Streamlining IPO Steps for Smooth Public Market Entry

In a CII session on the IPO market in India, Radha Kirthivasan, Head of Listing and SME, BSE Limited, said that companies should prepare themselves well before they go from private to public. This entails revising foundational documents to support an IPO process including, governance enhancement and financial transparency. Following are the key insights.

The process of Initial Public Offering (IPO) marks a turning point in the life of a company when it moves from private to public ownership. This is a complex journey that involves planning, regulatory compliance, and working with several intermediaries to satisfy the requirements of the SEBI and stock exchanges. This process involves updating the company’s foundational documents, improving corporate governance structures, and clearly defining the objectives for capital utilization. Following these guidelines enables companies to successfully run through the IPO process, establish a strong base for sustainable growth, and increase market visibility as a publicly listed company.   

Modification of the Company’s Memorandum and Articles of Association

Companies should revisit the Articles of Association and Memorandum before starting the IPO journey to match the IPO requirements. These documents are sometimes prepared at the time of incorporation, and may not contain certain clauses needed for public listing. For instance, if private equity is involved then companies may need to include demand clauses, buyback clauses, or even update share subscription agreements. Amending the foundational documents is to make sure that the company adheres to the legal and regulatory requirements for getting publicly listed.

Review of Authorized Capital

First of all, it is important to evaluate and possibly raise the company’s authorized capital. To keep costs low, many private companies hold low authorized capital. In an IPO, however, authorized capital must be sufficient to meet post-IPO capital requirements. It means revising the authorized capital to a level that would be enough to accommodate new share issuance and future expansion, creating a scalable capital structure.

Strengthening Pre-Issue Capital

The pre-issue capital which includes retained earnings and reserves should be at a substantial level before the issue of IPO. This is especially important for building a rock-solid balance sheet that will withstand the scrutiny of investors and regulators. Furthermore, the amount of equity dilution depends on the level of pre-issue capital; therefore, the companies should consider an optimal dilution balance to preserve a high capital base while maximizing IPO valuation.

Adherence to Regulatory Standards for Auditing

According to the Securities and Exchange Board of India (SEBI), companies that are looking for an IPO are required to have their financial statements audited by a peer-reviewed auditor. Since many private companies may not have had a peer-reviewed auditor before, this requirement necessitates finding or onboarding an auditor with peer-reviewed credentials. This is an important step as it increases the credibility of the company’s financial information provided to investors and it increases their confidence in the company’s financial health and governance.

Financial Restatement and Audit Adjustments

Under regulatory requirements, companies are compelled to restate their financials for a certain period, usually the last three fiscal years. Typically, restatements relate to different accounting policies, or audit qualifications, which make the company’s financials unified and consistent for the investing public. Adjustments made for prior period items may be included in this process to maintain transparency and accuracy of financial disclosures. This allows for more reliable and comparable financial data for the company.

Board Reconstitution and Governance Adjustments

Companies are often required to reconstitute their boards to include a mix of independent and non-independent directors to meet regulatory guidelines. The SEBI guidelines require at least 50 percent of the board to be independent board members, and a woman director to be included, as mandated. The changes bring the company in line with the standards of corporate governance expected of public companies, namely greater transparency, accountability, and diversity at the board level.

Defining Objectives for Fund Utilization

Companies need to clearly articulate their objectives for raising funds as a core aspect of their IPO filing. The documentation for the IPO must detail the intended use of the IPO proceeds, which must be clarified as to whether it is for expansion, paying debt, or other strategic initiatives. It matches with regulatory requirements and in turn, helps secure investor confidence by showing a clear growth plan.

Key Intermediaries and Legal Compliance Engagement

This process involves several intermediaries such as legal counsel, auditors, and registrars who help in the IPO process. Independent firm conducts legal due diligence of all aspects of the company, including promoter background checks and business operations. The use of experienced intermediaries guarantees compliance with SEBI and exchange-specific listing criteria, speeding up the approval process and reducing the legal risks.

Documentation and Filing with Stock Exchanges and SEBI

After the preparatory steps are done, companies file IPO documentation with stock exchanges and SEBI. This includes a list of resolutions, undertakings, and other filings required. After submission, documents are reviewed by the stock exchanges and by SEBI independently to confirm that they meet listing criteria, governance standards, and eligibility requirements. Exchanges usually have a 30-day window to provide feedback or approval, and as the SEBI review is ongoing, they may ask for more information or amendments, etc.

Marketing the IPO and Valuation Exercise

Once regulatory approvals are secured, companies go on a roadshow to sell the IPO to potential investors. It is about showing the company’s financial health, growth prospects, and strategic plans to both institutional and retail investors. During this stage, the valuation process is done to determine the price band of the IPO, i.e. the expected market value of the company. A roadshow can be a make or break in demand for the IPO which can materially affect the final pricing and the level of subscription achieved.

Final Filing and Registrar of Companies Submission

After getting the approvals in place and pricing finalized, the company prepares its prospectus in final form and submits it to the Registrar of Companies (RoC). This represents the IPO launch, and the prospectus is on file with the public. The RoC submission is the first day of the IPO subscription period, which lasts three to ten days. The final prospectus disclosures, which then take place, allow investors to subscribe to the IPO shares during this time.

Allotment and Listing Process

After the subscription period closes, the basis of the allotment of shares is determined and shares are allotted to investors. The listing of shares on the stock exchange and the company finishing the listing process is completed on the next day when the share credits are reflected in the investor's Demat accounts. This is the last step in this process, moving the company from being a private organization to a publicly listed one, which opens new possibilities for growth and expansion and at the same time some of these are subject to ongoing regulatory and reporting requirements.

Ongoing Compliance and Corporate Governance Responsibilities

After listing, the company has to fulfill its duties as a public entity in providing continuous disclosure and corporate governance standard as per SEBI. They guarantee transparency and defend shareholder interests in regular financial reporting, insider trading rules, and timely revelation of material events. In addition, the company has to abide by shareholding restrictions in terms of minimal public shareholding norms and maintain a high standard of ethics and accountability in its functioning.

Conclusion

The IPO process for an Indian company transitioning from Private to Public is meticulous and all of the preparations and alignment have to be made according to the regulatory expectations. Companies can improve their IPO readiness, reduce compliance risk, and increase stakeholder value with a structured approach by partnering with the right intermediaries. As Indian IPOs become ever more popular, companies need to adopt these best practices to establish a solid basis for industry-leading performance in public markets.