Authored by Mallika Agrawal, Associate and Sanchith Shetty, Associate under the guidance of Riddhi Dutta, Senior Associate and Archana Balasubramanian, Partner
This is Part-III of the Capital Markets article series.
In the Indian capital markets ecosystem, an Initial Public Offering (“IPO”) is often viewed as a milestone of growth, credibility and investor confidence. Founders are often focused on valuation, while merchant bankers closely track market timing and investors focus on growth narratives. Yet, buried beneath investor presentations and ambitious expansion plans lies one of the most underestimated threats to a successful IPO: delayed regulatory clean-up.
As legal advisors to the Issue, we often observe that IPO delays are not caused by weak businesses alone. In many cases, fundamentally strong companies lose valuable market windows because historical compliance gaps, unresolved litigation, governance deficiencies, or regulatory irregularities are identified too late in the process.
In an increasingly scrutinized regulatory environment led by Securities and Exchange Board of India (“SEBI”), regulatory preparedness is no longer a check-box exercise. It is a strategic determinant of IPO success.
The Market Window Problem
IPO markets are extremely sensitive to timing.
During this period, macroeconomic conditions, liquidity, geopolitical stability, sectoral sentiment and investor appetite align favourably. Missing that window can materially impact valuation, subscription levels, and even the viability of the issue itself.
Unlike private fundraising, IPOs are heavily dependent on external market sentiment. A delay of even three to six months can mean facing:
• adverse market corrections;
• increased volatility;
• declining sectoral valuations;
• election-related uncertainty;
• tightening liquidity; or
• competing public issues crowding the market.
Regulatory clean-up delays often become the silent reason behind such missed opportunities. The challenge is that IPO readiness and market readiness rarely move at the same speed. While businesses may require years to prepare operationally and financially, market opportunities can disappear within weeks.
What Does “Regulatory Clean-Up” Actually Mean?
In the context of IPO preparation, regulatory clean-up refers to the process of identifying and resolving legal, governance and compliance irregularities before filing the Draft Red Herring Prospectus (“DRHP”).
The exercise usually involves a combination of secretarial filling rectifications, FEMA and RBI compliance reviews, litigation assessment, promoter group mapping, review of historical share issuances and capital infusions, ESOP restructuring, approvals check and alignment of governance practices with SEBI disclosure expectations.
The challenge, however, is that many companies assume these exercises can be concluded within relatively short timelines, whereas remediation of historical compliance, governance and documentation issues often requires several months of sustained effort by various professionals.
The Cost of Historical Non-Compliance
A most common misconceptions among promoters is that historical compliance gaps can simply be included in risk factors in the offer document. In reality, unresolved regulatory issues frequently trigger extensive SEBI queries, delay observations, and complicate diligence exercises.
For example, companies often discover during IPO diligence that, prior share issuances were not fully compliant with the Companies Act or FEMA pricing guidelines, related party arrangements were undocumented, statutory filings were delayed for years, promoters were connected to entities facing regulatory proceedings or subsidiaries lacked critical operational licenses.
While these issues may appear manageable individually, collectively they create significant disclosure and regulatory risk.
Importantly, SEBI’s review process today is far more disclosure-oriented and governance-focused than it was a decade ago. The regulator increasingly examines whether there is a pattern of weak governance rather than merely isolated technical lapses. Further, there is an increasing expectation that material compliance deficiencies are substantively remediate before observations or approvals are granted. Regulators are often reluctant to rely solely on undertakings to initiate corrective action or ensure future compliance and instead seek demonstrable progress towards, or actual completion of, the remediation process depending on the intensity of the non-compliance.
Delays can also arise where an issuer has obtained regulatory comfort or approval based on an undertaking to rectify a compliance issue before the RHP stage. While the remediation plan may be acceptable to regulators, completion may depend on third parties such as landlords, counterparties or government authorities. If the rectification is not completed within the committed timeline, it can trigger additional regulatory queries, disclosure requirements and delays in the IPO process.
