Pre-IPO Structuring: The 18 Months Before Filing

The board says “let’s list” and the founder imagines six months of work. The reality is closer to eighteen months, and most of that time is spent before the merchant banker is even appointed — cleaning up the corporate body so it survives the SEBI observation letter without a flurry of carve-outs and disclosures. The companies that file smoothly are the ones that started preparing at T-minus 18 months. The ones that delay file at T-minus 12 and learn the hard way that DRHP is a six-month re-filing exercise on top of a year of cleanup.

This is the timeline I run with clients heading to BSE SME, NSE Emerge or the mainboards. The company sizes differ; the sequence does not.

The 18-month T-minus timeline

The work falls into roughly six time blocks: cap-table cleanup, capitalisation engineering, promoter lock-in design, ESOP scheme conversion, related-party purges, and DRHP drafting. Each block has a window where the work is cheap and a window where it becomes expensive. The art is sequencing them so each block’s output feeds the next without forcing rework. A bonus issue done after promoter lock-in calculations have been finalised forces re-filing. A related-party purge done after restated financials are locked forces re-statement. Sequence matters.

T-18: clean up the cap table, eliminate complex instruments

The first six months are spent removing instruments, not adding them. SEBI ICDR Regulation 5(2) requires that all convertible instruments — SAFEs, CCDs, CCPS, convertible notes, employee warrants, founder warrants, anti-dilution adjustments — be either converted into equity or extinguished before the DRHP is filed. There can be no outstanding convertible securities on the cap table at filing.

For a typical Series B startup, this means one or two rounds of conversion mechanics, possibly with renegotiation of the conversion ratios to reflect the listing benchmark. CCPS held by VCs almost always convert to equity at this stage. SAFEs left over from seed convert under their original valuation caps. Employee warrants get converted, exercised or surrendered. The cap table that goes into the DRHP must be a clean equity-only table — every cell of which can be tied back to a board resolution and a regulatory filing.

This is also when foreign shareholding gets cleaned up. FC-GPR filings missing from earlier rounds get regularised, RBI compounding is filed if necessary, and downstream investment compliance under FEMA NDI Rules is documented. SEBI does not file a DRHP with open FEMA exceptions.

T-12: bonus issues and share splits to bring face value to listing norm

Most pre-IPO companies have a face value of ₹10 with a small number of shares outstanding. For listing, the face value should typically be ₹10 (mainboard) or ₹10 (SME) — but the number of shares should be large enough that the post-issue price band can sit between ₹100 and ₹500 per share for SME or ₹100 and ₹1,500 for mainboard, with a marketable lot size.

The fix is a combination of bonus issue (under Section 63 of Companies Act) and share split (under Section 61). A 1:5 bonus issue followed by a 10-into-1 split, for example, multiplies the share count by 50× without changing the underlying economics. The restated financials get re-presented in per-share terms reflecting the post-bonus, post-split share count.

Two things to get right: bonus issues require free reserves on the balance sheet (which not every Series B startup has — some are still loss-making) and a special resolution in a general meeting. Plan the timing so that the most recent audited financials show the bonus and split fully reflected before DRHP filing — or you will be forced to file interim financials, which adds three to four months to the timeline.

T-9: promoter lock-in planning under SEBI ICDR

Under SEBI ICDR Regulation 16, the minimum promoter contribution (MPC) of 20% of post-issue equity is locked in for three years from listing. The remaining promoter holding is locked in for one year. For SME IPOs, the lock-in is three years from listing on the entire promoter holding. This is non-negotiable.

The planning question: which promoter shares get counted toward the 20% MPC? Shares acquired in the last year (from a fundraise, conversion, or transfer) cannot be counted. Bonus shares issued in the last year can be counted only if the underlying shares were eligible. Shares acquired via a scheme of arrangement may or may not count depending on the timing. This calculation must be done carefully and locked in well before filing — a bonus or split done after the 12-month look-back window resets the eligibility, and you have to wait another year before MPC qualifies.

