4. 1 The Issue

4.2 Summary of Financial Statement

4.3 General Information

4.4 Capital Structure

4.5 Objects of the Issue (IPO Objectives)

4.6 Basis for Issue Price (Key Performance Indicators)

4.7 Statement of Special Tax Benefit

4.1 The Issue

In the sub section of “The Issue” in DRHP discloses the number of existing equity shares, fresh issue size, and offer for sale details. It also specifies allocations for QIBs, anchor investors, retail, and non-institutional investors, usually the number of shares for each category appears as blank [.] in DRHP. 

The Details of the Issue section in the DRHP is vital for both IPO and SME IPO, outlining the structure of the offering. It ensures transparency and regulatory compliance.

The Issuer company for Initial Public Offer (IPO) is required to mention the following details in the given table:

4.2 Summary of the Financial Statement

Disclosure of Summary of Restated Financial Statements in DRHP

• Restated Balance Sheet:

  1. For the purposes of IPO, preparation of restated financial statements for the last three years is a regulatory requirement.
  2. In a Mainboard IPO or SME IPO, disclosing the balance sheet in the Draft Red Herring Prospectus (DRHP) is very important as it ensures financial transparency, regulatory compliance, and helps investors assess the company’s liquidity, profitability, and debt management. 
  3. It ensures informed decision-making before investing in an IPO or SME IPO.
      

• Restated Statement Profit and Loss Account:

  1.  Restated profit and loss account for the last three years forms part of Prospectus (DRHP).
     
     

• Restated Cash Flow Statement:

  1. Restated Cash Flow Statement is the cash flow statement for the last three years that removes non-recurring items to provide a clearer picture of a company’s cash inflows and outflows.  

4.3 General Information

General Information about the Company and its Directors

1. Brief summary on Original Incorporation of company and conversion to Public Limited.
2. Following details are required

1. Brief Information of Company and the Issue

2. Disclosing about the Board of Directors of the company

3. Following Details of Key Market Intermediaries Pertaining to The Issue and The Company forms part of DRHP;

4. Disclosure about any Change in Auditor in last three years to be disclosed in DRHP

5.  Disclosure about the Monitoring Agency, Credit rating and IPO Grading (if required) required for DRHP:

As per SEBI (ICDR) Regulations, 2018, a Monitoring Agency must be appointed if the IPO size is more than ₹100 crores. IPO grading and Credit rating is not mandatory but depends case to case.

6. Disclosure about the Designated Intermediaries involved in IPO Process:

• Self-Certified Syndicate Banks (SCSB’s)
• Registered Brokers
• Share Transfer Agents
• Brokers to the Issue
   

7. Disclosure about the Issue being made through Book Building Process or Fixed Price Process

8. Disclosure about the Underwriting details of IPO

1.  Name of the Underwriter:
2.  Address:
3.  Contact No:
4.  Email Id:
5.  Amount underwritten by each underwriter:

9. Disclosure about the Underwriting Commitments as per the Underwriting Agreement between Company and BRLM- The SME IPO needs to be 100% underwritten as per the SEBI ICDR Regulation 260.

10. Statement of inter se allocation of responsibilities among the lead manager:

This statement is only applicable when there is more than one Merchant bankers to the Issue and if there is only one merchant banker or Book running Lead Manager then it is not applicable.
 

11. Filing of DRHP with the designated stock exchange (NSE Emerge or BSE SME)- Disclosure of designated stock exchange where the equity shares are proposed to be listed. In case of Mainboard IPO, DRHP is filed with NSE, BSE and SEBI.

12. A copy of Red Herring Prospectus/ Prospectus with RoC  through the electronic portal at http://www.mca.gov.in

13. Market Making Details of Market making arrangement for the Issue- Market Making is compulsory in SME IPO as per SEBI ICDR Regulation 261 and following disclosure in DRHP is required:

14. Disclosure Clause in DRHP wrt Withdrawal of the Issue:

• The Issuer Company in consultation with BRLM can withdraw the Issue before the Bid/Issue Opening Date without giving any reason.
• If withdrawn after the Bid/Issue Opening date but before allotment, a notice will be issued within two working days, and ASBA accounts will be unblocked within one working day.

4.4 Capital Structure

Capital Structure refers to the combination of different sources of funds used by a company to finance its operations and growth. It typically includes equity capital (e.g., common and preferred shares) and debt (e.g., bonds, loans). 