Lessons from India’s IPO Landscape
India’s recent IPO history provides several examples where regulatory scrutiny materially affected timelines and investor confidence.
1. Governance and Disclosure Concerns
The proposed IPO of OYO reportedly faced heightened regulatory scrutiny around disclosure practices, business structure complexities and financial reporting concerns. While market conditions also played a role, governance-related scrutiny became a major factor in delaying listing plans.
Similarly, Go Airlines (India) Limited had received SEBI observations for its IPO plans, but prolonged operational and financial challenges ultimately overtook the proposed listing trajectory. The case highlighted how unresolved business and regulatory vulnerabilities can rapidly erode IPO readiness.
2. The Impact of Pending Litigation
Indian IPO disclosures increasingly dedicate extensive sections to litigation risk. In several instances, substantial tax disputes, regulatory investigations, or promoter-level criminal proceedings have raised investor concerns despite otherwise strong financials.
For institutional investors, litigation is not merely a legal issue, it is a governance signal. A pattern of unresolved disputes may indicate weak internal controls or aggressive compliance culture.
3. Promoter Group and Group Entity Complexity
Many Indian promoter-driven businesses operate through layered group structures built over decades. During IPO diligence, identifying promoter group entities and related parties itself becomes a major exercise.
Delays frequently arise where: crossholdings are unclear, family arrangements are undocumented, beneficial ownership structures are opaque or entities have unresolved compliance defaults, company registers are not maintained, business operations are carried out from premises belonging to a group entity without formal arrangements in place, or key permits and licenses required for the issuer’s operations continue to be held in the name of another group entity.]
These issues become especially significant under SEBI’s stringent disclosure framework for promoter group and related party disclosures.
The transition from a founder-led private company to a listed public company requires a complete governance reset. Delaying this transition until the IPO stage creates enormous execution pressure.
SEBI’s Evolving Approach
Over the years, Securities and Exchange Board of India has moved toward enhanced disclosure scrutiny and investor protection. Stock exchanges have also become increasingly rigorous in their review processes and now expect greater visibility on how compliance gaps are being addressed, rather than relying solely on assurances of future rectification.
SEBI’s approach has evolved significantly over the years, with far greater scrutiny now placed on governance quality, related party transactions, KPI disclosures, utilisation of proceeds and consistency between financial disclosures and business narratives.
In many IPO processes today, the real challenge is not drafting disclosures, it is ensuring the underlying business conduct can withstand disclosure scrutiny. This distinction is critical.
A disclosure can explain a problem, but it cannot eliminate regulatory discomfort arising from weak governance practices.
The Real Financial Cost of Delay
When IPO timelines slip due to delayed clean-up, the consequences extend beyond legal inconvenience.
The financial impact may include: increased transaction costs, prolonged diligence cycles, repeated updates to financial statements, revised valuation negotiations, withdrawal risk in volatile markets.
Regulatory Readiness Must Begin Early
The most successful IPO candidates are usually not those with perfect compliance histories. Rather, they are companies that begin regulatory preparation early enough to identify and resolve risks systematically.
Ideally, IPO readiness should begin at least 6-12 months before DRHP filing.
This allows sufficient time for governance restructuring, internal policy implementation, litigation strategy, restructuring exercises, secretarial rectifications, tax and FEMA remediation and operational documentation alignment.
Most importantly, it enables companies to approach the market from a position of preparedness rather than urgency.
In Sum
In India’s rapidly evolving IPO landscape, regulatory clean-up has become one of the most decisive factors influencing transaction success.
Companies that succeed are not necessarily those without problems, but those that recognize risks early, address them proactively, and build governance credibility before entering public markets.
In a market where windows open and close quickly, delayed regulatory preparedness can quietly become the difference between a successful listing and a missed opportunity.
For promoters and management teams, the lesson is simple: in IPOs, timing is everything and regulatory clean-up is what protects that timing.
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