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2016 was one of the best years in recent times for initial public offering (IPO) in India owing to stronger macroeconomics, pro-business political regime, continuing regulatory reforms and an overall positive investment climate.
Indian companies raised more than Rs 26,500 crore through IPOs in 2016, which is close to the aggregate equity raised over the preceding five years from 2011-15.
There has been significant uncertainty and caution over the last 3-4 months driven by demonetisation and an uncertain US political climate. This has led to confusion, caution and higher market volatility. However, continuing regulatory and tax reforms, strengthening regulatory environment and government focus on economic development will have a positive impact on further increasing the India attractiveness for the global investors.
The IPO pipeline for 2017 looks promising with some of the large companies expected to tap the equity markets. In addition, the government aims to divest Rs 72,500 crore as part of the 2017 budget proposal, including the insurance PSU, Railway PSU and other strategic government assets/investments.
What does it take to deliver a successful IPO?
Companies that have completed a successful IPO know that the process of transforming a private enterprise into a public one involves the complete transformation of the organisation’s people, processes and culture. Businesses need to devote several months to advance planning, organisation and team work before they are ready to go public.
Going public is not for every company. The pitfalls are numerous and the stakes are high. Lack of adequate preparation and poor market timing can jeopardise an IPO. Successful IPO candidates spend several months building business processes and infrastructure, recruiting executive and advisory talent, mastering financial and reporting aspects, and securing the commitment of the board of directors that is essential for going public. Getting IPO readiness right means implementing change throughout the business organisation and the corporate culture. Building a robust business infrastructure is an important component in establishing a sound financial reputation; a key criterion by which the market will judge companies’ business.
Many companies choose a minimalist tick-in-the-box approach as regards the infrastructure to meet the immediate compliance requirements. However, successful and mature organisations go beyond to develop a longer term sustainable infrastructure that exceeds the minimum required for an IPO. Once they are listed, companies will be subject to increased requirements as regards filing, transparency and compliance, as well as scrutiny by investors and analysts, and overall accountability for delivering on promises.
Companies around the world continue to ready themselves to go public. Whether a company is owned by its founders, a family business, a conglomerate, government, private equity or venture capital, it is important to build confidence and gain investors’ trust. This can best be achieved by being IPO ready in all areas.
Preparing for an IPO is an intense and arduous process. It is easy for management and employees to become distracted by the sheer size of the task. During an IPO, senior management must balance its focus between the IPO preparation and the company’s day-to-day operations. And they must have the experience and skills both to undertake the IPO transaction and operate a public company leading up to the road show and long after it is over. Some of the key focus areas for a company to be IPO ready include:
• Potential IPO strategy: Enables assessment of motivation, use of proceeds, relevant market, right exchange and appropriate listing segment; also involves an initial check of the equity story and the cornerstones of the issuing concept in an IPO base case.
• Legal structures as a listed company: Addresses questions regarding the right potential issuer, transparency of the company structure, design of the Articles of Association, and type of shares.
• Tax optimisation pre-IPO: Considers the country of registration, tax optimisation for shareholders and the company, as well as the process of transformation to the relevant legal form.
• Efficiency of finance and transformation to external reporting: Discusses accounting efficiency, reporting and disclosure periods with regard to fast-closing ability, GAAP conversion and integration, as well as the ability to deliver relevant content for prospectus preparation.
• Systems’ infrastructure readiness: Examines the readiness of relevant systems such as internal controls, as well as compliance and risk management supported by an efficient IT infrastructure, in order to determine whether the additional information required by the capital markets is available.
• New functions for the being-public phase: Reviews the readiness of corporate governance processes, investor relations and capital market requirements such as internal preparedness for insider regulation, directors’ dealings and ad hoc disclosure.
• Leadership structure and organisation: Is an experienced board in place? Are the members well-trained for media purposes and for life in a public company? Does remuneration match capital markets’ expectations? What about long-term incentive plans?
• Building the right team: Have you chosen the right advisors with IPO and public company experience? Are you aware of the key responsibilities of each stakeholder? Your external advisory team will primarily include: Bankers, lawyers, consultants, accounting and other advisors.
• Timing the right IPO window: Considers aspects, including a potential IPO schedule, the alternative of a plan B in a potential multitrack process and the ability to allocate internal resources to IPO project management.
Although the IPO event itself is generally short-lived, the value journey begins well in advance and continues well beyond the IPO. Thus, while an IPO should be a key turning point in the life of your company, market leaders don’t treat an IPO as simply a one-time financial transaction. Rather, they recognise the IPO event itself as just one defining milestone in a complex transformation from a private to a public company.
- By Vish Dhingra, Executive Director at the Indian member firm of EY global