For IPO and listing requirements, accurate presentation of this information in the DRHP is important to comply with regulatory requirements, and ensure a smooth IPO process. 

The capital structure section in the Draft Red Herring Prospectus (DRHP) gives disclosures about (table to be inserted)

1.     Changes in Authorized Equity share capital of the company.

2.     Equity Share Capital History of the company (upon incorporation and subsequently)

3.     Details on Initial Subscribers to memorandum of Association

4.     Details of Allotment made in the last two years preceding the date of DRHP

5.     Disclose the shareholding pattern of the Company (Issuer) in accordance with Regulation 31 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as on the date of the Draft Red Herring Prospectus.

6.     List of Shareholders of the Issuer holding 1% or more of the paid up share capital of the company: 

• As on the date of filing of the Draft Red Herring Prospectus
• Ten days prior to the date of filing of the Draft Red Herring Prospectus
• One Year prior to the date of filing of the Draft Red Herring Prospectus
• Two Years prior to the date of filing of the Draft Red Herring Prospectus

7.     Details on Capital Buildup in respect of Shareholding of the Promoter since incorporation which includes information on consideration paid for acquisition of shares, any bonus issue, transfer of shares and others.

8.     Details on shareholding of promoter and promoter group.

9.    Details of Promoters’ Contribution Locked-in for Three Years (Minimum Promoter Contribution)

10.  Details of Promoters’ Contribution Locked-in for One Year and other lock in requirements.

4.5 Objects of the Issue (IPO Objectives)

The "Objects of the Issue" section in a DRHP/RHP outlines the purpose of raising funds from the public. Below are the key disclosures required while filing DRHP with NSE Emerge or BSE SME in case of SME IPO or SEBI in the case of Mainboard IPO in India. (Link to the eligibility criteria blog for the SME and Mainboard)

1. What forms part of objects of Issue of an IPO?

As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the Objects of the Issue section in an IPO outlines the proposed utilization of funds raised from the public issue. It is an important section of DRHP that provides information on proposed utilization of funds to be raised through IPO. This section in DRHP typically includes the following components:

• Funding Capital Requirements – To meet the finance requirement for the purchase of plant and machinery, infrastructure development, or other business expansion needs.
• Working Capital Requirements – To meet day-to-day operational expenses essential for the company’s business operations.
• Investment in Land and property or technological advancements: To expand their projects, to set up the manufacturing unit of the company. It helps the company to enhance its infrastructure for future operations.
• Repayment or Prepayment of Borrowings – It helps in reducing the company's debt burden, improving financial stability for the growth of the company.
• General Corporate Purposes (GCP) – Utilization of funds for business growth, brand promotion, expanding operations. Issue-Related Expenses also form part of GCP. IPO Cost are the expenses incurred in connection with the IPO, including merchant banker fees, legal expenses, registrar fees, and other professional charges.
• Investment in Subsidiaries, Joint Ventures, or Strategic Acquisitions – To support business growth by acquiring other companies, forming joint ventures, or making strategic investments that help the company expand its operations or market presence.

 

2. What are the details to be disclosed in DRHP for Net Proceeds?

This section gives disclosures on the Net Proceeds that would be received by the Issuer company on listing. Net Proceeds is the amount after deducting the Issue expenses. The DRHP discloses the amount that would be available for the company’s stated purposes.

3. What is the Funding plan (means of finance) for Objects of Issue through IPO proceeds: 

Following disclosures are required in the DRHP

• An undertaking by the Issuer confirming that firm arrangements of finance have been made through verifiable means towards 75% of the stated means of finance for the project proposed to be funded from Issue proceeds, excluding the amount to be raised through proposed Issue and existing identifiable internal accruals.
• Balance portion of the means of finance for which no firm arrangement has been made without specification.
• Details of funds tied up and the avenues for deployment of excess proceeds, if any.

4.  What is the disclosure required in DRHP for the proposed utilization of net proceeds?

This section provides a clear breakdown of the allocation of funds towards specific purposes and objects of the IPO funding such as capital expenditure, working capital requirements, debt repayment, general corporate purposes, and other objects as mentioned in the Draft offer document. 

