Pre-IPO Services

What is an Initial Public Offering (IPO)?

An initial public offering (IPO) refers to offering shares of a private corporation to the public in a new stock issuance for the first time. An IPO allows a company to raise equity capital from public investors.

The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment, as it typically includes a share premium for current private investors. Meanwhile, it also allows public investors to participate in the offering.

This article will cover two aspects which need to take care of before going for IPO. One aspect will cover from the companies’ angle, i.e., Roadmap to file DRHP & the second aspect will cover the requirement of restatement of the financial statement.

Roadmap to DRHP

Normally a period of 6 months to 12 months requires a private limited company to file DRHP, as there would be some compliances which need to be fulfilled before filing DRHP, which were not applicable to a private company earlier.

The major steps & compliances include the following:

1. Appointment of Merchant banker & Legal advisor

2. Appointment of peer review certified CA as an Auditor in case the predecessor auditor did not hold a valid peer review certificate.

3. Converting Private limited into public limited

4. Appointment of whole-time Key managerial person like CFO, CS etc.

5. Increase in Authorised share capital

• Company law requirements for listed entities like:
• Formation of the Audit Committee
• Formation of Nomination & remuneration committee
• Formation of Stakeholder relationship committee (in case post-issue shareholders are more than 1000)
• Applicability of Internal Audit
• Applicability of Secretarial Audit
• Applicability of CARO
• Adoption of IND AS

Applicability of Ind AS: –

An issuer company should be mindful of the fact that the road map on Ind AS is applicable to all listed companies or any company which is in the process of listing inside or outside India. Generally, companies considering an IPO adopt Ind AS voluntarily and prepare restated financials to ease out financial reporting challenges post-listing. However, IND AS is not applicable to companies which are listed on the SME platform.

SEBI Regulation for preparation of restated financial statement: –

As per SEBI ICDR Regulations, 2018, an issuer is required to prepare the restated consolidated financial statements as part of the financial information.

The company have to prepare the restated financial statements for each of the three financial years immediately preceding the filing of the offer document and stub period (if applicable). Where the company has been in existence for a period of fewer than three years, the financial statements are to be given for the actual period of existence.

In case the entity does not have a subsidiary, associate or joint venture in any financial year, the issuer shall present separate financial statements for that financial year by following the applicable requirements of a restated consolidated financial statement.

The restated financial information shall be audited and certified by the statutory auditors who hold a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India (ICAI). If a new auditor holding a valid peer review certificate is appointed for the stub period, and the predecessor auditor did not hold a valid peer review certificate at the date of signing the last annual financial statement, then the last annual financial statement would need to be re-audited by the new auditor in accordance with applicable standards. The re-audit may exclude audit reporting on CARO, Internal financial control, and other regulatory matters. Where the auditor earlier held a valid peer review certificate but did not hold a valid certificate at the date of signing the restated financial information, the earlier certificate shall be considered valid, provided there is no express refusal by the peer review board to renew the certificate and the process to renew the peer review certificate was initiated by the auditor.

The restated financial information in the offer document shall not be more than six months old from the date of filing the DRHP/RHP/Prospectus, as applicable. In a situation where the financial statements for the latest full financial year included in the offer document are older than six months from the date of filing of the draft offer document (DRHP), the issuer company will be required to present a restated financial information for the stub period in accordance with Ind AS 34 or AS 25 as applicable and other accounting principles generally accepted in India for the stub period.

As per SEBI (ICDR) Regulations, 2018, the financial statements are required to be restated for the below-stipulated areas: –

• Change in accounting policy: Accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. Examples include the method of valuation of inventory
• Prior-period error: Prior period errors are omissions from, and misstatements in, an entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available and could reasonably be expected to have been obtained and considered in preparing those statements.
• Change in estimates: There are certain estimates which are used while preparing the financial statements for any period. For example, estimate the useful life of machinery and estimate the realizable value of an item in inventory.
• Audit qualifications: SA 705 Modification to the Opinion in the Independent Auditor’s Report requires a qualified opinion, adverse opinion or disclaimer of opinion for material misstatements. In case audit modifications, which are quantifiable or can be estimated, shall be adjusted in the restated financial information in the appropriate period. In situations where the qualification cannot be quantified or estimated, appropriate disclosures should be made, in the notes to account, explaining why the qualification cannot be quantified or estimated.
• Non-provisioning, regrouping, and other adjustments: Provision for expenses, regrouping from Current to non-current & vice versa and other adjustments shall be considered while preparing restated financial statement.

Following are other disclosure required in restated financial statements:

1. A reconciliation explaining the differences between the audited financial statement and the restated financial statement should be presented in a columnar format with respect to changes in

(i) equity and

(ii) profit/ (loss) after tax or total comprehensive income.

2. List of the related parties and all related party transactions of the consolidated entities

Other FS information: –

As mentioned below, in addition to restated financial statements, other relevant information shall form part of it:

1. Statement of Accounting & Other Ratios, as per SEBI ICDR

• Earnings per share (Basic and Diluted)
• Return on net worth
• Net Asset Value per share
• EBITDA

2. Statement of capitalisation

Capitalisation statements showing total borrowings, total equity, and the borrowing/ equity ratios before and after the issue is made shall be incorporated. It shall be prepared on the basis of the restated financial statement for the latest financial year or, when applicable, at the end of the stub period.

Conclusion: –

As it is mandatory for a listed company to appoint a peer-reviewed certified Chartered Accountant as a statutory auditor, the entity who is planning to file DRHP in the near future after 2-3 years can appoint peer review certified Chartered Accountant to streamline their DRHP filing process.

Authors:

Sachin Ostwal | Associate Consultant   |   Email: sachin.ostwal@masd.co.in|LinkedIn Profile

CA Sahil Rathod | Manager |   Email: sahil.rathod@masd.co.in |LinkedIn Profile