IPO Criteria- Objects of Issue in DRHP with proposed GCP changes in SEBI Consultation Paper

When a company decides to go public, it has to undergo IPO process as per the SEBI ICDR Regulations. The process includes steps of Due Diligence, Restatement of financials, Peer Review Audit and others. One such step is Objects of Offer to be published in DRHP. 

 

A prospective company for IPO has to state the objects for which the fund raise through IPO would be utilised in its offer documents of DRHP and RHP which has to be filed with SEBI or NSE SME or BSE SME for listing on either Mainboard or SME platforms as the case may be. A company may have requirement of funds for capital expansion, for working capital or for repayment of debt, these requirements form the basis of Objects of Offer for IPO in India. Merchant Bankers in India have the role and responsibility for forming and filing DRHP. Let’s discuss these Objects of Offer in detail.

 

Objects of the Issue

Object of the Issue is a crucial information to be published in the Offer documents. It shows the purpose of raising funds from the public. There can be different objects for utilisation of funds depending on the company’s requirement. These objects of Offer and their disclosure requirements are discussed below. 

 

With each object of offer, certain key information is to be provided by the SME company which is scrutinised by the BSE SME or NSE Emerge. This information becomes the basis for making decisions by the investors to invest in the upcoming IPOs.

1.Object of the Issue -  Loan Repayment; following information need to be given in the Offer documents: 

• Details of the loan proposed to be repaid such as the name of the lender, brief terms and conditions and the amount outstanding
• A certificate from the Statutory Auditor certifying the loan utilization for the purposes availed.

2. Object of the Issue - Investment in a joint venture or a subsidiary or an acquisition; following information need to be given in the Offer documents: 

• Details of the form of investment, i.e., equity, debt or any other instrument 
• A statement to the effect when the form of investment has not been decided
• Complete details regarding rate of interest, nature of security, terms of repayment, subordination, etc. if the investment is of debt nature.
• Nature of benefit expected to accrue to the Issuer as a result of the investment 

 

3. Object of the Issue - Granting a loan to an entity other than a subsidiary; following information need to be given in the Offer documents: 

• details of the loan agreements including rate of interest, whether secured or unsecured, duration, nature of security, terms of repayment, subordination etc.
• nature of benefit expected to accrue to the Issuer as a result of the investment. 
• Details of loan when such a loan is to be granted to any of the group companies

However, it should be noted that if the company decides on the above (2) and (3) objects of the Issue there shall be an extra scrutiny by the regulatory authority and there may be chances of rejection when the funds are not directly utilised by the Issuer company for its own purposes.

 

4. Object of the Issue- Working Capital Requirements; following information need to be given in the Offer documents

Raising funds for working capital forms quite a major portion of fund raise utilisation. The regulatory authorities, SEBI, NSE Emerge and BSE SME platform thoroughly check and verify the actual need of working capital by such companies. They raise many queries to this category of Objects of Issue to cross check until they are fully satisfied on the funds to be used for working capital purposes. 

• Basis of estimation of working capital requirement along with the relevant assumptions. 
• Reasons for raising additional working capital substantiating the same with relevant facts and figures. 
• Details of the projected working capital requirement, including detailed assessment of working capital after implementation of the project or achievement of objects of the Issue, as the case may be.
• Capacity utilisation assumptions.
• Break up of expected current assets into raw materials, finished goods, work in progress, sundry debtors etc. 
• It also requires statement with assumption about the holding norms for each type of current asset, total current liabilities, net current assets and envisaged sources of finance for net current assets, i.e., bank finance, institutional finance, own funds, etc. 
• Total envisaged working capital requirement in a tabular form, the margin money thereof and the portion to be financed by any bank(s) or otherwise. 
• Details of the existing working capital available to the Issuer with a break up for total current assets into raw materials, finished goods, work in progress, sundry debtors, etc., total current liabilities, net current assets and sources of finance for net current assets i.e. bank finance, institutional finance, own funds etc. 
• Needs reasons when no working capital is shown as a part of project for which the Issue is being made.

5. Object of the Issue- Acquisition of Land; following information need to be given in the Offer documents.

• Disclosing the names of the entities and cost of acquisition from whom land has been acquired/ proposed to be acquired. Cost so mentioned shall be consistent with the figures appearing under the section "Cost of the Project".
• Disclosure when there is any relationship of such entities with any promoter or director of the Issuer.
• Details on the clear title of the Land and it shall be free from all encumbrances.
• Land acquired to be registered in the name of the Issuer.
• Details regarding the Issuer has applied/ received all the approvals pertaining to land. 
• An affirmative statement when no such approvals are required to be taken by the Issue

 

6. Objects of the Issue- Funding a Project; following information need to be given in the Offer documents

• Location of the project
• Following disclosures are required in a tabular form
  • the details of the machines required to be bought by the Issuer, 
  • cost of the machines
  • name of the suppliers
  • date of placement of order 
  • date or expected date of supply etc
• The date of quotations relied upon for the cost estimates given shall also be mentioned whem machines are yet to be delivered
• Stating the percentage and value terms of the plant and machinery for which orders are yet to be placed.
• Infrastructure facilities for raw materials and utilities like water, electricity, etc.
• Details of the second-hand machinery bought or proposed to be bought including
  • the age of the machines
  • balance estimated life
  • collaboration, performance guarantee if any, or assistance in marketing by the collaborators. 
  • The following information regarding persons or entities with whom technical and financial agreements have been entered into shall be given:
    • place of registration and year of incorporation. 
    • paid up share capital. 
    • turnover of the last financial year of operation. 
    • general information regarding such persons relevant to the Issuer. 

