TOP 10 MISTAKES
COMPANIES MAKE BEFORE FILING A DRHP: LESSONS FOR A SUCCESSFUL IPO JOURNEY
By CS Ravi Garg, Company Secretary
An Initial Public Offering (IPO) is one of the most significant
milestones in a company's lifecycle. It not only provides access to capital but
also transforms a privately held business into a publicly accountable
enterprise. However, the journey towards listing begins much before the filing
of the Draft Red Herring Prospectus (DRHP).
In practice, many companies receive observations from the Securities
and Exchange Board of India (SEBI) due to gaps in governance, disclosures,
documentation, or compliance. These issues often delay the IPO process,
increase costs, and impact investor confidence.
This article highlights ten common mistakes companies should avoid
before filing their DRHP.
Here are the Top 10 mistakes every company should avoid before filing its DRHP:
🏛️ Weak Corporate Governance
📚 Poor Statutory Records
⚠️ Inadequate Material Disclosures
🤝 Related Party Transaction Issues
📊 Weak Internal Financial Controls
💰 Capital Structure Irregularities
📄 Inaccurate Risk Factor Disclosures
📁 Incomplete Due Diligence Documentation
👥 Promoter & Group Entity Disclosure Gaps
⏳ Delayed IPO Planning
1. Weak Corporate Governance 🏛️
Corporate governance is one of the first aspects evaluated during IPO
due diligence. Companies often postpone strengthening their governance
framework until the IPO process begins, which can lead to avoidable challenges.
Common gaps include:- Improper Board
composition
- Delay in appointing
Independent Directors
- Non-functional
Board Committees
Relevant Provisions:- Companies Act, 2013
(Sections 149, 177 & 178)
- SEBI (LODR)
Regulations, 2015
2. Poor Maintenance of Statutory
Records 📚
Accurate statutory records demonstrate a company's compliance culture.
Missing registers, unsigned minutes, or incomplete filings often become red
flags during legal and secretarial due diligence.
Common issues include:- Incomplete
statutory registers
- Missing Board and
Shareholders' approvals
- Non-compliance with
Secretarial Standards
Relevant Provisions:- Secretarial
Standards SS-1 & SS-2 issued by ICSI
3. Inadequate Material Disclosures
⚠️
The DRHP must provide complete, accurate, and transparent disclosures.
Failure to disclose material litigation, regulatory proceedings, contingent
liabilities, or significant contracts may attract SEBI observations.
Common omissions include:
Relevant Provisions:- SEBI (ICDR)
Regulations, 2018
- Schedule VI –
Disclosure Requirements
4. Related Party Transactions Not
at Arm's Length 🤝
Related Party Transactions (RPTs) receive close regulatory scrutiny.
Companies should ensure that all RPTs are appropriately approved, documented,
and conducted on an arm's length basis.
Common concerns include:Relevant Provisions:- Section 188 of the
Companies Act, 2013
- Regulation 23 of
SEBI (LODR) Regulations
5. Weak Internal Financial
Controls 📊
A listed company is expected to maintain a robust internal control
environment. Unresolved audit observations or inadequate documentation of
controls may adversely affect IPO readiness.
Key issues:- Weak Internal
Financial Controls (IFC)
- Pending internal
audit observations
- Lack of documented
control processes
Relevant Provision:- Section 134(5) of
the Companies Act, 2013
6. Capital Structure
Irregularities 💰
The company's capital structure should be clean, transparent, and
compliant before filing the DRHP.
Typical issues include:- ESOP-related
irregularities
- Unresolved
convertible securities
These issues may require restructuring before proceeding with the IPO.
7. Generic or Incomplete Risk
Factor Disclosures 📄
Risk factors should be specific to the company's business model and
industry. Generic disclosures fail to provide meaningful information to
investors.
Examples include:- Business-specific
operational risks
Relevant Provisions:- Schedule VI of SEBI
(ICDR) Regulations
8. Incomplete Due Diligence
Documentation 📁
Due diligence involves verification of every material aspect of the
business. Missing documentation often delays the IPO timeline.
Critical documents include:- Intellectual
property records
9. Promoter and Group Entity
Disclosure Gaps 👥
SEBI expects complete transparency regarding promoters and group
entities.
Common deficiencies include:- Non-disclosure of
related entities
- Pending promoter
litigation
- Incomplete business
relationship disclosures
Transparent disclosures significantly enhance investor confidence.
10. Starting IPO Preparation Too
Late ⏳
Perhaps the biggest mistake is assuming that an IPO can be completed
within a few months. Successful IPOs are usually the result of structured
planning over 12–24 months.
Early preparation provides sufficient time to:- Improve internal
controls
- Streamline the
capital structure
Key Takeaways
✔ IPO readiness is a continuous governance exercise
rather than a one-time compliance activity.
✔ Strong corporate governance and transparent
disclosures build investor confidence.
✔ Early identification and resolution of compliance
gaps help reduce SEBI observations.
✔ Company Secretaries play a strategic role in
ensuring legal compliance, governance excellence, and successful IPO execution.
Conclusion
Preparing for an IPO is far more than drafting a DRHP. It requires an
organization-wide commitment to governance, transparency, compliance, and
accountability. Companies that invest time in strengthening their governance
framework well before approaching the capital markets are better positioned for
a smoother regulatory review and a successful listing.
A well-planned IPO not only facilitates capital raising but also
enhances the company's credibility, strengthens stakeholder confidence, and
lays the foundation for long-term sustainable growth.
Disclaimer: This article is intended solely for knowledge sharing
and educational purposes. Readers should refer to the applicable provisions of
the Companies Act, 2013, the SEBI (ICDR) Regulations, 2018, the SEBI (LODR)
Regulations, 2015, and other applicable laws, along with subsequent amendments,
before taking any decision.
Regards,
CS Ravi Garg
