Due diligence and role of experts and legal

opinion

PGCSM Trimester-II
IPO – Due diligence Process Overview
• ◼ Issue Management – IPO Process Overview 
• Eligibility for IPO 
• Due Diligence – Disclosures  
• Key Teams and Considerations 
• Issue Structure, Capital Structure  
• Role of Statutory Auditor 
• Role of Independent Chartered Accountant 
• Role of Legal Counsel 
 IPO Process Overview

Appointment of Legal/Business Agreements Preparati

Intermediaries diligence by Book Restatement
Setting up with on of
(Kick-off Running Lead of Accounts
Data Room Intermediaries DRHP
presentation Managers

Incremental
DRHP filing Receipt of in- Receipt of due
principle interim Filing responses to
with SEBI diligence by
approval from comments from interim and final
and BRLM/Legal
exchanges SEBI observations by SEBI
Exchanges Counsel

Determining Issue Issue

Management Retail
Anchor opens Closing/Pricing
Roadshows Roadshows
Investors

Filing Commencement of Receipts

Prospectus Allotment of Listing and Trading of Funds
with ROC shares at Exchanges to Issuer
 Key Teams for IPO

• Promoters: Formulating the issue structure, capital structure , timing of IPO and inputs on business during
drafting sessions
• Information regarding themselves and identification of promoter group
• Directors: Formulation of committees as per the laws and regulations as per the appointment of intermediaries
• Approval of DRHP, RHP and prospectus
• Functional Head (including finance and legal) Inputs on business during drafting sessions
 Key Teams for IPO contd.
• ◼Finance Team:Coordination with auditors and lead managers on auditor deliverables.
• Information for comfort letters to be provided to auditors
• Coordination with lenders and customers for consents
• Secretarial Team
• Coordination with directors, promoter, promoter group and teams within on deliverables
• Coordination with counsels for conducting board meetings/ other deliverables
• Legal Team
• Coordinating with Counsels and providing information and backup documents for legal cases
• Generally the Investment Bank would be earmarking an 8-10 member team for the purpose of IPO
• Chief Financial Officer and Company Secretary can be a point of contact for coordinating with
counsels, lead managers and external intermediaries.
 Key Chapters in the Offer Document
Business Section Financial Information Non-business Sections

Industry Overview Restated Consolidated Corporate Legal and approvals Issue related
Financial Information

Business Overview Tax Benefits Statement Corporate History Government Approvals Objects of issue

Risk Factor Financial Indebtedness Management Profile Outstanding litigations Issue structure
Management Discussion Related Party transactions Promoter Profile Regulations and policies Basis of issue price
and Analysis

Dividend policy Group entities General information

about issue , banker and
other intermediaries

Issue procedure
IPO Eligibility
• ◼ The following companies are barred by SEBI from accessing the capital markets: 
• If the Company or promoter, promoter group, directors, selling shareholders are debarred from accessing the
capital market by SEBI
• If any of the promoter or director of the issuer is a promoter or director of any other company which is
debarred from accessing the capital  market by SEBI; 
• ⮲ If the Company or promoter or director is a wilful defaulter or fugitive economic offender 
• ◼ All outstanding convertible securities or any other right which would entitle any person with any option to
receive equity shares to be converted into  shares before filing of RHP, except ESOPs
Offer Structure(to determine allocation between QIB/HNI and Retail
investors)
•  The composition of Offer Structure will be decided based on compliance with the following regulations: 
• ◼ Basic conditions around which need to be met with on restated and consolidated basis: 
• Net worth to be more than Rs. 1 Crore and net tangible assets to be more than Rs. 3 Crores, in
preceding 3 full years
• Average operating profits of at least Rs. 15 Crores, during the preceding 3 years, with operating
profit in each of 3 preceding years 
• ◼ If they are not complied, still the Company is eligible to do an IPO with modifications in terms of
the Issue portion offered to QIB/Non Institutional/Retail portion

If conditions are met If conditions aren’t met

Eligibility-SCRR-Minimum Dilution requirements
Unlisted companies wanting to list

