Outstanding Litigation in DRHP: How to Read the Legal Chapter Before You Apply

Every IPO document has a chapter most retail applicants scroll straight past: the one listing court cases, tax demands and regulator actions. Reading outstanding litigation in DRHP filings is less painful than it looks, and it often tells you more about a company’s real risks than the glossy business overview does. SEBI’s rules fix what has to go into this chapter, who it covers, and how big a case must be before it is listed individually. Once you know that structure, the section takes about fifteen minutes to read properly.

Everything below comes from the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended up to March 21, 2026, mainly Schedule VI. If you are new to IPO paperwork, our guide to IPO investing in India sets out where the draft red herring prospectus (DRHP) sits in the process.

Where outstanding litigation in DRHP documents actually sits

Schedule VI, Part A lists what an offer document must contain. Item 12 is titled “Legal and Other Information”, and its first part is “Outstanding Litigations and Material Developments”. The regulation says these disclosures must be made in a separate chapter or section that is distinctly identifiable in the index or table of contents. So you never have to hunt for it. Open the contents page, look for “Outstanding Litigation and Material Developments” (the exact wording varies a little from issuer to issuer), and jump there.

The chapter in the DRHP is your first look, and the red herring prospectus later carries the updated version, including developments after the draft was filed. Comparing the two is one of the easiest checks a retail investor can do.

Whose cases have to be disclosed

The rule covers pending litigation involving four sets of people and entities: the issuer, its directors, its promoters and its subsidiaries. For each of them, the regulation lists categories that must be disclosed:

• All criminal proceedings. There is no size filter here. A small criminal case still goes in.
• All actions by regulatory and statutory authorities. Again, no threshold.
• Disciplinary action by SEBI or the stock exchanges against the promoters in the last five financial years, including penalties and any action still outstanding.
• Claims related to direct and indirect taxes, shown in a consolidated way, with the number of cases and the total amount.
• Other pending litigation above a materiality threshold, which we work through below.

A 2025 amendment, effective March 8, 2025, added a line that widens the net further. All criminal proceedings involving key managerial personnel and senior management of the issuer, along with actions by regulatory and statutory authorities against them, must also be disclosed. So the chief financial officer facing a criminal complaint is now squarely inside the chapter, even if that person is not a director.

Group companies are handled under a separate item. For them, the schedule asks for any pending litigation involving the group company that has a material impact on the issuer. If you want to understand how issuers decide which entities count as group companies, our explainer on group companies in a DRHP covers that.

Criminal cases and regulator actions have no size filter at all. If a company has one, it has to be in the chapter, however small the amount.

The materiality threshold, and why it changed in 2025

Civil disputes are where the numbers can get large, and also where a company has the most room to decide what to show. Before March 2025, “other pending litigations” were disclosed only “as per the policy of materiality defined by the board of directors” of the issuer. In plain terms, the board set its own bar.

The 2025 amendment replaced that with a two-part test. A case must now be disclosed based on the lower of:

1. the threshold in the board’s own materiality policy, disclosed in the offer document; or
2. a quantitative test: litigation where the value, or the expected impact in value terms, exceeds the lower of
   • 2% of turnover, per the latest annual restated consolidated financial statements;
   • 2% of net worth, per the same statements, except where net worth is negative; or
   • 5% of the average of the absolute value of profit or loss after tax, over the last three annual restated consolidated financial statements.

The word “lower” appears twice, and both times it works in the investor’s favour. A board can no longer set a generous threshold and quietly leave out mid-sized cases.

A worked example with hypothetical numbers

Take an imaginary issuer, Example Components Ltd. These figures are made up purely to show the arithmetic.

• Latest annual turnover: ₹800 crore. Two per cent of that is ₹16 crore.
• Latest net worth: ₹300 crore. Two per cent is ₹6 crore.
• Profit after tax for the last three years: ₹40 crore, a loss of ₹10 crore, and ₹60 crore.

The third test uses absolute values, so the loss year counts as 10, not minus 10. The average is (40 + 10 + 60) ÷ 3, which is about ₹36.67 crore. Five per cent of that is roughly ₹1.83 crore.

The lowest of ₹16 crore, ₹6 crore and ₹1.83 crore is ₹1.83 crore. Now say the board’s policy sets materiality at ₹5 crore. The regulation takes the lower of the board’s ₹5 crore and the quantitative ₹1.83 crore, so any pending civil case worth more than about ₹1.83 crore must be listed.

