Taking a company public is one of the most important milestones in the journey of an Indian promoter. It is not just a capital raising event. It is a complete transformation of the company’s financial discipline, governance standards, internal controls, compliance culture, and public accountability.

Before a company reaches the stage of filing the Draft Red Herring Prospectus, commonly known as the DRHP, it must go through a detailed financial due diligence process. This process helps identify accounting gaps, tax exposures, related party issues, internal control weaknesses, pending litigations, compliance defaults, and disclosure risks.

For Indian promoters, the road to DRHP should begin much before the actual IPO filing. A company may be profitable and growing, but unless its books, records, controls, and disclosures are IPO-ready, the public issue process can become difficult, delayed, and expensive.

This Q&A playbook explains the key areas promoters should review before starting the DRHP journey.

A DRHP, or Draft Red Herring Prospectus, is a detailed offer document filed by a company proposing to raise funds through an IPO. It contains information about the company’s business, financials, promoters, risks, objects of the issue, industry, management, litigations, related party transactions, and other material disclosures.

The DRHP is important because it becomes the primary document through which regulators, merchant bankers, investors, analysts, and institutions assess the company.

In simple words, the DRHP tells the market:

• What the company does
• How it earns revenue
• What risks does it face
• How strong its financials are
• Who the promoters are
• How funds will be used
• Whether the company is governance-ready
• Whether investors can rely on the disclosures

A weak DRHP preparation process may lead to repeated queries, delays, valuation concerns, or loss of investor confidence.

Pre-IPO financial due diligence is a detailed review of the company’s financial records, accounting policies, tax positions, internal controls, legal exposures, and business transactions before filing the DRHP.

It is not the same as a normal statutory audit.

A statutory audit generally verifies whether the financial statements are prepared in accordance with applicable accounting standards and legal requirements. Pre-IPO due diligence goes deeper. It asks whether the company is ready to face public market scrutiny.

It checks whether:

• Revenue recognition is proper
• Expenses are fully recorded
• Related party transactions are transparent
• Tax compliances are clean
• Loans and borrowings are properly disclosed
• Promoter transactions are properly documented
• Financial statements can be restated correctly
• Internal controls are reliable
• Historical issues have been cleaned up
• The company can defend its numbers before investors

This process helps promoters identify issues before regulators or investors raise them.

Ideally, IPO readiness should begin at least 12 to 24 months before the proposed DRHP filing.

Many promoters assume that IPO work starts when merchant bankers are appointed. In reality, that is too late. By the time investment bankers, lawyers, auditors, and other intermediaries come in, the company should already have clean financials, strong records, and proper documentation.

A practical timeline can be:

12 to 24 months before DRHP

• Clean up accounting records
• Review tax and GST compliance
• Identify related party transactions
• Strengthen internal controls
• Convert informal processes into documented systems
• Review group structure
• Prepare for Ind AS or applicable accounting standards
• Settle or document old disputes

6 to 12 months before DRHP

• Appoint key IPO advisers
• Prepare virtual data room
• Conduct financial and legal due diligence
• Review restated financial statements
• Strengthen MIS and reporting
• Finalise corporate governance structure

3 to 6 months before DRHP

• Resolve diligence observations
• Finalise financial disclosures
• Complete board and committee readiness
• Prepare DRHP sections
• Obtain required certificates and confirmations
• Coordinate with merchant bankers and legal advisers

The earlier the preparation begins, the smoother the DRHP process becomes.

The biggest change is moving from a promoter-driven company to a public-ready company.

In many private businesses, decisions are taken quickly and informally. Promoters may personally approve major payments, negotiate customer contracts, manage group company transactions, and handle banking relationships. This works in a private setup, but not in a public market environment.

Before an IPO, the company must shift towards:

• Transparent decision-making
• Documented approvals
• Proper delegation of authority
• Strong internal controls
• Independent board oversight
• Audit committee review
• Clean financial reporting
• Investor-focused disclosures

The focus also changes from tax-saving and flexibility to accuracy, transparency, and governance.

Public investors do not only invest in profits. They invest in trust.

Generally, no.

For IPO purposes, the company is required to prepare restated financial information as per applicable SEBI requirements. This means past financial statements are reviewed and adjusted to present them consistently for the periods covered in the offer document.

Restatement helps investors compare financial performance on a like-for-like basis.

Past audited financial statements may have been prepared under earlier accounting policies, different classification methods, or with certain audit qualifications. For DRHP purposes, these statements may need adjustments, regrouping, and proper disclosure.

