SEBI
Topic76 SEBI ICDR Regulations 2018 IPO FPO
SEBI (ICDR) Regulations 2018 — IPO, FPO & Capital Issues
Supplementary Topic — Issue of Capital & Disclosure Requirements: IPO Eligibility, Book Building, Allotment | SEBI Law Officer
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) govern all public offers of securities by listed and unlisted companies — IPOs, FPOs, rights issues, QIPs, and employee stock options. This is a heavily tested area in the SEBI Law Officer exam because it sits at the intersection of capital market regulation, investor protection, and market development — all three of SEBI's core mandates. The ICDR framework ensures that companies accessing public capital do so with adequate disclosure and investor protection.
1. Legal Basis & Applicability
ICDR Regulations are enacted under Section 30 read with Section 11A of the SEBI Act. Section 11A empowers SEBI to specify matters relating to the issue of capital, transfer of securities, and disclosure requirements.
ICDR Regulations apply to:
- All public issues by listed and unlisted companies (IPO, FPO, rights issues).
- Qualified Institutional Placements (QIPs) by listed companies.
- Preferential allotments by listed companies.
- Employee Stock Option Plans (ESOPs) by listed companies.
- Rights issues by listed companies.
2. IPO Eligibility — Two Tracks
Track | Eligibility Criteria | Applicable Companies |
|---|---|---|
Track 1 (Profitability Route) | Net tangible assets of at least ₹3 crore in each of the preceding 3 full years; operating profit from core activities of at least ₹15 crore in 3 of the preceding 5 years; net worth of at least ₹1 crore in each of the preceding 3 years | Established, profitable companies |
Track 2 (QIB Route) | No profitability requirement — at least 75% of the net offer to be allotted to QIBs; if QIB allotment falls below 75%, entire issue is withdrawn | Start-ups, loss-making companies, infrastructure companies |
3. IPO Process — Key Milestones
Step | Requirement | Timeline |
|---|---|---|
1. Appointment of intermediaries | BRLM (Book Running Lead Manager), co-BRLMs, Registrar, Bankers to issue | Before DRHP filing |
2. DRHP filing with SEBI | Draft Red Herring Prospectus filed with SEBI and exchanges | At least 30 days before opening of issue |
3. SEBI observations | SEBI reviews DRHP; issues observations if required | Within 30 days of valid DRHP filing |
4. RHP filing with ROC | Red Herring Prospectus (without final price) filed with Registrar of Companies | Before opening of issue |
5. Issue opening | Issue opens for subscription by investors | At least 3 days after RHP filing; minimum 3 working days bidding |
6. Price band announcement | Floor price and cap price disclosed (for book built issues) | 2 days before opening |
7. Issue closes | Bidding closes | Minimum 3 WD after opening |
8. Allotment / Basis of allotment | Final allotment determined by registrar on proportionate basis | Within 6 WD of issue closing |
9. Listing | Securities listed on exchange; trading commences | Within T+6 WD of issue closing (T+3 for main board IPOs from 2023) |
4. Book Building Process — Allotment Ratios
Book Built IPO Allocation: QIB = 75% | Non-Institutional Investors (NII/HNI) = 15% | Retail Individual Investors (RII) = 10% |
Category | Allocation | Who Qualifies | Minimum Application |
|---|---|---|---|
Qualified Institutional Buyers (QIBs) | 75% of Net Offer | FPIs, mutual funds, insurance companies, scheduled commercial banks, VCFs, AIFs | No minimum — bids in multiples of lot size |
Non-Institutional Investors (NII/HNI) | 15% of Net Offer | Resident Indians, NRIs, companies, HUFs, trusts applying for more than ₹2 lakh | Above ₹2 lakh application value |
Retail Individual Investors (RIIs) | 10% of Net Offer | Individual applicants (resident and NRI) applying for up to ₹2 lakh | Up to ₹2 lakh application value |
⚠️ Anchor Investor Sub-Category (within QIB) SEBI allows 'Anchor Investors' (a sub-category of QIBs) to bid before the public issue opens — up to 60% of the QIB portion may be allocated to anchors. Anchors receive allotment 1 day before issue opening (to signal confidence); they must hold shares for a mandatory 30-day lock-in after listing. |
5. Promoter Contribution & Lock-In
Category | Requirement |
|---|---|
Minimum promoter contribution | Promoters must contribute minimum 20% of the post-IPO equity capital |
Lock-in period for minimum contribution | 18 months from date of allotment in the IPO |
Lock-in for excess promoter holding | 6 months from date of allotment |
Pre-IPO investors (non-promoter) | Shares held for less than 1 year before IPO opening: locked in for 1 year from allotment |
6. Green Shoe Option (GSO)
The Green Shoe Option (also called 'overallotment option') allows the BRLM to stabilise the post-listing share price:
- The issuer/selling shareholders lend up to 15% additional shares to the BRLM for stabilisation.
