Introduction
Have you ever thought about what it really means to own just a single share of a company? In an Initial Public Offering (IPO) (on main board or SME platform), when a business invites the public to invest, even the smallest shareholder becomes a part-owner of that enterprise. Under Section 2(55)[1] of the Companies Act, 2013, any person whose name is entered in the company’s register of members (or recorded as a beneficial owner in the depository’s records) is a “member” and a member is, in law, a part-owner of the company with rights and obligations proportionate to their shareholding. As an investor stepping in to become a part-owner of a company, it is only natural to want a clear picture of what you are buying into. This information is given in the offer document by company. In this article, we focus on how material litigation details are disclosed in the Draft Red Herring Prospectus (DRHP) before an IPO, and the requirements for updating these disclosures after the company is listed.
Litigation Disclosures in DRHP
The Securities and Exchange Board of India (SEBI) has framed the Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2018 to ensure that prospective shareholders receive complete and reliable information about a company before investing. To help investors make informed decisions, the DRHP must set out a dedicated “Legal and Other Information” section covering key matters such as pending litigations, regulatory actions, and material dues. Schedule VI of ICDR Regulations sets out the detailed disclosure requirements for offer documents. In particular, Clause 12[2] of Part A of Schedule VI requires disclosure of Legal and Other Information. This includes pending litigations and other matters that could affect the company. To decide what needs to be disclosed, companies follow a materiality policy on litigation disclosure approved by the board of directors, or, where applicable, the specific thresholds laid down in the ICDR regulations: litigations involving at least 2% of turnover, or 2% of net worth of latest consolidated financial statements or 5% of the average absolute PAT over the past three years.
Here’s what legal part of the Legal and Other Information section typically includes:
| Disclosure Area | What Investors Can Expect to See |
| Pending Litigations | • All criminal cases involving the company, its directors, promoters, subsidiaries. • All regulatory or statutory actions against them. • All direct and indirect tax disputes – summarised with number of cases and total amounts. • Other pending cases that meet the company’s “materiality policy” or exceed set financial thresholds (based on turnover, net worth, or profit/loss). • Criminal and regulatory cases against Key Managerial Personnel (KMPs) and Senior Management Personnel (SMPs). |
Post Listing Litigation Disclosures
While the DRHP ensures that investors receive clarity before an IPO, disclosure obligations continue after listing. Under the SEBI (Listing Obligations and Disclosure Requirements) (LODR) Regulations, 2015, companies must promptly inform the stock exchanges of any material litigation or development that could influence investor decisions. Regulation 30(4)(i) read with Regulation 30 (3) of LODR Regulations requires each company to adopt a materiality policy, and Schedule III (Para A & B) of LODR Regulations specifies the categories of events to be disclosed. Litigation typically falls under Para B, requiring disclosure only if considered material. In practice, the Industry Standards Note on Regulation 30 serves as guidance for assessing materiality and determining the manner of disclosure. It outlines benchmarks such as financial thresholds and potential reputational impact. Accordingly, only those cases that meet these prescribed tests require reporting, not every litigation. The table below summarises the key benchmarks for post-listing litigation disclosures.
| Type of Litigation / Action | When Disclosure is Required | Materiality Threshold |
| New litigation or significant update in existing case | When monetary, operational impact meets thresholds in Board-approved policy | Lower of: • ≥2% of turnover • ≥5% of average PAT (last 3 years) or as per company’s materiality policy |
Conclusion
Material litigation disclosure is not only a regulatory requirement but also a means to build long-term trust with investors and the market. Many companies voluntarily share positive legal outcomes even when these fall below their stated materiality thresholds. Such updates can reinforce investor confidence, but once a disclosure approach is adopted whether for matters above or below the threshold regulators and stock exchanges generally expect consistency in future disclosures. Equally important is the link between the IPO and post-listing stages. The materiality policy guiding disclosures in the DRHP does not lapse once the IPO concludes; it extends into the company’s life as a listed entity under Regulation 30 of the LODR. Accordingly, the disclosure philosophy applied before listing should remain aligned with the ongoing materiality framework after listing. Maintaining this consistency not only reduces regulatory observations but also strengthens market confidence by demonstrating that the company treats disclosure as a continuing responsibility rather than a one-time IPO exercise.
[1] (55) “member”, in relation to a company, means—
(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;
(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;
[2]Schedule VI: Part A of ICDR Regulations: (12) Legal and Other Information:
(A) Outstanding Litigations and Material Developments:
(1) Pending Litigations involving the issuer/ its directors/ promoters/ subsidiaries:
(i) All criminal proceedings; (ii) All actions by regulatory authorities and statutory authorities;
(iii) Disciplinary action including penalty imposed by SEBI or stock exchanges against the promoters in the last five financial years including outstanding action; (iv) Claims related to direct and indirect taxes, in a consolidated manner, giving the number of cases and total amount; (v) Other pending litigations based on lower of threshold criteria mentioned below– (i) As per the policy of materiality defined by the board of directors of the issuer and disclosed in the offer document; or (ii) Litigation where the value or expected impact in terms of value, exceeds the lower of the following:
(a) two percent of turnover, as per the latest annual restated consolidated financial statements of the issuer; or (b) two percent of net worth, as per the latest annual restated consolidated financial statements of the issuer, except in case the arithmetic value of the net worth is negative; or
The article is written by Mr. Animesh Joshi and is published at Taxmann. The link is: