WHAT IS AN IPO AND WHAT ARE ITS LEGALITIES?

With more and more companies opting to get listed, it's an official IPO season. Post witnessing the humongous openings of Zomato, IRCTC, and Nykaa, people are now keeping their tracks on Paytm, PolicyBazaar, and Mobikwik's listings. As per the statistics, the Indian economy is expected to grow at a rate of 12.5% from 2021 to 2022, the reason being that a more significant number of companies are being listed in 2021 in comparison to 2020. In this article, we will learn about all the laws and regulations required to be complied with before issuing an initial public offer.

What is an IPO?

An Initial Public Offering, often known as an IPO, is the issuance of fresh securities of a company on a recognized stock exchange in India. Whenever a company plans to raise capital from its public investors, it is listed on a recognized stock exchange and offers them shares in exchange for money. Through an IPO, a company offers transparency and share listing credibility to its investors and creditors.

Laws Regulating IPOs in India

In India, all public issues (IPO or FPO) are regulated by an autonomous statutory authority called the Securities Exchange Board of India (SEBI). It is governed by the Securities and Exchange Board of India Act, 1992, which lays down rules and regulations to protect the interests of investors and to promote the securities market. 

SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018.

The Issue of Capital and Disclosure Requirements (ICDR) Regulations issued by SEBI have given detailed provisions regarding the IPO in relation to:

• Disclosure Requirements

• Eligibility Criteria

• Conditions required

• method to be undertaken for the opening and closing of the issuance. 

• Formats of various certifications and due diligence will be required before issuing an IPO. 

When an entity wants to issue securities and offer an IPO, it must follow all of the SEBI's ICDR and listing regulations, as well as other securities law regulations.

The Companies Act, 2013

Section 23 of the Companies Act 2013 lays down basic methods for public and private companies for the issue of an IPO. A public company can issue shares to the public through a prospectus, private placement, right issue, or bonus issue. 

Securities Contracts (Regulations) Act, 1956 (SCRA)

Section 17A of the SCRA provides rules and guidelines for the public issue and listing of securities. This states that every issuer intending to offer its securities to the public shall make an application to one or more recognized stock exchanges for permission before issuing the offer document to the general public. 

It also states that there should be a minimum public shareholding of 25% for all listed companies. If it falls below 25% at any time, the company must bring the public shareholding up to 25% within a maximum period of 12 months.

In addition to the above rules, a company must comply with other disclosure requirements as given in the Companies Act, 2013, SEBI (Insider Trading) Regulations, RBI Act, etc., in relation to the company's listing.

About The Author:

Adv. Achin Sondhi is a lawyer with more than 4 (four) years of experience in Civil, Criminal, and Commercial Litigation and Arbitration. He co-heads the Litigation and Arbitration practice at the Jaipur and Delhi offices of the firm. He is recognized for his excellent litigation practice in the Hon’ble Supreme Court and different High Courts, District Courts, and Tribunals, and also provides specialized litigation services to clients ranging from large multinational corporations to smaller, privately held businesses and individuals.