Restated financial information is one of the most important parts of the DRHP.

Restatement is the process of revising historical financial information so that it is presented consistently and correctly for IPO disclosure.

It may involve:

• Correcting prior-period errors
• Adjusting audit qualifications
• Aligning accounting policies
• Reclassifying financial statement items
• Giving effect to applicable accounting standards
• Consolidating subsidiaries, where required
• Adjusting extraordinary or non-recurring items
• Presenting financials in the required DRHP format

The objective is to ensure that investors receive a fair, comparable, and transparent view of the company’s financial performance.

Common restatement adjustments may include:

1. Revenue recognition corrections

Revenue may need adjustment if sales were booked before completion of obligations, delivery, acceptance, or milestone completion.

2. Expense cut-off corrections

Expenses relating to earlier periods but recorded later may need to be shifted back to the correct period.

3. Related party transaction classification

Transactions with promoter entities, group concerns, relatives, or associate entities may need proper classification and disclosure.

4. Provision adjustments

Bad debts, warranty obligations, employee benefits, litigations, or other liabilities may need appropriate provisioning.

5. Depreciation and asset classification

Fixed assets may need review for correct capitalisation, depreciation method, useful life, impairment, and classification.

6. Tax adjustments

Deferred tax, current tax, GST exposures, TDS defaults, and tax provisions may require review.

7. Regrouping and reclassification

Financial statement line items may need regrouping to ensure consistency across all reported periods.

Restatement is not merely a formatting exercise. It is a detailed financial clean-up exercise.

Related party transactions are one of the most sensitive areas in IPO due diligence.

In promoter-led businesses, transactions with group companies, family entities, relatives, partnership firms, LLPs, trusts, or promoter-controlled businesses are common. These may include loans, advances, property use, purchases, sales, services, guarantees, reimbursements, and shared expenses.

For IPO readiness, every related party transaction must be:

• Identified
• Documented
• Approved, where required
• Conducted at arm’s length
• Supported by agreements or invoices
• Properly disclosed
• Justified commercially

The concern is not only whether the transaction is legal. The concern is whether public investors will see it as fair and transparent.

Old balances with promoters, directors, group entities, or related parties should be reviewed early.

Promoters should check:

• Whether the balances are recoverable or payable
• Whether the transaction has proper documentation
• Whether interest should have been charged
• Whether there are Companies Act or tax implications
• Whether the amount should be settled before the DRHP
• Whether disclosure will create investor concern
• Whether the transaction was at arm’s length

Unexplained, long-outstanding, or informal balances can become a major red flag during IPO due diligence.

This is a serious issue for IPO readiness.

In private companies, promoters may sometimes use company accounts for personal expenses, family travel, personal assets, residence-related expenses, or non-business expenditure. While this may be common in some private setups, it is not acceptable for a public-ready company.

Before IPO, promoters should ensure:

• Personal and business expenses are clearly separated
• Non-business expenses are identified and reversed or recovered
• Director reimbursements are properly supported
• Perquisite implications are reviewed
• Tax treatment is corrected
• Proper expense approval systems are implemented

Public market investors expect clean corporate accounts.

Tax due diligence is a major part of the IPO preparation process.

The review generally covers:

• Income tax filings
• TDS/TCS compliance
• GST registration and returns
• GST reconciliation with books
• Tax assessments and appeals
• Transfer pricing, if applicable
• International transactions
• Deferred tax
• MAT or other tax positions
• Contingent tax liabilities
• Tax provisioning
• Outstanding demands
• Search, survey, or investigation history

The company should not wait for DRHP drafting to identify tax issues. Tax exposures should be quantified, documented, and resolved wherever possible.

GST reconciliation is important because mismatches between books, GSTR-1, GSTR-3B, e-invoices, e-way bills, and financial statements can raise questions.

Common GST issues include:

• Difference between revenue as per books and GST returns
• Unreconciled input tax credit
• Wrong HSN or SAC classification
• Incorrect place of supply
• Export documentation gaps
• Delayed payment of GST
• Interest or penalty exposure
• Unrecorded credit notes or debit notes

For a company preparing for IPO, GST data should match financial reporting logic or the differences should be properly explained.

Borrowings and banking records are carefully reviewed because they show the company’s financial discipline.

