The DHRP Rulebook: Volume III

Step into a Draft Red Herring Prospectus (“DRHP”), where numbers dance with strategy, legalities take center stage, and transparency rightfully gets the spotlight. Still thinking that a DRHP was merely regulatory checklist? Well, think again as Volume III of our series “The DRHP Rulebook” is here to shatter the stereotypes, diving into the eclectic mix of chapters that weave this pivotal document. Following the route taken in Volumes I and II, the third instalment is here to serve as a Practioner's Note knitting together diverse pieces of the DRHP puzzle that, on the surface, may seem unrelated but are all crucial to shaping an Issuer Company's journey into the public eye.

Through the aegis of this volume, the exploratory purpose is to debunk everything from how shareholding dynamics change post-IPO, to dissecting the regulatory framework that governs an Issuer Company's industry and peeling back the curtain on outstanding litigation that could send waves through investor confidence. In summation, Volume III is a patchwork of revelations wherein each chapter remains distinct yet bound together by one unifying force, the DRHP itself.

Far from being a usual dry, legal-speak, Volume III is a 'behind the scenes' tour which ventures into the Securities and Exchange Board of India (“SEBI/ the Regulator”) observations, and real-world lessons, offering a fresh perspective on how to handle these varied disclosures with flair and precision.

Capital Structure

In the mission control room of an Initial Public Offering (“IPO”) filing process, the Capital Structure chapter is the central console, monitoring every vital statistic before lift-off. The chapter charts the coordinates of control of a company's ownership landscape, equity allocation, and the historical and proposed issuance of securities. In essence, Capital Structure makes conspicuous the mix of different sources of funds that an Issuer Company injects to facilitate operations, fuel their expansion, and manage their capital. Broadly, the aforestated includes:

• Equity capital, such as equity shares, preference shares, and convertible instruments, which represent ownership in the Issuer Company; and
• Debt capital, for instance, loans, debentures, and bonds, which constitute financial obligations to creditors.

In the IPO context, the focus migrates predominantly to equity ownership, especially the distribution of shares to the existing stakeholders, inclusive of the promoters, institutional as well as retail investors, employees, and the total public float. Here is where the chapter's narrative turns into a story of dilution of ownership, control shifts, and entry points for investors.

The Capital Structure chapter plays a dual role:

• Regulatory Compliance: This leg of the role is crucial in fulfiling disclosure requirements under Schedule VI Part A Clause 8 of SEBI's Issue of Capital and Disclosure Requirements, 2018 (“SEBI ICDR Regulations”) by providing detailed data on share capital (whether equity or preference), ownership changes, promoter contributions, and lock-in obligations. Any misstep or omission here can lead to delays or even derailment of the IPO process.
• Investor Transparency: This leg of the role is to succinctly offer prospective investors a clear view of who owns what (Pre or Post IPO) and how that impacts control, governance, and potential returns. Tables disclosing pre and post-issue shareholding percentages serve as the foundation for understanding the company's equity story.

As the IPO horizon draws near, the company must unveil the face of ownership with precision, clarity, and candour. Who are the promoters, and how much of their stake will they retain post-listing? Are they staying firmly at the helm, or partially stepping back? How many shares are being offered to the public, and just as importantly, where are these shares coming from? Is the company raising fresh capital to fuel its next phase of growth, or is it an Offer for Sale (“OFS”), where existing shareholders including promoters, early investors, or institutional backers are cashing out? Or is it a hybrid of both?

This distinction isn't just a footnote, but rather a signal. A fresh issue expands the company's resources, while an OFS changes the hands that hold control. For investors and quintessentially for the Regulator, understanding this dynamic is crucial. A certain company while drafting a DRHP, ought to succinctly answer: What does ownership and control look like today and what will it look like tomorrow, once the dust of the IPO settles? How are the offered shares divided between Qualified Institutional Buyers (“QIBs”), Non-Institutional Investors (“NIIs”), Individual Investors, and Market Makers? What will be the promoter holding after the post issue or post offer? Who will gain significant influence?

The above mentioned are not rhetorical questions. They go to the very heart of the investor decision-making. Because in the world of capital markets, ownership is not just limited to a certain quantification of shares but rather the qualitative elements such as power, trust, and the story the company chooses to tell as it steps into the public light. The Capital Structure chapter also chronicles the evolution of key events like bonus issues, rights issues, preferential allotments, and ESOP grants. By presenting these components with clarity, accuracy, and logical flow, the chapter functions as a narrative of stewardship and strategic direction reassuring the Regulator that the company is IPO-ready in both form and substance.

I. Start Strong: Authorized, Issued, and Paid-Up Capital

Firstly, think of Authorized Capital as the framework of an Issuer Company's equity and the potential thereof which ought to be self-speaking of the maximum number of shares an Issuer Company is legally permitted to issue. While this figure remains constant unless the company opts for a resolution to increase their authorized capital, the key here is clarity (emphasis supplied).

The trick-of-the-trade is to document the authorized capital limit as it provides the financial capacity of the company to raise equity in the future, should the need arise. In a DRHP, the authorized capital should be presented simply but explicitly, ensuring that any increase since the Issuer Company's incorporation are clearly highlighted, with the relevant/significant resolutions or shareholder approvals are disclosed. In a way, this section does not/should not indulge in optimistic speculation about the Issuer Company's future needs or why the increase occurred, but strictly records the changes based on the facts and shareholder actions.

Secondly, the Issued Share Capital represents the shares that an Issuer Company has actually allotted to their shareholders. Picture it as a realization of potential, translating the theoretical authorized capital into actual, outstanding shares. When capturing this in a DRHP, the focus should be on the number of shares issued, the price at which they were issued, and the distribution of those shares among the different categories of investors.

