IPO Eligibility Norms Under SEBI Rules: Regulation 6(1) vs 6(2) Explained

Every company that wants to list on the main board has to walk through the same gate first. The IPO eligibility norms SEBI lays down in Regulation 6 of the ICDR Regulations decide which door a company uses: the profitability route in 6(1), or the institutional route in 6(2). Which one an issuer picks shapes who gets the biggest slice of the issue, how much retail investors can bid for, and how much risk sits on the table when you apply.

This guide reads the rule straight from the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as last amended on March 21, 2026, and runs two hypothetical companies through it. If you are new to primary markets, our guide to IPO investing in India covers the basics first.

Why IPO eligibility norms under SEBI rules exist at all

SEBI’s own FAQs on the ICDR Regulations call these “entry norms” and put the purpose plainly: they protect investors by restricting fund raising by companies that don’t meet the entry requirements. The same FAQ also says SEBI kept an alternative route so that genuine companies are not shut out just because they miss a strict number.

So there are two doors. The first one asks for a financial track record. The second one doesn’t, but it hands most of the issue to professional investors and makes them carry the weight of the decision.

Before either door, though, there is a short list of companies that can’t come in at all.

Who can’t file an IPO, whatever the numbers say

Regulation 5 shuts the gate on an issuer if:

• the issuer, any promoter, promoter group member, director or selling shareholder is debarred by SEBI from accessing the capital market;
• any promoter or director is a promoter or director of another company that is debarred by SEBI;
• the issuer or any of its promoters or directors is a wilful defaulter or a fraudulent borrower;
• any promoter or director is a fugitive economic offender.

A past debarment doesn’t count if it has already ended by the date the draft offer document is filed. Regulation 5(2) adds one more block: the company can’t have outstanding convertible securities or other rights that entitle someone to receive equity shares. Employee stock options granted under a compliant scheme are carved out, as are fully paid-up convertibles that must convert before the red herring prospectus is filed. Stock appreciation rights are carved out too, provided they are fully exercised before the RHP is filed and disclosed.

Regulation 4 also tells you when all of this is tested: on the date the draft offer document is filed with SEBI, and again on the date the offer document is filed with the Registrar of Companies.

Regulation 6(1): the profitability route

Under Regulation 6(1), an issuer can make an IPO only if it meets all four tests below, each calculated on a restated and consolidated basis:

1. Net tangible assets of at least ₹3 crore in each of the preceding three full years (twelve months each), with not more than 50% of those net tangible assets held in monetary assets. If more than half is monetary, the company must have used or made firm commitments to use the excess in its business or project. The 50% cap doesn’t apply if the IPO is entirely an offer for sale.
2. Average operating profit of at least ₹15 crore over the preceding three years, with an operating profit in each of those three years.
3. Net worth of at least ₹1 crore in each of the preceding three full years.
4. Name change: if the company changed its name in the last one year, at least 50% of its revenue for the preceding full year must come from the activity its new name points to.

Read clause 2 twice. It isn’t only an average. A company has to be profitable at the operating level in each of the three years as well. One loss year breaks the test even if the average looks fine.

The profitability route asks a simple question with no wiggle room: did you make an operating profit in each of the last three years, and did those profits average at least ₹15 crore?

Worked example: Company A clears 6(1)

Take a hypothetical Company A with these restated consolidated figures:

Net tangible assets are above ₹3 crore every year, and the monetary share stays under 50%. Operating profit averages (12 + 16 + 20) ÷ 3 = ₹16 crore, which is above ₹15 crore, and it was positive in all three years. Net worth is well above ₹1 crore throughout. Company A can use the profitability route.

Note that Year 1 alone, at ₹12 crore, is below ₹15 crore. That’s fine. The ₹15 crore bar applies to the three-year average, while each single year only needs to show a profit.

Worked example: Company B misses by one year

Now a hypothetical Company B, a fast-growing business with operating results of ₹30 crore, ₹18 crore and a ₹2 crore operating loss over its three years. The average is (30 + 18 − 2) ÷ 3, which is about ₹15.3 crore. That clears the ₹15 crore average. But the loss year means it fails the “operating profit in each of these preceding three years” condition, so Company B can’t use 6(1). Its door is 6(2).

Regulation 6(2): the QIB route for everyone else

Regulation 6(2) is short. An issuer that doesn’t satisfy 6(1) can still make an IPO, but only if:

• the issue is made through the book building process, and
• the issuer undertakes to allot at least 75% of the net offer to qualified institutional buyers (QIBs), and to refund the full subscription money if it can’t.

SEBI’s FAQ calls this Entry Norm II, “commonly known as QIB Route”, and its answer on compulsory book building says the same thing from the other side: a company that doesn’t meet the 6(1) conditions must go through the book-built route. A fixed-price IPO isn’t an option here.

The logic is that if a company can’t show a profit record, the people deciding whether it’s worth the price should mostly be institutions with research teams, not individuals bidding on a mobile app.

How the issue is split under 6(1) and 6(2)

This is where the two routes feel very different to a retail investor. Regulation 32 sets the allocation in the net offer:

In both cases, 5% of the QIB portion is set aside for mutual funds, and mutual funds can also bid in the rest of the QIB book. Up to 60% of the QIB portion can go to anchor investors under Schedule XIII. Within the non-institutional bucket, one third is reserved for applications above ₹2 lakh and up to ₹10 lakh, and two thirds for applications above ₹10 lakh.