The due diligence team may review:

• Loan sanction letters
• Security documents
• Charges registered with ROC
• Bank statements
• Repayment schedules
• Interest rates
• Covenant compliance
• Defaults or delays
• Working capital utilisation
• Bank guarantees and letters of credit
• Related party guarantees
• Personal guarantees by promoters

Any default, irregularity, or undisclosed borrowing can create serious concern.

Investors do not look only at revenue growth. They look at revenue quality.

A company may show high revenue, but due diligence will examine whether that revenue is sustainable, collectible, properly recognised, and not dependent on unusual or related party transactions.

The review may cover:

• Customer concentration
• Related party sales
• One-time revenue
• Revenue cut-off
• Credit notes after year-end
• Unbilled revenue
• Contract terms
• Collection history
• Debtor ageing
• Revenue from discontinued products or services

A company preparing for IPO should be able to clearly explain where its revenue comes from and whether it is recurring, scalable, and genuine.

Working capital is one of the clearest indicators of business health.

Promoters should review:

• Debtor ageing
• Bad debts and provisions
• Inventory ageing
• Slow-moving stock
• Advances to suppliers
• Advances from customers
• Creditor ageing
• Unbilled revenue
• Cash conversion cycle
• Bank overdraft utilisation

If profits are growing but cash flow is weak, investors will ask why.

Strong working capital discipline improves confidence in the company’s financial management.

Internal Financial Controls, or IFC, are the policies and procedures designed to ensure that financial transactions are properly authorised, recorded, processed, and reported.

For a public-ready company, internal controls cannot depend only on trust or promoter supervision.

There should be documented controls around:

• Purchase approval
• Sales invoicing
• Expense authorisation
• Bank payments
• Payroll processing
• Inventory movement
• Revenue recognition
• Fixed asset management
• Journal entries
• User access in accounting software
• Financial closing process

Weak internal controls can result in errors, fraud risks, inaccurate reporting, and investor concern.

Before the DRHP stage, the company must evaluate whether its board and governance structure are public-market ready.

Key areas include:

• Board composition
• Independent directors
• Audit committee
• Nomination and remuneration committee
• Stakeholders relationship committee
• Risk management framework, where applicable
• Related party transaction policy
• Code of conduct
• Insider trading policy
• Whistle-blower policy
• Document retention policy
• Delegation of authority matrix

Governance should not be created only on paper. It should be implemented in practice.

A virtual data room is created to share documents with merchant bankers, legal counsel, auditors, and other IPO advisers.

The data room should include:

• Audited financial statements
• Trial balances
• General ledgers
• Tax returns
• GST returns and reconciliations
• Bank statements
• Loan documents
• ROC filings
• Board and shareholder resolutions
• Material contracts
• Customer and vendor agreements
• Related party transaction records
• Payroll records
• ESOP documents, if any
• Litigation documents
• Licences and approvals
• Fixed asset register
• Insurance policies
• Internal policies
• MIS reports

A well-organised data room saves time and creates confidence.

Common red flags include:

• Unexplained related party transactions
• Personal expenses in company books
• GST and revenue mismatches
• Weak debtor recoverability
• Large cash transactions
• Unrecorded liabilities
• Improper revenue recognition
• Old unsecured loans without documentation
• Non-compliance in ROC filings
• Undisclosed litigation
• Weak internal controls
• Informal arrangements with group entities
• Pending tax demands
• Audit qualifications
• Frequent accounting policy changes
• Non-reconciliation of bank, debtors, creditors, and tax ledgers

Promoters should identify and resolve these issues before they reach the DRHP stage.

Merchant bankers, also called lead managers or book running lead managers, play a central role in the IPO process.

They review the company’s business, financials, disclosures, risks, governance, and issue structure. They coordinate with auditors, lawyers, registrars, stock exchanges, and SEBI.

From a financial due diligence perspective, they will ask whether:

• The company’s numbers are reliable
• Restated financials are properly prepared
• Key risks are disclosed
• Business performance is explainable
• Related party transactions are clean
• Financial ratios are consistent
• Fund utilisation is justified
• Promoter and group disclosures are complete

Merchant bankers will not want unresolved financial issues to surface late in the process.

The confidential pre-filing mechanism allows eligible companies to submit the draft offer document confidentially for regulatory review before making it public.

This may be useful where the company wants to protect sensitive commercial, financial, or strategic information until it is more certain about proceeding with the IPO.

It can be helpful when:

• Market conditions are uncertain
• The company wants regulatory feedback before public disclosure
• The business has sensitive competitive information
• Timing of the IPO is not final
• Promoters want more flexibility

However, this route should be evaluated carefully with merchant bankers and legal advisers.