Lastly, Paid-up capital encapsulates the actual funds that an Issuer Company has received from shareholders in exchange for the equity issued. This is the core financial commitment from investors, and capturing this in the DRHP must focus on surgical precision. Plainly speaking, the amount paid for the shares issued is as critical as the distribution of ownership.

The DRHP must clearly define the paid-up capital figure, categorically ensuring that it successfully distinguishes between fully paid-up shares and partly paid-up shares. While the latter may be relevant in certain cases (e.g., shares paid in installments), full payment is usually the gold standard for clarity and confidence. If an Issuer Company has partly paid-up shares, this information must never fall short on articulation thereby explaining the payment schedule and any conditions attached to the paid-up process.

Now, don't bury the abovementioned in lukewarm text. Use a tight, well-labelled table preferably with face value, number of shares, and aggregate amount. Avoid clutter or legal verbosity; the table should speak for itself. If there are different classes of shares (say, CCPS or redeemable preference share), split them out and clearly state their treatment, especially if they've been converted or are still outstanding. Additionally, the Charter Documents of the Issuer Company must also be compliant with the Companies Act, 2013 (“the Companies Act”) and SEBI laws, which should be explicitly stated in the DRHP.

II. Tell the Story Behind the Numbers: Change in Authorized Capital

Let's be honest, this section is often treated as a timeline of ROC filings and shareholder resolutions. But if you're drafting it well, it should do more than just list dates and amounts. It should capture how the company's capital muscle has evolved with its ambitions. Start by mapping out the chronology of authorized capital increases. Yes, each one should be backed by a shareholder resolution (typically via an AGM or EGM), and yes, it should reflect in ROC filings. But go a step further: assist the Regulator in understanding why these increases were made. Provide context - brief, but purposeful. What ought to be included in enlist herein below as:

• Dates of increase
• Amount by which capital was increased
• Method of approval (AGM/EGM + resolution reference)
• Any split or consolidation of face value of share
• Status of filings with ROC

Make sure this section syncs with the figures in the “Capital Structure” table and the historical share allotment chart. Also, if the company recently increased their authorized capital just ahead of the IPO (a common move to accommodate fresh issue), call it out transparently and factually. Remember: This is a governance marker showcasing whether the company's capital strategy has kept pace with its growth aspirations, and whether those decisions were taken in a well-documented, compliant manner.

III. Chronicle the Capital Journey: History of Capital Structure

Every company's journey to the public markets leaves a distinct imprint on its capital table. This section is where you, as a drafter, breathe life into that data capturing the decisions, milestones, and inflection points that have shaped the company's equity foundation. Start at the beginning. When did the company first issue shares, and to whom? Was it a tightly held promoter-driven vehicle, or did it open its arms early to angel investors or strategic partners? Each step, be it a rights issue, a bonus allotment, conversion of instruments, or a carefully timed ESOP grant; tells a story of calibrated trust between the company and its stakeholders.

As the structure of the chapter is constructed, allowing the chronology serves as the compass. Walk the Regulator through how the paid-up capital grew over time, pointing to the events that mattered. Avoid overloading the prose, let the numbers support the story. Provide key inputs like the date of allotment, number of shares issued, face value, issue price, nature of consideration (cash, conversion, etc.), and purpose, but always keep sight of the bigger picture: what strategic shift did this issuance represent?

As part of the disclosure process, ensure the DRHP reflects any prior issuance of equity or preferential shares, including instances where shares were issued to more than 49 or 200 persons, which may trigger deemed public issue provisions under the Companies Act. Confirm compliance with the relevant sections of the Companies Act, and provide the necessary details about these past issuances.

A tabular snapshot will do the heavy lifting, but the narrative should make it meaningful. Did a preferential allotment bring in a cornerstone investor? Did a bonus issue signal operational surplus? Such moments anchor the Regulator's understanding of how capital was raised and confidence was built.

If drafted with thoughtfulness, this chapter becomes more than a ledger of events, it reads like a capital growth curve, shaped by intent, supported by governance, and paced to match the company's vision.

IV. The Symphony of Ownership: Shareholding Pattern

In alignment with Regulation 31 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), the Shareholding Pattern section serves as the bedrock of the DRHP, offering investors a meticulously curated glimpse into the layered fabric of the company's ownership structure. This pivotal disclosure elegantly divides equity ownership into Promoters & Promoter Group, Public Shareholders, and Non-Institutional Investors, providing an exquisite portrait of how control and equity will evolve before and after the IPO, guiding investors through the transformation of the company's financial landscape.

Having begun with this preliminary remark, the narrative must offer a crystal-clear portrayal of the pre and post-issue ownership percentages, showcasing the number of shares held by each category, accompanied by their corresponding equity stakes. This breakdown must serve as a mirror, reflecting with exactitude the dilution effect the IPO will impose on the promoters' holdings, while highlighting any significant shifts in power or governance. Presented with finesse, the shareholding distribution should unfold in a meticulously structured table, each category of investor, be it QIBs, retail investors, or market makers, distinctly represented.

V. The Custodians of Ownership: Shareholding of the Promoters

The promoter shareholding section should be crafted with the utmost precision, offering an insightful view into the heart of the company's ownership dynamics. It must detail the methods by which promoters acquired their shares be it through private placements, subscriptions to the MOA, bonus issues, or other channels and clarify whether shares were transferred as gifts or for consideration. The price at which these shares were acquired is equally critical, providing investors with a transparent understanding of the promoters' financial commitment and the depth of their stake in the company.

A chronological portrayal of the promoters' shareholding evolution is indispensable. Each entry should highlight the date of allotment, nature of the transaction, number of shares acquired, face value, issue price, and the nature of consideration (cash, stock, or gift). Furthermore, it is vital to confirm that all promoter-held shares are fully paid-up and non-pledged, offering reassurance to investors regarding the promoters' enduring commitment and the integrity of their holdings.

