How to prepare for an SEBI inspection ahead of an SME IPO

SEBI inspection before an IPO (whether mainboard or SME) is a real and increasingly thorough exercise. The inspection is not announced as inspection per se - it manifests through SEBI's pre-listing observations on the DRHP, the merchant banker's diligence, and the exchange's listing committee review. Companies that treat IPO readiness as a paperwork exercise get tripped up by post-DRHP queries that delay listing by months. Preparation begins 12-18 months before the planned issue.

ICDR Regulations require restated standalone and consolidated financial information for the three most recent financial years and the stub period, prepared in accordance with the Companies Act and Schedule III, with comparable accounting policies across all periods. Engage a Big-4 or large-mid-tier statutory auditor at least 18 months before filing; many small-CA audits do not survive merchant banker diligence. Reconcile all related-party transactions, restate any depreciation policy changes, and document significant accounting policy choices in the notes. Address auditor qualifications, even minor ones, before filing the DRHP.

Constitute Board committees as required: Audit Committee (Section 177 Companies Act + SEBI LODR), Nomination and Remuneration Committee, Stakeholders Relationship Committee, Risk Management Committee (for top 1000 listed entities). Appoint independent directors meeting the ICDR/LODR independence criteria; the Board must comprise at least one-third independent directors (one-half if the Chairperson is executive). Document Code of Conduct, Whistleblower Policy, Insider Trading Policy, Materiality Policy. Conduct mock Board meetings under the LODR framework to surface governance gaps.

Identify all related-party transactions (RPTs) using the broad definition in IndAS 24 and the Companies Act: directors, KMP, holding/subsidiary/associate companies, individuals with significant influence, and their relatives. Confirm Audit Committee approval is in place for every RPT above thresholds. Material RPTs need shareholder approval. The DRHP requires three-year RPT disclosure. SEBI commonly challenges undisclosed RPTs surfaced during inspection - delayed listing penalties or re-filing requirements often follow. Run a forensic RPT review with an independent firm before DRHP submission.

Maintain a complete IPO data room with: incorporation and amendment documents, share certificates and allotment registers (Form PAS-3 and SH-7 for all issuances), board and shareholder resolutions with attendance, statutory registers (Members, Directors, KMP, Charges, Contracts, Related Parties), minutes books, statutory filings (MGT-7, AOC-4 with annexures for last 5 years), Income Tax filings and assessments, GST returns and reconciliations, labour-law registers, environmental clearances, intellectual property registrations, material contracts, litigation status. The merchant banker's IPO checklist runs to 1000+ items; build the data room over 12-18 months, not in the final week.

How long before IPO should preparation start?
12-18 months for SME IPO, 18-24 months for mainboard IPO. The first six months address financial restatement and Board reconstitution. The following six months address RPT cleanup and statutory hygiene. The final six months are DRHP drafting, merchant-banker diligence and SEBI/exchange review.

Does SEBI conduct on-site inspection before listing?
SEBI does not typically conduct routine on-site inspection pre-listing, but the exchange's listing committee, the merchant banker and SEBI's processing officers raise extensive queries on DRHP that are equivalent in depth. Post-listing, SEBI's periodic and special inspections are routine.

What is the most common DRHP query from SEBI?
Inadequate or inconsistent disclosure of related-party transactions, group-company structures and material litigation. Companies underestimate the depth of disclosure required and the SEBI-team's pattern recognition for missing pieces.

Do I need to restate financials if I changed accounting policy?
Yes, in most cases. ICDR requires comparable accounting policies across the restated three years. Voluntary or mandatory policy changes during the period must be reflected with restatement of prior periods. The auditor's restatement opinion is part of the DRHP.

How many independent directors does an IPO-ready Board need?
At least one-third of the Board (one-half if Chairperson is executive). For Companies Act compliance, listed companies need at least two independent directors. Practically, an IPO Board needs four to six independent directors with diverse expertise to satisfy committee composition requirements.

What if the Auditor's report has qualifications?
Address the qualifications before DRHP filing or disclose them prominently in the DRHP as risk factors. SEBI rarely allows listing with unresolved material qualifications. Plan auditor work-around the qualification with restatement and additional disclosures.