The DRHP Rulebook: Volume V

In the complex narrative of an IPO, the Objects of the Offer chapter is the very strategic playbook, transforming capital into tangible, strategic goals. This chapter goes beyond a mere listing of fund allocations for the reason that it curates a measurable roadmap that reassures investors that every rupee raised has a purpose, a timeline, and a direct alignment to the company's long-term vision. Anchored by Securities and Exchange Board of India ('the Regulator') regulations, it pushes for surgical clarity, urging an issuer company to detail fund utilization with quantifiable objectives, whether for capital expenditure, working capital, or debt repayment.

Parallel to this, the Basis for Issue Price chapter sets the stage for the IPO's asking price, marrying quantitative rigor with qualitative insight. This chapter is where raw financial data, such as EPS, P/E ratio, and revenue growth, shake hands with market position, scalability, and innovation, forming a compelling case for the price. Rightfully taken for an intricate narrative that insists on substance over superlative adjectives. By carefully disclosing financial metrics and justifications, along with a candid peer comparison, this chapter ensures that the offer price is not arbitrary but rooted in solid data, aligning expectations with achievable goals.

Together, these chapters are not merely procedural steps but critical foundations for investor confidence. They turn abstract financial ambition into clear, actionable strategy, ensuring transparency at every level. For it is a folklore that when it comes to a DRHP, clarity, evidence, and strategic vision do the talking.

Object of the Offer

Turning Proceeds into a Promise

In the theatre of an IPO, if the “Basis for Issue Price” sets the ticket cost, the Objects of the Offer tells the audience why the show is worth attending. It is here that an issuer unveils the blueprint for the funds to be raised, translating abstract capital into concrete plans. Far from a ceremonial section, this chapter stands as the intent in motion: a regulatory and strategic checkpoint that assures investors that every rupee has a destination, a timeline, and a measurable purpose.

Anchored in Clause 9(A), Part-A, Schedule VI of the SEBI (Issue of Capital Disclosure Requirements) Regulations, 2018 ('ICDR Regulations') and governed by guardrails like Regulation 7(2) (capping General Corporate Purposes at 25% for Mainboard issues), this chapter is where transparency meets execution. For the Regulator, it is the litmus test of whether the issuer's ambitions are matched by clarity, feasibility, and compliance.

I. Where the money goes and why that matters

The core of this chapter is essentially about clarity of fund utilization. The breakdown of specific objectives to which the proceeds raised through the IPO will be applied must be clear to investors, in simple yet understandable terms. It is important that the company does not just list uses for which funds are intended but gives specifics that will enable an investor relate how each allocation will drive the company's long-term vision. The primary obligation here is surgical clarity:

• Spell out each object in plain terms: debt repayment, capacity expansion, acquisitions, working capital, technology upgrades, land or asset purchases, strategic investments, or project financing.
• Attach numbers to the narrative: for each object, quantify the allocation, explain the cost estimates, and show the source of these figures.
• Connect the spend to the strategy: describe how each allocation will move the company toward its medium- and long-term goals.

Whether for Capital Expenditure (CapEx), working capital or loan payment, the breakdown must be specific, quantified and strategically linked to the company's long-term vision. In practice, these are three major categories that typically define the objects of the offer:

• CapEx: This is often the largest portion of an IPO's funding allocation, directed towards the acquisition or enhancement of physical assets, such as property, technology, or equipment, which are essential for scaling operations. For CapEx purposes, the company must perform thorough vendor due diligence. This means acquiring quotations from vendors, verifying their financial credibility, and ensuring that they can deliver the products and services as promised. It's also crucial to ensure transparency in all dealings. For example, if an IPO's objective is to procure machinery, the company should verify that the vendor is duly registered, has a solid track record, and can meet delivery timelines and technical specifications.
• Working Capital: Funds allocated to working capital should reflect an actual need that the company aims to fill, be it for inventory management, or day-to-day operations. It is important to show that there is a real gap in operational funds that will be addressed by the IPO proceeds. For instance, if the company's order book is expanding, but it lacks the liquidity to service those orders, the working capital allocation becomes critical. In this case, clear and transparent disclosures should reflect how much of the working capital is needed to bridge this gap, and how the funds will directly support the business's growth trajectory.
• Loan Repayment: When proceeds are used for loan repayment, it is essential to provide specific details of the loans being repaid, including the loan amounts, terms, and conditions. A CA certificate must accompany the financial statements to confirm that the funds are indeed being used for their intended purpose. This certificate serves as a guarantee that the loan repayment aligns with the company's debt strategy, ensuring that no funds are diverted to unrelated uses.