To indicate an example, large-scale share transfers, such as those executed during strategic realignments or family settlements, are documented with particular care to confirm compliance with deemed public issue provisions under regulatory frameworks. These transfers, often involving significant volumes, are scrutinized to ensure adherence to legal stipulations, avoiding unintended public offerings and safeguarding the company's regulatory standing.

VI. The Price of Commitment: Average Cost of Acquisition Disclosure

The average cost of acquisition disclosure serves as a critical transparency tool, shedding light on the true cost borne by the promoters for their shares. Investors must be informed of the number of equity shares held by the promoters as on the DRHP filing date, alongside the average cost of acquisition calculated by dividing the total acquisition cost by the total number of shares. This should be certified by a Chartered Accountant, with a clear reference to the certificate's date, ensuring the figures' accuracy and credibility. With this disclosure, investors are empowered to assess the promoter's effective entry price in comparison to the issue price of the IPO.

VII. The Pillars of Influence: Major Shareholders Disclosure

Equally crucial is the disclosure of major shareholders holding 1% or more of the pre-issue paid-up capital. Investors must be presented with the names of these significant stakeholders, the number of shares they hold, and the percentage of pre-issue capital they represent at several key points in time: as of the latest beneficial ownership statement, 10 days prior, 1 year prior, and 2 years prior to the DRHP filing. With this insight, investors can gauge the stability of the shareholder base and evaluate potential changes in control once the company transitions to the public market.

VIII. Foundations of Trust: Promoters' Contribution and Lock-In

In strict adherence to Regulation 236 of the SEBI ICDR Regulations, the promoters' contribution must be disclosed with precision, and a 3-year lock-in is applied to 20% of the post-issue capital contributed by the promoters. These shares must be fully paid-up, non-pledged, and fully compliant with SEBI's regulatory guidelines, reinforcing the promoters' long-term alignment with the company's strategic vision. The lock-in period ensures that the promoters' interests remain aligned with the company's sustained growth and the stability of its shareholder base.

Additionally, for any shares held by the promoters in excess of the minimum promoters' contribution (MPC), a 2-year lock-in applies, with 50% released after 1 year and the remaining 50% released after 2 years. This provision offers assurance to investors, ensuring that the promoters maintain substantial stakes in the company for a significant period after the IPO, fostering confidence in the company's governance and providing the company with strategic stability post-listing.

Management, Promoter & Promoter Group

Good governance starts with directors who can make tough calls without baggage.

The 'Our Management' chapter of a DRHP is more than a section to check for the Regulator as per the guidelines set under the Schedule VI Part A Clause 10 Clause F of the SEBI ICDR Regulations. Viewed from the lens of the investors, the said chapter is akin to a first handshake with the people driving the company, namely the Directors and Key Managerial Personnel (“KMP”). Our Management pulls back the curtain on leadership, offering a clear, honest look at who's steering the ship, how they're paid, and what motivates them. Done right, the Chapter knits a narrative of trust, competence, and a potential vision. Let's delve deeper into how this information should be presented and what content is to be emphasized:

I. The Heart of Trust: Independence of Directors & Transparency

First things first, the LODR Regulations require a “test of independence” to check for conflicts, to enlist a few: financial ties, family connections, or links to promoters that might sway a director's judgment. But ticking that box is not enough. The Issuer Company must lay out every director's present and past, including any skeletons in the closet (humor supplied), to build investor confidence.

To indicate an example: Picture XYZ Ltd., gearing up for an IPO. Its DRHP lists Mr. A's directorships but skips a messy detail: he once ran a company struck off by the Ministry of Corporate Affairs (“MCA”) for missing filings. Brushing such an antecedent regarding Mr. A, under the carpet could make investors speculate what else could be buried. Instead, the Issuer Company should come clean.

II. The Board's Blueprint: Composition of The Board of Directors

The Board of Directors (“BOD”) is the Issuer Company's brain trust, shaping the path and guarding the inherent values. The structure and makeup of the BOD are vital in ensuring effective governance and decision-making, as they directly influence the company's strategic direction and overall management. The DRHP must explicitly pigeon-hole directors as executive, non-executive, and independent, and needs to show who's who, what they do, and how much authority they wield, from borrowing limits to contract terms ensuring compliance with Section 149 of the Companies Act; and Regulation 17 of the LODR Regulations.

Pertinently, lay out the BOD's makeup in a tabular presentation capturing names, roles, tenures, and duties, along with links to other chapters of the given DRHP as required. In a nutshell, make it easy for investors to see the leadership's structure and strength.

III. The Pillars of Overwatch: Board Committees and Governance Framework

Board committees are the unsung heroes of governance, diving into the nitty-gritty so the full board does not have to. The DRHP should spotlight the audit, nomination and remuneration, and risk management committees, explaining who's on them, what they handle, and how they protect investors. These groups ensure the books are clean, the right leaders are picked, and risks are caught early. Use bullet points or a table to list each committee's members, roles, functions and wins, tying them to other DRHP sections for a cohesive story.

IV. People behind the plan

Who steers the company when the board isn't in session? That answer lies in this section where the operational backbone of an Issuer Company comes into the picture.

The KMP are the individuals responsible for executing the company's business strategies, ensuring compliance, managing investor expectations, and holding day-to-day decision-making authority. By the virtue of the weight of their designation, a given DRHP must present a complete picture pertaining to their KMPs which ought to be factual, structured, and current. For each KMP, the disclosure must include (this list hereinbelow is not exhaustive):

• Full name and present designation;
• Educational and professional background;
• Date and mode of appointment (including whether by board resolution or nomination committee);
• Current responsibilities and reporting structure;
• Annual compensation (broken down into salary, variable incentives, perquisites, and any non-salary components);
• Details of ESOPs or similar entitlements, including number of options granted, vesting schedule, and exercise terms;
• Shareholding in the company or its subsidiaries;
• Any family relationship with directors, promoters, or other KMPs; and
• Any disqualification or regulatory bar.

