Before a merchant banker (Lead Manager) agrees to file your DRHP, they perform a preliminary due diligence that covers 5 core areas. This checklist mirrors exactly what they evaluate.
Category 1 — Financial Readiness
- 3-year audited financials available — Statutory audit reports (unqualified preferred) for FY22, FY23, FY24
- IndAS financials prepared — Companies with revenue above ₹250 crore must use IndAS. SMEs often need restatement.
- Consistent revenue trajectory — Bankers look for 15%+ CAGR over 3 years as a positive signal
- EBITDA margins documented — Clear cost structure, no large one-off items without disclosure
- Promoter loans cleared — Outstanding loans from company to promoters or directors must be repaid before DRHP
- Working capital structure explained — Cash conversion cycle, creditor/debtor days should be reasonable for the sector
Category 2 — Governance
- Board composition — At least ⅓ independent directors for SME listed companies (SEBI LODR requirement)
- Audit Committee formed — Required pre-listing, must meet quarterly
- Nomination & Remuneration Committee — Required under Companies Act 2013
- Stakeholder Relationship Committee — Required post-listing for investor grievance handling
- Related party transaction policy — Board-approved RPT policy with disclosure mechanism
- Insider trading policy — SEBI LODR compliance from listing date
Category 3 — Legal
- Clean title to all immovable property — Land/building ownership documents, lease agreements
- All licences and registrations valid — Factory licence, FSSAI, drug licence, environmental clearances as applicable
- No pending criminal proceedings against promoters — SEBI checks criminal records of all promoters via ROC and court records
- IP ownership clear — Trademarks, patents, domain names registered in company name (not personal)
- All contracts in writing — Key customer and supplier agreements formalised, not just verbal arrangements
Category 4 — Compliance
- ROC filings up to date — Annual returns, financial statements, charge documents
- TDS, GST, advance tax compliant — No significant TDS defaults; GST returns filed; advance tax paid
- Provident Fund / ESI compliant — Employee statutory contributions up to date
- No SEBI or SFIO pending actions — Any prior SEBI order, debarment, or SFIO investigation is a significant red flag
- Labour law compliance — Shops and Establishment Act, Factories Act registration and compliance
Category 5 — Operations
- MIS system in place — Management Information System for monthly P&L, balance sheet, cash flow reporting
- ERP or accounting software — Tally, SAP, or equivalent with proper voucher trail
- Customer concentration below 30% — Single customer above 30% of revenue is a disclosure risk
- Inventory management documented — For manufacturing companies especially
- Business continuity plan — Key person risk mitigation; not 100% dependent on one promoter