Introduction
The Indian capital markets have always been a reflection of the country’s economic aspirations. In the last decade, especially post-2020, there has been a surge in Initial Public Offerings (IPOs) with companies across sectors stepping into the public market to raise funds and fuel their growth ambitions. While IPOs create opportunities for companies to expand and for investors to grow wealth, the market has also witnessed many instances where the optimism turned into disappointment, leading to a bust in share prices post-listing.
This cycle of boom and bust in IPOs highlights the critical need for comprehensive legal due diligence to ensure that companies are genuinely ready for public scrutiny and that investor interests remain protected in this rapidly changing landscape.
The IPO Boom: Riding on Market Optimism
When a company decides to go public, it often signifies that it has achieved a stage of stability, scalability, and growth potential. The IPO boom of 2021–22 saw new-age tech companies, fintech startups, and consumer brands raise billions from the public markets. Zomato, Nykaa, Policybazaar, Paytm, and many others became household names overnight.
This IPO boom was driven by:
- Excess liquidity in the market – Investors were looking for new avenues post-pandemic.
- Strong retail participation – With the rise of digital trading apps, retail investors actively invested in IPOs.
- Favourable regulatory environment – SEBI eased certain listing norms to encourage startups to list.
- Growth stories of the Indian economy – The expanding middle class, internet penetration, and consumer demand made these companies attractive bets.
The Bust Phase: When Reality Hits the Market
However, not all IPOs lived up to their valuations. Within months of listing, companies like Paytm lost more than 50% of their market value. Investors felt cheated, and market confidence shook. Several reasons contributed to this bust:
- Overvaluation of companies without strong revenue models
- Lack of robust corporate governance practices
- Inadequate disclosures and risk assessments
- Global market corrections impacting emerging economies
These failures also pointed towards gaps in legal due diligence during the IPO process. Investors realised that flashy presentations and optimistic projections are not enough – legal, financial, and operational preparedness are equally important.
Legal Due Diligence: The Backbone of a Successful IPO
What is Legal Due Diligence?
Legal due diligence is the process where lawyers and advisors thoroughly investigate the company’s legal standing before it offers its shares to the public. It ensures that:
- The company’s affairs are in order
- All statutory compliances are met
- There are no hidden legal risks
- Disclosures in the prospectus are accurate and sufficient
- Investors are not misled by incomplete information
Key Components of IPO Legal Due Diligence
1. Corporate Structure and Records Check
Verification of Memorandum and Articles of Association
Details of shareholding structure, subsidiaries, and joint ventures
Board and shareholder meeting records
Past changes in capital structure
2. Regulatory Compliances
Compliance with Companies Act, SEBI regulations, FEMA, and sector-specific laws
Environmental and labour law compliances
FDI and cross-border transaction compliances
3. Material Contracts and Obligations
Reviewing significant supplier, vendor, lease, and service contracts
Checking for any restrictive covenants or termination risks
4. Litigation and Disputes
Assessment of ongoing and potential litigation risks
Impact of disputes on business operations and reputation
5. Intellectual Property (IP) Rights
Verification of trademarks, patents, copyrights owned or used by the company
Ensuring no pending IP infringement claims
6. Taxation Matters
Analysis of pending tax assessments and potential liabilities
Review of tax compliance history
7. Employment and Labour Law Compliance
Statutory benefits, workplace regulations, employee contracts, and ESOP plans
Pending disputes with employees or ex-employees
8. Real Estate and Asset Ownership
Title due diligence of immovable properties
Validity of leases, mortgages, or charges created
Why is Legal Due Diligence More Critical in the Boom-Bust Cycle?
During an IPO boom, companies rush to go public to capitalise on investor optimism. In this race, corners are often cut, especially in disclosures and compliance checks. However, if legal due diligence is not robust:
Post-listing legal challenges can arise, damaging reputation
Investors may sue for misrepresentation under SEBI laws
Regulatory penalties can be imposed for incorrect disclosures
Long-term business sustainability is affected due to hidden risks
The IPO bust phases show that only those companies that have a solid legal, financial, and operational foundation can survive market corrections.
Changing Landscape of Capital Markets: A Call for Stronger Due Diligence
The Indian capital market is evolving rapidly with:
- Entry of tech-based companies with complex business models
- Rise in ESG (Environmental, Social, Governance) compliance expectations
- Global investors demanding transparency and accountability
- SEBI’s tightening of disclosure norms for startups and unicorns
These changes demand that legal due diligence becomes more strategic and holistic rather than a mere checklist exercise.
Recent SEBI Measures to Strengthen IPO Processes
In response to the IPO busts, SEBI has introduced reforms like:
- Mandatory for the disclosure of key performance indicators (KPIs) which linked to valuations
- Lock-in periods for anchor investors to prevent sudden exits
- Greater scrutiny of utilisation of IPO proceeds
- Strengthening risk factor disclosures in prospectuses
These reforms indicate that companies can no longer rely solely on market hype. Legal due diligence teams now play a critical role in ensuring full compliance with these enhanced requirements.
Role of Lawyers and In-House Counsels
Lawyers today act not only as compliance checkers but as strategic advisors in IPO planning. Their role includes:
- Pre-IPO readiness assessment – Identifying gaps in governance, contracts, or compliance early.
- Drafting and reviewing offer documents with accurate disclosures.
- Advising on restructuring if needed to meet regulatory requirements.
- Ensuring ESG compliance, especially for companies targeting global investors.
- Managing risk communication to boards and promoters realistically.
Practical Tips for Companies Planning IPOs
1. Start due diligence early, preferably 6–12 months before filing the Draft Red Herring Prospectus (DRHP).
2. Invest in governance and compliance frameworks, including robust internal policies.
3. Review contracts and liabilities, renegotiate terms if needed before listing.
4. Strengthen IP protection, as it significantly impacts valuations in tech sectors.
5. Address all pending litigations transparently, with adequate disclosures and mitigation strategies.
6. Train management teams for public company compliance culture and communication.
Lessons from Recent IPO Busts
Paytm Case Study: Despite being India’s largest IPO, Paytm’s share value halved post-listing. Analysts cite unclear revenue models, overvaluation, and inadequate investor education in DRHP.
Nykaa: Its share prices also fell due to profit declines and poor post-listing communication, despite strong brand value.
Zomato: Faced criticism for focusing on aggressive expansion without clear profitability projections, which impacted investor confidence.
These examples reiterate that robust legal due diligence and transparent disclosures are not just regulatory formalities but essential for sustainable public market performance.
Conclusion
The IPO boom and bust cycles are part of a healthy capital market’s evolution. However, the difference between a company that sustains post-IPO and one that fails often lies in the quality of its preparation. Legal due diligence is not merely a checkbox exercise; it is a strategic process that ensures:
- The company is genuinely ready for public scrutiny
- Investors have a clear and fair view of risks and opportunities
- Regulators trust the company’s commitment to compliance
As the Indian capital market continues to globalise, the importance of strong legal due diligence will only increase. Companies, promoters, and advisors must recognise that while market timing and valuations are important, it is legal preparedness and operational robustness that build long-term success in public markets.
Final Words
For law students, legal professionals, and corporate strategists, understanding the intersection of IPO cycles and legal due diligence is crucial. It not only adds depth to your knowledge of capital markets law but also equips you to advise clients effectively in an environment where credibility, compliance, and strategic clarity define success.
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