Beyond the individual details of KMPs, the leadership section must also provide a comprehensive view of the Senior Management Personnel (SMPs) to give investors a clear picture of the company's leadership depth. As per the latest amendments to the SEBI ICDR Regulations, it is no longer enough to focus solely on KMPs; SMPs play an equally critical role in ensuring operational efficiency and long-term strategic growth.

The disclosures should allow investors to assess whether the leadership team is stable, experienced, and appropriately incentivized to drive the company forward. This is not just about listing individuals, but about showcasing how the management team, collectively, is equipped to handle the company's challenges and opportunities. By including both KMPs and SMPs, the company paints a complete picture of its leadership strength and operational prowess.

Investors need to understand the experience, tenure, track record, and compensation structure for both KMPs and SMPs to gauge how well the leadership team is aligned with the company's growth and its shareholders' interests and disclosing these details will reflect how the leadership is motivated to contribute to the company's long-term value creation.

Where any of the KMPs are involved in material transactions whether with the Issuer Company or its group entities, the nature and terms of such transactions must be clearly disclosed under the related party section, and cross-referenced where appropriate in the DRHP.

Moving forward, the “Our Promoters” Chapter of a DRHP is akin to a meeting with the masterminds behind the mission of an Issuer Company, enabling potential investors to trace the origins of the company and assess the individuals or entities that continue to exercise meaningful influence. As per the guidelines etched in the Schedule VI Part A Clause 10 sub-clause G of the SEBI ICDR Regulations, this chapter discloses the identity, background, shareholding, and litigation history of the promoters, along with details of the promoter group, and any group entities.

Promoters are the individuals or entities who anchor a company's strategic vision to the roots, mobilize key resources, and guide the growth in the nascent stages of an Issuer Company. Given their central role in shaping and influencing the company, it is a no-brainer that investors have full visibility into who the promoters are, their background, and the extent of their involvement in the business.
These compliances are firstly based on the fact that whether the promoter is:

• An Individual: If the promoters of a company are individual, aside from disclosure relating to any and all current information, it is crucial that disclosures regarding their past positions (or directorship) and affiliations are made.
• A company: While individual promoters are often the public face of a company, many enterprises are also promoted by corporate entities, which play an equally critical role in the company's vision, operations, and long-term growth. For example, HDFC Bank serves as the corporate promoter for HDB Financial Services. The Regulator mandates that such corporate promoters must provide extensive disclosures detailing their own background, the identities and histories of their promoters, and declarations confirming registration with relevant stock exchanges. Critically, as emphasized by the Regulator, even if the promoter is a corporate entity, it must clearly disclose who the natural person(s) exercising control are, along with their complete details.
• Alternative Investment Fund (“AIF”)/ Foreign Venture Capital Investor: Beyond individuals and domestic companies, the Regulator also recognizes entities such as AIF and foreign venture capital investors as eligible promoters. Disclosures in such cases demand greater regulatory clarity and documentation of long-term control and contribution.

Now, what do Directors and Promoters actually earn and why does it matter? This question resonates across two key chapters of the DRHP: “Our Management” and “Our Promoters.” In IPO documentation, disclosures around remuneration are not just about numbers, they reflect the company's governance ethos. Investors scrutinize these details to assess how responsibility is compensated and whether leadership incentives are aligned with long-term shareholder value.

This section, therefore, must present a comprehensive, accurate, and well-structured account of the total compensation drawn by each Director, including Executive and Independent Directors. Disclosures must cover fixed salary, performance-linked incentives, commissions, stock-based benefits (such as ESOPs), sitting fees, perquisites, and any deferred or contingent entitlements. All forms of remuneration whether fixed, accrued, contingent, or in-kind must be clearly presented in compliance with the Companies Act and SEBI ICDR Regulations.

Where Promoters hold executive roles within the Company (such as Managing Director, Executive Chairman, or Whole-time Director), their remuneration must also be disclosed in the same granular detail, including salary, incentives, benefits, and equity-linked instruments. If a Promoter does not draw any remuneration from the Issuer Company, that fact too must be explicitly stated to avoid ambiguity and ensure full transparency.

Ultimately, remuneration disclosure is not about justifying compensation; it is about demonstrating the Issuer Company's alignment with governance principles, investor expectations, and its long-term strategic vision.

Equally important is a comprehensive disclosure of the Director's or Promoter's involvement not just within the issuer Company, but across its ecosystem. This includes shareholding, control or influence over group companies, business relationships with the issuer, or any formal or informal role beyond designated responsibilities. These disclosures serve a critical function: they help assess independence, highlight potential conflicts of interest, and provide visibility into the real decision-making architecture of the organization.

Moving further, certain “What Ifs” gain Impetus: There Are No Identifiable Promoters? Or Company Has No Promoter? We often associate IPO-bound companies with a clear promoter; someone whose name is attached to the business, who owns a substantial stake, and who calls the strategic shots. But not every company fits that mould. In fact, some of the most structurally sound and professionally governed institutions today are operating without any identifiable promoter. And when such companies go public, it shifts the way disclosure is expected and delivered.

So, what does the Regulator require in these cases? Under SEBI ICDR Regulations, if a company does not have an identifiable promoter, it must say so upfront. But that's not the end of the disclosure, it's actually the beginning of a different kind of transparency. The Issuer Company must then provide detailed information about those who hold 15% or more of the voting rights, since they are considered to hold significant influence. These are disclosed under a separate section in the DRHP, often titled “Principal Shareholders.”