For founder-promoters with multiple holding companies (a common pattern at Series B), this is when the promoter group is formally identified and disclosed. Every entity, every relative, every “person acting in concert” — all of this gets mapped, documented, and locked in. Errors at this stage create disclosures that haunt the company for three years post-listing.

T-6: ESOP scheme conversion to listed-company-eligible

The unlisted-company ESOP scheme drafted under Section 62(1)(b) of Companies Act needs to be re-aligned to the SEBI Share Based Employee Benefits Regulations 2021. This means a fresh shareholder approval, a re-drafted scheme, and re-grants (or grant amendments) for existing options. The SEBI scheme permits only certain trust structures, caps secondary acquisition, and prescribes specific disclosure formats.

If the company has used a trust route, the trust’s holding structure is reviewed against SEBI’s 5% secondary acquisition limit. If the unlisted scheme allowed phantom stock or SARs, those are typically wound down or converted to actual options before listing. The cleanup is tedious — but again, far cheaper than disclosing it as an open issue in the DRHP.

T-3: related-party transactions reduced or properly disclosed

SEBI looks closely at related-party transactions in the three financial years preceding the DRHP. Every transaction with a promoter group entity, director-controlled entity, or relative-controlled entity must be at arm’s length, supported by transfer pricing documentation where applicable, and approved under the audit committee process required by Section 188 of Companies Act and Regulation 23 of SEBI LODR.

The reality at most Indian SMEs heading to IPO: a tangle of related-party loans, lease arrangements, supply contracts, and management fees — most of which are commercially fine but documentationally sloppy. The T-3 cleanup involves settling related-party loans (or formally documenting them with arm’s-length interest rates), restructuring lease arrangements onto market terms, and either eliminating or properly documenting commercial transactions with promoter group entities.

The temptation here is to reduce related-party transactions for the three-year DRHP look-back — but retroactive cleanup creates a worse impression than forward documentation. The goal is to show a clear arc: messy in year one, cleaner in year two, fully arm’s-length in the year of filing.

DRHP filing readiness

By T-3 to T-1, the merchant banker (BRLM) is appointed, the legal counsel and auditors are coordinating, and the DRHP is being drafted. The CA’s work at this stage is the financial sections — three years of restated financials aligned to Ind-AS, the “Management Discussion and Analysis”, the risk factors that touch financials, the tax notes, the related-party disclosures, and the basis for the price band.

Restated financials are not the same as audited financials. Restatement adjusts for changes in accounting policies, errors in prior periods, related-party adjustments, and any carve-outs required by SEBI. The restated financials in the DRHP must reconcile to the audited financials with a clear reconciliation table — every adjustment explained.

The mistakes that delay filings by six months or more

Filing a DRHP with outstanding convertibles. SEBI returns the DRHP within four to six weeks with comments, and the company spends three months converting and re-filing.

Bonus or split done in the wrong sequence. If the bonus predates the most recent audited financials by less than 12 months, the financials need restating to reflect the bonus retrospectively — adding two to three months.

Promoter lock-in miscalculation. If the 20% MPC is not properly held for the eligibility period, listing is delayed until eligibility is met — sometimes 12 months.

Related-party transactions surfacing during diligence that were not flagged in the original cleanup. Each surprise requires fresh disclosure, sometimes a fresh audit committee ratification, and almost always a re-filing.

ESOP scheme not aligned to SEBI Regulations at filing. SEBI will require the scheme to be re-aligned and re-approved before clearance — three months of work.

Bottom line

Pre-IPO structuring is unglamorous, document-heavy work that determines whether the listing happens on the planned date or twelve months later. The 18-month roadmap exists for a reason: every block depends on the one before it, and every shortcut at one block creates a delay at the next. A founder-promoter heading to listing should treat the year before the BRLM appointment as the most leveraged year of the entire process — because by the time the DRHP is being drafted, the company’s structure is mostly fixed, and the merchant banker is just describing what is already there. The work that buys you a clean filing is the work you do before anyone outside the room knows you are going public.