Notice what the profit test does. A company with thin or volatile earnings ends up with a low threshold, which means more cases get disclosed. That makes sense: a ₹2 crore claim barely matters to a business earning hundreds of crores, but it can wipe out a big chunk of a year’s profit for a smaller one.

One more twist. If our imaginary company had negative net worth, the 2% of net worth test would simply drop out, and the threshold would be the lower of the turnover test and the profit test.

Creditors, defaulters and late developments

The same chapter goes beyond court cases. Under “outstanding dues to creditors”, the issuer must give, based on its board’s materiality policy, the consolidated number of creditors and the aggregate amount owed. Dues to micro, small and medium enterprises have to be shown separately from other creditors, with the number of cases and amounts. Full details of overdues to material creditors, with names and amounts, go on the company’s website, with a web link in the offer document.

For a further public offer or a rights issue, if the issuer, a promoter or a director has been declared a wilful defaulter or a fraudulent borrower, the document must name the person, the bank that made the declaration, the year and the outstanding amount at that time, among other details. The fact must also appear prominently on the cover page.

Then there is timing. If new litigation, material developments or creditor dues arise after the document is filed, the regulation says the facts must be added to the offer document. If there are no such cases, the document must carry a distinct negative statement saying so. The chapter also covers material developments since the date of the last balance sheet.

How the litigation chapter links to the risk factors

Litigation also has to show up in the risk factors section. Among the subjects SEBI says must be covered as risk factors wherever applicable is a summary of all outstanding litigations and other matters from the litigation chapter, in a table, with the amount involved where it can be quantified. The issuer must also separately highlight any criminal, regulatory or taxation matters that may have a material adverse effect on it.

There is a useful guardrail on tone. When a company proposes how it will address a risk, those proposals cannot contain speculative statements about a positive outcome of any litigation, and cannot be given at all for a matter that is sub-judice before a court or tribunal. So if you see a line like “we are confident of a favourable outcome”, treat it with care and check whether the case is still pending.

The amount in dispute is only half the story. A tax demand worth 2% of turnover reads very differently from one worth half a year’s profit.

Older DRHPs may also show a summary litigation table near the front, in an “Offer Document Summary” section. The 2026 amendment omitted that summary clause with effect from March 21, 2026, so newer documents filed after that date may not have it. The risk factor table and the full chapter remain.

A fifteen-minute reading routine

Here is the order we follow when going through this chapter.

1. Find the materiality policy first. The document has to disclose the board’s threshold. Work out the quantitative test yourself from the restated financials, the way we did above, and see whether the company is using the lower number.
2. Read criminal and regulatory matters against promoters and directors closely. These have no size filter, and they say more about governance than the amounts do.
3. Add up the tax claims. They are shown as a number of cases and a total amount. Compare the total with net worth and with a year’s profit after tax.
4. Look for cases against the company, not just by it. A company suing a customer to recover dues is a different risk from a customer suing the company.
5. Check the MSME dues line. Large or ageing dues to small suppliers can point to stretched working capital.
6. Compare the DRHP with the RHP. New cases, or the negative statement saying there are none, should appear in the later document.
7. Cross-check the notes to accounts. Disputed claims often show up as contingent liabilities in the financial statements. If the two sections tell different stories, ask why.

What the chapter can’t tell you

The disclosure tells you what is pending and, where quantifiable, how much is at stake. It does not tell you how likely the company is to lose, and SEBI’s rules actively stop the issuer from predicting a win on pending matters. Amounts claimed by the other side can also be far higher than what a court eventually awards. So the chapter is a map of exposure, not a forecast.

Also keep in mind that the rights issue letter of offer, covered in Part B of the same schedule, uses a narrower set of litigation categories (criminal liability, material statutory violations and economic offences) along with the same threshold test. If you are reading a rights issue document rather than an IPO prospectus, expect a shorter section.

The bottom line

Outstanding litigation in a DRHP is not a formality. SEBI requires all criminal and regulatory matters involving the issuer, its directors, promoters and subsidiaries to be listed, and since March 2025 the threshold for civil cases is the lower of the board’s own policy and a hard numerical test tied to turnover, net worth and profit. Do the threshold arithmetic once, read the promoter and director cases, total up the tax claims and compare the draft with the final document. That alone puts you ahead of most applicants who only look at the price band and the grey market chatter.

Disclaimer: This article is for education only and is not investment advice. The worked example uses hypothetical figures. IPO investments carry risk; read the offer document carefully and consult a SEBI-registered adviser before making investment decisions.