SEBI Compliance & DRHP Preparation: What Actually Goes Wrong (And How to Fix It)

Most companies that decide to go public underestimate one thing: how much the DRHP can work against them if it is not prepared well.

The Draft Red Herring Prospectus is not just a filing formality. It is the document SEBI uses to decide whether a company is ready for public investors. If the disclosures are incomplete, the risk factors are vague, or the financials are not properly restated — SEBI returns it. And that can push your listing by months.

In April 2026, roughly Rs 18,000 crore worth of planned IPO fundraising was disrupted in a single month — not because companies were unqualified, but because geopolitical volatility, sliding retail participation, and tight SEBI timelines collided at once.

SEBI responded with two major circulars: extending observation letter validity and allowing IPO size changes of up to 50% without refiling. These were relief measures — but they only help companies that had already filed correctly.

This article is about what goes into that preparation: the process, the common mistakes, the 2025-2026 regulatory updates you cannot afford to miss, and what the companies that list without hiccups actually do differently.

What the DRHP Is — and What SEBI Actually Checks

The DRHP (Draft Red Herring Prospectus) is the first formal IPO document filed with SEBI and the stock exchanges. Once filed, it goes into public domain for a minimum of 21 days. SEBI typically issues its Observation Letter — effectively, its approval to proceed — within 30 days of receiving satisfactory responses to its queries.

The document has to cover everything material about the company: the purpose of the IPO, the business, the financials, the risks, the promoters, any ongoing litigation, government approvals, and what the post-issue shareholding will look like.

What SEBI actually checks is whether these disclosures are complete, consistent with each other, and free of promotional language. Any section that contains a claim the company cannot independently verify — or any risk that is described in vague, positive-sounding terms — will come back with a clarification notice.

The IPO process from DRHP preparation to listing typically takes 7 to 12 months. For large or complex companies, it can stretch to 18 months. Building in that buffer early — rather than rushing toward a fixed listing date — is one of the most practical decisions a company can make.

What Changed in 2025-26: SEBI ICDR Amendments You Need to Know

SEBI made several significant amendments to the ICDR Regulations between 2025 and mid-2026. These are not optional updates — a DRHP filed without accounting for them will be returned for corrections.

The April 2026 IPO Size Flexibility Circular

Before April 2026, if the fresh issue size of an IPO changed by more than 20% from what was stated in the DRHP, the company had to refile the entire document. That process alone could cost 30-75 days and significant legal fees.

SEBI changed this on April 15, 2026. Companies can now revise the fresh issue size by up to 50% — upward or downward — without a refile, subject to prior SEBI approval and certain conditions. The OFS component is not covered; only the fresh issue is. The business objective and use of proceeds must remain consistent.

This came directly in response to what happened in April 2026: geopolitical tensions pushed crude oil to Rs 111 per barrel, the rupee weakened to Rs 95 per dollar, and FPIs turned net sellers. Only one mainboard IPO launched that month. The flexibility circular was SEBI acknowledging that market conditions can shift faster than DRHP timelines allow.

Observation Letter Extensions (April 7, 2026)

SEBI also extended the validity of all observation letters expiring between April 1 and September 30, 2026, by an additional six months. Companies like Hero Fincorp, Continuum Green Energy, and Veritas Finance — which had planned significant fundraising — got breathing room they would otherwise have lost.

For companies using the confidential DRHP filing route (Chapter IIA), the observation letter window is already 18 months instead of 12. The April extension applies on top of the standard period.

SAR Disclosure Rules (2025 Amendment)

If your company has issued Stock Appreciation Rights that have been exercised into equity shares, those shares and the underlying scheme must be fully disclosed in the DRHP. They are now exempt from the six-month lock-in period — even for employees who have left the company — but they must be accounted for in the Minimum Promoter Contribution calculation and the shareholding pattern.

This catches companies off-guard. Many assume SARs are an internal HR matter. Under the 2025 ICDR amendment, they are a material disclosure item.

Revised SME IPO Norms

For companies targeting NSE Emerge or BSE SME, the 2025 amendments introduced several structural changes:

Confidential Filing Route (Chapter IIA, ICDR 2018)

The confidential pre-filing route allows a company to submit its DRHP to SEBI without immediate public disclosure. This is increasingly popular among companies that want to test QIB appetite before going public — OYO, Zepto, and several others used it in 2025-26.

