Question 1

Which SEBI regulation governs the IPO process and what financial statements are required?

Accepted Answer

SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR) govern mainboard IPOs. Regulation 26 requires the issuer to have net tangible assets of at least Rs 3 crore and distributable profits in three of the preceding five years. The Draft Red Herring Prospectus (DRHP) must include audited financial statements for the last three financial years restated under Schedule III of the Companies Act 2013, with the audit report issued under Companies (Auditing and Assurance Standards) Rules 2006.

Question 2

What are the lock-in requirements for promoter shareholding post-IPO?

Accepted Answer

Under SEBI ICDR Regulations 2018, Regulation 16 requires promoters to lock in 20% of post-issue paid-up capital for 18 months from the date of allotment. The remaining promoter holding (beyond the 20% minimum) is locked in for six months. Shares allotted to anchor investors under Regulation 30 are subject to a 90-day lock-in from the date of allotment.

Question 3

How are capital gains on pre-IPO shares taxed when sold after listing?

Accepted Answer

For shares held for more than 12 months before sale, gains are long-term capital gains taxable at 12.5% under Section 112A of the Income-tax Act 1961 (AY 2026-27) or Section 67 of the Income Tax Act 2025 (TY 2026-27 onwards), after a Rs 1.25 lakh annual exemption. STT must have been paid on the sale transaction through a recognised stock exchange. Short-term gains on listed shares held 12 months or less are taxed at 20% under Section 111A (ITA 1961) or Section 198 (ITA 2025).

Question 4

Is a tax audit mandatory for the company in the year of IPO?

Accepted Answer

Yes. Once the company's turnover from business exceeds Rs 1 crore (or Rs 10 crore where cash receipts and payments each do not exceed 5% of total receipts/payments), a tax audit under Section 44AB of the Income-tax Act 1961 (Section 63 under ITA 2025) is mandatory. The auditor must file Form 3CA/3CB and Form 3CD. IPO proceeds credited to the company do not form part of turnover but all related professional fees and underwriting expenses must be disclosed in the audit report.

Question 5

What FEMA approvals are needed if foreign investors participate in the IPO?

Accepted Answer

Foreign Portfolio Investors (FPIs) may subscribe to IPO shares under Schedule 2 of the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (FEM NDI Rules) without separate RBI approval, subject to individual FPI limits of 10% and aggregate FPI limit of 24% of paid-up equity (extendable to sectoral cap by board resolution). If NRIs subscribe on a repatriation basis, Schedule 3 of the FEM NDI Rules applies. Any foreign direct investment route participation must comply with entry conditions and pricing guidelines under Schedule 1.

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