To illustrate NSDL's Example: Governance without a face at the top - In its DRHP/RHP, the company explicitly states that it is a professionally managed company with no identifiable promoter. This isn't a loophole it's a reflection of its institutional nature. NSDL is backed by multiple well-known entities such as IDBI Bank, National Stock Exchange, and State Bank of India. Yet, no single entity controls the company, and none exceed the 15% threshold post-offer that would trigger a promoter designation.

This means the usual “Promoter” and “Promoter Group” disclosures such as minimum contribution, lock-in obligations, or related party transactions do not apply. Instead, NSDL has taken the route of clear and candid disclosure by naming its significant institutional shareholders and laying out the governance structure that ensures independence and oversight.

But Without a Promoter, Who's Really in Charge?

That's a fair question and one the DRHP must address and the Regulator seeks. In the absence of a named promoter, investors (and the Regulator) still want clarity on who holds influence, who can nominate directors, and how key decisions are made. That's why disclosures don't stop at shareholding they often include details of shareholders' agreements, board nomination rights, and any governance arrangements that define how power flows in the organization.

The Bigger Picture: Transparency, Not Titles; What NSDL's example shows us is that the absence of a promoter is not a red flag; it's a disclosure pivot. And when handled with clarity and thoroughness, it builds confidence rather than uncertainty. Investors are not necessarily looking for a figurehead; they're looking for visibility into who steers the ship, how power is distributed, and whether the structure is robust enough to serve shareholders' long-term interests.

Coming to the disclosure of the Promoter Group and Group Entities. It's a gateway to understanding control, influence, and possible conflicts that may shape the company's future trajectory. For investors and the Regulator alike, tracing the web of relationships tied to the promoters is an essential due diligence exercise.

Under Regulation 2(pp) of the SEBI ICDR Regulations, the term Promoter Group casts a wide net. It includes not just the promoter but also their immediate relatives and, depending on whether the promoter is an individual or a body corporate, a cascading structure of entities linked through equity holdings, family ties, or shared capital. If the promoter is a corporate entity, its subsidiaries, holding companies, and other corporates with reciprocal shareholding of 20% or more come under the spotlight. Similarly, when the promoter is an individual, the focus widens to include corporates where either the individual or their family members hold 20% or more, directly or indirectly.

Equally significant is the concept of Group Entities: those companies with common control, ownership, or management with the issuer, whether past or present, or having business interests that intersect with the issuer in material ways. While Promoter Group disclosures explain who holds the power, Group Entities help clarify how that power may have been or could be exercised across a business ecosystem. Whether it's shared board members, intra-group transactions, or strategic alliances, these disclosures are vital for identifying possible areas of conflict, dependency, or hidden leverage.

In summation, these chapters combined unlock a world where transparency is a strategic advantage. In a disclosure regime, titles matter less than transparency. Whether a company is founder-led or professionally governed, what truly counts is how well it tells its story, how clearly it defines its ownership, and how transparently it outlines its decision-making architecture. That's the real foundation of investor trust.

Key Industry Regulations and Policies

In the journey from private ownership to public listing, every Issuer Company operates within a defined legal habitat, where the interplay of regulations, statutes, and compliance standards shapes the very contours of their operations. The “Key Industry Regulations and Policies” chapter of the DRHP is the map that outlines the terrain in which an Issuer Company moves, competes, and innovates. This chapter serves a cogent purpose: the Issuer Company reveals the specific legal and regulatory frameworks established for its industry/core area of business as these laws and regulations are inherently tied to the nature of the company's operations, encompassing all necessary certifications, industry-specific policies, and compliance obligations. The chapter must be tailored to the Issuer Company's industry.

For a company in healthcare or pharmaceuticals, this section might involve detailing compliance with drug safety regulations, clinical trial requirements, or FDA approvals. For technology companies, it might focus on data protection regulations, including GDPR or local data sovereignty laws. These laws don't exist in a vacuum, they dictate how the Issuer Company's products are developed, marketed, and distributed. The more industry-specific details you can offer, the better. Manufacturing companies may be heavily impacted by environmental controls, requiring detailed certifications and investments in sustainable practices. An automobile manufacturer may be subject to stringent emissions standards that influence its design and manufacturing processes. Companies in food processing must meet FSSAI standards and demonstrate how they ensure the safety of the food products they bring to the market. The regulatory environment is rarely static as laws evolve, new policies emerge, and global standards shift. A DRHP should acknowledge this fluidity.

In every case, the narrative must connect the dots between regulation and business model, showcasing not only compliance but how these regulations influence strategic decisions and growth initiatives.

To indicate an example: “The Factories Act defines a 'factory' to cover any premises which employs 10 or more workers and in which manufacturing process is carried on with the aid of power and any premises where there are at least 20 workers, where a manufacturing process is being carried on without the aid of power. State Governments have the authority to formulate rules in respect of matters such as prior submission of plans and their approval for the establishment of factories and registration and licensing of factories. The Factories Act provides that the person who has ultimate control over the affairs of the factory and in the case of a company, any one of the directors, must ensure the health, safety, and welfare of all workers. It provides such safeguards of workers in the factories as well as offers protection to the exploited workers and improve their working conditions. The penalties for contravention of the Factories Act include fine and imprisonment for the 'occupier' or 'manager' as defined under the Factories Act, and enhanced penalties for repeat offences and contravention of certain provisions relating to use of the hazardous materials.”

Government and other approvals

Where the above chapter defines what is applicable, the “Government and Other Approvals” chapter as defined in Schedule VI Part A Clause 10 sub clause C describes whether compliance for obtaining that specific license or approval has been followed as per the required law. It is the documentary evidence of the issuer's lawful entitlement to operate across factories, warehouses, offices, and digital platforms.

