IPO Financial & Tax Due Diligence — SEBI ICDR Format

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: Regulation 25 — due diligence certificate by BRLM; Regulation 57 — risk factor disclosures mandated for all material risks identified in due diligence. Schedule VI — restated financial information and auditor certificate requirements. Ind-AS 24 (Related Party Disclosures): all related-party transactions to be identified and disclosed in the offer document. Section 188 of the Companies Act, 2013: related-party transactions at arm's length; approval requirements. Section 92 of the Income Tax Act, 1961: international and domestic transfer pricing; Form 3CEB mandatory where aggregate international transactions exceed Rs. 1 crore. Section 17(2) of the Income Tax Act, 1961: perquisite taxation on ESOPs. ICAI Guidance Note on Auditor's Report in Prospectuses and Offer Documents: form, content, and liability framework for auditor comfort letters in IPO offer documents.

Financial and tax due diligence is a mandatory pre-IPO exercise conducted by an independent Chartered Accountant on behalf of the Book Running Lead Manager (BRLM) or the issuer company. While the statutory auditor prepares the restated financial statements for the DRHP, the due diligence CA independently examines the financial and tax position of the issuer to identify risks that must be disclosed in the offer document and to satisfy the BRLM's own due diligence obligations under SEBI ICDR Regulations.

The financial due diligence scope for an IPO covers: quality of earnings analysis (recurring vs. one-time income, normalised EBITDA, revenue recognition policies), working capital analysis (days sales outstanding, inventory days, creditor days and their trends), capex and asset verification, off-balance-sheet exposures (guarantees, contingent liabilities), related-party transactions analysis (Section 188 of Companies Act, 2013 and Ind-AS 24 disclosures), financial covenant review (term loan and working capital facility agreements), and management accounts reconciliation with statutory accounts.

The tax due diligence covers: income tax assessment history (open assessments, pending demands, stay orders), TDS compliance (26AS reconciliation with books), GST audit risk (GSTR-2A/2B vs. purchase register reconciliation), transfer pricing assessment exposure (Section 92 and Form 3CEB), potential tax liabilities on employee stock options (ESOP — Sections 17(2) and 192), deferred tax asset recoverability assessment, and customs/excise legacy liabilities.

The output of the financial and tax due diligence exercise is a due diligence report (also called a Long Form Report or Financial Due Diligence Report) delivered to the BRLM in confidence. Risk items identified in the report that are material are required to be disclosed in the DRHP as risk factors (Section "Risk Factors" of the DRHP) or in the notes to the restated financial statements. The CA also issues an auditor comfort letter (sometimes called a "bring-down" letter) at the time of pricing and again at the time of listing, confirming that there have been no material changes in the financial position of the company since the cut-off date of the restated financial statements.