An Initial Public Offering is not merely a capital-raising event; it is a moment of corporate truth. The scrutiny that accompanies a public issue forces companies to confront legacy decisions, informal arrangements, and governance gaps that were acceptable in a private environment but unacceptable in a listed ecosystem. Pre-IPO restructuring, therefore, becomes less about cosmetic clean-up and more about building institutional credibility.

Among the most sensitive areas in this phase are employee stock option structures, related-party funding arrangements, and historical compliance with the Registrar of Companies. Errors or ambiguities in these areas can delay regulatory approvals, invite adverse disclosures in offer documents, or even derail the IPO timetable. A disciplined, checklist-driven approach is essential.

1. ESOP Structures: Aligning Incentives Without Dilution Surprises

Employee Stock Option Plans are powerful retention and motivation tools, especially for high-growth companies. However, ESOPs that evolve informally over multiple funding rounds often carry structural defects that surface during IPO due diligence.

Authorisation and approval under Section 62(1)(c)
All ESOP issuances must trace back to valid shareholder approval under Section 62(1)(c) of the Companies Act, 2013. Companies often discover that earlier grants were made based solely on board approvals or on outdated shareholder resolutions. Before filing the offer document, the issuer must ensure that:

a. Shareholders approved the ESOP scheme through a special resolution.

b. Material changes to the scheme were also shareholder-approved.

c. Grant letters and vesting schedules align strictly with the approved scheme.

Any deviation may require ratification or restructuring before proceeding further.

Pricing and valuation concerns
Pre-IPO regulators and investors closely examine whether ESOPs were granted at fair value, especially when issued shortly before the IPO. Deeply discounted grants without a defensible valuation rationale may raise concerns around preferential allotment and unjust enrichment. Independent valuation support and a consistent pricing methodology are critical to withstand scrutiny.

Trust-based versus direct ESOPs
Companies using ESOP trusts must ensure that trust funding, share acquisition, and voting rights comply with applicable rules. Improper funding structures or voting arrangements may attract regulatory objections. In some cases, companies opt to unwind or simplify trust structures before an IPO to improve transparency.

2. Related-Party Loans: From Informal Funding to Balance Sheet Discipline

Startups and promoter-led companies frequently rely on related-party loans during their early stages—whether from promoters, group entities, or family trusts. While commercially expedient, such arrangements are intensely examined during IPO preparation.

Identification and classification
The first step is a comprehensive mapping of all related-party loans, including:

a. Promoter and promoter group advances

b. Inter-corporate deposits from group companies

c. Loans routed through LLPs or investment vehicles

These must be evaluated for compliance with Sections 185 and 186 of the Companies Act and appropriately disclosed.

Interest, tenure, and arm’s-length assessment
Loans carrying nil or concessional interest, indefinite tenure, or informal repayment terms raise red flags. Pre-IPO restructuring typically involves:

a. Regularising loan agreements

b. Aligning interest rates with market benchmarks

c. Defining clear repayment schedules

Where arm’s-length justification is weak, companies often choose to eliminate such loans.

Debt-to-equity conversions
One common restructuring tool is the conversion of related-party loans into equity or preference shares. While this strengthens the balance sheet and improves leverage ratios, it must be executed carefully:

a. Shareholder approvals must be obtained where required.

b. Valuation must support the conversion price.

c. Resulting shareholding patterns should not trigger control or minimum public shareholding concerns.

Improperly executed conversions may invite regulatory objections during IPO review.

3. Schemes of Arrangement and NCLT Validations

In more complex cases, especially involving group reorganisations, hive-offs, or the elimination of cross-holdings, companies resort to schemes of arrangement. These schemes require approval from the National Company Law Tribunal (NCLT) and form a critical part of pre-IPO restructuring.

Commercial rationale and transparency
Regulators assess whether the scheme has a genuine commercial objective or merely attempts to restructure shareholding before listing. Clear articulation of business rationale—such as operational focus, risk segregation, or simplification of group structure—is essential.

Treatment of shareholders and creditors
Schemes must demonstrate fairness to all classes of stakeholders. Any perceived preferential treatment, especially to promoters, may invite objections. Careful drafting and valuation support are crucial to withstand challenges.

Timelines and sequencing
NCLT processes are time-consuming. Companies must factor realistic timelines and ensure that scheme approvals precede critical IPO milestones. Inadequate planning here is a common cause of listing delays.

4. ROC Filings: Cleaning Up the Compliance Trail

Registrar of Companies filings form the documentary backbone of corporate compliance. During IPO due diligence, even minor lapses are magnified.

Delayed or incorrect filings
Common issues include delayed filings of:

a. Annual returns and financial statements

b. Allotment forms for shares or ESOPs

c. Charges related to loans or debentures

Before an IPO, companies must regularise such filings, often by paying additional fees or compounding offences where necessary.

Accuracy and consistency
Inconsistencies between financial statements, shareholding disclosures, and ROC records can undermine credibility. A detailed reconciliation exercise should be undertaken to ensure:

a. Share capital history matches ROC filings

b. Changes in directors and KMPs are properly recorded

c. Related-party disclosures align with statutory records

Impact on offer document disclosures
Any past non-compliance that cannot be fully cured must be transparently disclosed in the offer document. Early identification allows companies to manage the narrative and avoid last-minute surprises.

5. Sequencing the Pre-IPO Checklist

What distinguishes successful IPO preparation is not just compliance, but sequencing. ESOP restructuring, loan regularisation, and ROC clean-ups must be planned in a logical order:

a. Stabilise capital structure and ESOP framework.

b. Eliminate or convert related-party loans.

c. Execute schemes of arrangement, if required.

d. Complete all pending ROC filings and reconciliations.

Attempting these steps in isolation often leads to duplication, delays, or regulatory pushback.

Conclusion: From Founder-Led to Institution-Ready

Pre-IPO restructuring is ultimately about transition. It marks the shift from a founder-centric company built on trust and flexibility to an institution-ready enterprise governed by rules, disclosures, and accountability. ESOPs must reward without distorting equity, related-party loans must give way to clean capital structures, and ROC records must reflect a history of compliance rather than correction.

Companies that treat this phase as a strategic exercise—rather than a box-ticking one—not only accelerate their IPO timelines but also build long-term investor confidence. In public markets, transparency is not optional; it is the currency of trust.

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