 

7. Object of the Issue- Purchase of any Property where arrangements have already been made

• Names, address, descriptions and occupations of the vendors
• the amount paid or payable in cash
• shares or debentures to the vendor
• where there is more than one separate vendor, or the Issuer is a sub purchaser, the amount so paid or payable to each vendor, specifying separately the amount, if any, paid or payable for goodwill
• nature of the title or interest in such property acquired or to be acquired by the Issuer
• short particulars of every transaction relating to the property completed within the two preceding years, in which any vendor of the property to the Issuer or any person who is, or was at the time of the transaction, a promoter, or a director or proposed director of the Issuer had any interest, direct or indirect, specifying the date of the transaction and the name of such promoter, director or proposed director and stating the amount payable by or to such vendor, promoter, director or proposed director in respect of the transaction. 
• The property to which all the above points are applicable, is a property purchased or acquired by the Issuer or proposed to be purchased or acquired, which is to be paid for wholly or partly out of the proceeds of the Issue or the purchase or acquisition of which has not been completed as of the date of the draft offer document or offer document, as the case may be.

 

8. Object of the Issue- purchase of plant, machinery, technology, process, etc.

• Disclosure in a tabular form of the following:
  • details of the equipment to be bought by the Issuer 
  • cost of the equipment,
  • name of the suppliers, 
  • date of placement of order
  • date or expected date of supply, etc. 
• In case the order for the equipment is yet to be placed, the date of quotations relied upon for the cost estimates given. 
• The percentage and value terms of the equipment for which orders are yet to be placed. 
• The details of the second hand equipment bought or proposed to be bought, if any, including the age of the machines, balance estimated life, etc. 

However, it shall be considered that companies which want to do fund raise only for acquiring properties do not indicate a growth potential for the company and also the Investors or the market may not have a positive perception of the company. Any kind of object for investment in a depreciable asset may be highly scrutinised by the regulatory authorities.

 

What are General Corporate Purposes (GCP) in DRHP/RHP in IPO? 

In terms of ICDR Regulation 2(r), general corporate purposes include such purposes for which no specific amount is allocated. Allocation of funds under GCP can be used for any purpose which need not be specified by the company.  The earmarked funds will be applied to various corporate activities that support the overall growth and operations of the company. While the specific use of proceeds can vary depending on the company, general corporate purposes often includes:

 

• investing in innovation, product development, or other research initiatives to strengthen the company’s competitive position.
• Allocating funds to grow the company’s sales force, marketing efforts, or distribution channels.
• Funding new business initiatives, geographic expansion, or entry into new markets or product lines.
• Improving branding and visibility.

 

What changes are proposed in General Corporate Purposes limits as per SEBI Consultation Paper on SME IPO framework?

However, with release of SEBI consultation paper on Nov 19, 2024, a revision in GCP allocation is proposed to 10% instead of existing 25% of Issue Size with an absolute limit of Rs. 10 Crores. Similarly, the GCP amount + unidentified acquisition or investment target, the threshold should change or any unidentified acquisition during the filing of draft offer document should be disallowed. 

Summary- Hence, GCP under new proposal by SEBI cannot exceed 10% of the Issue size or Rs 10 crores whichever is lower.

Existing provisions for GCP as per regulations is discussed below:

Existing- Under existing provisions, a company going for IPO can allocate not more than 25% of the funds raised towards general corporate purposes.

 

Monitoring of funds under GCP

Since GCP is an unspecified amount towards a purpose, SEBI has proposed that companies shall monitor the use of proceeds earmarked for GCP and disclose this information in quarterly reports.

 

The term "general corporate purposes" provides flexibility to the company, allowing it to allocate the funds as needed to support its business strategy and goals. However, investors typically want to see a detailed breakdown of how the funds will be used to ensure that the company has a clear and focused plan for utilizing the capital.

 

The current regulation in SEBI ICDR without any change should be duly noted: 

Taken together, the below amount shall not exceed 35% of the amount being raised by the Issuer

(I) General corporate purposes

(II) such objects where the issuer company has not identified acquisition or investment target, as mentioned in objects of the issue in the draft offer document (DRHP) and the offer document (RHP).

 

Provided that the amount raised for such objects where the Issuer company has not identified acquisition or investment target, as mentioned in objects of the issue in the DRHP and the offer document shall not exceed 25% of the amount being raised by the Issuer.

 

However, provided further that such limits shall not apply if the proposed acquisition or strategic investment object has been identified and suitable specific disclosures about such acquisitions or investments are made in the draft offer document and the offer document at the time of filing of offer documents.

 

Conclusion

 

On fulfilling the IPO eligibility criteria, a company going public has to initiate the IPO process with assistance of IPO advisors and Merchant Bankers. The Objects of the Issue section in the offer documents of DRHP and RHP of an IPO is crucial for transparency and for providing investors with a clear understanding of how the raised capital will be used. Companies must ensure that they comply with SEBI's detailed disclosure requirements to avoid regulatory scrutiny and gain investor trust. Whether funds are allocated for debt repayment, working capital, project funding, or general corporate purposes, each purpose needs to be justified with clear information and proper documentation. Regulatory authorities closely examine this section to ensure that the funds will be used in a manner that supports the long-term growth and sustainability of the company.