• When IPO Proceeds are utilized for Capital Expenditure: Following are the details which are required to be disclosed in the offer document of the Issuer company:
  1. All details regarding the existing manufacturing facility of the company and funds from IPO to be utilized on expansion/automation of such manufacturing facility.
  2. Detailed break up of estimated cost of such CAPEX is to be disclosed in DRHP.
  3. Details of machinery and equipment to be purchased.
  4. Need of government approval and clearances for purchase of plant and machinery.
      
• When IPO Proceeds are utilized for financing working capital requirements from IPO Proceeds: Following are the details which are required to be disclosed in the offer document of the Issuer company:
  1. Basis of Estimation of working capital with relevant assumptions
  2. Reason for raising the working capital with all the relevant facts and figures
  3. Detailed projections of working capital requirements, including:
     • Expected current assets (raw materials, finished goods, work-in-progress, receivables, etc.).
     • Holding period assumptions for each asset type.
     • Total current liabilities, net current assets, and sources of finance (e.g., bank loans, institutional finance, internal funds).
        
  4. Total working capital requirement, margin money and sources of finance in Tabular form
  5. Details of existing working capital with the Issuer at the time of DRHP including
     • Breakdown of current assets (raw materials, finished goods, work-in-progress, receivables, etc.).
     • Total liabilities, net assets, and sources of finance.
        
  6. If no working capital shown, reason for the same

• When IPO Proceeds are utilized for Repayment of Borrowings from IPO Proceeds: Following are the details which are required to be disclosed in the offer document of the Issuer company:
  1. Name of lender
  2. Brief terms and conditions 
  3. Amount outstanding
  4. Certificate from statutory auditor for utilization of loan.
      
• When IPO Proceeds are utilizing for Investment in Joint Venture or Subsidiary or Acquisition:  Following are the details which are required to be disclosed in the offer document of the Issuer company:
  1. Form of Investment
  2. If form of investment is not decided, then the Issuer company has to give a statement to that effect
  3. Debt investment (All details regarding rate of interest, nature of securities, term of repayment)
  4. Nature of benefit to the Issuer from the investment
      
• When IPO Proceeds are utilized for Granting Loan to Entity other than Subsidiary: Following are the details which are required to be disclosed in the offer document of the Issuer company;
  1. Details of loan agreements, including interest rate, security status (secured/unsecured), loan duration, repayment terms, and subordination.
  2. Expected benefits to the Issuer from providing the loan.
  3. If the loan is being granted to a group company, full details of the arrangement.
      
• When IPO Proceeds are utilized for Project Funding: Following are the details which are required to be disclosed in the offer document of the Issuer company;
  1. Location of the Project
  2. Plant and machinery, Technology, Process etc.
     • Details of all the machinery brought by Issuer
     • Cost of all the machineries, Name of Suppliers, date of placement of order, and date of expected delivery dates.
     • In case machines are yet to received then the date of quotations used for cost estimations.
  3. Details of second hand machinery brought by the company or proposed to be brought;
  4. Age of machinery, collaborations, performance guarantee, etc.
  5. Infrastructure facilities for the raw material and utilities like water, electricity etc.
      
• When IPO Proceeds are utilized for Purchase of Land: Following are the details which are required to be disclosed in the offer document of the Issuer company;
   
  1. Name of the Entities from whom land is acquired or proposed to be acquired and the relationship with the person, (if any)
  2. Details of whether land is acquired free from all encumbrances and has a clear title
  3. Details of approval of status pertaining the land (or a statement confirming that no approvals are needed). Consistency of land costs with the project cost section of the DRHP.

• When IPO Proceeds are utilized for acquiring any kind of property: Following are the details which are required to be disclosed in the offer document of the Issuer company;
  1. Name, address, occupation of vendors
  2. Disclose the amount paid or payable in cash, shares or debentures issued to sellers
  3. Nature of Title
  4. Nature of Issuers’ Interest in such property
  5. Any past transaction involving the property within the last 2 years including any involvement of promoters and directors.
  6. Details of property acquired or proposed to be acquired partly or wholly from out of the proceeds of the issue or purchase/acquisition has not been completed on the date of Draft offer document.

• When IPO Proceeds are utilized for Purchasing any Plant/Equipment: Following are the details which are required to be disclosed in the offer document of the Issuer company;
  1. Details are to be present in tabular form including, details of equipment bought or required to be bought, cost of equipment, date of order placement, date of supply.
  2. In case machines are yet to received then the date of quotations used for cost estimations.
  3. Details of second hand machinery brought by the company or proposed to be brought including age and remaining life span.

