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

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (commonly abbreviated ICDR Regulations or ICDR 2018) are the principal substantive regulations governing public issuances of equity and certain other securities by Indian companies. Notified by the Securities and Exchange Board of India on 11 September 2018 under SEBI/LAD-NRO/GN/2018/31, the regulations replaced the earlier SEBI (ICDR) Regulations, 2009 and came into force on their date of notification.

The regulations apply to every initial public offering (IPO), follow-on public offering (FPO), rights issue, bonus issue, preferential allotment, and qualified institutions placement (QIP) by an Indian listed or to-be-listed company. They establish the eligibility conditions for accessing the public capital markets, prescribe the content and review process for offer documents, specify pricing methodologies, set out allotment norms, and impose post-listing obligations in respect of the funds raised.

An accessible overview of the key provisions appears in the companion article SEBI ICDR Regulations summary .

Regulatory history

The 1947-1992 era: Merit-based regulation

From independence until 1992, public equity issuances were controlled by the Capital Issues (Control) Act, 1947, under which the Controller of Capital Issues set the price, timing, and quantum of every public issue. This was a merit-based regulatory system: the regulator decided whether a company was worthy of raising public capital, not merely whether it had disclosed sufficient information to allow investors to decide.

SEBI (DIP) Guidelines, 1992

With the establishment of SEBI as a statutory regulator in 1992, the Capital Issues (Control) Act was repealed and SEBI introduced its Disclosure and Investor Protection (DIP) Guidelines, 1992. These guidelines shifted the regulatory model towards a disclosure-based approach – companies could issue shares freely if they made adequate disclosures, without SEBI’s approval of the price or the merits of the issue. However, the guidelines were informal in character, issued under SEBI’s general power rather than as formal regulations.

SEBI (ICDR) Regulations, 2009

In 2009, SEBI consolidated and formalised the DIP Guidelines into the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. These were formal regulations made under Section 30 of the SEBI Act, 1992 and had the force of law. They introduced the modern framework for book-built IPOs, anchor investor allocations, and the ASBA (Application Supported by Blocked Amount) mechanism.

The 2018 revision

The 2018 regulations replaced the 2009 version after a comprehensive review. The primary rationale was to simplify the regulatory text, incorporate changes made through multiple amendments to the 2009 regulations, and update the framework to reflect market developments including the significant growth of the SME IPO segment, the evolution of the mutual fund and insurance industries as institutional investors, and the expansion of the QIP mechanism.

Structure of the regulations

The ICDR Regulations 2018 are divided into twelve chapters and several schedules.

The schedules specify the content requirements for draft red herring prospectuses, red herring prospectuses, and final prospectuses in considerable detail, and set out the minimum disclosure standards for financial statements, legal proceedings, and risk factors.

Key provisions

Eligibility criteria for IPOs

The ICDR Regulations prescribe both eligibility routes for an issuer to access the main board of a stock exchange.

Route I (profitability route): The issuer must have net tangible assets of at least Rs 3 crore in each of the three immediately preceding years, distributable profits in at least three of the immediately preceding five years, and a net worth of at least Rs 1 crore in each of the immediately preceding three years. At least 75 per cent of the proceeds from the fresh issue must be deployed in stated capital expenditure or specified purposes.

Route II (QIB route): Where an issuer does not meet the profitability criteria, it may still access the market if at least 75 per cent of the issue size is allotted to Qualified Institutional Buyers (QIBs). This route is commonly used by high-growth, pre-profit technology companies, new-age businesses, and financial services firms with regulatory approvals but limited operating history.

There is no SEBI review of the merits of the business; the regulatory function is limited to ensuring that the disclosures are complete and the prescribed conditions are met.

Draft Red Herring Prospectus (DRHP) and review process

The issuer files a Draft Red Herring Prospectus (DRHP) with SEBI at least thirty days before the opening of the issue. The SEBI Primary Market Department reviews the DRHP and issues observations (commonly called the SEBI letter) within thirty days. The SEBI letter is not an approval of the issue; it is a set of observations that must be addressed by the issuer before the final Red Herring Prospectus (RHP) is filed with the Registrar of Companies.