One detail many miss: if the OFS size changes by more than 50% after the confidential filing, a full refile is required. The OFS holding period is also computed from the date of filing the UDRHP-I, not from the original confidential submission.

The DRHP Preparation Process: A Realistic Timeline

Most companies underestimate how long proper DRHP preparation takes. The filing itself — Day 0 — is the midpoint of a much longer process, not the beginning.

A useful rule: if you want to list in a specific quarter, start DRHP preparation at least 12 months before that quarter begins. Companies that build in a 3-month contingency buffer almost always thank themselves for it.

Where DRHP Preparation Actually Goes Wrong

Based on SEBI’s enforcement record and publicly available clarification notices, these are the areas that cause the most trouble — in order of how often they cause a DRHP to be returned.

The Risk Factors Chapter Is Written Like a Sales Document

This is the single most common cause of SEBI clarification notices. Risk factors must be specific, quantified, and written in plain language — not marketing language.

SEBI does not permit words like “leading”, “robust”, “strong”, “well-established”, or “significant market position” in the risk section unless they are backed by independently verifiable data. Companies write these instinctively because they are used to investor decks. In a DRHP, they are grounds for a returned document.

Risk factors also have to be internally consistent. If the business overview says revenue has grown 40% year-on-year, the risk section cannot describe demand as “stable.” SEBI reviews both chapters together.

Related Party Transactions Are Incomplete or Misclassified

This is the highest-risk area from a regulatory enforcement standpoint. Related party transactions — including those between the company and promoter-controlled entities, family members, or associated businesses — must be fully disclosed, even if the company considers them “technical” or small in value.

The DLF DRHP case from 2007 remains the defining example: three group companies were omitted from the revised DRHP after appearing in the original. SEBI found that share transfers between them were not genuine. The enforcement action that followed shaped disclosure norms for years.

For promoters who have faced any SEBI disciplinary action or stock exchange penalties in the last five financial years, full disclosure is required. If any promoter or director has been declared a wilful defaulter or fraudulent borrower, this must also appear on the cover page of the DRHP.

The Objects of the Issue Cannot Be Verified

Every stated use of IPO proceeds must be quantified and certified. “Working capital requirements” without a number is not acceptable. “General corporate purposes” is capped — at the lower of 15% of fresh issue proceeds or Rs 10 crore for SME IPOs — and anything beyond that must have a specific, certified justification.

A 2025 ICDR amendment clarified one grey area: if the loan being repaid was taken by a subsidiary or during an unaudited period, certification from any ICAI-registered CA (not just the statutory auditor) is now acceptable. This was a meaningful change for holding companies with complex group structures.

Litigation Disclosure Is Structurally Inconsistent

Companies are required to define a board-approved materiality threshold and disclose every litigation above it. The threshold itself must also be disclosed in the DRHP.

The problem usually is not what companies disclose — it is what they exclude. SEBI reviewers check the stated threshold against the value of items that were left out. A Rs 500 crore IPO that uses a Rs 5 crore litigation threshold but excludes a Rs 3.8 crore pending GST demand will get a clarification notice. The math is obvious to a reviewer.

Post-Filing Compliance Is Treated as Optional

Regulation 54 of the SEBI ICDR Regulations requires that all securities transactions by promoters and promoter-group entities be reported to the stock exchanges within 24 hours — from the date of DRHP filing until issue closure. This obligation begins the moment the DRHP is filed, not when the IPO opens.

The Quadrant Future Tek settlement (April 1, 2025) is the clearest illustration: a promoter transferred 4 lakh shares to his son as a gift on September 12, 2024, but reported it 31 days later. SEBI initiated proceedings. The company settled for Rs 3 lakh. The transaction was non-commercial and the delay was administrative — but neither was a defence.

Financial Restatement Errors Slip Through

SEBI’s Regulation 185(1) is clear: the offer document must contain all material disclosures that are true, correct, and adequate. Incomplete or incorrect restated financials are treated as material misstatements.

Common restatement problems include incorrect revenue recognition treatment, bridge loans not disclosed as material obligations, and changes in accounting policy not adequately explained across the three-year restatement window. All of these have appeared in SEBI clarification notices in 2024-25.

