Regulatory and tax things to do before an IPO in India

Regulatory and tax things to do before an IPO in India (illustrative list): 

1. Create a family trust and transfer shares before IPO. Post IPO, one needs to wait for 3 years or obtain SEBI’s approval. 

If one is planning for an IPO in less than a year, then avoid transferring all shares. Keep a portion out for Minimum Promoter Contribution (MPC), and OFS requirement. Unlike income tax, transfer to trust isn’t considered an exempt transfer under ICDR regulations - MPC and OFS period starts from the day the trust obtains the shares. 

Pre IPO - one has the option of using sub trust structure and corporate trustee. None of these options are available post listing. 

If more than 1 families/family trusts are involved, execute an SHA. This is critical. SHA should supercede the trust and not the other way around. 

Commonly misunderstood, SHAs are valid post listing as well, albeit with limitations. For a listed company, SHA cannot bind a company, but binds the relevant shareholders to each order. 

2. Approve ESOP policy: lucrative for employees especially pre-IPO and avoids regulatory hassle if the policy is approved before listing. 

For old/existing ESOPs, exercise it before IPO - this will be highly lucrative for employees’ taxation. 

3. Issue bonus shares in advance, ideally 2 years before the IPO. This is a simple way of increasing paid up capital/number of shares, but can save significant taxes during IPO. People end up issuing bonus shares just before the IPO and their OFS is subject to short term capital gains’ tax. 

Also - use different demat account for bonus shares. This provides higher flexibility under income tax. For instance, transfer bonus shares which are short term and has 0 cost of acquisition to the trust, and use the original shares under OFS. Without a seperate demat, the original shares can get transferred to demat due to FIFO. 

4. Restructure in advance - remove non-core assets including real estate and non IPO business. Combine relevant businesses.

The restructuring can generally be done via slump sale (high tax but quick), demerger (tax-neutral but very time consuming) and mergers (similar treatment as demerger).m

5. Clean up the financials - rectify accounting gaps - and there are generally numerous gaps. Do this early on to avoid shocks later. 

6. Rectify past non compliances - especially regulatory, tax and legal. 

7. Start gathering promoter groups entities’ details - this can get extremely difficult due to the wide definition. It may become embarrassing to ask specific information about the companies that your siblings or inlaws controls. 

8. Group company - this again is tricky and its also a misnomer. Group entities includes your ex-JV partner as well.. Any related party in the last 3 years! It may be difficult to obtain information from an estranged JV partner or an overseas partner. Obtaining SEBI exemption is difficult.