Pre-IPO Conversion

Conversion from a private limited company to a public limited company is governed by Section 18 of the Companies Act 2013 read with Rule 33 of the Companies (Incorporation) Rules 2014. The company must pass a special resolution under Section 14 to alter its Memorandum and Articles of Association to remove the restrictions applicable to private companies — typically relating to restriction on transfer of shares and limitation on number of members. The altered AOA and MOA must be filed with the Registrar of Companies in Form INC-27 along with the prescribed fee. The ROC issues a fresh Certificate of Incorporation upon conversion. This conversion must be completed before filing the Draft Red Herring Prospectus (DRHP) with SEBI under Regulation 25 of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018.

Under Regulation 26(1) of SEBI (ICDR) Regulations 2018, an issuer must have audited financial statements for at least the last three full financial years before filing the DRHP. These financials must be prepared in accordance with the Companies Act 2013, Indian Accounting Standards (Ind AS) notified under Companies (Indian Accounting Standards) Rules 2015 (for companies meeting the threshold), and audited by a Peer Review certified auditor as required under SEBI Circular SEBI/HO/CFD/DIL1/CIR/P/2019/26. If the company has undergone a change of auditor, a proper handover and consistency of accounting policies across all reported periods must be demonstrated. For companies that have completed a corporate restructuring, restated financials are required to reflect the restructured entity as if it had existed for all three years.

Under Regulation 26 of SEBI (ICDR) Regulations 2018, a company seeking a mainboard IPO must meet one of two eligibility tracks: Track I requires a minimum net worth of ₹1 crore in each of the preceding three full years, net tangible assets of at least ₹3 crore in each of those years, and distributable profits (under Section 123 of the Companies Act 2013) in at least three of the immediately preceding five years. Track II — the QIB route — requires at least 75% of the net offer to be allocated to Qualified Institutional Buyers and has no minimum profitability requirement, but imposes a post-issue market capitalisation of at least ₹500 crore. Companies not meeting either track may list on the SME platform of BSE or NSE under separate SEBI Circular conditions with a lower paid-up capital threshold of ₹1–25 crore.

Under Regulation 16 and 17 of SEBI (ICDR) Regulations 2018 (as amended by SEBI Amendment Regulations 2021 effective August 2021), promoters' minimum 20% contribution (Minimum Promoter Contribution or MPC) must be locked in for 18 months from the date of allotment in the IPO. The remaining promoter shareholding (beyond the MPC) is locked in for 6 months from the date of allotment. Pre-IPO shares allotted to non-promoter shareholders (other than shares issued under ESOPs or for consideration other than cash) are locked in for 6 months. SEBI Circular SEBI/HO/CFD/DIL1/CIR/P/2021/47 further clarified that shares held by promoters for more than one year before IPO filing are eligible for the shorter lock-in period of 6 months even for MPC purposes, subject to conditions.

The conversion of a private company to a public company under Section 18 of the Companies Act 2013 does not itself constitute a transfer of assets and therefore does not attract GST under the CGST Act 2017. However, the alteration of the Memorandum of Association and Articles of Association involves filing with the ROC and attracts stamp duty under the Indian Stamp Act 1899 at rates prescribed by the relevant state — typically a nominal duty on the altered documents. The public issue of shares (fresh issue component of the IPO) is not a supply of goods or services and is therefore outside the scope of GST as clarified by CBIC in its FAQ on Financial Services. Underwriter commissions and merchant banker fees paid as part of the IPO process attract GST at 18% under SAC 997159 and are recoverable as Input Tax Credit by the company under Section 16 of the CGST Act 2017 if the company is registered.