Query:
A private limited company in India with 3 year profitability track record wants to go for IPO
diluting promoters stake from 60% to 40%. It is seeking advise in terms of all required
regulatory, accounting, valuation, due diligence,legal formalities to get the company ready
for listing. Advise and discuss in detail.?
Answer:
Based on the provided information and guidelines, here is a detailed advisory for the
private limited company in India looking to go for an IPO:
Initial Public Offering (IPO) Process for a Private Limited Company in
India
1. Introduction
This advisory outlines the key regulatory, accounting, valuation, due diligence, and legal
formalities required for a private limited company in India with a 3-year profitability track
record to prepare for an Initial Public Offering (IPO), diluting promoters’ stake from 60% to
40%.
2. Relevant Standard/Law References
a) The primary regulations governing the IPO process in India are:
º The Companies Act, 2013
º Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018 (SEBI ICDR Regulations)
º Securities Contracts (Regulation) Rules, 1957
º SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI
LODR Regulations)
Companies Act 2013 as amended upto 01.04.2021_, page 197
b) The company must comply with the eligibility criteria specified in Regulation 6 of the
SEBI ICDR Regulations, which includes:
º Net tangible assets of at least ¹3 crore in each of the pre
º Average operating profit of at least ¹15 crore during the
º Net worth of at least ¹1 crore in each of the preceding th
Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations 2018 [Last amended on May 17, 2024], page 54
3. Detailed Explanations
3.1 Pre-IPO Preparations
i. Convert to Public Limited Company: The company must first convert from a private
limited company to a public limited company as per Section 14 of the Companies Act,
2013. This involves:
º Amending the Memorandum and Articles of Association
º Obtaining shareholders’ approval through a special resolution
º Filing necessary forms with the Registrar of Companies (RoC)
Companies Act 2013 as amended upto 01.04.2021_, page 23
ii. Appointment of Key Personnel: Appoint key personnel required for a public company,
including:
º Nomination and Remuneration Committee
º Stakeholders Relationship Committee
º Risk Management Committee (for top 1000 listed entities)
iv. Corporate Governance Compliance: Ensure compliance with corporate governance
norms as per SEBI LODR Regulations, including:
º Board composition
º Related party transactions
º Vigil mechanism
º Code of conduct for board and senior management
3.2 Due Diligence and Documentation
i. Appoint Intermediaries: Engage the following intermediaries:
º Book Running Lead Managers (BRLMs)
º Legal Advisors (domestic and international)
º Statutory Auditors
º Registrar and Transfer Agents
º Bankers to the Issue
ii. Conduct Due Diligence: The BRLMs and legal advisors will conduct comprehensive due
diligence covering:
º Legal and regulatory compliance
º Financial statements and accounting practices
º Business operations and contracts
º Intellectual property rights
º Litigation and contingent liabilities
iii. Prepare Draft Red Herring Prospectus (DRHP): The DRHP must contain all material
information as per Schedule VI of SEBI ICDR Regulations, including:
º Risk factors
º Capital structure
º Objects of the issue
º Business overview
º Financial information
º Management discussion and analysis
º Legal and other information
Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations 2018 [Last amended on May 17, 2024], page 54
3.3 Regulatory Filings and Approvals
i. SEBI Filing: File the DRHP with SEBI for its observations. SEBI typically takes 30-45
days to provide its comments.
ii. Stock Exchange Filings: File the DRHP with the stock exchanges where the shares are
proposed to be listed.
iii. RoC Filing: File the DRHP with the RoC for registration.
iv. In-principle Approval: Obtain in-principle approval from the stock exchanges for listing of
shares.
v. SEBI Observations: Address SEBI’s observations and file the updated Red Herring
Prospectus (RHP).
3.4 Valuation and Pricing
i. Valuation: Conduct a detailed valuation of the company considering:
º Discounted Cash Flow (DCF) method
º Comparable company analysis
º Precedent transactions analysis
ii. Price Band Determination: Determine the price band in consultation with the BRLMs,
considering:
º Valuation results
º Market conditions
º Investor feedback from pre-IPO marketing
iii. Price Band Announcement: Announce the price band at least 5 working days before the
bid opening date.
3.5 IPO Process
i. Marketing: Conduct road shows and investor meetings to generate interest in the IPO.
ii. Bid/Issue Period: The issue must remain open for at least 3 working days and not more
than 10 working days.
iii. Basis of Allotment: Finalize the basis of allotment in consultation with the designated
stock exchange.
iv. Allotment and Refunds: Complete the allotment process and initiate refunds within 4
working days of bid closing date.
v. Listing: List the shares on the stock exchanges within 6 working days of bid closing date.
4. Used Cases/Interpretations & Disclosures by the listed entities
Prince Pipes and Fittings Limited – Year 2020: The company’s IPO process involved
comprehensive steps including appointing intermediaries, conducting due diligence,
preparing and filing offer documents, and obtaining necessary approvals. The company’s
board was authorized to take various actions related to the IPO, including determining the
price band, anchor investor allocation, and basis of allotment Prince Pipes and Fittings
Limited, page 74.
Art Nirman Limited – Year 2019: The company faced issues related to compliance with
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, and delays in
filing listing applications for shares allotted upon conversion of warrants. This highlights the
importance of strict adherence to regulatory timelines and requirements Art Nirman
Limited, page 34.
RRIL Limited – Year 2020: The company’s case demonstrates the process of
reclassification of promoters as public shareholders under Regulation 31A of SEBI LODR
Regulations. This is relevant for companies considering changes in their promoter structure
before or after an IPO RRIL LIMITED, page 10.
5. Summary
To successfully execute the IPO and dilute the promoters’ stake from 60% to 40%, the
private limited company should:
1. Convert to a public limited company and ensure compliance with all regulatory
requirements.
2. Appoint necessary key personnel and form mandatory board committees.
3. Engage reputable intermediaries for the IPO process.
4. Conduct thorough due diligence and prepare comprehensive offer documents.
5. Obtain all required regulatory approvals from SEBI, stock exchanges, and RoC.
6. Determine an appropriate valuation and price band for the IPO.
7. Execute the IPO process, including marketing, allotment, and listing, within the
prescribed timelines.
It is crucial to maintain transparency, comply with all regulatory requirements, and work
closely with appointed intermediaries throughout the process. The company should also be
prepared for increased scrutiny and ongoing compliance requirements post-listing.
6. Attribution
The information provided in this response is based on the Companies Act, 2013, SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2018, and SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 as issued by the Ministry of
Corporate Affairs and the Securities and Exchange Board of India respectively. For
complete and authoritative guidance, please refer to the full regulations available through
the official websites of the Ministry of Corporate Affairs and the Securities and Exchange
Board of India.
IPO preparation India