The key is to link each allocation to the company's medium- and long-term goals, ensuring investors understand how each piece of the puzzle fits into the broader strategic picture. Every element of the chapter must be supported by a clear explanation. This might consist of presenting explicit deadlines, expected results, and financial statistics for each of the specified objectives.

To illustrate an example,

ABC Ltd. plans to raise ₹500 crore through its IPO. The breakdown might look like this:

• ₹200 crore for expanding its production facility in Gujarat, increasing output by 40% by Q3 FY26.
• ₹100 crore to reduce outstanding short-term debt, improving liquidity.
• ₹150 crore for working capital to support an increased order book, especially from export clients.
• ₹50 crore for strategic acquisitions of smaller competitors in Tier-2 cities.

Each of these goals is supported by clear cost estimates, timelines, and rationales, with further breakdowns showing how each will contribute to the company's overall growth strategy

II. Transparency and Justifications

Transparency is the cornerstone of investor confidence. Issuers must provide clear, quantified disclosures on how the funds will be utilized. As per ICDR Regulations, an independent monitoring company will be appointed to make sure the funds are used in accordance with the stated goals if an IPO's earnings surpass ₹100 crores. According to Regulation 41(2) of the ICDR Regulations, the monitoring agency will provide reports every three months till the complete amount is used.

For every objective, the issuer should break down the financial requirements and the expected benefits which can from be its increased production capacity, improved operational efficiency, or market expansion. It is also critical to identify any external dependencies that may have an impact on the project's execution, such as governmental approvals or supplier agreements. Furthermore, cost projections must be detailed and fair so that investors may grasp the project's feasibility. This transparency allows investors to align their expectations with the company's objectives and assess whether those goals are realistic and achievable.

Issuer Companies is obligated to ensure that the data presented is current, with financial information not more than six months old, this is done to maintain the relevance and accuracy of the disclosures.

To indicate an Example: Suppose “XYZ Ltd” is planning to go for an IPO and discovers that some existing shareholders wish to curtail their stake, they are permitted to sell their shares. The said shareholders selling their stake ought to bear the issue expenses in proportion to their shares sold. This would succinctly ensure that the Issuer Company is not subjected to the costs of current shareholders selling their shares.

Basis for Issue Price

When it comes to an IPO, determining the issue price is far more than just choosing a figure. For the sake of brevity, it can best be defined as a regulatory process, a market positioning exercise, and a trust-building tool that conveys to investors how the issuer's valuation was derived. The Basis for Issue Price chapter puts forth as to how the asking price was cemented drawing from both quantitative data (like Earnings Per Share or P/E ratios) and qualitative factors (like market position and growth potential).

The guidelines for this chapter are defined under Clause 9(k), Part-A, Schedule VI of ICDR Regulations, with clear mandates to show how the price fits the company's financials, market peers, and growth potential. This chapter should lay out the metrics and benchmarks used to set the price, giving investor's confidence that the price isn't arbitrary, but grounded in real data.

III. Quantitative Factors: The Date behind the Price

Quantitative elements are to be considered first while determining the basis of issue price. The Regulator calls for measurable, verifiable data to justify the asking price. Key quantitative factors such as Earnings Per Share (EPS), Price-to-Earnings (P/E) Ratio, Return on Net Worth (RoNW), and Net Asset Value (NAV) are critical in justifying the offering price. Additionally, other financial metrics such as Revenue from Operations, EBITDA, and Operating Cash Flow play a crucial role. Revenue Growth Rate indicates the company's ability to expand its business year over year, while EBITDA Growth Rate provides an understanding of how well the company's operational profits are increasing. Operating Cash Flow gives investors a glimpse into how efficiently the company generates cash from day-to-day operations.