- If the post-listing price falls below the issue price, the BRLM buys shares in the secondary market (using the GSO proceeds) to support the price.
- If the price stays above the issue price, the BRLM exercises the overallotment option — purchasing the borrowed shares from the issuer/selling shareholders at the issue price.
- The GSO is exercised for a maximum 30-day period after listing.
7. SEBI's Role — DRHP Observations ≠ Endorsement
⚠️ Critical Distinction — SEBI Does Not Endorse IPOs SEBI's issuance of observations on the DRHP is a COMPLIANCE REVIEW — not an endorsement of the quality, soundness, or fairness of the issue. The Red Herring Prospectus must carry a prominent disclaimer: 'SEBI does not take any responsibility for the financial soundness of any scheme or the project or for the correctness of the statements made or opinions expressed in this offer document.' Investors must make their own assessment. |
8. Rights Issue — Key Features (ICDR Chapter VI)
A rights issue allows an existing listed company to offer additional shares to its existing shareholders in proportion to their current holdings:
- Entitlement ratio: prescribed in the notice — e.g., 1 new share for every 5 held.
- Renunciation: shareholders who do not wish to subscribe can sell their rights entitlement to others.
- Fast-track rights issue: listed companies with specified track records can complete a rights issue in a shorter timeline.
- SAST intersection: existing shareholders exercising rights issue entitlements are exempt from open offer obligation (SAST Regulation 10(1)(i)).
9. Model Examination Questions
Q1. Explain the book building process in an IPO. What are the allotment ratios for different investor categories?
Book Building Process & IPO Allotment Ratios Model Answer — BOOK BUILDING: In a book built IPO, the price is determined through a bidding process rather than a fixed price. The company discloses a price band (floor and cap prices). Investors bid within the price band. After issue closure, the cut-off price is determined based on demand — all bidders who bid at or above the cut-off price receive allotment. ALLOTMENT RATIOS (ICDR Regulations): QIBs: 75% of Net Offer — eligible investors include FPIs, mutual funds, insurance companies, banks, VCFs, AIFs. NIIs (High Net Worth Individuals): 15% — residents/NRIs/companies applying for more than ₹2 lakh. Retail Individual Investors: 10% — individuals applying for up to ₹2 lakh. Anchor Investors (sub-category of QIBs): up to 60% of the QIB portion — bid 1 day before issue opens; 30-day mandatory lock-in post-listing. PROMOTER LOCK-IN: minimum 20% post-IPO equity for 18 months; excess holding for 6 months. GREEN SHOE OPTION: up to 15% overallotment; BRLM stabilises price for 30 days post-listing. SEBI'S ROLE: SEBI reviews DRHP and issues observations within 30 days — this is a compliance review, NOT an endorsement. The RHP must carry a disclaimer that SEBI does not vouch for financial soundness. T+3 LISTING: from 2023, main board IPOs must list within 3 working days of issue closing. |
🎯 EXAM POINTERS — Topic 76: SEBI (ICDR) Regulations 2018
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