Market Cap at offer Market cap at offer Market cap is Market Cap at offer
price<=1600 cr lies between 1600 and between 4000 cr to >1,00,000 cr
4000Cr 1,00,000cr
Atleast 25% to be Either a minimum Minimum 10% to be Either a minimum 5-
offered to the public between 10-25% offered to the public 10% dilution or an
dilution or an IPO of IPO of Rs 5000 crore
400 crore whichever is to be offered to the
lower to be offered to public
the public

Eventually to increase Eventually to increase Eventually to increase

public shareholding to public shareholding to public shareholding to
25% within 3 years 25% within 3 years 10% within 2 years
from the date of the from the date of the and atleast 25%
listing of securities listing of securities within 5 years from
the date

• 25% minimum dilution can be achieved though a combination of fresh issue and offer for sale.
• Minimum dilution by promoters at the DRHP stage leaves head room for future dilution
Minimum Dilution requirements

Any public shareholding less than 25% to be made up in 3/5 years 

• ◼ If the current offer to public is less than 25% then subsequently the Company will have to adopt
any of the following methods:
• FPO fresh shares and/or OFS 
• OFS by promoters through the secondary market 
• QIP (Primary or Secondary) 
• Promoter/Promoter Group can sell upto 2% of equity through open market sale (with
prior intimation)
• Rights Issues to public shareholders, with promoters forgoing their entitlement,  
• Bonus Issues to public shareholders, with promoters forgoing their entitlement, 
• Any other method approved by SEBI on a case to case basis 
 Conversion of Private Limited into Public Limited
•Conversion of Private Limited into Public Limited Company 

•Company which is to be listed has to compulsorily convert from private limited to public limited company 
• Some Critical Points to considered for conversion:  
• Minimum number of 7 members/ Shareholders required 
• Altered copy of MoA and AoA (Remove special rights of any shareholder) 
• Appoint a full time Company Secretary 
•Stock Exchanges may warrant other qualitative and quantitative confirmations which could also be evaluated.

BSE limited NSE limited

Minimum post issue paid up capital of the Minimum post issue paid up capital of the
applicant company shall be 10 crores for IPOs applicant company shall not be less than 10
crores for IPOs

Minimum Issue size to be 10 crore The capitlization of the the applicant’s equity
shall not be less than Rs 10 crore for IPOs
Minimum market cap shall be 25 crores
Deciding the Issue Structure
• . ◼ Deciding the issue composition - Primary and/or Offer for Sale .

IPO dilution to be achieved through either by: 

• Fixing Issue Size in Amount (Variable Dilution), OR 
• Fixing Number of shares to be issued (Fixed Dilution)

• Discount and Reservations

• ◼ A discount of maximum 10% can be offered to Retail Investors and Eligible Employees 
• ◼ Reservation options are available: 
• Shareholders (other than promoters and promoter group) of listed subsidiaries or promoter companies, (max 10%  of Issue Size) 
• Permanent employees of the issuer or promoters or subsidiary company, other than promoter and promoter  group, director holding more than 10% (max
5% of post issue capital) (Max Application Rs. 5 lacs)
• Reservation buckets can be added subject to exclusion from the minimum dilution of 10%
• Employees can bid in both Employee category and retail category 
• Single application in the reserved category cannot exceed reservation portion

. 
Capital Structuring and Offer for Sale –Regulatory and IPO marketing

◼ Prior to IPO, capital re-structuring is typical. Key considerations for capital re-structuring are:
• Monetizing accumulated earnings for the benefit of existing shareholders  
• Achieving an “optically” lower per share value 

• Conversion of all outstanding convertibles prior to filing of RHP

• Bonus Issue: To arrive at an optically price per issue
• Bonus would be issued out of free reserves and securities premium account
• Offer for Sale: Equity shares to be offered in OFS should be held for atleast 1 year prior to the DRHP 
• Holding period of compulsory convertibles and resultant equity shares together are considered for 1 year holding  period 
• Compulsory convertibles can be converted to equity shares that are proposed to be offered in OFS, prior to RHP  filing 
• 1 year holding period shall not be applicable in case of: 
• OFS by Government 
• Equity shares acquired pursuant to any scheme in lieu of business and invested capital for atleast 1 year.
• Bonus shares issued on eligible OFS shares in last 1 year provided that the bonus shares have to be issued using  free
reserves/ securities premium
Key Action items regarding Auditors
•  ◼ Peer review:Statutory Auditors, should be peer reviewed

• If not then a new peer reviewed auditor to re audit for 1 full financial year

• Financials and Period: Consolidated audited restated financials for last 3 full years and relevant interim 
period 
• Validity of financial statements: 
• Should not be older than 6 months as on the issue opening date
• For a 144A transaction, should not be older than 135 days as on the issue  opening date
 Key action items
• ◼Restatement of Financials: Financial statements to be restated for: 
• Changes in accounting policies  
• Prior period adjustments  
• Auditor qualifications  
• Incorrect accounting polices 
• Extraordinary Items

• Comfort Letters and circling up:Auditors to issue “comfort letters”  

• Comfort letters taken at various stages – DRHP RHP, Prospectus and allotment
• Management to provide monthly MIS
Use of Issue Proceeds(Applicable to Issue Portion in IPO
Identification,  Disclosure and  Utilization
• Defining the definite use of Issue proceeds is a requirement 
• Financing a project / acquisition  
• Investment (through equity or debt) in a JV / subsidiary 
• Setting up a project / factory 
• Repayment of Debt 
• General Corporate Purposes (restricted to 25% of the issue proceeds) 

Change in Objects 
• Deletion of objects permitted subject to overall issue size not decreasing by more than 20%
• Reduction of estimated deployment in any object now permitted subject to overall issue size not decreasing
by more than 20% 
• Addition to objects permitted subject to estimated issue size or estimated means of finance not increasing
by more than 20% 
• of up to 20% in estimated deployment towards any object permitted 
• Funding Tie-up
• ◼ Disclose the break-up of overall means of finance into equity, debt and internal accruals
• ◼ Demonstrate “firm” tie-up status of 75% of funds for overall means of finance excluding IPO proceeds 
Use of Issue Proceeds(Applicable to Issue Portion in IPO
Reporting requirements beyond IPO
•  Monitoring Agency to be appointed if the Issue size (excluding Offer for Sale
portion) is more than Rs. 100 Crores
• Quarterly Disclosures and Annual report 
• Post Listing any change in the Objects to require approval of Shareholders

Minimum subscription
• 90% of the fresh issue portion
• Not Applicable on offer for sale portion
International Legal Counsel

◼ Role and Responsibility of International legal counsel

• Attending organizational, due diligence and drafting sessions with the Company, its representatives  and its accountants and the BRLMs; 

• Drafting of the Business chapters - Risk Factors, Industry, Business and Management Discussion &  Analysis to be included in the
Offer Documents; 

• Conducting customary due diligence in relation to the Company; 

• Interacting with the Company, Selling Shareholders along with BRLMs and the domestic legal  counsels to explain and agree
upon the due diligence information and documentation  requirements; 

• Drafting overseas publicity restriction guidelines applicable to the Offering and advising on  publicity issues; 

• Drafting pre-deal research report guidelines applicable to the Offering and review of the research  reports, if any, of the BRLMs; 
 International Legal Counsel
◼ Providing written advice relating to international publicity related restrictions and internet  restrictions; 

• Review of all Agreements relating to the Offering;  

• Negotiating the Underwriting Agreement on behalf of the BRLMs; 

• Reviewing comfort letters of the auditors at the stages of filing the Offer Documents and providing  final
bring down comfort letter at closing; 

• Interacting with the auditors of the Company for finalization of the comfort letters to be provided  by the
auditors at different stages of the Offering and organizing the executed copies from the  auditors; 
 International Legal Counsel

