What is an IPO

An IPO is the first time a company sells its shares to the public. Until that moment, the company is private: owned by its founders, a handful of early investors, maybe a venture-capital or private-equity fund. The IPO opens the door. Anyone with a brokerage account can buy in, and the company’s shares start trading on the National Stock Exchange or the BSE the following week. The company is now listed.

Two things can happen in that sale, and usually both do. The company can issue brand-new shares and keep the money — capital it uses to pay down debt, build a factory, fund research, or acquire another business. That is a fresh issue. Separately, the existing shareholders — founders, angel investors, private-equity backers — can sell some of their existing shares to the new public investors, cashing out part of a bet they made years earlier. That is an offer for sale. Most Indian IPOs are a mix of both.

None of this is casual. A company cannot simply decide to list. The Securities and Exchange Board of India — SEBI, the market regulator — lays out exactly who is kept out and who qualifies. The rest of this article is about that gate: why a company goes through it, what changes on the other side, who is barred from trying, and the two routes SEBI provides for those who are allowed.

Why a company goes public

The most obvious reason is money. The fresh-issue portion of an IPO brings in capital that the company can put to work immediately — paying off loans, building factories, funding research, or buying other businesses. A company that has been growing on borrowed money can use the IPO proceeds to clean up its balance sheet.

The second reason is a payout for the early backers. Founders who started the company a decade ago, angel investors who wrote the first cheque, and private-equity funds that have held the stock for years all get a chance to sell part of their stake through the offer-for-sale portion. The IPO turns paper wealth into cash.

There are other advantages. A public company can use its shares as currency for acquisitions — instead of paying cash to buy another business, it can offer stock. It can attract better talent by granting stock options that employees can actually sell one day. And banks and bond markets tend to offer cheaper financing to listed companies, because the ongoing disclosure requirements give lenders a clearer picture of the company’s health.

Life after the IPO

Once the shares start trading on the exchange, the company enters a different world.

The shares now trade daily. Anyone with a brokerage account — a retail investor in Chennai, a mutual fund in Mumbai, a foreign pension fund in New York — can buy or sell, and the price moves on supply, demand, and news. Ownership becomes dispersed among thousands of public shareholders. The company now has a public float — shares held by the public rather than the promoters — and must answer to minority investors who have no relationship with the founders.

The biggest change is disclosure. A private company files its accounts once a year with the Registrar of Companies, and that is largely it. A listed company must file quarterly results, annual reports, details of every related-party transaction, and immediate disclosures of any material event — a big order win, a factory fire, a promoter selling shares — to the stock exchanges. The compliance burden is substantial, and it never ends.

Who cannot do an IPO

SEBI keeps certain entities out of the IPO market entirely. The list is in Regulation 5 of the ICDR Regulations — the Issue of Capital and Disclosure Requirements rules that govern every public offer.

First, anyone currently debarred from the capital market by SEBI is out: the company itself, its promoters, its directors, and any selling shareholders under a SEBI ban. The bar extends to a promoter or director who is linked to another company that is debarred. A promoter of Company A cannot take it public if they are also associated with Company B, which is banned. ¹

Second, wilful defaulters and fraudulent borrowers — as categorised by the Reserve Bank of India — are barred. So are fugitive economic offenders, declared under the Fugitive Economic Offenders Act, 2018. ¹

Third, an IPO cannot happen if the company has outstanding convertible securities — instruments like convertible bonds or warrants that could later be turned into equity. The logic is simple: if someone holds a right to convert into shares after the IPO, public investors cannot know exactly how many shares will eventually exist. Two exceptions survive: employee stock options and stock appreciation rights are allowed, and any other convertible securities must be fully converted before the prospectus is filed. ¹

A past debarment is not permanent. If the period has ended by the time the draft offer document is filed with SEBI, the restriction no longer applies. The ban expires with the penalty. ¹

Category	What it means
Debarred by SEBI	Company, promoters, directors, or selling shareholders currently banned from the capital markets
Wilful defaulter / fraudulent borrower	As categorised by the RBI; includes those who defaulted despite the ability to pay
Fugitive economic offender	Declared under the Fugitive Economic Offenders Act, 2018
Outstanding convertible securities	Bonds, warrants, or other instruments that could convert into equity — must be converted before the IPO

The two ways to qualify

A company that is not barred still has to prove it is fit to list. SEBI provides two routes, and they are mutually exclusive: a company either qualifies under the first or must use the second.

