The “Outstanding Litigations and Material Developments” section in the DRHP outlines all significant legal proceedings, regulatory actions, and dues involving the company, its promoters, and group entities. It includes materiality thresholds, pending approvals, and updates post-filing. This disclosure ensures transparency, helps investors assess potential legal and financial risks, and strengthens governance. Accurate reporting of these details is crucial for building investor confidence and meeting SEBI’s IPO compliance standards during the public listing process.

OTHER LITIGATIONS AND MATERIAL DEVELOPMENTS

The "Outstanding Litigation and Material Developments" section in Draft Red Herring Prospectus (DRHP) is very important as it discloses all significant legal proceedings involving the company, its promoters, subsidiaries, or group entities, and enabling investors to assess potential legal and financial risks.

What are the material litigations that need to be disclosed in DRHP or Offer document?

The listing Regulations specify that a pending litigation is considered to be material if the monetary value of such litigation exceeds the lowest of the following:

• 2% of turnover, as per the latest annual restated consolidated financial statements of the Issuer; or
• 2% of net worth, as per the latest annual restated consolidated financial statements of the issuer, except in case the arithmetic value of the net worth is negative; or
• 5% of the average of absolute value of PAT, as per the last three annual restated consolidated financial statements of the Issuer.

It shall be noted that the Materiality policy is adopted by the Board of Directors of the Issuer in line with the listing regulations so it may vary from company to company.

Disclosure with respect to Material Litigation Policy in DRHP:

The Draft Offer Document shall clearly state the Materiality Policy adopted by the Board of Directors of the Issuer and the below points

• Litigations which exceed the materiality threshold as stated above
• Litigation that could materially impact the business, operations, or reputation of the Company.
•  Similar cases where the combined impact exceeds the Materiality Threshold, even if individual cases do not.

It is to be noted that the pre-litigation notices are not considered unless the Company is formally impleaded (to bring into a lawsuit) in court.

What are Pre litigation notices?

Pre-litigation notices (other than those issued by governmental, statutory or regulatory authorities) are the legal notices received by the Company, but shall not be considered as litigation till such time until the Company, or the Directors is made a party to proceedings initiated before any court.

What is the need of disclosure of Material litigations in DRHP?

Transparency is essential for informed investment decisions, as unresolved litigation can impact the company’s operations, profitability, reputation, or valuation. Disclosure of litigation fulfills the regulatory requirements set by SEBI and builds investor trust by demonstrating a commitment to full disclosure and good corporate governance. Overall, this section helps both investors and the company manage risk and maintain credibility during the IPO process.

The following are the major headings which require disclosure in the DRHP:

1. Litigation involving Issuer Company

   • Litigations filed against the company
   • Litigations filed by the company
     
     

2. Litigations involving subsidiary companies

   • Litigations filed against the company
   • Litigations filed by the company
      

3. Litigations involving Promoters/Directors

   • Litigations filed against the promoter

   • Litigations filed by the promoter

4. Material Litigations involving Group Companies

The above mentioned litigations must consist these proceedings:

(1) Pending Litigations involving the Issuer/ its directors/ promoters/ subsidiaries:

• All criminal proceedings;
• All actions by regulatory authorities and statutory authorities;
• Disciplinary action including penalty imposed by SEBI or stock exchanges against the promoters in the last five financial years including outstanding action;
• Claims related to direct and indirect taxes, in a consolidated manner, giving the number of cases and total amount;
• Other pending litigations - As per the policy of materiality defined by the board of directors of the Issuer and disclosed in the offer document.

(2) Outstanding dues to creditors:

• Based on the policy on materiality defined by the board of directors of the Issuer, details of creditors which include the consolidated number of creditors and the aggregate amount involved
• Consolidated information on outstanding dues to micro, small and medium enterprises and other creditors, separately giving details of number of cases and amount involved;
• Complete details about outstanding over dues to material creditors along with the name and amount involved for each such material creditor shall be disclosed, on the website of the company with a web link thereto.

What is considered as material dues to creditors of the company which needs a disclosure in the DRHP?

In terms of the Materiality Policy, outstanding dues to any creditor of the Company having monetary value which exceeds a certain % (as decided by the Board of Directors) of the total consolidated trade payables of the Company as per the latest restated financial statements of the Company shall be considered as ‘material’. The percentage varies for each company as per its nature of business.