These figures are not just numbers; they tell a story of the company's trajectory, its ability to scale, and how its business operations are being managed. Here is a detailed look at key quantitative metrics and their significance:

• EPS and Diluted EPS: These metrics reflect the company's profitability per share. It can be derived by dividing the net income by the total number of outstanding shares. Issuers ought to disclose EPS for the last three years, accounting for any capital changes such as bonus issuance or stock splits.
• P/E Ratio: This ratio is one of the most important metrics used in price determination. It compares the company's price to its earnings and should be compared to the industry average to show how the company stacks up against its peers.
• RoNW: This metric helps investors assess how successfully a company generates income from its equity. A high RoNW shows that the company is capital efficient and profitable.
• NAV: NAV is the difference between the company's total assets and total liabilities. The NAV per share is important as it reflects the company's underlying asset value. Investors can assess the relationship between the issue price and the company's true asset value by comparing pre- and post-issue NAV. To determine NAV per share, divide NAV by the company's total outstanding shares.

It is essential that such calculations are properly explained, demonstrating how each aspect contributes to the price-setting process. This extensive disclosure ensures that investors understand how the price was decided and what evidence supports it. The regulations also mandate the disclosure of the formulas used to calculate certain financial ratios. The applicable law also provides for the illustrative format of disclosure of these metrics. These figures should be derived from the restated financial statements and must be certified by statutory auditors to ensure accuracy.

Along with these calculations of different financial ratios, a comparative analysis with peer companies in the same industry is necessary and it is to be disclosed that on what basis the benchmarking with other companies is done. For extracting the financial information of peer companies, the issuer company shall rely upon the regulatory filings of the peer companies. This benchmarking helps investors understand the Issuer Company's valuation relative to its competitors and offers a sense of where the company stands in the market. It is also critical to make sure that peer comparisons are legitimate. If a company is in the IT services industry, it should not compare itself to businesses in completely unrelated industries, such as hotel operations. Clearly expressing the basis for selecting peers, the comparison parameters, and the number of years the mentioned peers have been in business contributes to the analysis's credibility.

The Key Financial and Operational Performance Indicators ('KPIs') are also factored in determining the issue price for the offer. KPIs are defined measurements used to assess a company's long-term performance. KPIs must be set according to industry-specific parameters to ensure that the comparisons made with peer companies are meaningful. A two-picture comparison between the issuer and its competitors can only be made if the KPIs are comparable in terms of industry standards.

While most attention tends to focus on financial KPIs like revenue and profit margins, it's equally important to spotlight operational KPIs, which provide a deeper insight into how the business operates and its sustainability in the long term. Disclosing both financial and operational KPIs paints a more comprehensive picture for investors, showcasing not just profitability, but also efficiency, market positioning, and growth drivers. Financial KPIs are typically the most common, such as revenue growth, EBITDA, net profit margins, and earnings per share. However, the operational KPIs such as market share, customer retention rates, production capacity, and efficiency metrics are equally critical for a complete view of the company's health.

For instance, if we are dealing with a manufacturing company, KPIs like production capacity or cost per unit produced will reflect the operational performance far better than metrics that might apply to a software company. Similarly, financial metrics such as revenue per unit or operating profit margins need to be compared with companies in the same field, to ensure the numbers are comparable. Peer comparison, thus, is vital for providing context to KPIs, particularly when they are tied to the basis for issue price.

Furthermore, the Issuer Company and Lead Merchant Banker (LM) must disclose the price per share of each Primary/New Issue of shares made within the 18 months before the filing date of the DRHP if such issuance equals or exceeds 5% of the fully diluted paid-up share capital. Along with this, price per share of any secondary sale/acquisition/offer for sale in an IPO during the 18 months preceding the filing date of the DRHP that equals or exceeds 5% of the fully diluted paid-up share capital must be disclosed.

