IPO Readiness: Financial and Compliance Requirements in India

Going public through an Initial Public Offering (IPO) represents a transformative milestone for any company in India. However, the journey from a private entity to a publicly listed company demands meticulous preparation, robust financial systems, and unwavering compliance with regulatory frameworks. For IPO-bound companies, understanding the financial audit requirements, compliance checklists, and timeline planning is not just essential—it’s the foundation upon which a successful public offering is built.

Understanding SEBI’s Regulatory Framework

The Securities and Exchange Board of India (SEBI) governs the entire IPO ecosystem through the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, commonly known as ICDR Regulations. These comprehensive regulations work in conjunction with the Companies Act, 2013, Securities Contracts (Regulation) Act, 1956, and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, to create a robust framework that protects investor interests while ensuring market integrity.^[1]

For companies aspiring to list on the mainboard of stock exchanges like NSE or BSE, compliance with these regulations is mandatory. The framework covers everything from eligibility criteria and disclosure requirements to corporate governance norms and post-listing obligations.

Financial Eligibility Criteria: The Foundation of IPO Readiness

Before embarking on an IPO journey, companies must satisfy specific financial thresholds established by SEBI. These requirements ensure that only financially sound entities access public markets.

Net Tangible Assets Requirement

Companies must maintain net tangible assets of at least ₹3 crore in each of the preceding three full financial years. These assets must be calculated on a restated and consolidated basis. Importantly, if more than 50% of net tangible assets are held in monetary assets (cash and cash equivalents), the issuer must have utilized or made firm commitments to utilize such excess monetary assets in its business or project. However, this 50% limitation does not apply if the IPO is made entirely through an offer for sale.

Operating Profit Requirements

The company must demonstrate an average operating profit (pre-tax) of at least ₹15 crore over the preceding three years, with positive operating profit in each of those three years. This profitability criterion ensures that companies have a proven track record of generating sustainable earnings before accessing public capital.

Net Worth Criteria

A minimum net worth of ₹1 crore is required in each of the preceding three full years. Net worth comprises the company’s paid-up share capital, reserves created from profits, securities premium account, and the profit or loss balance from financial statements. This calculation must be done on a restated and consolidated basis.

Track Record

Companies must have at least a three-year track record, either as the company itself, through its promoters, a promoting company (incorporated in or outside India), or through a partnership firm converted into a company.

Alternative Route for Companies Not Meeting Standard Criteria

If a company fails to meet the above financial criteria, it may still proceed with an IPO under the “QIB Route,” wherein at least 75% of the net offer must be allocated to Qualified Institutional Buyers (QIBs). This alternative pathway provides flexibility while maintaining investor protection through institutional scrutiny.

Restated Financial Statements: The Core of Financial Due Diligence

One of the most critical requirements for IPO readiness is the preparation of Restated Financial Statements (RFS). This process involves revising previously issued financial statements to correct errors, reflect changes in accounting policies, and ensure full compliance with accounting standards.

Purpose and Importance

Restated financial statements provide reliable, transparent information to potential investors and accurately represent the company’s financial position and performance. They align the financial data of the last three years with the requirements of the Companies Act, 2013, and Indian Accounting Standards (Ind AS).

Time Period Coverage

For IPO purposes, restated financial statements must be prepared for at least the last three financial years and any stub period if applicable. According to SEBI regulations, the financial information in the offer document cannot be more than six months old from the date of filing. If the financials for the latest full financial year are older than six months from the filing date, then restated financial information for the stub period must be prepared as per AS 25 or Ind AS 34.

Peer Review Audit Requirement

A critical compliance aspect is that restated financial statements must be audited and certified by auditors holding a valid Peer Review certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India (ICAI). The peer review audit ensures accuracy, reliability, and regulatory compliance of the company’s financial statements for inclusion in the Draft Red Herring Prospectus (DRHP).

Only Chartered Accountants with at least 10 years of practice experience and valid ICAI Peer Review Board certification can perform peer review audits. The process can take several weeks to months, with costs typically ranging from ₹2.5 lakh to ₹5 lakh. The peer review must confirm that accounts and disclosures comply with Schedule III of the Companies Act, 2013, that prescribed accounting standards have been followed, and that financial statements present a true and fair view of the firm’s accounts.

