This is Part – VIII of the Capital Markets article series.
An Initial Public Offering (IPO) is a landmark event in the lifecycle of any company. Beyond the transfer of stakes, rebalancing of the capital structure, etc., the IPO acts as a fundamental public trust exercise where the retail and institutional investors commit capital subject to the representations made in the offer documents. Core to the overall offer documents lies the Object of the Issue. The SEBI and stock exchanges have long required issuer companies to disclose the reasons for raising capital, be it identifying specific capital expenditure projects, debt repayment tranches, acquisition targets, and working capital requirements with reasonable particularity. But nestled alongside these specific objects, almost invariably, is an omnibus category i.e., “General Corporate Purposes” (GCP). GCP has always been treated as benign residual funding. Regulators and Bankers have always understood it as a modest catch all for unanticipated operational needs. But over the past decades as the IPO markets started growing in volume, the GCP line item too began to grow in size and opacity. Offer Documents saw GCP allocations swelled up to 25-35% of the total issue size with a single statement mentioning the same without any meaningful disclosure. This led to a rise in SEBI scrutiny, with GCPs being a flashpoint in IPO regulation.
The concept of GCPs
The SEBI ICDR Regulations defines GCP as those identified purposes for which no specific amount is allocated for the identified needs in the Offer Document. It stems from the company’s requirement for operational flexibility. A financial basket, which allows the issuer company to fund for unanticipated expenses, being working capital, unexpected supply chain costs, strategic market shifts, unidentified acquisitions, etc., without it being locked into a single specific project. While these funds were segregated with the intention of covering operational contingencies, SEBI and the exchanges observed that they were being channelled towards inter-corporate loans to related party entities, acquisition of assets not disclosed in the Offer Document, repayment of informal shareholder loans not disclosed as debt, unrelated diversification activities, and retention in fixed deposits generating returns significantly below the cost of capital. Each of these uses is arguable under a loose definition of GCP. None is what a reasonable investor would have expected their capital to fund.
The SEBI ICDR Regulations allow for a certain percentage of issue proceeds to be used for GCP. In case of Main Board IPOs , the GCP component shall not exceed 25% of the total issue proceeds whereas for SME IPOs , the GCP component does not exceed 15% of the total issue proceeds or ₹ 10 crores whichever is less. The cap on GCP ensures that issuer companies allocate and earmark funds for identified objects as permissible under the law and thereby being transparent towards potential investors.
The disclosure of GCPs stands in contrast to the other components of the Objects. While every other object would require detailed backups wherein its need, merits and projections are looked through, GCPs only requires the identification for which the proceeds would be utilised. This is an information asymmetry. Hence, the line item essentially means that a company is saying, “we will spend this money on things we haven’t decided yet.” This asymmetry is compounded when GCP allocation is large. A 5% GCP allocation seems like a reasonable residual offer, but a 15-25% GCP allocation is effectively a blank cheque, one especially backed by public company.
The rise of scrutiny of GCPs
SEBI and stock exchanges started observing that GCP allocations in the past decades were always kept at the maximum permissible limits. The cap on the usage was being treated not as a maximum but as an entitlement. Hence, over the years SEBI proposed decreasing the GCP component, but were faced with strong pushbacks from the market. Consultations were even proposed for the issue proceeds earmarked for GCP to be brought under the purview of the monitoring agency. While these proposals couldn’t be set on stone, the regulators shifted their focus from imposing an immediate stringent action to focussing more decisively on qualitative disclosure requirements, requiring issuers to particularise the categories of expenditure contemplated under GCP to the extent possible.
The primary rationale for SEBI’s heightened scrutiny of GCP is investor protection and specifically, the protection of retail investors who subscribe to IPOs on the basis of Offer Document disclosures. Unlike institutional investors who have the analytical resources to model post-IPO fund flows, retail investors typically rely on three pieces of information being, the company’s financial performance as disclosed in the restated financials, the valuation implied by the issue price, and the stated objects of the issue. The objects section is the investor’s primary window into how management intends to deploy their capital. A vague GCP allocation corrupts this window.
SEBI has, in various communications, expressed concern that retail investors in the SME and main board IPO markets may not fully appreciate the risk embedded in a large GCP allocation. The grey market premium culture, which often drives retail subscription decisions, provides no price discovery for fund diversion risk, a risk that a well-informed institutional investor might price into their bid.
The convergence of three structural shifts explains why GCP scrutiny has sharpened materially over the past decade. First, Indian IPO volumes expanded rapidly both on the main board and the SME platform, meaning a permissive GCP standard was now capable of misallocating a proportionally larger pool of retail capital. Second, post-listing monitoring revealed a pattern wherein GCP funds were not merely covering unanticipated operational needs, but were being routed into related-party loans, undisclosed acquisitions, and low-yielding fixed deposits, uses that fell within the letter of SEBI ICDR Regulations but frustrated their spirit. Third, SEBI’s evolving investor protection mandate, particularly in the context of retail participation in SME IPOs, made the information asymmetry embedded in a large, unparticularised GCP allocation no longer acceptable on purely formal compliance grounds. It is the combination of market scale, documented misuse, and a sharpened regulatory philosophy and not any single event that accounts for GCP being a flashpoint in Indian IPO regulation today.
The Road Ahead
The regulatory trajectory on GCP is unlikely to reverse. Three observable developments point toward a regime of narrower, more disclosure-intensive GCP usage in the near term. First, exchange query practice has already shifted. In recent DRHP review cycles, both BSE and NSE have issued specific queries requiring issuers to particularise the intended deployment of GCP proceeds asking for category-wise breakdowns (such as working capital support, marketing expenditure, or strategic reviews) rather than accepting the single-line omnibus statement that was standard practice until a few years ago. This effectively imposes a disclosure obligation that the SEBI ICDR Regulations do not yet expressly require, and it signals that formal regulatory amendment may follow informal guidance practice, as has occurred repeatedly in Indian capital markets regulation. Second, investment bankers and legal counsel advising on mainboard and SME IPOs have begun recommending that GCP allocations be accompanied by category-level explanatory notes in the objects section, even in the absence of a mandatory requirement. This market practice shift is partly defensive as it reduces the risk of an exchange query cycle delaying the filing and partly commercial, as issuers that can articulate a credible use for every rupee of GCP tend to be received better by institutional investors during the anchor and book-building process. Third, for SME IPOs specifically, the existing cap of 15% or ₹10 crores (whichever is lower) is already creating a tight constraint on smaller issues. The practical effect is that SME issuers are increasingly structuring their objects section to absorb what would otherwise be GCP into identified working capital and general expenditure heads, rather than risk exchange queries on an already constrained GCP line. Taken together, these developments suggest that GCP will persist as a regulatory category and the operational need it serves is genuine but its function is shifting from an unexamined residual to a bounded, disclosed, and monitored component of the objects section. Practitioners advising on IPO readiness should treat GCP strategy as a disclosure exercise requiring the same diligence as any identified object, rather than a drafting formality.
In Sum
Hence, GCPs remain a legitimate and necessary component of IPO proceeds, but their role cannot be viewed as a mere drafting convenience. As SEBI and the stock exchanges have increasingly demonstrated, the concern is not with flexibility itself, but with the opacity and potential misuse that can arise when a large portion of public funds is left vaguely described. The regulatory trend is therefore moving toward greater specificity, stronger disclosures, and closer scrutiny of how issuers frame and deploy this residual category. For companies and their advisors, the practical takeaway is that GCP should be treated as a carefully justified part of the offer structure, not as an open-ended or mechanical line item.
For further information, please contact:
Archana Balasubramanian, Partner, Agama Law Associates
archana@agamalaw.com