It functions as a compliance snapshot: not just of what the company ought to have, but what it actually holds, complete with issuing authorities, expiry timelines, renewal obligations, and pending applications. Whether it is pollution clearances, fire safety certificates, factory licences, or UDYAM registrations, every entry should reflect a conscious mapping between business functions and the approvals enabling them. These approvals bifurcated into few main sections pertaining the approvals for issue, approvals for incorporation of the company, licences or approvals obtained by the company, approvals applied for but not yet received and copyrights and trademarks held by the company.

A typical mistake in this section is vague language like “all material approvals are in place” or “we are in the process of obtaining necessary approvals” without specifying which approvals are pending or contingent upon certain conditions. For instance, stating “the company has all necessary environmental permits” without listing which permits, who issued them, and when they were obtained is not sufficient for SEBI's scrutiny. The Regulator often calls attention to incomplete disclosures in this chapter, particularly if important approvals are either not mentioned or vaguely described. Incomplete lists of licenses can lead to regulatory delays and additional compliance requests. It's critical for the company to be thorough and transparent in listing all its approvals.

Drafters must be specific and detailed in listing approvals. It's not enough to state “all approvals are in place”; each approval should be listed, along with the issuing authority, the date of issuance, and any renewal or compliance requirements. If an approval is pending, the estimated time for issuance and any conditions should be clearly disclosed.

Other Regulatory and Statutory Disclosures

Ah, the “Other Regulatory and Statutory Disclosures” chapter, a space that can be as dry as a desert, but it is valuable than it initially appears. The disclosure requirements as per Schedule VI Part A Clause 14 of the ICDR Regulations must be adhered to by a practitioner for a smooth, well-drafted disclosure.

I. Authority for the Offer: Don't Leave a Grey Area

Get the facts straight here, and by facts, we mean dates, resolutions, and the correct order of authority. Every corporate action leading to the offer needs to be backed by resolutions passed by the board and shareholders. There should be no ambiguity. This chapter tells the Regulator, the investors, and everyone else that the Issuer Company has followed the proper procedures. Mention the relevant dates for board meetings and shareholder approvals in a neat, concise table, without losing clarity. An Issuer Company must provide detailed resolution dates and corporate actions, specifying the “who, what, when” with absolute accuracy.

To indicate an Example: “Our Offer for Sale was approved in board meetings on July 4, 2024, and November 12, 2024, with shareholder approval on November 14, 2024.” Simple, precise, and everything in order.

II. Prohibition by SEBI, RBI, or other Governmental Authorities

An Issuer Company ought to state upfront whether there are any prohibitions on accessing capital markets by SEBI, RBI, or other authorities. Clarity on this is key for investors, as it assures them that the company and its promoters are clean and free from any regulatory red flags. If no such restrictions exist, say it loud and clear. It shall be a futile exercise to skip or ignore mentioning even the slightest detail. One time, a company forgot to mention a minor pending investigation, and it nearly derailed the whole IPO. Trust the mantra, be transparent.

To indicate an Example: “Our Promoters, Directors, and Selling Shareholders are not prohibited from accessing capital markets by SEBI, RBI, or any other regulatory authority.”

III. Directors Associated with the Securities Market

Always make sure to disclose whether any director has been involved in the securities market. This Chapter shall speak for itself to the Regulator that Issuer Company has succinctly done their homework and is upfront about any past issues or ongoing investigations. If there's nothing to disclose, don't be afraid to say so, for silence here doesn't necessarily mean a problem. By no means should an Issuer Company fail to mention directors with any pending regulatory investigations or actions. If this comes up later, it's going to be a problem. Do not claim casually “None of our Directors are involved with the securities market” without proper due diligence. Better safe than sorry works wonders, always.

To indicate an Example: “None of our Directors have been associated with the securities market, and there have been no actions initiated by SEBI against them in the past five years.”

IV. Compliance with Companies (Significant Beneficial Owners) Rules, 2018

Ensuring compliance with the Companies (Significant Beneficial Owners) Rules, 2018 is non-negotiable, yet it is an appalling fact that how many Issuer Companies forget this critical step. When there's a shift in shareholding, this needs to be spelled out clearly. Tossing it in as a side note would surely attract regulatory scrutiny. Treat it like a golden ticket. The Regulator is not here for vague fluff, they expect the cold, hard facts. So, make sure that the statement captured here in this Chapter is as sharp as a tack.

V. Eligibility for the offer – The Golden Rule: Know your numbers

To be plain, this is a mathematical section, and the numbers must be absolutely spot on. The Issuer Company must meet the net tangible asset requirement, operating profit, net worth, and confirm compliance with SEBI's eligibility criteria. Ensure the numbers are clear, and the source documents are available for an easy verification. Try not to round off numbers when they should be precise. If you say you have net tangible assets of ₹30 million, back it up with exact figures for each year, including the breakdown. If anything seems questionable, go back to your financial team before drafting this!

To indicate an Example: “Our company has net tangible assets of ₹10,122.88 million, which are at least 50% held in monetary assets, ensuring compliance with SEBI ICDR Regulations.”

While the chapters on Key Industry Regulations, Government Approvals, and Other Approvals and Regulations might seem secondary to the core business narrative of a DRHP, they are indispensable to the credibility and completeness of the document. These sections offer investors a clear view of the company's compliance standing and regulatory readiness. Properly drafted according to the industrial standards set, they signal the company's operational maturity and its alignment with legal requirements.

Outstanding Litigation

Litigation is often seen as the inevitable storm cloud that follows a company wherever it goes. But how heavy is that cloud, and should investors prepare for rain?

In the metaverse of capital markets, a company's legal disputes aren't just about courtroom drama; they're about determining the potential risks that investors are walking into. When an IPO is on the horizon, every piece of litigation that casts a shadow over the Issuer Company must be brought to light, but with finesse. As per disclosure requirements set in Schedule VI Part A Clause 12 sub clause A for Outstanding litigation and material developments serve as a window through which investors peer to gauge a company's resilience and potential risks.