Comprehensive Compliance Checklist for IPO-Bound Companies

Company-Level Compliance

Beyond financial criteria, companies must ensure they are not subject to winding-up petitions, that promoters are not declared wilful defaulters or fugitive economic offenders, and that the company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR). All tax and statutory dues must be cleared, and all securities held by promoters must be in dematerialized form.

Promoter and Director Eligibility

SEBI imposes strict conditions on promoters and directors. None of them should be debarred from accessing capital markets by SEBI, be associated with other debarred companies, be wilful defaulters or fraudulent borrowers, or be fugitive economic offenders. If any promoter or director has a past debarment that has expired as on the date of filing the draft offer document, the company may proceed with the IPO.

Capital Structure Requirements

Post-issue paid-up capital shall not be less than ₹10 crore, and the market capitalization shall not be less than ₹25 crore. The company must not have any outstanding convertible securities or outstanding rights issues, except in specific cases like employee stock options.

Minimum Public Shareholding (MPS)

Listed companies must maintain at least 25% public shareholding. Newly listed companies typically have three years from the date of listing to achieve this requirement. However, SEBI’s recent reforms provide extended timelines for mega-IPOs: companies with post-issue market capitalization between ₹50,000 crore and ₹1,00,000 crore now have five years to meet the 25% MPS requirement. For issuers above ₹1,00,000 crore, if public shareholding is less than 15% at listing, they have five years to achieve 15% and up to 10 years to reach 25%.

Due Diligence Requirements

Merchant bankers must conduct comprehensive due diligence covering legal, financial, and operational aspects. The scope includes a look-back period of three years for most compliances, though compliances related to capital evolution are examined since incorporation. Due diligence teams typically comprise practicing company secretaries for compliance-related due diligence, financial auditors for financial due diligence, and legal advisors for legal due diligence.

Key Documentation Requirements

The IPO process demands extensive documentation. The primary documents include:

Draft Red Herring Prospectus (DRHP): Filed with SEBI containing details about the business, financial statements, and IPO offering. SEBI typically takes 30 days to provide an observation report on the DRHP, which remains valid for 12 months.

Red Herring Prospectus (RHP): Filed after SEBI approval and made public for at least 21 days before the issue opens. The RHP is the marketing document used for investor subscription.

Prospectus: The final document filed after price and quantity are fixed.

Financial Statements: Audited financial statements for the last three years including profit and loss accounts, balance sheets, cash flow statements, and notes to accounts.

Due Diligence Report: Prepared by legal advisers and underwriters, confirming regulatory compliance.

Legal Agreements: Including engagement letters, BRLM MoU, registrar MoU, escrow agreement, syndicate agreement, underwriting agreement, and tripartite agreement with depositories.

IPO Timeline: From Preparation to Listing

Understanding the IPO timeline is crucial for effective planning.

Pre-Filing Phase (6-12 months)

Appointing key intermediaries including merchant bankers, legal advisors, auditors, and registrars. Conducting comprehensive due diligence covering legal, financial, and operational aspects. Preparing restated financial statements and obtaining peer review audit. Addressing compliance gaps and strengthening corporate governance structures. Preparing and finalizing the DRHP with all required disclosures.

DRHP Filing and Review (30-45 days)

Filing DRHP with SEBI and stock exchanges. SEBI reviews the DRHP and issues observations typically within 30 days. The company addresses SEBI’s observations and clarifications. SEBI requires 15 days to issue an observation report on clarifications received.

RHP Filing and Marketing (21+ days)

Filing the RHP after SEBI approval. The RHP is made available on SEBI and stock exchange websites for at least 21 days. Conducting roadshows, press releases, and advertising campaigns to promote the IPO. Finalizing the price band, which must be announced at least two business days before the issue opens.

Issue Period (3-5 working days)

The IPO opens for subscription from retail investors, QIBs, and Non-Institutional Investors (NIIs). Bidding typically remains open for 3-5 working days. Investors apply through the Application Supported by Blocked Amount (ASBA) facility or UPI.

Post-Issue Activities (6-10 days)

Basis of allotment is finalized in consultation with stock exchanges within 3-4 days of issue closure. Refunds for unallotted or partially allotted applications are initiated within four working days of issue closure. IPO refunds are typically processed within 6-7 working days after allotment is finalized. Shares are credited to demat accounts of allotted investors.

