An IPO is not only a fund-raising event. It is a complete transformation of a company from a promoter-driven private business into an institutionally governed public company.

For any company preparing for an SME IPO or mainboard IPO, the Profit & Loss Account becomes more than just a financial statement. It becomes a reflection of business discipline, governance quality, earning stability, compliance maturity and investor confidence.

In India, IPO disclosures are governed by the SEBI ICDR Regulations, 2018, which were last amended on March 21, 2026. SME IPO applicants also need to comply with the eligibility and listing conditions prescribed by platforms such as NSE Emerge and BSE SME.  

The two years before an IPO are extremely important because investors, merchant bankers, stock exchanges and regulators do not only look at the latest year’s profit. They look at the quality, consistency and sustainability of earnings.

If a company suddenly shows higher profits just before filing for an IPO, it may create doubt regarding whether the numbers are genuine, recurring and operationally sustainable. A 24-month preparation period helps the company demonstrate that its profitability is not the result of last-minute accounting adjustments, but the outcome of a stable business model.

A clean and consistent P&L also helps in better valuation, stronger investor confidence and smoother due diligence.

P&L institutionalization means converting the financial statements from a privately managed format into a professionally governed and investor-ready format.

In many private companies, the P&L may include personal expenses, informal arrangements, related party transactions, non-recurring income, inconsistent accounting practices or promoter-driven decisions. Before an IPO, these items need to be reviewed, corrected, documented and aligned with public-market expectations.

In simple terms, it means making the P&L clean, transparent, comparable and defensible.

One major area of scrutiny is Related Party Transactions, commonly known as RPTs. In promoter-led companies, it is common to find rent paid to promoter-owned premises, loans from directors, advances to group entities, family-linked vendor arrangements or promoter expenses routed through the company.

These transactions are not automatically wrong, but they must be properly documented, commercially justified and conducted on an arm’s length basis.

The company should ensure that all related party transactions are supported by formal agreements, board approvals, market-rate justification and proper accounting disclosure.

Public investors prefer a clear separation between the company and its promoters. Therefore, any informal financial arrangement between the promoter and the company should be reviewed well before the IPO.

Outstanding loans to or from promoters, personal expenses booked in the company, arbitrary drawings, or informal advances should be cleaned up. Promoter remuneration should also be converted into a board-approved, market-aligned salary or commission structure.

The objective is simple: the company should look like an independently managed institution, not an extension of the promoter’s personal finances.

High profit is useful only when it is genuine, recurring and generated from the core business.

For example, if a company’s EBITDA improves because of one-time asset sale income, waiver of liabilities or accounting adjustments, investors may not give the same valuation multiple as they would for operating profit earned from regular business.

Improving earnings quality means:

1. Removing non-recurring income from core operating performance.
2. Cleaning old receivables, doubtful debts and slow-moving inventory.
3. Applying consistent accounting policies.
4. Avoiding aggressive revenue recognition.
5. Ensuring that margins are supported by actual business operations.

A company with slightly lower but cleaner profits may command better confidence than a company with higher but questionable earnings.

Revenue is one of the most closely reviewed areas during IPO due diligence. The company must ensure that sales are genuine, supported by contracts, invoices, delivery proof and customer confirmations wherever required.

Companies should avoid practices such as artificial year-end billing, channel stuffing, inflated sales to related entities or booking revenue without sufficient delivery or performance obligation.

If a large portion of revenue comes from one or two customers, the company should also focus on customer diversification. Heavy dependence on a single customer can create concentration risk and may affect valuation.

Private companies often carry expenses that may not be acceptable from an institutional investor’s perspective. These may include personal travel, family-related expenses, excessive cash expenses, unsupported reimbursements, non-business assets, informal commissions or expenses without proper documentation.

These items should be identified through a diagnostic review and either removed, regularized or properly documented.

The objective is not to artificially increase profits, but to present the true operating performance of the business.

A listed company has higher compliance and governance costs than a private company. Therefore, the company should gradually start absorbing such costs before the IPO.

These may include:

1. Appointment of a qualified Company Secretary.
2. Stronger statutory audit and internal audit processes.
3. Independent directors and board committee-related costs.
4. Legal, secretarial and investor communication expenses.
5. Improved MIS, ERP, internal control and reporting systems.
6. Professional advisory cost for taxation, governance and compliance.

Introducing these costs early gives a more realistic picture of post-listing profitability.

Contingent liabilities such as tax disputes, GST demands, legal cases, labour claims, guarantees or pending regulatory matters must be disclosed in the offer document wherever applicable.

Even if these matters do not immediately affect the P&L, they can affect investor perception and valuation. A company with unresolved disputes may face deeper questioning during due diligence.

Therefore, the 24-month pre-IPO period should be used to identify, quantify, settle or properly disclose such liabilities.

Institutional finance improves credibility. If a company has structured bank limits, proper loan documentation, clean repayment history and disciplined working capital management, it signals financial maturity.

On the other hand, excessive unsecured loans, informal borrowings, high-interest private debt or unexplained advances may create discomfort during IPO evaluation.

A company preparing for an IPO should ideally strengthen its banking relationships, improve credit discipline and maintain proper documentation for all borrowings.

The first phase should focus on diagnosis.

The company should conduct a detailed review of its P&L, balance sheet, related party transactions, promoter accounts, statutory dues, tax positions, receivables, inventory, debt structure and accounting policies.

This phase helps identify what needs to be cleaned, corrected or formalized before the company enters the active IPO planning stage.

This is the correction phase.

The company should formalize related party arrangements, settle promoter loans, correct accounting policies, improve documentation, clean old receivables, appoint stronger advisors and create proper internal controls.

By the end of this phase, the company should start operating with the discipline expected from a listed entity.

The final 12 months should be treated like a public-company trial run.

The company should maintain proper monthly MIS, board reporting, compliance calendar, internal audit reviews, customer concentration analysis, margin tracking, tax compliance, and cash flow discipline.

This period should prove that the company can operate with transparency, predictability and institutional governance.

The goal is to make the company investor-ready before it becomes IPO-ready.

A clean P&L helps the company tell a stronger story to merchant bankers, investors, stock exchanges and other stakeholders. It improves valuation confidence, reduces due diligence friction and demonstrates that the business has matured beyond founder dependency.

Visak Financial Services Pvt. Ltd. helps businesses move from promoter-led financial management to institution-ready reporting and governance.

VFSL supports companies in preparing for IPO-readiness through a practical, finance-first approach covering:

·      Pre-IPO Financial Diagnostic Review

Identifying accounting, compliance, governance and transaction-level issues before they become IPO roadblocks.

·      P&L and Balance Sheet Clean-Up Advisory

Reviewing revenue quality, expense classification, related party transactions, promoter accounts, working capital and contingent liabilities.

·      IPO Readiness Documentation Support

Assisting with business profile, financial analysis, management notes, investor presentations and due diligence support.

·      Governance and Compliance Structuring

Helping companies align with board-level, audit-level and public-market expectations.

·      Fundraising and Capital Market Advisory

Supporting businesses in evaluating SME IPO, mainboard IPO, GIFT IFSC listing, private equity, debt and structured finance options.

·      Strategic CFO-Level Guidance

Providing management-level insights on profitability, valuation, cash flow, business model strength and investor positioning.