Key content requirements for the DRHP include:

• a detailed risk factors section disclosing all material risks, both issuer-specific and sector-wide;
• complete financial statements for the last three financial years (five years if Route I is used), restated to comply with SEBI accounting requirements;
• a management discussion and analysis (MD&A) section covering financial condition and results;
• details of related party transactions;
• details of pending legal and regulatory proceedings above a materiality threshold; and
• a detailed objects of the issue section explaining how the proceeds will be deployed.

The RHP must be filed with the stock exchanges and the Registrar of Companies at least three days before the issue opens, and contains the price band, which was absent from the DRHP.

Pricing

For book-built IPOs, the issuer and its book running lead managers set a price band with a maximum spread of no more than 20 per cent between the floor price and the cap price. The floor price cannot be lower than the face value of the shares. The final issue price is determined by the book-building process, in which QIBs, non-institutional investors (NIIs), and retail individual investors (RIIs) submit bids at various prices within the band.

For fixed price issues (less common), the price is set in advance and disclosed in the prospectus.

The regulations prescribe that a promoter’s and promoter group’s combined shareholding must not exceed 20 per cent of the post-issue paid-up equity capital in the case of a divestment issue, and set out lock-in requirements on promoter shares.

Allocation norms

The standard allocation norms for a book-built issue are:

QIBs include mutual funds, foreign institutional investors / foreign portfolio investors, scheduled commercial banks, insurance companies, and certain other regulated entities. NIIs are applicants (other than QIBs) who apply for amounts exceeding Rs 2 lakh. RIIs are individual investors who apply for amounts up to Rs 2 lakh.

In QIB route issues (75% to QIBs), the allocation is: 75% QIBs, 15% NIIs, 10% RIIs.

December 2021 NII sub-categorisation

A significant 2021 amendment introduced a sub-division of the NII (Non-Institutional Investor) category into two:

• sNII (small NII): applications between Rs 2 lakh and Rs 10 lakh; receives one-third of the NII allocation;
• bNII (big NII): applications above Rs 10 lakh; receives two-thirds of the NII allocation.

Within each sub-category, allotment is made on a proportionate basis by lot (lottery) rather than on a pro-rata basis, to improve the probability that smaller NII applicants receive at least one lot. This amendment came into force on 1 April 2022.

Anchor investor allocation

Up to 60 per cent of the QIB portion may be reserved for Anchor Investors – QIBs invited by the book running lead managers to bid before the issue opens (on the day before). Anchor investor allocations are made at a price disclosed before the issue opens and serve partly as a signalling mechanism to the broader market. Anchor investors are subject to a lock-in of 30 days for 50 per cent of their allocation, and 90 days for the remaining 50 per cent, from the date of allotment.

At least one-third of the anchor investor portion must be reserved for domestic mutual funds.

Retail individual investor (RII) allocation

The RII category uses a lottery-based allotment mechanism: if the issue is oversubscribed in the RII category, each applicant is allotted a minimum of one lot (the minimum application quantity) by lottery. This contrasts with the pro-rata method used before 2012 and is intended to ensure that small investors have a non-zero probability of receiving shares even in heavily oversubscribed issues.

An RII is defined as an individual investor applying for a total value of not more than Rs 2 lakh across all applications (including all exchanges). The limit was raised from Rs 1 lakh to Rs 2 lakh effective 1 December 2012 and has remained unchanged since.

Employee reservation

An issuer may reserve up to 5 per cent of the post-issue capital for its eligible employees at a discount to the issue price of not more than 10 per cent. The definition of “employee” is prescriptive and excludes promoters and directors who are promoters.

Promoter lock-in

Post-IPO, the promoters’ minimum shareholding (a prescribed percentage of post-issue paid-up capital) is locked in for eighteen months from the date of allotment in the IPO, and any additional promoter holding above the minimum is locked in for six months. Pre-IPO shares held by persons other than promoters are locked in for six months.

