Shambhavi Kumar

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Eligibility Criteria and Allocation

While we discuss how Initial Public Offering(s) (“IPO(s)“) are approached from a lawyers point of view, one needs to understand that there are basic criteria that the Company needs to meet in order to undertake an IPO, these criteria are known as eligibility criteria and are mentioned under Regulation 6 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“ICDR“). For ease of reference, the same has been reproduced below:

Regulation 6 (1) – a) it has net tangible assets of at least three crore rupees, calculated on a restated and consolidated basis, 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 utilised or made firm commitments to utilise such excess monetary assets in its business or project; 

Provided further that the limit of fifty per cent. on monetary assets shall not be applicable in case the initial public offer is made entirely through an offer for sale. 

b) it has an average operating profit of at least fifteen crore rupees, calculated on a restated and consolidated basis, during the preceding three years (of twelve months each), with operating profit in each of these preceding three 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), calculated on a restated and consolidated basis; 

d) if it has changed its name within the last one year, at least fifty per cent. of the revenue, calculated on a restated and consolidated basis, for the preceding one full year has been earned by it from the activity indicated by its new name. 

Regulation 6 (2) – An issuer not satisfying the condition stipulated in sub-regulation (1) shall be eligible to make an initial public offer only if the issue is made through the book-building process and the issuer undertakes to allot at least seventy five per cent. of the net offer to qualified institutional buyers and to refund the full subscription money if it fails to do so. 

Now, one might think as to why the distinction between an IPO undertaken under Regulation 6(1) and an IPO undertaken under Regulation 6(2 is necessary, this is because the eligibility criteria regulation under which the Company falls determines the allocation limits for the various kinds of investors to whom the Offer can be made under Regulation 32 of the ICDR.

If the Company satisfies the eligibility criteria under Regulation 6(1) then the allocation can be made under Regulation 32(1) where the allocation of the net Offer is –

• Not less than 35% to retail individual investors
• Not less than 15% to non-institutional investors
• Not more than 50% to qualified institutional buyers, 5% of which shall be allocated to mutual funds.

While if the Company is unable to satisfy Regulation 6(1) criteria then it will only be allowed to make an offer under Regulation 6(2) and allocation will be made under Regulation 32(2) where the allocation of the net Offer is –

• Not more than 10% to retail individual investors
• Not more than 15% to non-institutional investors
• Not less than 75% to qualified institutional buyers, 5% of which shall be allocated to mutual funds.

This information is mentioned in the Cover Page as well as the Offer related chapters of the Draft Red Herring Prospectus (“DRHP“), Red Herring Prospectus (“RHP“) and Prospectus (together, the “Offer Documents“).

Different Types of Investors

From the above it is amply clear that there are various kinds of investors that are present in the market.

1. Retail Individual Investors – It is defined under Regulation 2 (vv) of the ICDR and covers individuals such as you or me that participate in the IPO and the subsequent sale and purchase of shares of the Company in the secondary market.
2. Qualified Institutional Buyers – It is defined under Regulation 2 (ss) of the ICDR and covers
   • a mutual fund, venture capital fund, alternative investment fund and foreign venture capital investor registered with the Board; 
   • [foreign portfolio investor other than individuals, corporate bodies and family offices]6; 
   • a public financial institution; 
   • a scheduled commercial bank; 
   • a multilateral and bilateral development financial institution; 
   • a state industrial development corporation; 
   • an insurance company registered with the Insurance Regulatory and Development Authority of India; 
   • a provident fund with minimum corpus of twenty five crore rupees; 
   • a pension fund with minimum corpus of twenty five crore rupees; 
   • National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of the Government of India published in the Gazette of India; 
   • insurance funds set up and managed by army, navy or air force of the Union of India; and 
   • insurance funds set up and managed by the Department of Posts, India; and 
   • systemically important non-banking financial companies. 
3. Non-Institutional Investors – It is defined under Regulation 2 (jj) of the ICDR and covers investors other than a retail individual investor and qualified institutional buyers.

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Disclaimer

All capitalised terms used that are not defined in this article shall hold the meaning assigned to them under the ICDR.

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