lakh shares through the IPO:
Secondary sale = 3 lakh
OFS = 8 lakh
Total sale = 11 lakh shares
Since 11 lakh shares exceed the permitted limit of 10 lakh shares, the proposed Offer for Sale will not comply with the ICDR Regulations.
