Once Investment bank is hired by Issuer Company, Investment bank makes appointments of various intermediaries like Registrar to the issue, Depository, Compliance Officer, Monitoring Agency, Authorized collection Agents and Set up collection center etc in consultation with the lead manager. Practically it is the Investment Bank who make the Issuer Company in touch with such intermediaries.

Registrar – A registrar for an IPO mainly involves in  processing of IPO applications, allocate shares to applicants based on SEBI guidelines, process refunds through ECS or cheque and transfer allocated shares to investors’ Demat accounts.

Monitoring Agency – Monitoring Agency monitor the investments of the IPO funds in the various projects for which the funds are raised by the Issuer Company from the public. Project implementation progress report shall be submitted to SEBI on half yearly basis till full utilization of the funds raised.

Depository – The role of the Depository is to offer Demat accounts to investors. Hold, and maintain a record of securities in Demat accounts for investors. Make online trading fast & secure.

Compliance Officer – Compliance officer is responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc. issued by the Board or the Central Government, monitoring the compliance of the securities laws and for redressal of investors’ grievances.

Sponsor banks- Sponsor banks are bankers to the issue registered with SEBI and have been recently introduced to effectuate a Unified Payments Interface (UPI) as a payment mechanism for bids submitted by retail individual investors (RIIs) through intermediaries. They are appointed by the issuer and are responsible for (1) initiating a mandate request (i.e., requesting the RIIs to authorise blocking of funds that is equivalent to their application amount); (2) receiving the status of the block request from the RII and sharing it with the stock exchanges; and (3) ensuring subsequent debit of funds to the issuer’s account in the case of allotment.

Legal counsel- Legal counsel to the issuer undertakes legal due diligence, advises on the Indian laws applicable to the issuer and the IPO, and assists in drafting the non-business sections of the offer document.

Due Diligence Certificate

One of the major activities done by the Investment bank in relation to IPO management at this stage is to Issue of Due Diligence Certificate to Issuer Company.  Regulation 24 of SEBI (ICDR) Regulation, 2018 mandate that lead manager shall exercise due diligence and satisfy themselves about all aspects of the issue including genuineness and adequacy of disclosure in the draft offer document and the offer document  Whether Issuer Company  fulfills the eligibility criteria relating to a minimum tangible asset, Net worth, and average operating profit ,whether the issuer satisfies the general conditions for IPO, whether the issuer has made all the material disclosure in draft offer documents and  whether the minimum promoter contribution requirement mentioned in Regulation 14 is fulfilled.

In the first step of Due diligence Terms of Engagement are decided between Investment bank and Issuer Company. A Non-Disclosure agreement is signed between both parties as sensitive financial, operational, legal and regulatory information would be disclosed during this due diligence process.  Operational data, Financial data, legal and regulatory data and information of the business is  Collected and Investment bank   work to gain  full understanding  how the company operates, how it’s structured, how healthy it is financially, and whether there are any potential issues that could be a roadblock to going public. The due diligence process effectively clears the way for the next steps in the IPO process.

Company/ Organization  Due Diligence

The Investment bank gather information about the company’s organizational structure.  Check organization Annual business plan for the previous three years, strategic plans, and company’s organizational structure including Board members, Directors, and Employees. In general  following information and documents are collected to  perform due diligence:

Company Information –  Date of Incorporation ,Authorized Capital , Paid-up Capital ,Date of Last AGM , Date of Last Balance Sheet ,Status of the Company

Director Information – Directors of the Company, Date of Appointment of Directors

Charges Registered – Details of Secured Lenders of the Company, Quantum of Secured Loans

Documents –  Memorandum of Association ,Articles of Association ,Certificate of Incorporation , Shareholding Pattern ,Financial Statements ,Income Tax Returns, Bank Statements , Tax Registration Certificates ,Tax Payment Receipts ,Statutory Registers ,Property Documents ,Intellectual Property Registration or Application Documents, Utility Bills ,Employee Records ,Operational Records

Review of Articles of Association

The articles of association of a company can restrict the transfer of shares of a company.

So It is very important to review the AOA of a company to ascertain the different classes of equity shares, their voting rights and to ascertain the procedure for transfer of shares

Review of Statutory Registers of Company

Under Companies Act, 2013, a private limited company is required to maintain various statutory registers pertaining to share allotment, share transfer, board meetings, the board of directors, etc., therefore, the statutory registers of a company must be reviewed to obtain and validate information pertaining to directorship and shareholding.

Review of Book of Accounts and Financial Statements

All companies are required to maintain the book of accounts as per Companies Act, 2013. Financial transaction and information are audited and verified in the financial statements prepared by the company. During Financial due diligence , Investment bank review company’s accounting and amortization methods, fixed and variable expenses, Bank statement , valuation of all assets and liabilities, cash flow information, previous Financial Audits, company’s inventory holdings etc,

Review of Taxation Aspects

It is checked if there are any unforeseen tax liabilities created on the company in a future date. The following aspects relating to the taxation aspects are checked like:

  • Income tax return filed,Income tax paid ,Calculation of income tax liability
  • ESI / PF Payment Calculation,Payments and its return filed
  • Service Tax / VAT Payment Calculation,Payments and its return filed
  • TDS Calculations,Payments and its return filed

Review of Legal Aspects

A comprehensive legal audit of the company is  performed by a legal practitioner to ascertain if there are any pending legal actions, suits by or against the company and liability in each case. In legal review it is checked about :

Legal due diligence for all real estate properties of the company.

No objection from Secured Creditor for transfer of the company.

Verification of court documents and court filings, if any.

Customer/Service Information

Interactions with customers and service practices are also reviewed like

  • Products and services offered by the company
  • Legal approvals / License for the company’s products and services
  • Company’s trading policies, Marketing materials, company’s marketing strategies, customer supply or service agreements. Consumer complaints filed against the company if any

Company Property

it is also checked about property  owned by the company, Business locations, of company Official contracts showing the purchase of Property, Rent   agreements, franchise licenses, Trademarks and copyrights, Patents held by the company, Inventory of any physical or property owned by company.

The process of preparation for IPO commences with due diligence. Due diligence of IPO helps in identifying and overcoming the weaknesses, lapses, and vulnerabilities. In terms of the ICDR Regulations, the Investment Bank is required to submit due diligence certificate to SEBI and the formats for such certificate have been provided in the ICDR Regulations. The ICDR Regulations require that Offer Documents should contain all material disclosures, which are true and adequate to enable prospective investors to take an informed decision. Furthermore, the SEBI ICDR Regulations, 2018 require due diligence certificate to be issued by Investment Bank. Under the applicable Code of Conduct, the Investment Banks also are required to demonstrate  that all reasonable steps were taken to exercise due diligence and ensure adequate disclosures were made to potential investors.

Whilst the regulatory framework does not specifically define what constitutes due diligence, as a matter of practice, the objective of due diligence is to collect information about the Issuer company that helps the Investment  Bank to draft as well as assess disclosures that are made in the Offer Document.

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