I. Understanding Materiality

When it comes to outstanding litigation, Regulators are clear on what needs to be disclosed: any case that could materially affect the company's operations or reputation. Materiality, often termed as the 'Risk Threshold', is the keystone for determining which events, including litigation, need to be disclosed in a DRHP. While both the ICDR Regulations and Regulation 30 of the LODR Regulations govern these disclosures together, they focus on different stages of a company's lifecycle pre-IPO and post-IPO ensuring that investors are always in the loop.

Under the Regulation 30(4) of LODR Regulations, an Issuer Company must disclose any litigation that meets specific materiality thresholds as set by their respective materiality policy by BOD in determining what constitutes a material event or information based on its potential impact on the company's operations or reputation. Materiality is judged by several criteria:

• 2% of turnover, based on the latest annual restated consolidated financial statements.
• 2% of net worth, based on the same financial statements, except in cases where the net worth is negative.
• 5% of the average profit or loss after tax, based on the last three annual restated consolidated financial statements.

If a litigation exceeds any of these thresholds, it must be disclosed in the DRHP.

But here's where it gets more nuanced: Regulator doesn't just want numbers. They want to understand if a litigation is likely to affect a company's business, its financial position, or its market reputation. For example, while a tax case might not exceed the materiality threshold, if the outcome could cause a company to lose significant business or face major reputational damage, it's still something that needs to be laid bare. The real skill lies in recognizing the broader implications of a case. The challenge is not just in calculating amounts, but in understanding how an unresolved case could ripple through a company's future. In cases where the monetary impact is uncertain, it's the potential for adverse effects on business operations that triggers the disclosure requirement.

II. Types of Litigation and Proceedings to Disclose

In the world of litigation disclosure, it's essential to identify and categorize the types of proceedings that must be included. The Regulator mandates that the following proceedings involving the company, its directors, promoters, subsidiaries and group companies must be disclosed with status and latest update:

• Criminal Proceedings: Any criminal litigation that involves the company, its directors, or promoters must be disclosed. Even cases where First Information Reports (FIRs) are filed but no cognizance has been taken by the court should be disclosed if they pose a reputational risk or potential operational impact.
• Tax Proceedings: This includes both direct tax (e.g., income tax, GST, etc.) and indirect tax (e.g., excise, service tax, VAT). Litigation related to tax claims or disputes with tax authorities (such as show-cause notices or appeals against tax assessments) must be disclosed if the amount involved crosses the materiality threshold.
• Regulatory or Statutory Proceedings: This includes any action by regulatory authorities (like SEBI, RBI, or any stock exchange) that could potentially impact the company's compliance status or operations. If the company is under investigation or facing any penalty or compliance issue, these must be disclosed.
• Disciplinary Actions: Any penalty imposed by SEBI or stock exchanges within the last five financial years must be disclosed, including outstanding actions.
• Civil and Other Material Litigations: Any civil litigation, including breach of contract cases or material civil suits, involving a claim above the materiality threshold (including the total amount involved) must be disclosed. Civil matters may also include legal disputes over corporate governance or employee-related matters.
• Claims Related to Direct and Indirect Taxes: Tax disputes, whether for direct taxes like income tax or indirect taxes like GST, VAT, etc., must be disclosed with the number of cases and total claim amounts. This also includes any contingent liabilities related to taxes that could become significant based on the outcome of litigation.
• Disputes Involving Subsidiaries and Group Entities: Litigation involving subsidiaries or group entities that could materially affect the issuer company; whether through financial liabilities, operational disruptions, or reputational damage-must be disclosed. Even if the dispute is not directly with the issuer company, it's crucial to highlight any risks or contingent liabilities that could impact the overall group. This ensures investors are fully informed about any cross-entity risks that may influence the parent company's financial stability and market standing.

III. The Due Diligence Process: Validating the Information

Before drafting this section, a thorough due diligence process is essential. Legal teams must verify all the disclosed information by cross-referencing case details with courts, tribunals, and regulatory authorities. Additionally, companies may leverage credible third-party sources that specialize in tracking pending legal matters to ensure comprehensive accuracy. These third-party reports provide valuable insight into any ongoing proceedings involving the company, its promoters, directors, KMPS and SMPs. By incorporating such reports, companies ensure transparency and avoid missing any critical disclosures. The process also includes gathering supporting documentation from internal personnel and external legal advisors to substantiate each litigation disclosure.

IV. Presenting the Information

To ensure that investors can easily digest the disclosed information, it is essential to present the details in a structured tabular format. This visual representation not only improves readability but also makes it easier for investors to quickly identify material risks. The tabular format provides investors with clear, concise, and easily accessible information on ongoing legal matters. It ensures that each material litigation is presented with key details such as the parties involved, the amount at stake, and the current status. In addition to the tabular presentation of individual litigation cases, SEBI guidelines require that certain information be made available on the company's website, with a link to the list of specific creditors and the amounts owed. This includes creditors that are material as per the company's materiality policy those whose outstanding dues exceed 10% of the company's total trade payables.

Finally, it is important to close the Outstanding Litigation chapter with positive affirmations about the company's legal standing. For instance:

• A statement confirming that there are no ongoing criminal proceedings or regulatory actions against the company.
• A confirmation that there are no fraudulent borrowing or economic offences involving the company, its promoters, or directors.
• A statement that no inspections or inquiries under financial sector regulations remain undisclosed.

The Regulator also insists that the company disclose whether the outcome of pending litigation could jeopardize its survival. If there is no such risk, a clear negative statement should be included, assuring investors that no single litigation could potentially impact the company's viability. These affirmations help reassure investors that the company is in good standing and is compliant with all regulatory requirements.