ESOP and SAR Disclosures Are Not Aligned With the Shareholding Pattern

This became a more common problem after the 2025 SAR amendments. When SARs are exercised into equity before the DRHP is filed, those shares must appear in the cap table, the offer document, and the Minimum Promoter Contribution calculation — consistently, everywhere.

Companies that update one section but not the others create internal contradictions that SEBI catches during review. This alone can add 3-4 weeks to the clarification cycle.

What a Pre-Filing Review Actually Looks Like

A manufacturing company from Delhi NCR engaged Sapient Services about six months before their target mainboard IPO date. They had a preliminary DRHP prepared internally and wanted an independent review before filing with SEBI.

What the review found: the risk factors chapter used phrases like “leading manufacturer” and “strong client relationships” in seven places. Two related party transactions between the company and a promoter-owned logistics firm had been classified as arm’s length without supporting documentation. The outstanding litigations section used a materiality threshold that happened to exclude a Rs 1.2 crore pending GST demand.

Across five chapters, we identified 23 disclosure issues before the document was filed. The financial restatement for one product line also needed to be re-aligned with the current Ind AS treatment.

The DRHP was filed after corrections. SEBI issued its Observation Letter without a single clarification request on the sections we reviewed. The company listed within 11 months of the initial review engagement.

The pre-filing review cost a fraction of what a single round of SEBI clarification notices — with the associated legal fees, intermediary costs, and timeline delays — would have cost.

A Practical Pre-Filing Checklist for Companies Preparing Their DRHP

These are the actions that consistently separate companies that get clean Observation Letters from those that spend months in the clarification cycle.

• Start 12-18 months early. Resolve pending litigations, clear outstanding tax demands, address ROC compliance defaults, and get your related party transaction documentation in order. None of this can be fixed quickly once SEBI starts asking about it.
• Appoint your BRLM before due diligence begins — not after. Under Schedule V of the SEBI ICDR Regulations, the lead manager has to certify that all disclosures are true and complete. They need time to actually verify that.
• Build a data room before anyone starts drafting. Audited financials, board resolutions, shareholder agreements, ESOP and SAR scheme documents, all operating licenses, and litigation files should be organised and accessible before due diligence starts. Gaps in the data room are the most common cause of delays during the drafting phase.
• Set your litigation materiality threshold carefully. It should be defensible — neither so low that it creates an unmanageable disclosure list, nor so high that SEBI reviewers identify obvious exclusions.
• Train your team on Regulation 54 the day the DRHP is filed. Every promoter and promoter-group member needs to know that any securities transaction — sale, gift, pledge, or transfer — must be reported to the exchanges within 24 hours from that date forward.
• Consider the confidential filing route if timing or competitive sensitivity is a concern. The 18-month observation letter window under Chapter IIA gives significantly more flexibility than the standard 12-month window.
• Get an independent pre-filing review. Your BRLM reviews the document too, but an independent review from a different advisory perspective catches structural issues — particularly in financial disclosures and restatements — that are easy to overlook when you have been working on the same document for months.

Where Sapient Services Fits Into the DRHP Process

Sapient Services works alongside Book Running Lead Managers and legal counsel during the DRHP preparation phase. Our specific contribution is in three areas: valuation (ensuring the company’s pre-IPO valuation is aligned with ICDR norms and investor expectations), financial disclosure review (particularly restated financials and the objects of the issue), and compliance advisory (post-filing Regulation 54 monitoring and SEBI clarification support).

We have worked with companies across manufacturing, technology, NBFCs, and professional services sectors preparing for mainboard and SME IPOs. Our team is based in New Delhi and operates pan-India.

If you are in the early stages of IPO planning, or if you have a DRHP under preparation and want an independent review before filing, call us at +91 9540162888 or write to valuation@sapientservices.com.

Frequently Asked Questions

Q-1: What is the difference between a DRHP, UDRHP, and RHP?

Ans: The DRHP is the draft filed with SEBI for review. Once SEBI issues its observations, the company files the UDRHP-I (Updated DRHP), which incorporates those changes and goes into the public domain for 21 days. The RHP (Red Herring Prospectus) is filed with the ROC just before the issue opens and includes the final price band. After issue closure, the company files the final Prospectus with the issue price.

Q-2: How long does SEBI take to review a DRHP?

