IPO Application Eligibility Criteria:

Investing in an IPO allows individuals and institutions to become shareholders in a company going public. IPOs offer a chance to invest in high-growth companies from the start, thus creating opportunities for both retail and institutional investors. Participating in an IPO is not as simple as it seems; investors must meet certain eligibility criteria and requirements. Whether you are an individual making your first IPO investment or an institutional investor seeking a significant stake, knowing the eligibility criteria is important for a smooth application process.

This blog will outline the important requirements for various investors, discuss other factors and guide you on how to successfully apply for an IPO.

What is an IPO?

IPO stands for Initial Public Offering. It refers to the process when a private company first sells its shares to the public on the stock exchange. This changes the company from being privately owned to publicly owned. 

When the company launches its IPO, the money flows to the company as its share capital, and shareholders become owners of a part of the company. 

However, before investing in an IPO, an investor should keep in mind that not all IPOs have a successful launch. Some IPOs may be unsuccessful, and the company’s stock price might fall after listing.

Who Can Apply for an IPO?

An initial public offering is available for investing to various investors based on criteria set by regulators and the company. Here is a list of different types of IPO applicants:

1. Retail Investors: Retail investors must have a demat account to hold shares electronically and a trading account for executing transactions. They can invest up to ₹2 lakhs.

2. Qualified Institutional Buyers: Qualified institutional buyers or QIBs are institutional investors with substantial capital to invest, such as large financial institutions, banks and insurance companies. 

3. High-Net-Worth Individuals or HNIs: High net-worth individuals (HNIs) or non-institutional investors (NIIs) are individuals or entities making investments that exceed the retail investor limit. HNIs are similar to retail investors but with no investment cap.

4. Anchor Investors: Anchor investors represent financial institutions that are allotted shares at a fixed price before the shares are offered to the public. These investors are subject to a lock-in period during which they can’t sell their shares post-IPO. They must invest a minimum of ₹10 crore in a mainboard IPO and ₹1 crore in a SME IPO. 

5. Employee Quota: Employees of the company launching the IPO can also apply under a special category if reserved by the company. Shares may be offered at a discounted price or on preferential terms to employees.

Read Also: What is the IPO Allotment Process?

Eligibility Criteria for Companies

Mainboard IPO

• Net Tangible Assets

The company should have net tangible assets of at least ₹3 crore, with no more than 50% in monetary assets, for the preceding three years.

• Operating Profit

The company should have an average operating profit of at least fifteen crore rupees, calculated on a consolidated basis in at least three years of the past five years.

• Net Worth

The company should have a net worth of at least one crore rupees in each of the preceding three full years (of twelve months each), calculated on a consolidated basis. 

• Name Change

If the company has changed its name within the last year, at least 50% of the revenue for the preceding year should have been earned from the activity indicated by its new name.

SME IPO

• Post-Issue Paid Up-Capital

The company’s post-issue paid-up capital should not be more than ₹25 crores.

• Net Worth

The net worth of the company should be at least ₹1 crore for two preceding full financial years.

• Net Tangible Assets

The net tangible asset of the company must be at least ₹3 crores as per the latest audited financial results.

• Past Track-record

The applicant company should have a track record of at least 3 years, provided the applicant company must have been operating for at least one full financial year and must provide audited financial results for that year.

If the applicant company lacks a three-year track record, the proposed IPO project must be evaluated and funded by NABARD, SIDBI, Banks (excluding cooperative banks), or other financial institutions.

• Operating Profit

The company or firm must have an operating profit of at least ₹1 crore for at least two of the last three financial years before applying.

• Name Change

In case of a name change in the past year, at least 50% of the revenue for the previous full financial year must come from the activity associated with the new name.

