An initial public offering, or IPO, is the first issue of shares by a private company to the general public. When a company decides to go public, it offers shares at a pre-determined price/price band through the IPO. Investors get an opportunity to become shareholders in the company.

IPO share the way for unlisted or privately traded companies to raise funds from the open market for the growth of the organization. Some organizations go for IPOs to reduce the debt burden.

Every private company has a choice between staying private or going public. The Securities and Exchange Board of India (SEBI) has laid down certain requirements that it needs to fulfil before launching an IPO, which include disclosing its financial records to the public, etc., which we will discuss below.

This article will cover two dimensions that need to be taken care of before going for an IPO.

     1. Road map to DRHP (Draft Red Herring Prospectus)

     2. Restatement of financial statements 

1.  Roadmap to DRHP

Chapters of DRHP

    a. General: This section contains basic introductory information such as definitions, abbreviations, presentation of financial / industry data, and the overall summary of the offer document.

‍

     b. Risk Factors: This section sets out the key risks relating to the company, its business, the industry, the promoters, and the proposed offer that investors should consider before investing.

‍

     c. Introduction: This section gives an overview of the offer, capital structure, objects of the issue, basis for the offer price, and details of possible tax benefits available to investors.

‍

     d. About the Company: This section explains the company’s business, industry overview, key regulations, history, promoter details, business model, and other important background information about the issuer.

‍

     e. Financial Information: This section contains the restated financial statements, key financial data, capitalisation statement, MD&A, and other financial disclosures relevant for understanding the company’s financial position and performance.

‍

      f. Legal and Other Information: This section includes details of litigations, material developments, group companies, government approvals, regulatory disclosures, and other legal matters relevant to the company and the offer.

‍

     g. Offer Related Information: This section explains the structure and size of the IPO and sets out the terms on which the shares are being offered to the public. It includes details of the total issue size, the number of shares being offered, whether the issue consists of a fresh issue or an offer for sale, and the objects of the issue, i.e., the specific purposes for which the funds are being raised. It also generally specifies how much money is proposed to be utilised for each object, such as repayment of borrowings, capital expenditure, working capital requirements, or general corporate purposes.

‍‍

     h. Description of Equity Shares and Terms of the Articles of Association: This section describes the rights attached to the equity shares, such as voting rights, dividend rights, transfer rights, and key provisions of the Articles of Association affecting shareholders.

‍

     i. Other Information: This section generally includes material contracts, documents available for inspection, and other miscellaneous disclosures that are required to be included in the DRHP.

‍

     j. Declaration: This is the final section containing declarations, confirmations, and sign-offs by the company, directors, merchant banker, and other intermediaries in relation to the DRHP.

‍

Normally a period of 6 months to 12 months requires a private limited company to file DRHP, as there would be some compliances that needed to be fulfilled before filing DRHP that were not applicable to a private company earlier.

The steps include:

     (a) Increase in Authorized Share Capital: When a company wants to issue new shares, it must ensure that its authorized share capital is sufficient to accommodate the additional shares. Authorized share capital, also known as nominal capital, is the maximum amount of share capital that a company is authorized to issue.

Increasing the authorized share capital gives the company more flexibility to raise additional funds in the future for issuing shares. Also, DRHP is reviewed by SEBI, so having sufficient share capital is essential to comply with regulatory requirements.

‍

For Example:

ABC Limited has authorized share capital of 15 crores and issued share capital of10 crores. Now the company is planning to get listed on the BSE Mainboard, and one of the criteria is that the minimum issue size shall be 10 crores.

If we raise 12 crores via IPO, the total share capital of the company would be 22crores (12 crores issue size + 10 crores issued share capital), which is more than authorized share capital, so for that, the company needs to increase its authorized share capital by at least 7 crores (22 crores share capital minus existing authorized share capital) to accommodate the additional share capital with the issued share capital.

     (b) Issue bonus/right shares to maintain appropriate shareholding of the promoters: When a company issues new shares to the public during an IPO, the existing shareholders, including promoters, may see their ownership percentage decrease, so the company generally issues bonus or right shares to maintain an appropriate shareholding pattern among the promoters.

SEBI mandates that promoters should hold a minimum percentage of shares after an IPO, typically around 20% or more.

SEBI wants promoters to have "skin in the game" to ensure they make decisions beneficial for the company and its shareholders.