Route one: the profitability route

This is the straightforward path. The company shows it already makes money, and has done so consistently. The thresholds, all on a restated and consolidated basis for the three preceding full years: ¹

• Net tangible assets of at least ₹3 crore in each of the three years, with no more than half held in cash or cash equivalents — unless the excess cash is already committed to the business or project.
• Average operating profit of at least ₹15 crore over the three years, with a profit in each year — not an average that hides a loss year.
• Net worth of at least ₹1 crore in each of the three years.

There is one more rule: if the company changed its name in the last year, at least half its revenue must come from the activity reflected in the new name. This stops a company from rebranding into a hot sector just before listing. ¹

A company that clears these can use any issue method — fixed price or book-building — and the allocation is relatively flexible: at least 35% of the net offer to retail investors, at least 15% to non-institutional investors, and up to 50% to qualified institutional buyers. ¹

Route two: the compulsory-QIB route

A company that cannot meet the profitability thresholds can still list — but only through the book-building process, and under a much stricter rule. It must allot at least 75% of the net offer to qualified institutional buyers — the big money: mutual funds, insurers, pension funds, foreign portfolio investors. If it cannot place that 75%, it must refund the entire subscription. There is no partial success. ¹

Retail investors are capped at 10% of the net offer under this route, and non-institutional investors at 15%. ¹

The logic is protective. A company that has not proven it can earn consistent profits is a riskier bet. By forcing it to sell mostly to sophisticated institutions — who can run their own due diligence — SEBI puts the risk in the hands of those best equipped to price it, and limits how much of it lands on retail investors.

Requirement	Route 1 — Profitability	Route 2 — Compulsory QIB
Net tangible assets	≥ ₹3 crore in each of 3 years	Not required
Operating profit	≥ ₹15 crore average, profit each year	Not required
Net worth	≥ ₹1 crore in each of 3 years	Not required
Issue method	Any	Book-building only
QIB allocation	Up to 50% of net offer	At least 75% of net offer
Retail allocation	At least 35% of net offer	Up to 10% of net offer

IPO vs FPO vs OFS: what’s the difference

These three get confused, but the distinction falls out of two questions: has this stock ever traded publicly before? and are the shares coming from the company or from its shareholders?

An IPO — initial public offer — is the first public sale by a company that is not yet listed. That is the whole subject of this article.

An FPO — follow-on public offer — is a public sale by a company that is already listed. It can be a fresh issue, an offer for sale, or both. The ICDR Regulations define it as an offer of specified securities by a listed issuer to the public, and they explicitly include an offer for sale by existing holders in a listed company. ¹

An OFS — offer for sale — is the part of any public sale where existing shareholders, not the company, sell their shares. No new shares are created, so the company raises nothing; the selling shareholders do. An OFS can sit inside an IPO or an FPO. The ICDR Regulations define a selling shareholder as any shareholder offering shares for sale in a public issue. ¹

So: an IPO is the first listing; an FPO is a later public sale by an already-listed company; an OFS is a sale of existing shares rather than new ones. The company itself raises money only in a fresh issue, whether that happens inside an IPO or an FPO.

The gate to the public market is not wide open. SEBI keeps out those it has banned, those who have defaulted on their debts, those who have fled the country with stolen money, and those whose share count is still in flux with convertible instruments. For everyone else, the path splits two ways: prove you already make money, or sell mostly to institutions who can judge the risk themselves. Every company that lists in India walks through one of those two doors.

Footnotes

1. SEBI ICDR Regulations, 2018, last amended on March 8, 2025. sebi.gov.in. Citations are to Regulation 5 (entities not eligible), Regulation 6(1) (profitability route), Regulation 6(2) (compulsory-QIB route), Regulation 32 (allocation), and the definitions of “fugitive economic offender”, “further public offer”, and “selling shareholder”. ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶ ↩⁷ ↩⁸ ↩⁹ ↩¹⁰ ↩¹¹