पाठशाला Pathshala · नियम Niyam, Law and compliance · Lesson 25 · Scale

IPO readiness: the legal housekeeping SEBI expects

An offer document describes the company’s past, and SEBI’s rules look back one, two and three years. Clean the cap table, articles, board and related-party history before the draft is filed.

Pathshala, The Founder Library · 11 October 2026 · 8 min read

Two window cleaners on ropes, small against the glass facade of a high-rise office building. — Photograph: Wolfgang Weiser · Pexels

The bankers want to file the draft offer document in March. In January the lawyers find that two investors still hold compulsorily convertible preference shares, that one angel’s shares were never dematerialised, that a 2023 allotment to a Singapore fund was reported to the Reserve Bank late, and that the founder’s brother owns the warehouse the company leases. Each is fixable. None is fixable in eight weeks.

An initial public offer is a disclosure exercise, and disclosure is about the past. SEBI’s rules for public issues, the Issue of Capital and Disclosure Requirements Regulations 2018, last amended on 21 March 2026, contain tests that look back one year, two years and three years from the filing of the draft. This lesson walks through the housekeeping those tests demand, in the order a company should do it, and closes with a calendar that starts twenty-four months before the draft red herring prospectus. Every regulation cited was read on 11 October 2026; SEBI amends these rules several times a year, so the merchant banker’s current reading governs.

Why two years, not two months

Three features of the regulations set the clock. First, eligibility under regulation 6(1) is measured over the three preceding full years: net tangible assets of at least ₹3 crore, of which no more than half are monetary assets; an average operating profit of at least ₹15 crore, with a profit in each of those years; and a net worth of at least ₹1 crore in each year. A company that fails any test is not shut out. Under regulation 6(2) it may still list on the main board through book building, provided it allots at least 75 per cent of the net offer to qualified institutional buyers and refunds everyone if it cannot. A company that has not yet made three years of profits can only use this second door, so know which one is yours before choosing bankers.

Second, several tests look back a year from the filing date. Shares offered for sale must have been held for at least one year before the draft is filed (regulation 8). Shares the promoters bought in the preceding year at a price below the IPO price do not count towards their minimum contribution (regulation 15). Third, the financial statements in the offer document must be restated and not more than six months old at the issue opening date (regulation 24(5)), which fixes when the audit has to be done. Put together, a founder who decides in month zero to list in month twelve has already missed the holding-period window for any secondary sale arranged after month zero. The housekeeping has to begin before the decision feels real.

One class of share, all in demat

Venture-funded Indian companies carry a stack of instruments: [CCPS](/library/ccps-instrument-indian-vcs-actually-use), convertible notes, warrants, stock appreciation rights and options. Regulation 5(2) says plainly that an issuer is not eligible for an IPO while any convertible security or other right to receive equity shares is outstanding. There are three exceptions. Options granted to employees under a scheme that complies with the Companies Act and the ICAI guidance may stay outstanding. Stock appreciation rights must be fully exercised before the red herring prospectus. And fully paid-up convertibles are allowed only if they are required to convert on or before the date the red herring prospectus is filed. In practice every preference share converts to equity before the offer, and the conversion ratio, which depends on the price adjustment clauses in the shareholders’ agreement, has to be settled with investors months earlier.

Demat. Regulation 7(1)(c) requires the shares held by promoters, the promoter group, selling shareholders, directors, key managerial personnel, senior management, qualified institutional buyers, employees and several other categories to be in dematerialised form before the draft offer document is filed. A company that has issued physical certificates to early angels, or allotted shares to a former employee who has since moved abroad, should start tracing holders now. A missing signature is the commonest reason a filing date slips.

The register itself. Reconcile the register of members, every allotment return and every valuation report with the cap table the company shows investors, share by share. Where a foreign investor subscribed, check that each allotment was reported in Form FC-GPR, which the Reserve Bank’s Master Direction on Foreign Investment, updated to 15 June 2026, requires the company to file within thirty days of issuing the shares. Late filings can be regularised, but not quickly; the [FEMA lesson](/library/fema-for-founders-when-a-foreigner-invests) sets out the regime. And confirm that the [secretarial record](/library/board-resolutions-minutes-secretarial-record) contains the board and shareholder approvals behind every allotment, transfer and conversion.