‍

For Example:

The existing shareholding pattern of ABC LTD pre-IPO is: 

Total  number of shares      10,00,000  shares

Promoters’  shareholding    4,00,000  shares (40%)

Others  Shareholding          6,00,000  shares (60%)

‍

Before IPO issue the company will issue bonus shares in the ratio of 1:5 to maintain the appropriate shareholding

Calculation: The bonus shares attributable to promoter’s 10,00,000 shares/ 5 = 2,00,000* 40%= 80,000 shares

And attributable to other shareholders 10,00,000 shares/ 5 = 2,00,000*60% =1,20,000 shares

‍

Shareholding pattern Post Bonus shares

Total  number of shares     12,00,000  shares

Promoters’  shareholding   4,80,000  shares (40.00%)

Others  Shareholding          7,20,000  shares (60.00%)

‍

The company is planning to raise ₹12 crores through IPO

New shareholding pattern post-IPO & Bonus shares

Total  number of shares      24,00,000  shares

Promoters’  shareholding    4,80,000 shares (20.00%)

Others  shareholding           7,20,000  shares (30.00%)

Public  shareholding            12,00,000  shares (50.00%)

Now the company is complying with 20% of the promoter's shareholding criteria. The substantial promoter shareholding gives potential investors confidence that promoters are committed to the company.

     (c) A company appoints merchant banker to advisor: As we are aware, an IPO process is complex and involves a lot of legal, financial, and regulatory requirements. A merchant banker has the expertise to help the company navigate this complicated journey smoothly.

The merchant banker will help in preparation and filling of DRHP with SEBI.

One of the most important tasks during an IPO is determining the right value of the company and the price of the shares to be offered to the public. The merchant banker will help the company in determining the correct price range.

A merchant banker acts as the company’s advisor, guide and manager during the IPO process.

     (d) Converting the private limited company into public limited Company: Only public limited companies are allowed to offer shares to the general public. A private limited company cannot legally raise funds from the public through an IPO. Therefore, conversion is mandatory to meet the legal requirements for going public.

Also, as per The Companies act, 2013 Private limited company has restricted number of shareholders (i.e., 200) When a company is converted into public limited company the limit is removed.

     (e) Appointment of whole time KMPs (Key managerial person): As per Section203 of the companies’ act, 2013 also the Securities and Exchange board of India (SEBI)Mandates the appointment of whole-time Key Managerial Personnel (KMP), including Managing Director, Whole-Time Director, Chief Financial Officer, Company Secretary, and Chief Executive Officer, at least 6 months prior to filing the Draft Red Herring Prospectus (DRHP) for an Initial Public Offering (IPO). This requirement ensures that the KMP are in place to oversee the company's operations, implement strategies, and ensure regulatory compliance during the critical IPO preparation phase. By appointing KMP at least 6 months in advance, companies demonstrate stability, accountability, and commitment to good governance, which enhances investor confidence and facilitates a smooth transition to public listing.

This time frame allows KMP to establish a track record, develop understanding of the company's affairs, and make informed decisions, ultimately contributing to the company's success post-IPO.

     (f) Dematerialization of shares: Dematerializing shares is crucial when filing a Draft Red Herring Prospectus (DRHP), as it converts physical shares into electronic form (Demat form). This process simplifies share transfers and reduces paperwork and administrative costs.

SEBI mandates dematerialization of all outstanding shares at least 6 months prior to DRHP filing, making it essential for companies to complete this process before proceeding with the IPO.

‍

     (g) Legal Due Diligence: The company, along with its merchant banker and external legal advisor, carries outa legal due diligence review to identify any compliance issues that may affect the IPO. This review covers the entire period from the incorporation of the company up to the proposed IPO / filing date and includes verification of corporate records, share capital history, statutory approvals, material agreements, borrowings, pending litigations, related party transactions, and compliance with applicable laws.

The objective is to ensure that non-compliances, or legal issues are either resolved or properly disclosed in the offer document before the company approaches the public issue.  

‍

     (h) Appointment of RTA (Registrar and Transfer Agent): The company appoints a SEBI-registered Registrar and Transfer Agent (RTA) to manage the share registry and investor servicing aspects of the IPO. The RTA is responsible for maintaining records of shareholders, processing IPO applications, validating bid details, coordinating with stock exchanges, bankers and depositories, finalising the basis of allotment, handling refunds / unblocking of funds, and crediting shares to investors’ demat accounts.

     (i) Obtaining No Objection Certificates (NOCs) from Banks / Material Creditors: The company should review its loan agreements and other material arrangements to identify any covenants restricting change in shareholding pattern, dilution of promoter shareholding, or raising of capital through a public issue. In cases where such restrictions exist, the company maybe required to obtain No Objection Certificates (NOCs) or prior consents from banks, financial institutions, or other material creditors.