Disclosure requirement with respect to Outstanding Dues to Creditors:

• Disclose if there are any material outstanding dues to creditors, except as stated.
• Define material creditors as those with outstanding amounts exceeding (--) of total payables as of March 31, ----.
• Provide the total trade payables amount (---)

(3) If any of the above mentioned litigations, material developments, dues to creditors etc., arise after the filing the offer document, the facts shall be incorporated appropriately in the offer document. In case there are no such cases, a distinct negative statement is required to be made in this regard in the offer document.

(4) Disclosures pertaining to wilful defaulters or fraudulent borrowers in case of a further public offer or a rights issue:

If the Issuer or any of its promoter or director has been declared as a wilful defaulter or a fraudulent borrower, it shall make the following disclosures with respect to each such person separately:

• Name of the person declared as a wilful defaulter or fraudulent borrower
• Name of the bank that made the declaration
• Year of declaration
• Outstanding amount at the time of declaration
• Steps taken, if any, to remove the name from the list of wilful defaulter
• Any other relevant information to help investors make informed decisions
• Any other disclosures required by the regulatory authority

(5) Issuer shall clearly mention on the cover page of the DRHP if the Issuer, promoter, or director is a wilful defaulter or fraudulent borrower, with reference to details inside the DRHP.

(6) The Issuer shall include all disclosures in a separate, clearly marked section, listed in the Index/Table of Contents.

Outstanding Legal Proceedings:

The Draft Offer Document of IPO requires disclosure regarding any ongoing criminal proceedings, regulatory actions, tax claims, or material litigation involving the Company, Directors, Promoters, and Group Companies. An Issuer shall also disclose if there are any penalties imposed by SEBI or Stock Exchanges in the last five financial years.

MSME Dues Disclosure: Following disclosures are required w.r.t MSME creditors of the Issuer

• Publish details of outstanding dues to micro, small, and medium enterprises (MSMEs) and other creditors on the Company's website.
• MSME status should be determined based on the MSME Development Act, 2006, as verified by the Statutory Auditors.

Disclosures with respect to Material Development occurring after the last balance sheet date

As per the disclosure requirement, it is to be stated that “Except for what’s mentioned in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of DRHP it shall clearly state that nothing has happened since the last financial update in the Draft Red Herring Prospectus that would significantly impact the company’s business, profits, assets, or the ability to pay what the company owes in the next 12 months from the last balance sheet date in the DRHP.

It has to be noted that:

• All the information provided in the Draft Red Herring Prospectus (DRHP) is based on facts available as of the date of the DRHP, unless stated otherwise.
• The meaning of terms used in the litigation section apply only within that specific case and should not be interpreted for the rest of the document.

GOVERNMENT AND OTHER APPROVALS

The "Government and Other Approvals" section in the Draft Red Herring Prospectus (DRHP) is a very essential part because it provides investors with a clear understanding of the legal and regulatory framework within which the issuer operates. This section lists all the key approvals, licenses, registrations, and permissions obtained or required from government bodies and regulatory authorities for the company’s operations and for the proposed issue.

It helps investors assess the company's compliance status and any potential risks related to pending or conditional approvals. A well-documented approvals section builds investor confidence, ensures transparency, and supports informed decision-making by highlighting the company’s readiness to operate lawfully and smoothly in its industry.

These are the following Government approvals are required by the Issuer company:

REGULATORY AND STATUTORY DISCLOSURES

Regulatory and Statutory Disclosures at the time of filing DRHP

Disclosures with Respect to Disclaimer Clauses of Regulatory Authorities to be included in DRHP

Additional Disclosures by the Issuer Company

1. Disclosure regarding any previous Rights and Public Issue since Incorporation of the Issuer Company.
2. Disclosure regarding any Equity shares issued for consideration other than cash except for what is highlighted under the section titled Capital Structure of DRHP. (Link to capital structure blog)
3. Disclosure about any amount that has been paid or has been payable as commission or brokerage for subscribing to or procuring or agreeing to procure subscription for any of Equity Shares in the five years preceding the date of the Draft Red Herring Prospectus.
4. Disclosure required regarding any public Issue or Right Issue in the 3 preceding years from the date of DRHP of any group companies, associates or subsidiaries of the Issuer company. If any of the group companies, associates or subsidiaries is listed it is required to disclose the data regarding performance vis-a-vis objects of Issue.

• 5. Disclosure regarding outstanding debentures, bonds or redeemable preference shares.