Table of Contents
Chapter 14: SEBI (ICDR) Regulations, 2018
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) establish the rules for raising capital through Initial Public Offers (IPOs), Further Public Offers (FPOs), Rights Issues, and Private Placements.
Dual Eligibility Routes for Main Board IPOs (Regulation 6)
Workflow & Structure Diagram
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| REGULATION 6 IPO ELIGIBILITY ROUTES |
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| ROUTE 1: PROFITABILITY ROUTE (Reg 6(1)) |
| - Net Tangible Assets: >= ₹3 Crores in each of preceding 3 full years |
| (maximum 50% held in monetary assets) |
| - Operating Profit: Minimum average operating profit of >= ₹15 Crores during |
| preceding 3 years (operating profit in each of these 3 years) |
| - Net Worth: >= ₹1 Crore in each of preceding 3 full years |
| |
| ROUTE 2: ALTERNATIVE BOOK BUILDING ROUTE (Reg 6(2)) |
| - For growth tech companies / startups unable to satisfy Reg 6(1) metrics |
| - Mandate: Must issue through 100% book building process |
| - Mandatory QIB Allotment: At least 75% of net offer must be allotted to |
| Qualified Institutional Buyers (QIBs); if not achieved, full refund mandated |
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Investor Category Allocations
Under the Profitability Route (Reg 6(1)), the net offer is typically allocated as:
- Qualified Institutional Buyers (QIBs): Up to 50% of the net offer;
- Non-Institutional Investors (NIIs / HNIs): At least 15% of the net offer;
- Retail Individual Investors (RIIs): At least 35% of the net offer. Under the Alternative Route (Reg 6(2)), at least 75% goes to QIBs, up to 15% to NIIs, and up to 10% to RIIs.
To ensure promoter skin-in-the-game and prevent speculative exits, ICDR mandates minimum promoter equity contribution and lock-in periods.
Promoters' Contribution & Lock-in Requirements (Regulations 14 & 16)
- Minimum Contribution: Promoters must contribute at least twenty percent (20%) of the post-issue capital.
- Lock-in Horizons:
- The 20% minimum promoters' contribution is locked in for eighteen (18) months from the date of allotment (or 3 years if majority capital is deployed in greenfield projects).
- Any promoter holding in excess of 20% is locked in for six (6) months.
- All pre-issue capital held by non-promoter shareholders (pre-IPO investors, venture capital funds) is locked in for six (6) months from date of allotment (with exemptions for SEBI-registered VCFs/AIFs).
Hierarchy of Offer Documents
- Draft Red Herring Prospectus (DRHP): Filed with SEBI and stock exchanges; hosted on SEBI's website for at least twenty-one (21) days for public comments.
- Red Herring Prospectus (RHP): Filed with ROC and stock exchanges; contains complete material disclosures, risks, and a price band (or floor price), but omits the final issue price and exact quantity of shares.
- Prospectus: Filed with ROC after book building closes, containing the final discovered issue price, total number of shares, and final allocation data.
Modern IPOs incorporate specialized institutional tranches and compressed listing settlement timelines.
Anchor Investor Tranche
- Part of the QIB quota allocated to marquee institutional investors one day prior to IPO opening to build market confidence.
- Up to 60% of the QIB portion can be allocated to Anchor Investors on a discretionary basis.
- Lock-in Periods for Anchor Investors:
- 30 Days lock-in for 50% of allocated shares;
- 90 Days lock-in for the remaining 50% of allocated shares.
Minimum Subscription & Refund Mandates
- Every public issue must receive a minimum subscription of ninety percent (90%) of the offer through the offer document.
- If 90% minimum subscription is not achieved, the issuer must refund the entire application money within four (4) days from issue closure. Delayed refunds attract 15% per annum statutory interest.
Compressed T+3 Listing Settlement Mandate
SEBI transitioned Indian IPO listing timelines from T+6 to T+3 trading days:
Workflow & Structure Diagram
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| T+3 IPO LISTING LIFECYCLE |
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| T-DAY: Issue Closes for Bidding (5:00 PM) |
| T+1 DAY: Validation of ASBA applications, UPI block reconciliation, and Basis |
| of Allotment finalized with Stock Exchanges. |
| T+2 DAY: Execution of fund debits, unblocking of unsuccessful ASBA funds, and |
| electronic credit of shares into allottees' demat accounts. |
| T+3 DAY: Formal commencement of trading and listing on Stock Exchange screens. |
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In addition to public IPOs, the ICDR Regulations establish detailed regimes for rights issues and preferential allotments.
Rights Issue Architecture
A rights issue offers existing shareholders the opportunity to purchase additional shares in proportion to their existing holding:
- Fast-Track Rights Issue: Listed companies meeting specific criteria (shares traded on stock exchanges for at least 3 years, compliance with listing agreement, no show cause notices from SEBI) can launch rights issues without filing a draft letter of offer with SEBI.
- Rights Entitlements (REs) in Demat Form: SEBI revolutionized rights issues by crediting Rights Entitlements directly into eligible shareholders' demat accounts:
- REs can be traded on recognized stock exchanges during the trading window.
- Shareholders can exercise their rights, sell (renounce) their REs on the market, or let them lapse.
Preferential Allotment Framework (Chapter V)
Preferential allotment refers to issuing shares or convertible securities to a selected group of persons on a private placement basis:
- Pricing Formula (Regulation 164): For frequently traded shares, the price cannot be lower than the higher of:
- The 90 trading days volume-weighted average price (VWAP) preceding the relevant date; or
- The 10 trading days volume-weighted average price preceding the relevant date.
- Lock-in Mandate: Preferential shares allotted to promoters are locked in for eighteen (18) months, while allotments to non-promoters are locked in for six (6) months.
Corporate issuers frequently utilize QIPs and bonus issues for equity dilution and capital restructuring.
Qualified Institutions Placement - QIP (Chapter VI)
A QIP allows listed companies to raise capital rapidly by issuing equity shares or convertible debentures to Qualified Institutional Buyers (QIBs):
- Eligibility: The company's equity shares must have been listed on a recognized stock exchange for at least one (1) year.
- Pricing: The issue price cannot be less than the average of the weekly high and low closing prices during the two weeks preceding the relevant date (a maximum discount of 5% is permitted with shareholder approval).
- Allotment Restrictions: A single QIB cannot be allotted more than 50% of the total issue size. No allotment can be made directly or indirectly to any promoter or promoter-related entity.
Bonus Issue Regulations (Chapter XI)
- A company can issue bonus shares only if authorized by its Articles of Association (AoA) and approved by shareholders.
- Capital Reserves Source: Bonus shares can be issued out of free reserves, securities premium account, or capital redemption reserve account. Bonus shares cannot be issued by capitalizing revaluation reserves.
- Irrevocability: Once a company's Board announces a bonus issue proposal, it cannot be withdrawn under any circumstances.