•
◼Providing legal clearance on all issue material and publicity material viz. Offer Documents, research  reports,
abridged prospectus, public notices, Bid cum Application Forms, Confirmation of  Allocation Notes, press releases,
corporate and issue advertisements, etc; 
•◼ Review of responses to comments/ queries of SEBI, BSE and NSE, including investor complaints/  queries, etc; 
•Providing legal clearance on any investor grievances, complaints, legal notices, etc. received in  relation to the
Offering; 
•Drafting of the international wrap/ selling restrictions in the jurisdictions where the international  marketing shall
be done and filling of necessary documents in other jurisdictions; 
• Providing closing checklist prior to closing of the transaction; 
•Providing no registration opinion and disclosure letter (Rule 10b (5) of the US Securities Act); 
• Providing advice in relation to the Issue pertaining to international regulations including the U.S.  Securities Act;
 Domestic Legal Counsel
• Attending organisational, due diligence, kick-off meetings and drafting sessions with the  Company’s
representatives, their legal advisors and accountants/auditors of the Company; 
• Reviewing and commenting on the due diligence checklist and requisition lists; 
• Conducting legal due diligence on the Company and its material subsidiaries, if any, and drafting/ reviewing necessary
consents (including identification of required lender consents, customer and supplier consents for the transaction),
approvals relating to the Offer, if any; 
• Reviewing and commenting on the publicity guidelines, applicable to the Offer and advising the Company and the
book running lead managers on questions on publicity restrictions; 
• Drafting the research guidelines from an Indian Law perspective and advising on issuance of research reports, including
reviewing of any Indian Law related descriptions contained in the research reports, prepared in connection with the Issue.
Reviewing research reports prepared by the book running lead managers’ research teams for consistency of information
with the Offer Documents. 
• Reviewing and providing comments on all sections of the Draft Red Herring Prospectus, the Red Herring Prospectus,
and the Prospectus (collectively, the “Offer Documents”); 
• Reviewing and commenting on the board resolutions (including committees thereof) and
Domestic Legal Counsel
• Drafting standard certificates and consents, independent chartered accountant certificates and  auditor
certificates including the comfort letter, arrangement letter and the rep letter of the  issuer and subsidiaries
/associates etc.; 
• Reviewing the responses/in-seriatim replies to observations from SEBI and the Stock Exchanges on the
Offer Documents; 
• Reviewing and approving corporate, statutory and Issue advertisements (including press releases, if any); 
• Drafting the transaction agreements for the Offer, including the Offer agreement, the cash escrow agreement,
share escrow agreement, the syndicate agreement and the underwriting agreement; 
• Reviewing and commenting on the agreement with the registrar to the Offer, the advertising agency and the
monitoring agency agreement; 
• Review of amendment agreements to the existing shareholder agreements of the Company, if  any; 
• Reviewing and commenting on all offer related materials including the Abridged Prospectus and  reviewing
and commenting on the applications forms, confirmations of allocation note and  allotment advice
 Role of the Montoring Agency

•  Deliver the monitoring report to the Company in the format as prescribed in the SEBI ICDR  regulations, on a
quarterly basis (or any other frequency as prescribed by SEBI from time to time. 
• Delivering the monitoring report to the Company in the format prescribed under the SEBI ICDR  Regulations,
on quarterly basis till 100% (hundred percent) of the Issue Proceeds have been  utilized (including proceeds
earmarked for General Corporate Purposes) or termination of the  Agreement. 
• Taking such action and doing such other acts, deeds or things as may be required under the  provisions of the
SEBI ICDR Regulations or as required by BSE, NSE, SEBI or any other statutory /  regulatory body and in
accordance with the terms of this Agreement,  
• Reviewing of the information/ documents/ statements received from the Company with regard to the use of the
Issue Proceeds including the status of implementation of the activities proposed to  be funded out of the Issue
Proceeds as stated in the Prospectus filed with the RoC. 
• Review the information / documents / statements (including bank statements) received from the  Company
showing use of the Issue Proceeds as stated in the final Red Herring  Prospectus/Prospectus..