Ans: SEBI typically issues its Observation Letter within 30 days of receiving satisfactory responses to all queries, and after the relevant stock exchange grants in-principle approval. The DRHP must also be in the public domain for a minimum of 21 days. For more complex filings — or those that require multiple clarification rounds — the review can stretch to 45-60 days.

Q-3: What happens if SEBI returns the DRHP?

Ans: SEBI returns the DRHP when it finds material deficiencies — typically in risk disclosures, financial restatements, or related party disclosures. The company must address all identified issues and refile. Depending on the number and complexity of observations, this can add anywhere from a few weeks to several months. In cases of deliberate misrepresentation, SEBI can also take enforcement action against the issuer and lead managers.

Q-4: Can a company keep its DRHP confidential before filing?

Ans: Yes. Chapter IIA of the SEBI ICDR Regulations, 2018 allows companies to file their DRHP with SEBI privately, without public disclosure, in the early stages. This is called the confidential or pre-filing route. It gives the company an 18-month observation letter window instead of the standard 12 months, and allows early QIB testing without competitor exposure. OYO, Zepto, and Groww used this route in 2025-26.

Q-5: What are the most common reasons SEBI seeks clarifications on a DRHP?

Ans: In practice: promotional language in the risk factors chapter, restated financials that are inconsistent across years, related party transactions that are disclosed in one section but not cross-referenced in another, objects of the issue that lack independent certification, and litigation disclosures that appear inconsistent with the stated materiality threshold.

Q-6: Do SME IPO companies follow the same DRHP rules as mainboard IPOs?

Ans: SME IPOs are filed with the stock exchanges (BSE SME or NSE Emerge) rather than directly with SEBI, but they follow the SEBI ICDR Regulations with specific SME provisions. The 2025 amendments tightened several of these: OFS is now capped at 50% of pre-IPO promoter holdings, GCP is capped at 15% of fresh issue proceeds or Rs 10 crore, the minimum allottee count was raised from 50 to 200, and entities converting from LLP or proprietorship structures must complete one full financial year post-conversion before filing.

Q-7: What is SEBI’s Observation Letter and how long is it valid?

Ans: The Observation Letter is SEBI’s formal signal that a company may proceed with the IPO. It is valid for 12 months under the standard route, and 18 months under the confidential filing route. SEBI’s April 2026 circular extended all observation letters expiring between April 1 and September 30, 2026, by an additional six months — providing relief to companies caught in the market disruption caused by West Asian geopolitical tensions.

Q-8: How is the IPO price band decided?

Ans: The price band appears in the RHP, not the DRHP. It is determined jointly by the company and its BRLM based on comparable listed company multiples (P/E, EV/EBITDA, EV/Revenue), a DCF-based intrinsic value, and recent sector transaction benchmarks. The final price is then discovered through book-building with institutional investors. For SEBI compliance, the price band must have a minimum 5% spread between floor and cap.

Q-9: What does Sapient Services do during the DRHP preparation process?

Ans: Sapient Services contributes to pre-IPO valuation (aligning the company’s stated value with ICDR norms and investor benchmarks), financial disclosure review (restated financials, objects of the issue, revenue recognition consistency), and compliance advisory — including post-filing Regulation 54 monitoring. We work alongside the BRLM and legal counsel rather than replacing them. If you want to discuss how we can support your IPO preparation, call +91 9540162888 or email valuation@sapientservices.com.

The Companies That List Without Problems Share One Thing

They prepare the DRHP as if every section will be read carefully by someone whose job is to find inconsistencies. Because that is exactly what SEBI does.

The disclosures that seem minor during drafting — a slightly vague risk factor, a related party transaction that is “probably fine,” a litigation threshold that happens to exclude one notice — are exactly the things that generate clarification notices. And clarification notices cost time, money, and in volatile markets like April 2026, they can cost the IPO window itself.

2025 was a record year for Indian IPOs — 100+ mainboard listings. 2026 is expected to be even larger, with unicorns like Flipkart, Zepto, and OYO in the pipeline. The competition for investor attention and SEBI bandwidth is real. A clean DRHP is not just a compliance goal — it is a competitive advantage.

Sapient Services Pvt. Ltd. is based in New Delhi. We provide SEBI compliance advisory, DRHP preparation support, pre-IPO valuation, and post-filing disclosure management for companies across India.

Contact us at +91 9540162888 or valuation@sapientservices.com for a free initial consultation on your IPO readiness.