ASBA mechanism

All IPO applications (except anchor investor applications, which are paid immediately) are made through the Application Supported by Blocked Amount (ASBA) mechanism, which is administered by the ICDR framework and complementary SEBI circulars. Under ASBA, the application amount is blocked in the investor’s bank account, not debited, until allotment. If the investor does not receive allotment, the block is released immediately after the basis of allotment is finalised, without the investor needing to wait for a refund cheque or transfer. ASBA was made mandatory for all investor categories (including retail) in January 2016.

SME IPO framework

The ICDR Regulations include a separate, lighter framework for SME IPOs – issuances by small and medium enterprises on dedicated SME platforms of stock exchanges (BSE SME and NSE Emerge). The key distinctions from the main-board framework are:

• lower financial eligibility thresholds (paid-up capital of at least Rs 1 crore post-issue, for instance, instead of the Rs 10 crore main-board minimum);
• a market maker requirement for post-listing liquidity;
• relaxed continuing disclosure obligations;
• migration to the main board upon meeting specified thresholds over subsequent years.

Recent amendments

October 2024 derivatives linkage

The October 2024 derivatives reform measures implemented by SEBI pursuant to its broader F&O policy review had some interaction with the ICDR framework in respect of newly listed companies’ inclusion in derivatives segments. SEBI tightened the criteria for the introduction of individual stock derivatives for newly listed large-cap companies, requiring a minimum market capitalisation and liquidity thresholds to be met before a stock is permitted as an underlying in the futures and options segment.

Voluntary delisting and re-listing

Amendments made in 2023 introduced a new fixed price route for voluntary delisting, alongside the reverse book-building mechanism that had been the only delisting mechanism since 2003. This change is relevant to the ICDR framework because re-listing after a voluntary delisting triggers the IPO process; the 2023 framework clarified the applicable eligibility criteria for such re-listings.

Interpretive guidance

SEBI issues formal interpretive guidance through:

• Informal guidance letters: issued in response to specific queries from market participants; binding only on the querying party;
• Frequently Asked Questions (FAQs): published on the SEBI website for common interpretive questions;
• SEBI circulars: supplements and amendments to the regulations, issued periodically; and
• Primary Market Advisory Committee (PMAC) recommendations: advisory inputs from market experts that feed into regulatory changes.

The SEBI Annual Reports provide statistical data on primary market activity under the ICDR framework, including the number and size of IPOs, subscription levels, and post-listing performance.

Comparison with global frameworks

Rights issues under the ICDR framework

A rights issue allows a listed company to raise capital by offering additional shares to its existing shareholders in proportion to their current holdings, at a price (usually at a discount to the prevailing market price) and within a defined acceptance period. Under the ICDR 2018 framework, key requirements for a rights issue are:

• the issue must be accompanied by a Letter of Offer (LoF) filed with the stock exchanges and the Registrar of Companies;
• SEBI review applies only if the issue size exceeds Rs 10 crore and is made to fifty or more persons (in which case it constitutes a “public issue” threshold cross);
• shareholders who do not wish to exercise their rights may renounce them to third parties, enabling a secondary market in rights entitlements;
• the Application Supported by Blocked Amount (ASBA) mechanism applies to rights issues as well, and since 2020, applications are submitted digitally through the R-WAP (Rights Issue Web Access Portal) or ASBA portal, eliminating physical application forms.

SEBI’s 2020 circular on rights issues substantially relaxed the timeline requirements, reducing the minimum subscription period from fifteen days to seven days for rights issues by listed companies, and permitted rights issues to open within as few as three working days of the letter of offer filing – a significant acceleration compared to the pre-2020 practice.