Run a hypothetical ₹1,000 crore net offer through both routes and the gap is stark:

• Under 6(1): retail gets at least ₹350 crore, non-institutional investors at least ₹150 crore, and QIBs at most ₹500 crore. Of the QIB portion, ₹25 crore (5% of ₹500 crore) is reserved for mutual funds and up to ₹300 crore (60%) can go to anchors.
• Under 6(2): retail gets at most ₹100 crore, non-institutional investors at most ₹150 crore, and QIBs at least ₹750 crore. Of that, ₹37.5 crore (5% of ₹750 crore) is the mutual fund reservation and up to ₹450 crore (60%) can go to anchors.

So a retail investor in a 6(2) issue is competing for less than a third of the rupees available in a same-sized 6(1) issue. If you want the retail-side detail, we’ve broken it down in our piece on the retail individual investor quota in an IPO.

Under the QIB route, the size of the retail quota is itself a signal. SEBI caps it at 10% because the issuer couldn’t show three years of operating profit.

Extra conditions that only bite on 6(2) issues

The QIB route comes with strings that the profitability route doesn’t.

Offer for sale limits (Regulation 8A). When the draft is filed under 6(2), a shareholder holding more than 20% of the pre-issue fully diluted capital, alone or with persons acting in concert, can’t sell more than 50% of their own pre-issue holding in the offer for sale. A shareholder below 20% can’t sell more than 10% of the issuer’s pre-issue fully diluted shareholding. These limits are measured as on the draft filing date and count secondary sales made before the issue too. Those above 20% also face the full promoter-style lock-in under Regulation 17, without the relaxation that clause (c) of that regulation otherwise allows.

A quick hypothetical: a private equity fund holding 30% of Company B’s fully diluted capital can sell at most 15% of the company (half its stake) through the IPO and any pre-IPO secondary sales combined. An angel holding 15% can sell at most 10% of the company.

No underwriting of the 75% QIB block. Regulation 40(3) says the at-least-75% portion that must be allotted to QIBs to meet the 6(2) condition can’t be underwritten. If institutions don’t show up for it, no underwriter steps in to buy it; the issuer has to refund. Our explainer on IPO underwriting in India covers the rest of how underwriting works.

Rules that apply on both routes

Clearing Regulation 6 is only the start. A few general conditions apply to every main-board IPO:

• Listing and demat (Regulation 7). The issuer must apply for in-principle listing approval, sign with a depository, and have shares held by promoters, promoter group, selling shareholders, directors, key managerial personnel, senior management, QIBs, employees and some other holders in demat form before filing the draft offer document. Partly paid shares must be fully paid up or forfeited.
• Project funding. Firm arrangements of finance through verifiable means must be in place for 75% of the stated means of finance for a specific project, leaving out the amount raised through the issue and identifiable internal accruals.
• Caps on vague objects. Money for general corporate purposes can’t exceed 25% of the amount raised. General corporate purposes and unidentified acquisition or investment targets together can’t exceed 35%, and unidentified targets alone can’t exceed 25%. These limits fall away if the acquisition or investment targets are identified and specifically disclosed.
• Offer for sale holding period (Regulation 8). Only fully paid-up shares held for at least one year before the draft filing can be offered for sale.
• Promoter skin in the game (Regulations 14 and 16). Promoters must hold at least 20% of the post-issue capital, with certain investors allowed to make up a shortfall. That minimum contribution is locked in for eighteen months from allotment, or three years if most of the fresh issue money is going into capital expenditure. Promoter holding above the minimum is locked in for six months, or one year in the capex case.
• Minimum subscription (Regulation 45). Except in an offer for sale, the issue must collect at least 90% of the offer. If it doesn’t, all application money is refunded within four days of the issue closing.

What this means when you’re reading an RHP

We’d keep three checks in mind the next time a big IPO lands.

Find the route first. Check which part of Regulation 6 the issuer is relying on. The allocation table gives it away too: a retail quota of 35% points to 6(1), and a 10% retail quota points to 6(2).

Don’t read 6(2) as a red flag on its own. It means the company didn’t meet at least one 6(1) test. That could be a loss year, a thin asset base or some other gap. It doesn’t tell you whether the business is good or bad, only that the regulator wants institutions to carry most of the pricing call. Read the restated financials to see which test failed and why.

Watch who is selling. On a 6(2) issue, Regulation 8A limits how much large existing holders can exit, but the offer for sale can still be a big part of the issue. Compare the fresh issue with the OFS, and check how the fresh money will be used against the 25% and 35% caps above.

A quick recap

1. Regulation 5 bars debarred, wilful-defaulter, fraudulent-borrower and fugitive-offender links, and most outstanding convertibles.
2. Regulation 6(1) needs ₹3 crore net tangible assets and ₹1 crore net worth in each of three years, a ₹15 crore average operating profit with a profit every year, and a revenue test after any name change.
3. Regulation 6(2) is for everyone else: book building only, at least 75% to QIBs, full refund if that fails.
4. Retail gets at least 35% under 6(1) but at most 10% under 6(2).
5. On 6(2) issues, large holders face OFS caps and the 75% QIB block can’t be underwritten.

The rules here are taken from SEBI’s ICDR Regulations as last amended on March 21, 2026. SEBI does amend them from time to time, so check the latest version on SEBI’s website before relying on any single number.

Disclaimer: This article is for educational purposes only and is not investment advice. Company A, Company B and all their financial figures, and the ₹1,000 crore issue, are hypothetical illustrations. Please consult a SEBI-registered investment adviser before making investment decisions.