Promoters should be ready to explain the business in a clear and credible manner.

Investors may ask:

• Why is the company raising funds?
• What is the growth strategy?
• How sustainable are margins?
• Why has working capital increased?
• Are related party transactions reducing?
• Are promoters taking money out of the business?
• What are the key risks?
• How strong is the second-line management?
• Is the company dependent on a few customers?
• How will IPO proceeds be used?
• What is the return on capital employed?

Numbers alone are not enough. Promoters must be able to explain the story behind the numbers.

The first 90 days should focus on diagnosis and clean-up.

Promoters should:

Step 1: Conduct a financial health check

Review the last three years’ financial statements, tax returns, audit reports, and major reconciliations.

Step 2: Prepare an issue list

Identify financial, tax, legal, governance, and documentation gaps.

Step 3: Clean related party balances

Review promoter, director, group company, and family-linked transactions.

Step 4: Strengthen MIS

Prepare monthly MIS, EBITDA reconciliation, cash flow reports, debtor ageing, creditor ageing, and working capital dashboards.

Step 5: Review compliance status

Check ROC filings, tax filings, GST returns, licences, labour law compliances, and statutory registers.

Step 6: Start documentation

Prepare agreements, board approvals, transaction notes, policy documents, and data room folders.

Step 7: Appoint advisers

Engage the right financial, tax, legal, secretarial, and capital market advisers early.

The first 90 days set the tone for the entire IPO process.

Promoters should avoid:

• Entering into informal related party transactions
• Changing accounting policies without strong reason
• Delaying tax payments
• Ignoring GST mismatches
• Booking revenue aggressively
• Using company funds for personal expenses
• Giving undocumented loans or advances
• Delaying ROC filings
• Hiding litigations
• Not documenting board approvals
• Waiting for advisers to identify obvious issues
• Treating IPO as only a fundraising exercise

IPO preparation is not cosmetic. It requires real discipline.

The road to DRHP is not only about preparing a document. It is about preparing the company.

A successful IPO journey requires clean books, transparent disclosures, strong governance, reliable internal controls, tax discipline, and a promoter mindset that is ready for public accountability.

Promoters should remember one thing: issues that are manageable privately may become serious concerns once the company enters the public market.

The earlier the clean-up starts, the stronger the IPO story becomes.

Pre-IPO financial due diligence should therefore be treated as a strategic preparation exercise, not a last-minute compliance requirement.

A company that is financially clean, governance-ready, and disclosure-ready will always be better positioned to earn investor confidence.

Filing a DRHP is a major milestone, but it is not the beginning of the IPO journey. The real journey starts much earlier with financial due diligence, restatement preparation, tax review, related party clean-up, internal control strengthening, and governance readiness.

For Indian promoters, the most important lesson is simple: do not wait until the merchant banker starts asking questions.

Start early. Clean up the books. Document the transactions. Strengthen controls. Review taxes. Settle old issues. Build a strong MIS. Prepare the data room. Create a company that can withstand regulatory and investor scrutiny.

The road to DRHP is demanding, but with the right preparation, it can become a powerful step towards building a transparent, scalable, and publicly trusted enterprise.

Preparing for an IPO is not only about appointing merchant bankers and drafting the DRHP. The real preparation starts much earlier, with clean books, reliable financial reporting, tax discipline, strong documentation, and promoter-level readiness.

This is where Visak Financial Services Private Limited (VFSL) can support Indian promoters with a structured and practical pre-IPO readiness approach.

VFSL helps promoters identify financial, accounting, tax, compliance, and documentation gaps before they become serious issues during IPO due diligence. Our focus is to make the company more organised, transparent, and ready for regulatory and investor scrutiny.

VFSL can assist with:

• Pre-IPO financial due diligence support
• Review of historical financial statements
• Restated financial information coordination
• Related party transaction review
• Promoter and group entity transaction clean-up
• GST, TDS, income tax and compliance review
• Working capital and cash flow analysis
• MIS and management reporting improvement
• Data room preparation support
• Internal control gap identification
• Documentation of key financial and commercial transactions
• Coordination with auditors, company secretaries, legal advisers and merchant bankers

With VFSL, promoters get a practical partner who understands finance, compliance, transaction readiness, governance expectations, and the realities of Indian promoter-led businesses.

A strong IPO story begins with strong preparation. VFSL helps promoters build that foundation before the DRHP stage.