Deciding who the promoters are

Indian startups rarely think of their founders as promoters. The offer document will. The regulations define a promoter as a person named as one in the offer document or the annual return, or who controls the company directly or indirectly, or on whose advice the board is accustomed to act. Institutional investors such as venture capital funds and banks are not treated as promoters merely because they hold 20 per cent or more. The promoter group reaches further: the promoter’s immediate relatives and, for an individual promoter, companies in which the promoter or relatives hold 20 per cent or more. Each person in it is disclosed, and their shares are subject to the rules above.

Being a promoter carries two obligations that shape the cap table. Under regulation 14 the promoters must hold at least 20 per cent of the post-issue capital, and under regulation 16 that minimum contribution is locked in for eighteen months from allotment, or three years where most of the fresh proceeds are to be spent on capital expenditure. The promoters’ holding above the minimum is locked in for six months, or a year in the capital expenditure case. Every other shareholder’s pre-issue capital is locked in for six months under regulation 17, with exceptions for certain employee shares and for shares held by Category I and II alternative investment funds and foreign venture capital investors. Founders diluted below 20 per cent by successive rounds need to know early how the shortfall will be met, because shares bought cheaply in the last year will not count.

Run your own numbers through the figure. Move the operating profit below ₹15 crore and the route changes; move the promoters’ holding below 20 per cent and the contribution test fails; watch how much of the company stays locked on listing day.

A board and articles fit for a listed company

A listed company’s board is governed by the Listing Obligations and Disclosure Requirements Regulations 2015, last amended on 14 July 2026. Regulation 17(1) requires at least half of the board to be non-executive directors, at least one woman director, and independent directors making up one-third of the board where the chairperson is non-executive and half where there is no regular non-executive chairperson or where the chairperson is a promoter or related to one. The committees follow. Independent directors take months to find, and they should sit through at least one audit cycle before they sign off on an offer document, so appoint them a year ahead.

The stone facade of the Elphinstone building in Mumbai’s Fort district. — Mumbai’s Fort district, a few streets from the exchange. A listed company answers to strangers, and its board has to be built for them a year before they arrive. Photograph: Aayush · Pexels

The articles and the [shareholders’ agreement](/library/shareholders-agreement-what-you-are-signing) need the same attention. Investor protections written for a private company, affirmative votes, board nomination rights, information rights, rights of first refusal, sit badly with a public shareholder base. Lead managers will ask for an amendment agreement under which those rights fall away on listing, and for new articles adopted when the company converts from private to public, which it must do before it can offer shares to the public. Negotiate the amendment with investors when you agree the conversion of their preference shares; it is the same conversation.

The related-party history and the record

The regulations define group companies to include companies, other than the promoters and subsidiaries, with which the issuer had related-party transactions. That one definition turns every founder-owned vendor, landlord or service company into a disclosure. The two years before the filing are the time to end arrangements that cannot be defended, re-paper the ones that can at arm’s length, and make sure each was approved as the Companies Act requires; the [related-party lesson](/library/related-party-transactions-founders-conflicts) has the approval tree. A loan from the founder, a car in the company’s name used by a relative, a trademark registered personally: each will be asked about, so move it now.

The rest of the record follows the same logic. Collect every notice from a tax authority, regulator or court, with its status. List every licence and registration with its expiry. Gather the employment and IP assignment papers of everyone who built the product, because diligence will ask who owns the code, and the [IP assignment lesson](/library/ip-assignment-company-owns-what-you-built) is easier to apply in year one than in the month before filing. Name an owner for each item and a date.

An offer document can only describe the past the company already has. The two years before it are the last chance to change that past.

The twenty-four-month calendar

Twenty-four months out, appoint a company secretary with listed-company experience, reconcile the register of members and every allotment filing, and start the demat of every holder. Eighteen months out, decide who the promoters are, model the promoters’ contribution and lock-in in the figure, and agree with investors the conversion of every preference share and the amendment of their special rights. Fifteen months out, freeze secondary transfers by anyone who may sell in the offer, because the one-year holding clock runs from their last acquisition, and stop any promoter purchase below the expected issue price. Twelve months out, reconstitute the board with independent directors, constitute the committees, end or re-paper related-party arrangements and finish the litigation and licence register. Six months out, convert to a public company, adopt the new articles and close the audit that the restated financials will rest on. Review the list at every board meeting until the draft is filed, and treat any item still open at six months as a reason to move the date, not to rush the item.

Nothing here is legal or tax advice; confirm the current rule with a chartered accountant or lawyer before acting.