Pre-IPO Reorganisations: How to Eliminate Post-Listing RPT Litigation Narratives Before They Start

Author: Archana Balasubramanian

Late-stage companies approaching IPO often discover their corporate structures, optimised for operational efficiency during growth phase, create related party transaction exposures that institutional investors and minority shareholders will challenge post-listing. The instinct is to defer restructuring until after raising capital. This instinct, while financially understandable, creates legal risks that vastly exceed the capital cost of earlier restructuring.

When derivative suits challenge RPTs 18-24 months post-IPO, In post-listing derivative litigation, scrutiny typically focuses on whether the company used the pre-IPO window when control and context were intact to neutralise arrangements that would predictably attract minority or institutional challenge. Structures left untouched during this period are more vulnerable to adverse interpretation once the company enters a public governance regime.

Listing with unresolved related-party or promoter-linked arrangements creates an evidentiary risk: it allows post-listing scrutiny to characterise those structures as outcomes of control-era convenience rather than arm’s-length governance. Once framed this way, the burden shifts to the company to disprove inferences that could have been neutralised earlier.” This narrative is difficult to overcome once a company is defending litigation. The legal work we do in pre-IPO reorganisations is specifically designed to prevent this narrative from having evidentiary support.

The Legal Structuring Work: Beyond Generic Corporate Cleanup

Pre-IPO reorganisations require three levels of legal work that distinguish sophisticated securities practice from routine corporate restructuring.

1) Forensic analysis of every intercompany relationship to identify which transactions will face heightened scrutiny under SEBI’s related party transaction regulations and judicial precedent on derivative standing.

This isn’t a compliance checklist exercise. It requires analysing:

• Whether transaction pricing was established through arm’s-length negotiation or through formulae that could be characterised as arbitrary.
  
• Whether independent directors (if any existed pre-reorganisation) received sufficient information to make informed judgments about transaction fairness.
  
• Whether comparable market transactions exist that could be used as benchmarks, and if so, whether company’s transactions fall within or outside the range of market comparables.
  
• Whether any transactions involved promoter entities receiving benefits (favorable pricing, risk allocation, payment terms) that third parties in similar situations would not have received.
  

The legal judgment required here is assessing not just compliance with RPT disclosure rules which most companies satisfy technically but whether the transaction structure would survive hostile scrutiny in derivative litigation where plaintiffs have discovery rights and can retain forensic accountants to challenge every pricing assumption.

Revenue visibility and valuation integrity

Pre-IPO review increasingly examines whether internal or group-linked transactions inflate topline visibility without corresponding margin quality. While such arrangements may be commercially justified during growth phases, post-listing scrutiny assesses whether revenue recognition reflects durable, third-party economics or transitional group support.

Legal structuring at this stage must therefore test not only compliance, but how revenue narratives will withstand independent investor and litigation review.

Illustration (logistics company): A study’s forensic RPT analysis identified that warehouse leasing arrangements with promoter entities, while disclosed and audit committee–approved, had pricing set five years earlier and never re-benchmarked. Automatic escalation clauses compounded annually; by IPO prep, lease rates were 30–35% above market comparables. The exposure wasn’t disclosure violation, it was derivative suit risk: minorities could argue INR 15+ crore excess rent over five years, benefitting promoters at corporate expense, and breach of fiduciary duty by directors who renewed without re-benchmarking.

The legal work to address this exposure involves multiple technical layers:

• Independent valuation with litigation-grade documentation: Engage valuation experts for comprehensive market rent analysis using multiple methodologies, comparable lease transactions, DCF based on alternatives, cost-plus reflecting landlord capital deployment. The scope must answer the questions derivative plaintiffs will raise: why historical rates were appropriate when set, when they diverged from market, and what arms-length parties would have done. The resulting opinion can run 60+ pages with comparable analysis, sensitivity testing, and explicit responses to anticipated challenges beyond operational valuation norms, but necessary to survive expert cross-examination.
  
• Restructuring documentation with “four corners” completeness: Execute new agreements that reset pricing to independently validated market rates, with escalation tied to objective indices (CPI, market rent surveys) rather than arbitrary percentages. Critically, document the decision-making process: board and audit committee materials should show the valuation conclusions, comparison of proposed terms to market benchmarks, analysis of alternatives (including third-party leasing), and an explicit determination that the new arrangements serve corporate interest and reflect arms-length terms. The documents themselves should tell the story without external explanation of a genuine independent evaluation.
  
• Legal opinions on validity and fairness: Based on the independent valuation and market analysis, ensure that the restructured arrangements comply with Companies Act Section 188 and represent terms unrelated parties would accept. These opinions both evidence good faith and create expert support if arrangements are later challenged.
  

2) Drafting audit committee processes for meaningful independent review.
Many committees technically comply with independence requirements but don’t operate in ways that demonstrate genuine independence. Building charters, information rights, and meeting protocols that courts will recognise as independence in practice, not just on paper is essential.

3) Creating decision-trail documentation to prevent “bad faith” characterisations.
To preserve business judgment protections, the record must show decisions made in good faith, on an informed basis, without conflicts. That means documenting alternatives, legal analyses of fiduciary duties, and contemporaneous reasoning.

Why Do This Pre-IPO?

Public market governance is not judged solely on compliance, but on interpretability. Structures, valuations, and board decisions must be capable of explaining themselves under hostile reading, without reliance on promoter credibility or informal context.

Pre-IPO reorganisations, when done properly, are not remedial. They are interpretability exercises ensuring that future readers of the record arrive at governance-strength conclusions without assistance.

Pre-IPO reorganisations are not generic cleanup. They are securities-grade legal architecture valuation fit for cross-exam, contracts designed for disclosure, and board processes drafted for courtroom scrutiny. The cost is modest compared to the litigation risk, settlement exposure, and reputational damage of defending RPT narratives post-listing.