Objects of the Issue in IPOs

In simple terms, the objects of the issue answer the key investor question:

“What will the company do with the money it raises?”

Understanding this section is critical because it directly reflects the investment objectives, strategic direction, and financial discipline of the company.

Components of the Object of Issue

The objects of the issue typically cover the deployment of proceeds across several major categories. Each component demonstrates a distinct aspect of the company’s capital allocation plan.

1. Capital Expenditure (CapEx): Funds allocated to acquire or upgrade plant, machinery, infrastructure, or technology, often aimed at expanding capacity or improving operational efficiency.
2. Repayment or prepayment of borrowings: Utilising IPO proceeds to reduce existing debt strengthens the balance sheet, decreases interest costs, and improves financial leverage.
3. Working capital requirements: Ensures the company has adequate liquidity to manage day-to-day operations, such as inventory, receivables, and operating expenses.
4. General corporate purposes: Provides financial flexibility for administrative and operational expenses, brand building, employee incentives, or unforeseen business needs. Note SEBI restricts this allocation to 25% of gross proceeds in Mainboard IPOs and 15% or ₹1,000 lakhs (whichever is lower) in SME IPOs.
5. Offer-related expenses: Covers fees, commissions, and expenses associated with the IPO, including payments to merchant bankers, legal advisors, auditors, registrars, and regulatory filing costs.

Important Points on Objects of the Issue

• The objects of the issue are relevant only to a Fresh Issue of shares, where the company actually receives funds. In an Offer for Sale (OFS), the proceeds go to existing shareholders, not the company.
• Transparency and clarity in the object statements help investors assess the company’s growth potential and credibility.
• Overly broad or vague purposes—like “for general business purposes”—may signal weak planning or a lack of focus.
• Regulatory norms require the disclosure of the deployment schedule and the expected timeline for fund utilisation.
• A company must provide an IPO proceeds utilisation certificate, confirming that funds have been deployed as per the stated objectives.

Investor Checklist – Evaluating the Objects of the Issue

Before investing, investors should scrutinize the objects of the issue section carefully. Here’s a checklist to evaluate the company’s intent and credibility:

Red Flags to Watch

• A very high allocation to general corporate purposes — indicating vague usage.
• Repayment of promoter-related loans instead of funding business expansion.
• Projects unrelated to the company’s core business activities.
• No time-bound plan for the deployment of proceeds.
• Excessive issue-related expenses that erode the amount available for growth.

Key Evaluation Criteria

To evaluate the objects of issue effectively, investors should assess the following points:

Key Takeaways

• The objects of the issue serve as a critical link between a company’s strategic goals and investor expectations.
• They clearly outline why the company is raising capital and how it intends to deploy the IPO proceeds.
• Transparency and clarity in defining these objects enhance investor confidence and regulatory compliance.
• For companies, well-articulated objects demonstrate strategic intent, financial discipline, and credibility in capital utilisation.
• For investors, this section provides valuable insights into the company’s priorities, such as growth expansion, debt repayment, or operational strengthening.
• Regulatory disclosures around object-wise fund allocation ensure accountability and traceability of proceeds.
• Balanced allocation among capex, working capital, and general corporate purposes reflects prudent financial planning.
• Ultimately, a well-defined object of the Issue section reflects the company’s transparency, governance standards, and commitment to long-term value creation.