     (j) Company law requirement (post-IPO)

          1. Formation of the Audit Committee

          2. Formation of Nomination & Remuneration Committee

          3. Formation of Stakeholder Relationship Committee (in case post-issue shareholders are more than 1000)

          4. Applicability of Internal Audit

          5. Applicability of Secretarial Audit

          6. Applicability of CARO

          7. Adoption of IND AS (in case of company listed on main board)

All of the above-mentioned requirements are applicable to a publicly listed company, whether on the mainboard or SME board. It is important to comply with the requirement

Upon listing, the company is required to comply not only with the provisions of the Companies Act, 2013, but also with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which become applicable to listed entities.

Frequency of publishing financial results (post-IPO)

Listed companies in India must publish financial results regularly.

For Main Board Listed Companies: Companies listed on the stock exchanges(BSE/NSE) must publish their financial results quarterly, within 45 days of each quarter-end. However, for the fourth quarter, companies are required to publish their financial results within 60 days from the end of the financial year.

For SME Board Listed Companies: Companies are required to publish their financial results half-yearly. They must publish their financial results within 45 days from the end of the first half-year and within 60 days from the end of the second half-year.

‍

     2. Restatement of financial statements

As per SEBI ICDR Regulations, 2018, an issuer is required to prepare the restated consolidated financial statements as part of the financial information. The company has to prepare the restated financial statements for each of the three financial years immediately preceding the filing of the offer document and stub period (if applicable). Where the company has been in existence for a period of fewer than three years, the financial statements are to be given for the actual period of existence.

There stated financial information shall be audited and certified by the statutory auditors who hold a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India (ICAI). If a new auditor holding a valid peer review certificate is appointed for the stub period, and the predecessor auditor did not hold a valid peer review certificate at the date of signing the last annual financial statement, then the last annual financial statement would need to be re-audited by the new auditor in accordance with applicable standards. The re-audit may exclude audit reporting on CARO, internal financial control, and other regulatory matters.

The restated financial information in the offer document shall not be more than six months old from the date of filing the DRHP/RHP/Prospectus, as applicable. In a situation where the financial statements for the latest full financial year included in the offer document are older than six months from the date of filing of the draft offer document (DRHP), the issuer company will be required to present restated financial information for the stub period in accordance with Ind AS 34 or AS 25 as applicable and other accounting principles generally accepted in India for the stub period.

 
Following disclosure in Restated Financial Statement.

     1. A reconciliation explaining the differences Between the audited financial statement and the restated financial statement should be presented in a columnar format with respect to changes in

     (i)equity and

     (ii)profit/loss after tax or total comprehensive income.

     2. Other financial information:

          a. Statement of Accounting & Other Ratios, as per SEBI ICDR

          · Earnings per Share (Basic and Diluted),

          · Return on net worth,

          · net asset value per share,

          · EBITDA

‍

          b. Statement of capitalisation: Capitalisation statements showing total borrowings, total equity, and the borrowing/ equity ratios before and after the issue is made shall be incorporated. It shall be prepared on the basis of the restated financial statement for the latest financial year or, when applicable, at the end of the stub period.

Stub Period: The financial information included in the DRHP is required to be current and should not be more than six months old from the date of filing of the offer document. Accordingly, where the latest audited financial statements of the company are older than six months as on the proposed filing date, the company is required to prepare and include updated financial information for the interim / stub period, duly audited or reviewed, as applicable, in accordance with the requirements of the SEBI ICDR Regulations and the applicable accounting framework.

Conclusion

An initial public offering (IPO) marks a significant milestone for a company, allowing it to raise equity capital from public investors. Before filing a Draft Red Herring Prospectus (DRHP), companies must undergo several key steps, typically over 6 to 12 months. These include appointing a merchant banker, legal advisor, and peer-reviewed statutory auditor; converting from private to public limited; and meeting various Company Law requirements like forming key committees and increasing authorized share capital.

Restatement of financial statements is also crucial for compliance with SEBI ICDR Regulations, 2018. Companies must restate financials for the last three years(or actual years of existence) and, if needed, provide a stub period. This ensures financial information is consistent, transparent, and aligned with applicable accounting standards, such as Ind AS. The restated financials, audited by a peer-reviewed auditor, offer investors a clear, reliable picture of the company’s financial health, essential for making informed decisions.

To facilitate a smooth DRHP filing process, companies who are planning to go public must appoint a peer-reviewed certified Chartered Accountant as a statutory auditor. The entity that is planning to file DRHP in the near future after 2-3 years can appoint a peer-reviewed certified Chartered Accountant to streamline their DRHP filing process.

Authors

CA Aakash Mehta | Partner

Sunil Suthar | Consultant