Qualified institutions placement (QIP)

A Qualified Institutions Placement (QIP) is a fast-track capital-raising mechanism available exclusively to companies already listed on a recognised stock exchange in India. Under QIP, a listed company may issue shares (or convertible securities or non-convertible debentures with warrants) to Qualified Institutional Buyers without obtaining government or regulatory approval and without filing a prospectus with SEBI – the company files only a placement document, which is less onerous than a full prospectus.

Key features under ICDR 2018:

• the placement document is filed with the stock exchange and SEBI on the day of opening;
• the minimum price is the higher of the average of weekly high and low closing prices of the stock over the two or six weeks preceding the relevant date;
• allotment must be to at least two QIBs (or one if the issue size is below Rs 250 crore);
• no single QIB may receive more than 50 per cent of the issue size;
• proceeds may not be used for real estate or capital markets investment;
• the total amount raised through QIP in any twelve-month period may not exceed five times the net worth of the company as per the last audited balance sheet.

QIPs became a preferred route for large listed Indian companies to raise growth capital quickly – particularly during windows of strong institutional investor appetite – because the process can be completed in a matter of days compared to weeks for a rights issue or FPO.

Disclosure requirements: risk factors and use of proceeds

Two sections of the DRHP and RHP attract particular regulatory and investor attention: the risk factors section and the objects of the issue (use of proceeds) section.

Risk factors: SEBI’s review of the DRHP focuses heavily on whether risk factors are company-specific and material, rather than generic boilerplate. SEBI’s observations letters frequently require issuers to:

• reorganise risk factors in order of materiality;
• add quantitative disclosure about the financial impact of identified risks where determinable;
• remove risks that apply to all companies in any industry (which are not “specific” to the issuer); and
• ensure consistency between risk factor disclosures and the financial statements.

Objects of the issue: The ICDR 2018 regulations require a minimum of 75 per cent of the fresh issue proceeds (in a Route I IPO) to be deployed in stated capital expenditure or specific qualifying purposes. All objects must be backed by an appraisal report from a scheduled commercial bank or a financial institution (with certain exceptions). The company is required to report on deployment of IPO proceeds in its annual report and on a quarterly basis to the stock exchange through a monitoring report prepared by the monitoring agency (typically a bank).

Post-listing obligations and lock-ups

Beyond the promoter lock-in described above, the ICDR 2018 regulations and the associated LODR 2015 framework impose a range of post-listing obligations including:

• Monitoring agency reports: the company must appoint a monitoring agency to oversee the deployment of IPO proceeds and submit reports to the audit committee and stock exchanges on a quarterly basis;
• Material deviation disclosure: any material deviation between the stated objects and the actual deployment of proceeds must be disclosed immediately on the stock exchange with an explanation and the audit committee’s views;
• Corporate governance: from the date of listing, the company becomes subject to all LODR obligations including independent director requirements, committee mandates, and quarterly disclosure obligations.

SME IPO framework: detailed provisions

The SME IPO framework within ICDR 2018 provides a proportionate regulatory environment for smaller issuers. Key distinctions from the main board:

The market maker requirement for SME IPOs – under which one or more registered market makers committed to providing two-way quotes – compensates for the lower secondary market liquidity that characterises small-cap stocks.

References

1. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. SEBI/LAD-NRO/GN/2018/31, dated 11 September 2018. Securities and Exchange Board of India.
2. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (repealed). SEBI/LAD-NRO/GN/2009/32.
3. SEBI Circular SEBI/HO/CFD/DIL2/CIR/P/2022/45, dated 30 March 2022. Implementation of NII sub-categorisation.
4. SEBI Annual Report 2023-24. Primary Market Statistics. Securities and Exchange Board of India.
5. SEBI Consultation Paper on Review of Regulatory Framework for SME IPOs, December 2023.
6. SEBI Master Circular for Issue of Capital and Disclosure Requirements Regulations, 2018. SEBI/HO/CFD/DIL1/P/CIR/2023/00 series.
7. Capital Issues (Control) Act, 1947 (Act No. 29 of 1947). Repealed by the Securities and Exchange Board of India Act, 1992.