• When IPO Proceeds are utilized for Developing New Technology or process: Following are the details which are required to be disclosed in the offer document of the Issuer company;
  1. Details of Acquisition and strategic Investment
  2. Details regarding Technical Advancement of leading-edge technology
  3. Details of Funding requirement if it is utilizing for Development of Micro Services Application
  4. Details of acquiring Software 
  5. Utilization of IPO proceeds for General Corporate Purposes 

GENERAL CORPORATE PURPOSE

As per regulation 230 of the SEBI ICDR Regulations, 2018, The amount to be utilized for General Corporate Purposes and unidentified inorganic acquisitions shall not in aggregate exceed 25% of the amount raised, out of which:

1. General corporate purposes shall not be more than 15% of the Gross proceeds or 10 Crores or whichever is lower and
2. Unidentified inorganic acquisitions shall not exceed 10% of the amount raised.

The amount of GCP can be used for the below purposes and has to be disclosed in the DRHP:

• For hiring human resources including marketing people or technical people in India or abroad.
• For Funding growth opportunities.
• Capital expenditure for development, renovation or expansion of the assets of the company.
• For Brand Building and strengthening of marketing activities of the company.
• For the meeting expenses incurred by the company in the ordinary course of the business and towards any other Contingencies.
• Ongoing general corporate needs or any other purposes approved by the Board, subject to necessary regulatory compliance.
• any other purpose, as considered expedient.
   

A. What are the Public Issue expenses (IPO Cost) and what it includes?

This section is required in the DRHP to provide a detailed breakdown of the IPO Cost or Issue related expenses incurred by the company during the IPO process. 

 The fees to be disclosed in the DRHP include:

• Lead Manager Fees
• Registrar to the Issue Fees
• Advertising and Publishing Expenses
• Regulatory and Stock Exchange Fees
• Printing, Stationery, and Postage Expenses
• Fees to Auditors, Legal Advisors, and Other Professionals
• Miscellaneous Expenses (Selling Commission, Brokerage, Underwriting Fees, Marketing, and Distribution Expenses)

B. Disclosure regarding Appraisal of Objects by any banks/financial institution (Appraising Agency) - Scope and purpose and date of  appraisal, if any with following details:

• Cost of the project and means of finance shall be as per the appraisal report.
• Explanation of revision, if any, in the project cost and the means of finance after the date of issue of the appraisal report.
• Weaknesses and threats, if any, given in the appraisal report, by way of risk factors.
• Disclaimer clauses of the appraisal report, as applicable.
  
   

C. Tabular disclosure on the proposed year wise break up of deployment of funds and Schedule of Implementation of Net Issue Proceeds as below:

• giving details of land acquisition,
• civil works, installation of plant and machinery,
• trial production,
• date of commercial production and reasons for delay, if any.
  
   

D. Deployment of Funds:

• Details of the sources of funds and the deployment of these funds on the project (where the issuer is raising capital for a project), up to a date not earlier than two months from the date of filing of the offer document, as certified by a statutory auditor of the issuer and the date of the certificate.
   
• Where the promoters’ contribution has been brought prior to the public issue, which is utilised towards means of finance for the stated objects and has already been deployed by the issuer, a cash flow statement from the statutory auditor, disclosing the use of such funds received as promoters’ contribution.
  
   

E. Sources of Financing of Funds Already Deployed:

Means and source of financing, including details of bridge loan or other financial arrangement, which may be repaid from the proceeds of the issue.

F. Deployment of Balance Funds:

Year-wise break-up of the expenditure proposed to be incurred on the project.

G. Interim Use of Funds:

A statement that net issue proceeds pending utilization (for the stated objects) shall be deposited only in the scheduled commercial banks.

H. Who is responsible for monitoring the utilization of IPO funds?

The Monitoring Agency is responsible for monitoring the utilization of IPO funds. It ensures that the funds raised are used as per the purpose mentioned in the offer document.

As per SEBI ICDR Regulations, appointing a Monitoring Agency is mandatory if the public issue size exceeds ₹100 crores (excluding offer for sale). The Monitoring Agency must be either a Scheduled Commercial Bank or a Public Financial Institution.

4.6 Basis for Issue Price (Key Performance Indicators)

Key Performance Indicators

What are the Key Performance Indicators (KPIs) Disclosure in the Offer Document?