Basic Eligibility Criteria for IPO Application/Eligibility Criteria for Retail Investors

The basic eligibility criteria for applying for an IPO generally include the following requirements:

• Applicants must be at least 18 years old, or if they are underage, a guardian must apply on their behalf.
• A demat account is required to hold shares electronically.
• A valid PAN card is required for IPO applications in India. This ensures compliance with tax regulations.
• A functional bank account is necessary to make payments using ASBA (an application supported by blocked amounts) or similar methods. The account must have enough funds to cover the application amount.
• Applicants must complete the KYC process with their broker or bank, which includes identity proof (Passport, PAN) and address proof (utility bills, bank statement).
• Applicants must not be blacklisted by regulatory authorities like SEBI. There should be no legal or financial barriers to participating in the stock market.
• Investors should apply within their respective category limits:

1. Retail Individual Investors: Generally, up to INR 2 Lakh (or equivalent).
2. High Net-worth Individuals (HNIs): Above the retail limit.

• The applicant’s residency status must comply with the country’s regulations. For instance, NRIs or Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) must adhere to specific regulations in India. 

Additional Eligibility Factors

Beyond standard eligibility criteria for investors, other factors can also affect an individual or institution’s ability to participate in an IPO. Let us have a quick overview of some additional eligibility factors.

1. Timely Application Submission: 

• IPO applications are usually accepted during a specific time frame. 
• Submitting after the deadline or during operational downtimes can result in rejection.

2. Employee and Shareholder Eligibility:  

If an IPO offers a special quota for employees or current shareholders, make sure to have the necessary documentation, like proof of employment or shareholding, to qualify for shares offered in these reserved categories.

3. Correct Documentation

• Both retail and institutional investors need to provide documents such as identity proof, address proof, etc.
• Any kind of discrepancies in documentation could lead to rejections.

Eligibility Criteria for Institutional Investors

Institutional investors are entities such as mutual funds, venture capital funds, pension funds, insurance companies, commercial banks, alternate investment funds (AIFs), hedge funds, foreign institutional investors (FIIs), and qualified institutional buyers (QIBs)

Eligibility criteria for institutional investors participating in an IPO vary by country’s regulations. However, the general guidelines are as follows:

• The entity must be registered with SEBI. Institutional investors require approvals to invest and operate in the Indian stock market.
• In contrast to retail investors, institutional investors face no limit on the maximum investable amount. 
• Institutional investors must have a demat account and a trading account. Furthermore, applications supported by blocked amounts or ASBA are also necessary in India to block funds in the bank account for IPO applications.
• In India, a quota of 50% is generally reserved for qualified institutional buyers.
• Institutions must provide financial disclosures or evidence of capital adequacy. They need to show they can finance large investments.

How to Check IPO Allocation Status

1. Visit the Registrar’s website 

Each IPO has a designated registrar responsible for processing applications and allocating shares. Common registrars include Link Intime and KFin Technologies. Open the official website of the registrar, and you will find an IPO status or allotment section.

2. Find the Allotment Page 

Search for the specific IPO name in either the IPO allotment or IPO status sections. Click on the IPO name to proceed.

3. Enter the details 

To check your allocation status, you will need to provide your PAN number, IPO application number or the demat account number.

4. Check the Allotment Status 

The system will display your IPO allotment status, i.e., whether the shares are allotted or not.

Additionally, the registrar usually sends updates about allotments to your registered email. If the IPO was applied using the UPI ASBA method, you can also check your bank account for unblocked amounts. Blocked funds indicate successful allotment, while non-allotment of shares is followed by unblocking of funds.

Read Also: Apply in IPO Through ASBA- IPO Application Method

Conclusion

Applying for an IPO can lead to wealth creation and allow an investor to invest in high-growth companies. Understanding the eligibility criteria for retail, institutional, or foreign investors is important to simplify the application process and prevent rejections. Stay informed, be financially prepared and follow changes in regulations to enhance your chances of successfully investing in IPOs and benefiting in the long run. Consult your financial advisor before investing in IPOs.

Frequently Asked Questions (FAQs)