Conclusion

As the echoes of Volume III's revelations settle into silence, let's linger a moment on the profound truth at its core: while the law provides the steadfast scaffolding, outlining the rhythms of capital's evolution, leadership's guardianship, regulatory terrains, and litigation's vigilant disclosures; the soul of a DRHP lies in its customization. Each chapter, though anchored in ICDR Regulation's precise mandates, truly comes alive when infused with the issuer's unique operations, the distinctive contours of its industry, and the bespoke narrative that emerges from their intersection whether it's a tech firm's data sovereignty battles or a manufacturer's environmental safeguards shaping strategic horizons.

This is where the craft turns visionary: seize these insights to sculpt not just compliant prose, but resonant stories that mirror the company's real-world pulse, drawing investors into a world of unassailable trust and shared ambition. From ownership's intricate dance to governance's unwavering watch, let every line echo the issuer's essence, proving that transparency isn't merely an obligation rather the alchemy that forges enduring market triumphs.

Practitioner's Takeaways

Capital Structure

• Clarity Is King: Remember, this chapter is not about speculating future needs, but about documenting facts and shareholder approvals with surgical precision. Ensure you break down the pre and post-issue requisite information with absolute clarity. Don't wander into vague territory or add optimistic fluff.
• Tell the Capital Evolution Story: Document the rationale behind any increases or decreases. Do not perceive it as a ledger of corporate actions, therefore, draft it as a chronicle of the Issuer Company's capital growth that needs to speak volumes about the strategic foresight. Don't forget: each entry should serve as a signpost of the company's growth journey.
• Ownership Unveiled: Whether the shares are acquired through private placements, subscriptions, or other mechanisms, make sure the Promoter's Contribution walks the talk. And don't forget to affirm that all shares are fully paid-up and non-pledged. Clarity here means investors will sleep easy.
• The Lock-In Logic: The Lock-In Period is a vital signal of long-term commitment. Whether it's a 3-year lock-in for the 20% contribution or a 2-year lock-in for excess promoter shares, always make sure these periods are meticulously defined. Don't leave any room for confusion about lock-in releases.
• Fostering Trust with Transparency: Ultimately, the Chapter captures the story of an Issuer Company's equity journey. Don't just fill in numbers; tell the story of trust, transparency, and strategic intent. Whether it's authorized, issued, or paid-up capital, the message must be clear: the company is compliant, its ownership structure is evolving, and investors are entering a stable, governed entity with a clear vision for the future.

Management & Promoter & Promoter Group

• Board Blueprint Clarity: Categorize directors explicitly in tables with roles, tenures, and powers.
• KMP Operational Backbone: Present factual profiles via exhaustive lists; names, backgrounds, appointments, responsibilities, pay breakdowns, ESOPs, shareholdings, relationships, disqualifications. Quantify incentives and track records; cross-ref material RPTs to flag alignments.
• SMP Leadership Depth: Per latest ICDR amendments, treat SMPs on par with KMPs by disclosing experience, tenure, and motivations for stability. Showcase collective strength: not just listings, but how the team tackles challenges, painting a full prowess picture.
• Promoter Masterminds: Disclose identities, backgrounds, shareholdings, litigations, and group entities for types.
• Remuneration Governance Ethos: Granularly account for salaries, incentives, perks, and stock benefits for directors/promoters; state if none drawn.
• Conflict Visibility Tools: Highlight equity holdings, group controls, and roles beyond designations by flagging family ties or informal influences. In flawless drafts, these evaluate independence and preempt issues, turning potential red flags into transparent strengths.
• No-Promoter Pivots: For unpromoted companies, disclose ≥15% voters and governance structures upfront: detail agreements, nominations, and power flows.
• Strategic Transparency Narrative: Knit the chapter as a handshake of trust! Reveal strengths, weaknesses, and visions without fluff.

Regulatory and Compliance Framework

• Tailor the Legal Landscape: An issuer company must begin by stating the relevant industry-specific laws and regulations that govern its operations. Each applicable law must be clearly outlined based on the company's business activities and operations. This isn't a general overview, it's about pinpointing exactly what applies to the issuer company.
• Be Exhaustive with Licenses, Approvals, and No Objection Certificates (NOCs): A comprehensive disclosure of the licenses, approvals, NOCs, and other related authorizations is mandatory. Ensure that no approval is left unmentioned. This includes not just the standard business operation licenses but also sector-specific approvals that may seem secondary but are just as critical, be it pollution control, fire safety, or FSSAI certifications.
• Eligibility and Compliance with the Rules: Clearly state that the issuer meets all eligibility criteria laid down by SEBI, relevant stock exchanges, and other regulatory bodies. This includes the company's net worth, operating profit, and other thresholds for market access. Highlight the exact figures and link them to the documentation that substantiates these claims. These numbers must be verifiable and aligned with industry requirements to avoid red flags.

Outstanding Litigation

• Materiality as Keystone: Don't stop at numerical thresholds like 2% of turnover or net worth as set by Policy and applicable law; assess qualitative ripples on operations, reputation, or survival.
• Categorize with Precision: Break down into criminal, tax, regulatory, disciplinary, civil, and group/subsidiary disputes include status updates and latest developments. Always flag FIRs or show-cause notices, even pre-cognizance, for reputational risks.
• Due Diligence Rigor: Cross-verify with courts, tribunals, and third-party trackers; gather advisor documents early.
• Tabular Mastery: Present in structured tables: parties, amounts, status, potential impacts enhance with website links for material creditors (exceeding 10% payables). Visual clarity turns dense data into digestible insights.
• Affirmations for Assurance: End strong with clear negatives of no ongoing criminals, no frauds, no survival threats.