Merchant Banker Due Diligence: The IPO Readiness Guide Every Board Needs in 2026
By CS Sapna Malpani, Practising Company Secretary, Bangalore · Last updated 25 August 2026
In 2025 a profitable Bangalore manufacturer spent eleven months preparing to list, signed its book running lead manager, and then watched the timeline slip by two full quarters. Nothing was fraudulent. The company simply could not produce clean related-party registers, a permissioned data room, or three years of restated IND AS accounts fast enough for the merchant banker to sign its certificate. The merchant banker due diligence did not fail the company, the company was not ready for it. That gap between “we are profitable” and “we are diligence-ready” is where most Indian IPO dreams quietly lose six to nine months and several crore in advisory fees.
- What changed: The SEBI (Merchant Bankers) Amendment Regulations, 2025 took effect on 3 January 2026, raising Category I net worth to Rs 50 crore and banning banks from outsourcing your IPO due diligence.
- Who must act: Any company targeting an NSE or BSE main-board listing in the next 12–24 months.
- The risk: A weak data room does not just delay filing, incomplete disclosures can force a fresh Draft Red Herring Prospectus, restart the SEBI clock, and blow the market window.
- Key action: Appoint the BRLM before diligence begins and build a regulator-grade data room now, not after the mandate is signed.
- Time to act: Readiness work should start 12–18 months before you intend to file the DRHP.
Why merchant banker due diligence decides whether your IPO survives
When a company files a Draft Red Herring Prospectus with SEBI, it does not file alone. The book running lead manager (BRLM), a SEBI-registered merchant banker, signs and submits a due diligence certificate confirming that every material statement in the offer document is true, fair and adequate for an investor to take an informed decision. That certificate is submitted under Regulation 25(2)(b) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, along with the due diligence process note in Form A of Schedule V.
Read that again. The merchant banker is putting its own registration on the line for the accuracy of your numbers, your litigation, your related-party arrangements and your promoter background. No BRLM signs that certificate on trust. It signs only after a forensic examination of your company, and it will not proceed until the evidence is in front of it. This is why merchant banker due diligence is the real gate on an Indian IPO, tighter in practice than the ICDR eligibility maths that founders obsess over.
The stakes rose sharply this year. On 2 January 2026 SEBI notified the SEBI (Merchant Bankers) Amendment Regulations, 2025, in force from 3 January 2026. Two changes matter to every issuer. First, SEBI split merchant bankers into two categories by net worth: Category I with a minimum net worth of Rs 50 crore (phased up from Rs 25 crore by 2 January 2028) and Category II with Rs 10 crore, where only Category I may manage a main-board equity issue. Second, and more directly relevant to you, SEBI prohibited merchant bankers from outsourcing critical functions, issue management, due diligence and underwriting, and required existing outsourcing arrangements to be wound down by 3 April 2026. Your BRLM must now do the diligence itself, in-house, which means the scrutiny is deeper and the demand for clean documents is higher.
The problem: most companies mistake profitability for readiness
Meeting the numbers is the easy part. Under the profitability route in Regulation 6(1) of the ICDR Regulations, a company broadly needs net tangible assets of at least Rs 3 crore in each of the preceding three full years, an average operating profit of at least Rs 15 crore across any three of the last five years, and a net worth of at least Rs 1 crore in each of the preceding three years. Plenty of promoters clear that bar and assume the listing is a formality.
The certificate does not test whether you are profitable. It tests whether you can prove it, cleanly, on paper, to a banker who is now personally exposed. The three failure points I see most often in Bangalore boardrooms are the same three that independent readiness reviewers flag nationwide: related-party transaction registers that are incomplete or reconstructed after the fact, data shared with early advisers without proper permissioning or an audit trail, and a Business Responsibility and Sustainability Report scoped far too late to be credible. Each of these is a documentation failure, not a business failure, and each can stall a filing.
Diagram 1: The IPO readiness runway (12–18 months to DRHP)
What actually happens inside a due diligence exercise
Once the mandate is signed, the BRLM appoints its legal counsel and begins a structured examination that runs in parallel with your restatement work. The banker will not certify anything it cannot trace to a source document. The flow below is what your team will live through, and every arrow depends on your data room being ready before the banker asks.
