Most companies that approach an SME listing are profitable, growing and well run. What slows them down in diligence is rarely the business. It is a handful of balance sheet items that made sense in a closely held private company and look very different when a merchant banker, an examining auditor and eventually public investors ask what they are.
Before an offer document is filed, three years of financial statements must be restated and examined by a statutory auditor holding a valid peer review certificate from ICAI. Every balance below has to be explained, supported and, where necessary, corrected across all three years. Dealing with them early is far cheaper than dealing with them during the restatement.
1. Loans and advances involving promoters, directors and related parties
Money moving between a company and its promoters, their relatives and group entities is normal in private companies. It is also the first thing diligence examines, for three reasons.
First, private companies enjoy exemptions that public companies do not. Section 185 of the Companies Act, 2013 restricts loans to directors and connected persons, and many private companies rely on a conditional exemption from it. Similarly, the Companies (Acceptance of Deposits) Rules, 2014 allow a private company to accept money from directors and from relatives of directors without it counting as a deposit, subject to a declaration. When the company converts to a public company, as it must before an IPO, those exemptions no longer apply. Balances that were lawful yesterday may need to be recovered, restructured or regularised.
Second, since SEBI’s March 2025 amendments, an SME issuer cannot use IPO proceeds to repay loans taken from promoters, the promoter group or related parties. Any plan that assumed the IPO would clear these balances needs to change.
Third, every related-party balance needs documentation: an agreement, a board or shareholder approval where section 188 applies, an arm’s length basis for interest, and tax deducted at source on that interest. Missing paperwork does not usually stop a listing, but reconstructing it under deadline pressure delays one.
What to do: list every promoter and related-party balance at the latest year end, trace each to its approvals, and decide which will be repaid, formalised or converted before conversion to a public company. Converting a loan into equity has its own consequences for promoter contribution and lock-in, so plan it with the listing timeline in mind.
2. Trade receivables and payables that have not moved
Schedule III to the Companies Act requires ageing schedules for trade receivables and trade payables, and separate disclosure of amounts due to micro and small enterprises. In a restated offer document those schedules cover three years, so a receivable that has sat unchanged for 30 months is visible to every reader.
Old receivables raise the question of whether they should have been provided for, and if so in which year. If the answer is “two years ago”, the restatement moves that loss into the earlier year, which can change the EBITDA and net worth figures that determine eligibility.
Old payables raise different questions. Under the MSMED Act, 2006, dues to micro and small enterprise suppliers must generally be paid within the agreed period, which cannot exceed 45 days, and late payment attracts compound interest at three times the bank rate that is not tax-deductible. The income-tax law also restricts the deduction for such dues until they are paid, under section 43B(h) of the Income-tax Act, 1961 and the corresponding provision of the Income-tax Act, 2025 for later years. An unrecorded liability for interest to MSME suppliers is a common restatement adjustment.
What to do: obtain balance confirmations for material parties, apply a written provisioning policy consistently across all three years, identify MSME suppliers correctly, and write off irrecoverable balances with proper approval.
3. Statutory balances that do not reconcile
Tax balances carried forward year after year without reconciliation are a warning sign to any examiner. The usual candidates are:
- GST input tax credit in the books that does not match what suppliers have reported, or output tax that differs from the returns filed;
- TDS receivable and advance tax that do not agree with Form 26AS and the annual information statement;
- income-tax refunds shown as receivable for several years with no follow-up;
- demands and notices from tax authorities that have not been assessed as liabilities or contingent liabilities.
The last item matters beyond the balance sheet. The offer document must disclose outstanding litigation, including tax proceedings, and material litigation is measured against a materiality policy that the board adopts. Undisclosed or unquantified tax disputes surface in legal diligence, and they are harder to explain when the finance team has not tracked them.
What to do: reconcile each statutory balance to the government portals for all three years, file rectifications where possible, and maintain a register of every notice and demand with its status and exposure.
4. Capital work in progress and intangible assets under development
Schedule III also requires ageing of capital work in progress and intangible assets under development, and a completion schedule for projects that are overdue or have exceeded their original budget. A factory expansion that has sat in work in progress for three years, or a software platform that has been “under development” since before the pandemic, will be questioned.
The questions are whether the costs genuinely relate to an asset, whether any should have been expensed, whether borrowing costs were capitalised correctly, and whether the asset is impaired. Each answer can move profit between years.
There is an eligibility angle too. BSE SME requires net tangible assets of at least ₹3 crore in the last full financial year. Capitalised intangibles do not count towards that figure, so a company that has capitalised heavily may find its tangible asset base smaller than it expected.
What to do: review every open project, capitalise what is complete, expense what does not meet the recognition criteria, and support what remains with a realistic completion plan. Run a physical verification of fixed assets against the register while you are at it.
5. Share capital and share application money
The capital history of a company is examined from incorporation onwards, and small procedural lapses from years ago become visible. Common findings include:
- share application money received but not allotted within 60 days, which must be refunded within the following 15 days and can otherwise be treated as a deposit;
- private placements that did not follow section 42, such as money received into a general account rather than a separate bank account;
- returns of allotment not filed with the ROC on time;
- preferential allotments without the valuation report required under section 62;
- foreign investment where the reporting to RBI under FEMA was late or missing;
- convertible instruments from earlier funding rounds that are still outstanding.
Most procedural lapses can be regularised through late filing, condonation or compounding, but each route takes weeks or months. Outstanding convertible instruments are more pressing: under the amended SEBI rules they generally make an SME issuer ineligible unless converted or settled, with limited exceptions such as employee stock options.
What to do: rebuild the complete share capital history with supporting filings, identify every gap, and start regularisation early. It is usually the slowest part of pre-IPO clean-up.
The common thread
None of these issues means a company cannot list. Each means that someone has to explain, support or correct a number, and that the correction may flow through three years of restated accounts. Matters highlighted in past audit reports have to be addressed in the restated information too.
A useful test is a restatement dry run: take the latest audited year, apply the scrutiny an examining auditor would, and see what changes. If the answer is “very little”, the company is in good shape. If the answer is a long list, it is far better to find out 18 months before a target listing than six.
Want a second pair of eyes on your balance sheet? Our diagnostic reviews these areas, among others, and gives you a written list of what to fix and in what order. Book a diagnostic call or try the eligibility checker.
This article is general information on the law and regulations as understood in September 2026 and is not advice on any specific situation. Regulations change; confirm the current position before acting.