Listing (T+6 days)

Shares are listed on stock exchanges approximately 6 days after the issue closes. Listing begins with a pre-open session from 9:00 AM to 9:45 AM, order matching from 9:45 AM to 9:55 AM, a buffer period from 9:55 AM to 10:00 AM, and regular trading commencing at 10:00 AM.

Understanding the Cost Structure

IPO preparation involves significant expenses. For SME IPOs, the typical cost structure includes:

Merchant Banker Fees: ₹25-30 lakh for IPO management and DRHP preparation.

Underwriting and Fund Raise Cost: 8-10% of issue size.

Legal and Regulatory Costs: ₹5-10 lakh covering RTA costs and listing fees.

Peer Review Audit Costs: ₹2-5 lakh.

Printing and Distribution Costs: ₹3-6 lakh.

Marketing and Roadshow Expenses: ₹5-10 lakh.

Exchange Fees: Initial processing fees of ₹25,000, initial listing fees of ₹50,000 or 0.01% of issue size (whichever is maximum), and annual listing fees of 0.02% of full market capitalization.

For mainboard IPOs, costs scale proportionately with issue size, with total expenses typically ranging from 4-7% of gross IPO proceeds.

Post-Listing Compliance Obligations

IPO readiness extends beyond listing. Companies must prepare for ongoing compliance requirements under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Periodic Disclosures: Quarterly financial results within 45 days of quarter-end, half-yearly financial results within 45 days, annual financial results within 60 days, and shareholding pattern updates within 21 days of each half-year.

Corporate Governance Reporting: Quarterly corporate governance reports within 15 days of quarter-end, reconciliation of share capital audit reports quarterly, and annual reports as soon as issued.^[34]

Event-Based Disclosures: Material events including mergers and acquisitions, related party transactions, changes in capital structure, legal proceedings, and management changes must be disclosed immediately.

Board Composition Requirements: At least one-third of the board must consist of independent directors, with enhanced requirements for top 1,000 companies by market capitalization.

Key Performance Indicators (KPIs) Disclosure

SEBI has introduced stringent KPI disclosure standards for IPOs. Companies must prepare a Master Data Sheet of all relevant KPIs, obtain audit committee approval with detailed minutes of deliberations, and continue KPI disclosures at least annually until issue proceeds are fully utilized or one year from listing, whichever is later. KPIs must be defined as per relevant accounting standards, SEBI ICDR Regulations, or the Companies Act, 2013, in that order.

Strategic Recommendations for IPO-Bound Companies

Start preparation at least two to three years before the intended IPO date to ensure all financial and compliance criteria are met. Engage experienced intermediaries including merchant bankers, legal advisors, and auditors early in the process. Implement robust financial reporting systems aligned with Ind AS requirements. Strengthen corporate governance structures including board composition, independent directors, and key committees. Address all compliance gaps identified during due diligence well in advance. Maintain comprehensive documentation of all corporate actions, board resolutions, and statutory filings. Establish investor relations capabilities for post-listing communications. Prepare management for increased scrutiny and disclosure obligations. Plan for post-listing compliance costs including annual listing fees (ranging from ₹3 lakh to ₹7.3 lakh depending on paid-up capital), compliance filings (₹2-5 lakh annually), and market maker arrangements if applicable.

Conclusion

IPO readiness is a comprehensive journey that demands strategic planning, meticulous execution, and unwavering commitment to compliance. For IPO-bound companies in India, understanding and meeting SEBI’s financial audit requirements, completing the extensive compliance checklist, and following the structured timeline are non-negotiable prerequisites for success. The regulatory framework, while stringent, is designed to protect investor interests and maintain market integrity. Companies that proactively address these requirements, engage qualified professionals, and maintain transparency throughout the process position themselves for a successful public offering. With proper preparation, robust financial systems, and adherence to regulatory standards, the IPO journey transforms from a daunting challenge into an achievable milestone that unlocks growth capital, enhances credibility, and creates long-term shareholder value. As India’s capital markets continue to evolve with reforms aimed at facilitating mega-IPOs and improving efficiency, staying informed about regulatory changes and maintaining compliance readiness remains paramount for companies aspiring to go public.