IV. Qualitative Factors: Going beyond the numbers

While quantitative factors anchor the price, qualitative aspects also play a critical role in determining the issue price. These include market leadership, competitive edge, scalability, innovation, and operational efficiency play an equally important role in determining the offer price. These are critical considerations in determining the offer price, but simply saying them is insufficient. To back up these claims, data is required.

Investors seek hard facts to support any qualitative statements. For example, if a firm claims market leadership, it should back it up with genuine data points like market share, R&D investments, or customer retention rates. These figures support the company's claims that its qualitative strengths influence valuation and pricing.

Additionally, factors such as scalability, market growth prospects, and management team efficiency must be supported by credible evidence. This data-driven strategy boosts investor confidence while also ensuring compliance with SEBI's transparency regulations.

If a corporation claims to have a strong competitive edge, it must provide particular metrics, such as revenue growth, market share, and client loyalty. This allows investors to better comprehend the company's situation and how these elements support the offer price.

To indicate an example:

Avoid: “Our strong market projections and new products support our offer price for the issue.”
Prefer: “Our offer price is supported by metrics such as our customer retention rates, projected growth model (as disclosed in Page no. [•] of Business Overview Chapter of the Draft Red Herring Prospectus), and market share, in addition to our financial performance over the last three years.”

V. Avoiding unnecessary usage of adjectives

One of the most significant aspects to remember while drafting the chapter is to make the language accurate, factual, and free of misleading terminology. Adjectives such as 'exceptional', 'strong', or 'fast-growing' can undermine the chapter's credibility, making it appear more like marketing copy than a genuine basis for the offer price.

Rather than relying on ambiguous phrases like 'high operational efficiency', the Issuer Company should provide specific data to support their assertions. Instead of asserting that it is 'highly efficient', the business may offer quantifiable information like project completion rates, turnaround times, and production costs per unit.

The Curtain Call

As the curtain gently falls on The DRHP Rulebook, it does not mark the close of a mere technical exercise, but rather the final stroke of a meticulously painted canvas, where every brushstroke brings to life the heterogenous shades of a homogeneous document i.e., a DRHP.

A series that has charted the complex, ever-shifting terrain of capital markets with a singular focus: precision, transparency, and clarity in drafting a DRHP. Undoubtedly, the landscape of capital markets is vast, constantly shifting like the tides, yet the fundamental pillars of trust, accuracy, and disclosure remain steadfast, unwavering as the North Star. From the outset, the raison d'être of the Rulebook was simple: to provide a comprehensive practitioner's note in the nature of a guide that supports a practitioner, who is yet to put the first brick in the wall of a DRHP.

Throughout the five volumes of The DRHP Rulebook, the series undertook an exploration of the foundational chapters namely, Risk Factors, Industry Overview, Our Business, Capital Structure, Our Management, Our Promoter & Our Promoter Group, Key Industry Regulations & Policies, Government & Other Approvals, Other Regulatory & Statutory Disclosures, Outstanding Litigation, General Information, History & Corporate Structure, Objects of the Offer, Basis for Issue Price; each with a focus on regulatory requirements and their practical implications. Each chapter built upon the next, offering guidance on how to maintain precision and clarity at every stage.

The present volume, like the ones before it, represents more than just a guidebook. It serves as an open invitation to practitioners in the field, seasoned or new, to engage with a process that defines the public offering landscape in India. In a world that often prizes speed over accuracy, the sole focus of the series has been concentric around the value of methodical, thoughtful preparation.

In the final flow of words, if there was a final “Practitioners' Takeaway”, it would read as follows: Swap flashy adjectives for plain disclosures, trade empty boasts for piercing clarity, and strip away hollow pomp for unyielding substance. When investors read the fine print, one truth blazes bright: disclosures dominate descriptions as they unravel every atom of existence, woven so intricately that the regulator find no thread to pull, no speck to fault.