Diagram 2: From data room to due diligence certificate
Notice where the company controls the clock: steps 1 and 3. A banker can only move as fast as your evidence arrives. When a promoter says the diligence “took forever,” what usually happened is that documents were assembled reactively, one demand at a time, instead of sitting ready in a permissioned room from day one.
The deal-killers: five documentation gaps that stall a DRHP
These are the issues that most often turn a six-month diligence into a twelve-month one, drawn from patterns across recent Indian readiness reviews. Treat the table as your pre-mortem.
| Gap | Why the banker stops | Cost of ignoring it |
|---|---|---|
| Incomplete RPT registers | Every related-party arrangement must be disclosed; a gap suggests suppression | Fresh disclosures, SEBI queries, restated DRHP |
| Un-restated financials | SEBI requires 3 years of restated IND AS accounts | Retroactive audit, 3–6 month delay |
| Unpermissioned data sharing | No audit trail means the banker cannot vouch for what was seen by whom | Diligence restarts, confidentiality risk |
| Weak board and committees | Audit, nomination and stakeholder committees must exist and function | Governance overhaul mid-diligence |
| Late BRSR / ESG | Sustainability disclosure prepared too late reads as an afterthought | Credibility hit, investor questions |
What you must do now: a nine-step readiness plan
The work that clears merchant banker due diligence fastest is the work you do before the banker arrives. Here is the sequence I run with clients preparing to list.
- Convert to a public limited company. File under Section 18 with Form INC-27, and amend the Articles to reflect public-company governance and SEBI obligations. A private company cannot file a DRHP.
- Appoint the BRLM before diligence begins. The certificate under Schedule V presumes the banker was present for the process; appointing after the fact undermines the certification.
- Restate three years of accounts under IND AS. If your books were not audited on this basis, budget three to six months for retroactive restatement.
- Build a permissioned virtual data room. Treat it as regulator-grade evidence infrastructure. Every document dated, indexed and access-logged, because that audit trail is what SEBI and later complainants will reference.
- Reconstruct and reconcile RPT registers. Map every transaction under Section 188 of the Companies Act, board and shareholder approvals, and the arm’s length basis. This single item derails more DRHPs than any other.
- Fix statutory records and secretarial hygiene. Minutes, registers, charge filings and annual returns must be clean. A Section 204 secretarial audit is the standard tool to surface gaps before the banker does.
- Restructure the board and committees. Put independent directors, the audit committee, and the nomination and remuneration committee in place and running well ahead of filing, not during diligence.
- Scope BRSR and ESG early. Begin sustainability data capture at least a year out so the disclosure reads as lived practice, not a last-minute exhibit.
- Run an independent mock diligence. Have a company secretary or counsel stress-test the data room and answer the banker’s likely questions before the banker asks them.
The deeper implication of SEBI’s 2026 reset
According to CS Sapna Malpani, the January 2026 amendments mark a shift from a registration mindset to a capital-and-accountability mindset for merchant bankers, and issuers will feel the second-order effect first. When a banker cannot outsource diligence and must carry Rs 50 crore of net worth against the work it signs, it becomes far more selective about the companies it takes on and far more demanding about the evidence it accepts. The banker’s risk appetite has narrowed, and unprepared issuers will find fewer willing hands and longer queues.
The forward view for the next two years: expect BRLMs to push readiness diagnostics earlier, ask for the data room at pitch stage rather than post-mandate, and walk away from companies whose records cannot survive scrutiny. The companies that win are the ones treating due diligence readiness as a standing discipline, not a pre-IPO sprint.
How this differs from investor due diligence and secretarial audit
Founders often confuse three exercises that look similar. Investor due diligence is what a venture capital or private equity fund runs before a funding round, commercial, and focused on the deal. A secretarial audit under Section 204 is a statutory review of legal and secretarial compliance, resulting in Form MR-3. Merchant banker due diligence is broader and public-market-grade: it feeds a disclosure document that the whole investing public will rely on, and it ends in a certificate to the regulator. The secretarial audit is a valuable input to the banker’s work, but it does not replace it, and neither substitutes for a clean pre-IPO governance gap analysis.