Key Performance Indicators are the financial metrics of the Issuer required to be disclosed in the offer document.  The financial metrics so disclosed in the Offer Document depicts the historical financial or operational performance of the Issuer.  These KPIs are critical in helping investors assess the performance of the business and make informed investment decisions with respect to valuation of the Issuer Company.

KPIs are disclosed in the following sections of DRHP

• “Basis for Issue price” section of DRHP
• “Management Discussion and Analysis of Financial Conditions and Result of Operations” section of DRHP
•  “About the Business” section of DRHP

Which financial metrics need to be disclosed under Key Performance Indicators?

• Revenue from Operations
• EBITDA
• EBITDA Margin
• Profit After Tax (PAT)
• PAT Margin
• ROE (Return on Equity)
• ROCE (Return on Capital Employed)

The Issuer Company and Lead Merchant Bankers (BRLM) must ensure the following with respect to all KPIs disclosed in the offer document:

Definition and Clarity

• KPIs and related terms must be clearly defined in the “Definitions and Abbreviations” section of the offer document.
• Simple language should be used for easy understanding.
• If technical terms are used, they must be further explained in simple words.

Approval and Certification

• The Audit Committee of the Issuer Company must approve the KPIs.
• KPIs must be certified by:
  • Statutory Auditors
  • Chartered Accountants (CA) or a firm of CAs with a valid Peer Review Board certificate from ICAI
  • Cost Accountants with a valid Peer Review Board certificate from ICMAI

Document Accessibility

• The certificate related to KPIs must be included in the list of important documents for inspection.

Reporting Period Consistency

• KPI details must be disclosed for the same period as the restated financial information in the offer document.

Explanation and Usage

• KPIs must be comprehensive and include explanations on how the company has used them in the past to track and analyze performance.

Comparison Over Time

• Changes in KPIs over time should be explained, considering any major business acquisitions or disposals.
• Key metrics like revenue growth, EBITDA Margin, PAT Margin and few balance sheet ratios are monitored periodically for evaluating the overall performance of the Company
• Comparison of key performance indicators should be explained with listed industry peers for the Financial Years/ periods included in the Restated Financial Information.

Basis for Issue Price Section

For this section, the following must be disclosed:

• All KPIs were shared with investors in the last three years before filing the DRHP/RHP.
• The Audit Committee must confirm that these KPIs have been verified and audited.
• The Issuer Company may disclose any other relevant KPIs that impact the issue price.
• Cross-references to KPIs mentioned in other sections should be included.
• A comparison of KPIs with Indian and/or global listed peer companies should be provided, ensuring the selected peers are similar in size, industry, and business model. If an exact comparison is not possible, explanatory notes should be included.

Ongoing KPI Disclosure After Listing

• The Issuer Company must continue to disclose the KPIs from the "Basis for Issue Price" section at least once a year (or as per the company’s decision).
• This must be done for at least:
  • One year after the listing date (or as specified by SEBI), OR
  • Until the issue proceeds are fully utilized as per the prospectus—whichever is later.
• Any changes in KPIs during this period must be explained.
• Ongoing KPI certifications must continue to be provided by an expert body, as mentioned in point 2.

4.7 Statement of Special Tax Benefit

What is the disclosure requirement for Statement of Tax Benefits?

This section of Draft Red Herring prospectus needs disclosure if any special tax benefits (under Direct and indirect tax laws) is applicable on the Issuer, its shareholders or any of its material subsidiaries as identified by the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015.

The Draft offer document discloses the following:

The current position of special tax benefits available to the Company and to its shareholders as per the provisions of the direct and indirect tax laws, including the Income-tax Act, 1961, the Central Goods and Services Tax Act, 2017, the Integrated Goods and Services Tax Act, 2017, the Union Territory Goods and Services Tax Act, 2017, respective State Goods and Services Tax Act, 2017 (collectively the “GST Act”), the Customs Act, 1962 and the Customs Tariff Act, 1975.

It shall be noted that the enclosed statement and the contents stated therein is the responsibility of the Issuer’s management. The content of the enclosed statement is based on the information, explanations and representations obtained from the Company and on the basis of understanding of the business activities and operations of the Company.

What is the need of preparing the Statement of Tax Benefits for DRHP?

The Statement of Tax benefits intends to provide general information to the investors and shall not be intended to be a substitute for professional tax advice. The statement does not give an assurance wrt continuity of tax benefits in the future and meeting the conditions as may be prescribed for availing the benefits.