Pre-listing Certificates - An Overview

We know that listing is not compulsory under the Companies Act, 2013 but it becomes mandatory to a public limited company when it intends to issue securities to the public for subscription.

This article helps you to understand the certificates that should be obtained by the company which intends to get its securities listed in a recognised stock exchange, from an Independent Chartered Accountant (“CA”) who holds a valid certificate of Peer Review and documents to be verified in this regard.

Below explained certificates are issued to the BRLMs (Book Running Lead Managers). There may be one or more BRLMs for an IPO. In case of more than one BRLMs, certificates are to be addressed to all BRLMs of said issue. These certificate are for BRLMs information and for inclusions (in part or in full) in the Draft Red Herring Prospectus, Red Herring Prospectus and Prospectus, to be issued by the company in relation to the issue and filed with the SEBI, Stock Exchanges and the ROC, as may be required.

1. CERTIFICATE OF AVERAGE COST OF ACQUISITION

This certificate requires the CA to verify and certify the average cost of acquisition of Equity Shares of the Company held by the Promoters of the Company as defined in the SEBI(ICDR) Regulations, 2009 (including amendment thereof) as on the date of this certificate.

Hence, Promoter has to be identified in accordance with SEBI (ICDR) Regulations, 2009. It’s worth noting that the definition of the promoter includes the person or persons named in the offer document as promoters.

For the purpose of determining the average cost of acquisition of shares, one may have to verify the Register of Members, Register of Share Transfers, the Minutes of the Meetings of Board of Directors, and other relevant registers and returns.

2. CERTIFICATE OF LOAN REPAYMENT

This certificate requires the CA to verify and certify that the company has utilized the loan amounts for the purpose for which they were raised.

For the purpose of this certificate, following documents needs to be verified:

• Audited restated standalone financial statements of the Company for the relevant years
• Loan agreements, sanction letters and
• Such other relevant records.

3. CERTIFICATE ON BASIS OF ISSUE PRICE

Under this CA needs to review and confirm the information relating to Earning per Share, Average Return on Net Worth and Net Asset Value for 3 preceding financial year and completed part of current financial year in relation to the calculation for the basis of issue price of the Equity shares in the issue.

He also needs to compute the weighted averages for the aforesaid information. For this certification, information extracted from the Audited Restated Financial Statements of the Company has to be verified.

4. CERTIFICATE ON LIST OF GROUP COMPANIES

This certificate requires to review the audited restated consolidated and standalone financial statements of the Company and such other relevant records and documents and confirms the list of Group Companies in accordance with Accounting Standard 18.

This certification requires clear understanding of Accounting Standard 18.

5. CERTIFICATE ON STATUTORY DUES

This certificate requires to verify and certify that there are no instances of non-payment of undisputed statutory dues pertaining to five preceding financial year as on the date of the certificate.

There may be delays in payment of statutory dues beyond the due dates prescribed under the respective statutes. For the purpose of certification following may be reviewed:

• CARO report for the relevant period
• Tax audit report for the relevant period and
• Other relevant statutory records and documents of the company for the purpose of certifying.

6. CERTIFICATE ON ESOP

This certificate requires the CA to review the Employee Stock Option Schemes of the company and confirm details required for disclosures for proposed IPO. Such disclosure includes number of options granted, vesting period, options vested and not exercised, options forfeited / lapsed etc.

As this certificate also requires confirming of ESOP scheme in line with SEBI (Share Based Employee Benefits) Regulations, 2014 and relevant Guidance Note and/or Accounting Standards, issued by the ICAI in this regard, one should have clear understanding of such regulation/GN/AS.

7. CERTIFICATE of CORPORATE GOVERNANCE

This certificate requires the CA to certify the compliance of provisions of the SEBI (LODR) Regulations, 2015 and Companies Act, 2013 with respect to composition of Board of Directors and constitution of the Board Committees.

8. CERTIFICATE OF RELATED PARTY TRANSACTIONS

This certificate requires the CA to verify and certify that profits wherever applicable from related party transactions have arisen from legitimate business transactions.

Following are further certifications required under this certificate:

• transactions mentioned in annexure to certificate are only related parties transactions (as defined under the AS 18 issued by the ICAI)
• all transactions between the Company and its related parties, its Promoters or members of the Promoter Group, as mentioned in the restated Audited Financial Statements, are legitimate business transactions
• all related party transactions have been at arm’s length basis

For the purpose of above certifications, following needs to be verified:

• Restated Audited Consolidated Financial Statements and Restated Audited Standalone Financial Statements for the relevant period
• Transfer pricing documentation and other relevant documents

9. CERTIFICATE ON WORKING CAPITAL REQUIREMENT

Under this certificate one needs to review the working capital requirement of the company and confirm details required for disclosures for proposed initial public offer.

For the purpose of this certificate, following needs to be examined:

• Business plan duly approved by the Board of Directors of the Company for the uncompleted part of current financial year and next two financial years.
• Restated standalone audited financial statements and other relevant records of the Company for the two preceding financial year and completed part of the current financial year.

Requirements of SAE 3400 are also need to be considered.

10. CERTIFICATE ON RELATED PARTY TRANSACTIONS MORE THAN 10%

This certificate requires the CA to confirm that there are no sales or purchases between the Company and group companies/subsidiaries, as identified in the Offer Documents, where such sales or purchases exceed in value in the aggregate 10% of the total sales or purchases of the Company during five preceding financial years and completed part of current financial year.

Above certification requires the review of Restated Audited Standalone Financial Statements for the above mentioned period.

11. CERTIFICATE ON AUDITORS OBSERVATION

This certificate requires to review and confirm the emphasis of matters and other adverse observations made by the statutory auditors of the company in their report on the Audited Standalone and Consolidated Financial Statements pertaining to five preceding financial years.

Above certification requires the review of Statutory auditor’s report and Director’s reports for the relevant period.

12. CERTIFICATE ON REJECTION CRITERIA

This certificate requires the CA to provide confirmations on certain matters stated in the SEBI(Framework for Rejection of Draft Offer Documents) Order, 2012 in relation to the restated audited financial statements of the Company for the two preceding financial year and completed part of current financial year, respectively and examination report of the statutory auditors on the Financial Statements proposed to be included in the draft red herring prospectus to be filed by the Company (“DRHP”).

Following needs to be certified:

• There has been no sudden spurt in the line items appearing in the Financial Statements just before filing of the DRHP.
• The statutory auditors of the Company have not made any qualifications in the Examination Reports and have not raised any doubts or concerns over the accounting policies followed by the Company and
• Such other matters.

Above certifications requires critical analysis of company transactions during the relevant periods.

13.CERTIFICATE ON SOURCE OF PROMOTERS CONTRIBUTION

Under this one needs to review and confirm the source of contribution made by the Promoters of the Company, towards the capital build-up of Company.

Bank statements, Income Tax returns, Net Worth certificates, Audited Financial Statements and Other relevant documents may be reviewed for the purpose of above certification.

Requirement/content of above certificates may change according to the requirement of BRLMs.

Disclaimer: This article has been prepared with a view to share the knowledge. Views expressed herein are not necessarily the views of any relevant statutes.  Author is not responsible for the correctness or otherwise of the contents published herein. If any errors or omissions are noticed, the same may be brought to the attention of the author.

The author can also be reached at Koushik.d.c@gmail.com.