- ✓ The BRLM’s due diligence certificate under Reg 25(2)(b) and Form A of Schedule V is the real gate on an Indian IPO.
- ✓ SEBI’s amendments effective 3 January 2026 raised Category I net worth toward Rs 50 crore and banned outsourcing of due diligence, ending on 3 April 2026.
- ✓ You need 3 years of restated IND AS accounts and net tangible assets of at least Rs 3 crore under the ICDR profitability route.
- ✓ The three commonest deal-killers are incomplete RPT registers, unpermissioned data sharing, and late BRSR.
- ✓ Appoint the BRLM before diligence begins; a certificate presumes the banker was present for the process.
- ✓ Start readiness 12–18 months before you intend to file the DRHP; listing follows 6–12 months after.
Sources and references
- SEBI, Regulations (ICDR, Merchant Bankers): sebi.gov.in
- SEBI (Merchant Bankers) Amendment Regulations, 2025, analysis: Mondaq and Lexology
- Capital adequacy and net-worth thresholds: Business Standard
- India Code, Companies Act, 2013 (Sections 18, 188, 204): indiacode.nic.in
- MCA, forms and circulars: mca.gov.in
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Frequently asked questions
What is merchant banker due diligence in an IPO?
Merchant banker due diligence is the structured examination a SEBI-registered book running lead manager conducts on a company before it files a Draft Red Herring Prospectus. The banker reviews financials, contracts, litigation, related-party transactions, licences and promoter background, then signs a due diligence certificate under Regulation 25(2)(b) of the ICDR Regulations confirming that the offer document disclosures are true, fair and adequate. Because the banker’s own registration is on the line, this examination is in practice the tightest gate on an Indian IPO, and it moves only as fast as the company can produce clean, traceable evidence.
How did the SEBI merchant banker regulations 2026 change due diligence?
The SEBI (Merchant Bankers) Amendment Regulations, 2025 took effect on 3 January 2026. They split merchant bankers into Category I (minimum net worth rising to Rs 50 crore by 2 January 2028, the only category permitted to manage a main-board equity issue) and Category II (Rs 10 crore). Critically, SEBI barred merchant bankers from outsourcing issue management, due diligence and underwriting, requiring existing arrangements to end by 3 April 2026. For issuers this means the BRLM now performs due diligence in-house, with deeper scrutiny and a higher bar for document quality.
What is a BRLM due diligence certificate?
A BRLM due diligence certificate is the formal confirmation the book running lead manager files with SEBI stating that all statements in the offer document are true and correct, that referenced documents were reviewed, that no material information was suppressed and that risk factors are adequately disclosed. It is submitted under Regulation 25(2)(b) of the ICDR Regulations along with a due diligence process note in Form A of Schedule V. The banker should be appointed before diligence begins, because the certificate presumes it was present throughout the process.
How long does IPO due diligence readiness take?
For most companies, readiness work should begin 12 to 18 months before the intended DRHP filing, followed by another 6 to 12 months from filing to listing. The heaviest items are restating three years of accounts under IND AS, building a permissioned data room, reconciling related-party registers and restructuring the board and committees. Companies that treat these as a pre-IPO sprint routinely lose two quarters; those that maintain them as standing disciplines file on schedule.
What are the most common IPO due diligence deal-killers?
The three failures that most often stall a DRHP are incomplete or reconstructed related-party transaction registers, data shared with early advisers without permissioning or an audit trail, and a Business Responsibility and Sustainability Report scoped too late to be credible. Each is a documentation failure rather than a business failure, and each can force fresh disclosures, SEBI queries or a restated draft prospectus. A mock diligence run by a company secretary before the banker arrives surfaces most of these early.
Does a secretarial audit replace merchant banker due diligence?
No. A secretarial audit under Section 204 of the Companies Act is a statutory review of legal and secretarial compliance that results in Form MR-3, and it is a valuable input to the banker’s work. Merchant banker due diligence is broader and public-market-grade: it supports a public disclosure document and ends in a certificate to the regulator. Treat the secretarial audit and a pre-IPO governance gap analysis as inputs that make the banker’s diligence faster, not as substitutes for it.