Going public is certainly, a very important milestone in the life of a company. Initial Public Offer (IPO) happens only once in a lifetime during the journey of the Company. The process of IPO involves certain changes in the business processes, impacting a large group of shareholders, since they have acquired the ownership in the company and the management has more responsibility towards the group of stakeholders consisting shareholders at large, regulators and other group of people being directly or indirectly impacted by the operations of the Company. All this demands, adherence to the ethical and sound business practices to serve the society in a sustainable manner. The said role is enforced by the overseeing power of the regulator, the Securities and Exchange Board of India (Board) by framing the legislative regulations, with an aim to protect the interest of the Investors, investing through various mechanisms sought by the corporates for fund raising and one of the ways is the going public by attaining the status of a Listed Company.
1. Advantages of Going for an IPO
1. Means of Fund Raising
2. Enhanced Brand Image
3.Higher Valuations of Companies
4.Managing Shareholders Value
5.Talent Acquisitions and Management
2. Disadvantages of Going for an IPO
1. Sharing and Disclosing Sensitive Financial and Business Information
2. Higher Compliance Cost
3. Stricter Enforcement Mechanism
4. Drastic Change in Company Structure
5. Time Commitment
Since, every fund-raising avenue brings in some challenges with it, hence IPO also has some disadvantages due to various reasons as stated above. However, every fundraising demands for the accountability towards the providers of capital (“the Investors” or “the Shareholders”). This element of accountability demands the corporates, to promote the Good Corporate Governance by adhering to the framework of various regulations, rules and other administrative processes to serve the investors in a better way.
The phrase “Corporate Governance” describes the framework of rules, relationships, systems and processes within and by which the authority is exercised and controlled within corporations. Corporate Governance means to steer an organisation in the desired direction by determining the ways to take effective strategic decisions. Good Corporate Governance practices ensures success and economic growth.
As per, the Institute of Company Secretaries of India (“ICSI”) “the Corporate Governance is the application of best management practices, compliance of law in letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”
Hence, the Corporate Governance is managing, monitoring and overseeing various corporate systems in such a manner that corporate reliability and reputation are not put at stake. Corporate Governance pillars on transparency and fairness in action satisfying accountability and responsibility towards the stakeholders.
3. Pillars of Corporate Governance
Hence, the Corporate Governance is integral to the existence of the company. Corporate Governance is needed to create a culture of transparency, accountability and disclosures.
In the context of an IPO, every corporate which strives to take the path of attaining “Listed” status should be aware of the requirements, regulatory or otherwise, which may become the hurdle in the success if not adhered to up to the mark. It is imperative that planning and proper preparation requires the certain Corporate Governance arrangements in the governance framework of the company, which may include setting up of relevant teams, change in management structure, more structured reporting processes etc. The importance of Corporate Governance can be imagined or in fact the same can inferred from the Offer Document of the Companies proposing to get its securities listed. Hence, the Offer Document in itself speaks much about the governance measures of the companies.
Now, the question emerges, that what amounts to Corporate Governance in the context of an intended Listed Company?
Some of the important functions which have reference in terms to enhanced Corporate Governance in the company, which inter alia generally includes;
1. Board Composition including Committees
2. Corporate Compliance Framework/Compliance Calendar
3. Policies
4. Website Disclosures
5. Efficient Reporting Processes
6. Effective Management Information System (MIS)
7. Investor Grievance Redressal Mechanism
8. Disclosure of Event or Information
The Companies intending to get their securities listed, have to address all the above said arrangements, since publicly listed companies have scattered shareholders group requiring the companies to adopt the practices of good Corporate Governance and continuous compliance to be ensured.
The concept of Corporate Governance emerges from the legislative intent of the law maker and law enforcement machinery in the country. The Board has been empowered to regulate the activities of corporates having attained the listed status or are in the process of getting such status by framing regulations in this behalf. The listed companies are required to comply with continuous listing norms and have to adhere to periodic disclosures to stock exchanges. The listed companies basically will have to comply (besides provisions of Companies Act, 2013) with applicable requirements of:
- SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”)
- SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”)
- SEBI (Prohibition of Insider Trading) Regulations, 2015 (“Insider Trading Regulations”)
- SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (“Takeover Regulations”)
Apart from the above regulations, the companies shall also comply with other sector specific legislative requirements. The sole motive of these regulatory enforcement mechanism is to force the companies to strive for good Corporate Governance measures for the sake of society and not to put the interest of stakeholders at stake for their personal financial or non-financial gains.
The companies going for an IPO have to align themselves with certain additional requirement of management policies as per the Listing Regulations (1 to 13) and Insider Trading Regulations (14 to 15) such as;
1. Risk Management Policy
2. Policy for preservation for documents
3. Policy for determining Material Subsidiaries
4. Policy on Materiality of Related Party Transactions and on dealing with Related Party Transactions
5. Policy for determination of Materiality of events/information
6. Vigil Mechanism/Whistle Blower Policy
7. Policy relating to Remuneration of the Directors, Key Managerial Personnel (“KMP”) and other Employees
8. Policy on Diversity of Board of Directors
9. Dividend Distribution policy
10. Code of Conduct for Board of Directors and Senior Management personnel
11. Insider Trading Policy
12. Policy for Prevention of Sexual Harassment at Workplace
13. Archival Policy
14. Code of Fair Disclosure and Conduct
15. Policy for determination of “Legitimate Purposes”
The above policies are framed with sole aim to strengthen the Corporate Governance framework of companies so as to boost the confidence of investors in the corporate and securities market. All the above efforts by regulator are targeted to make the corporates a safe investing option for widely scattered shareholders, for wealth maximisation by assuring compliance to ethical Corporate Governance practices.
To sum up, making an IPO is like conducting an Orchestra where all the instruments are required to run in sync with each other to get more public attention for investing. Success of an IPO is absolutely dependent on the Corporate Governance framework proposed to be adopted by the Company and history of the Company in terms of compliance to such measures leading to more listing gain for investors and higher valuation for companies.
Every fund raising activity, forces the companies to make suitable arrangements for catering to the needs of the financers, since the long term survival of companies is led by long term investors providing sustainable growth opportunities for corporates.
Corporate Governance measures are meant to stop the financial scams by the corporates and to channelise the scarce capital for productive purposes leading to prosperity of the entire economy.
“Role Players in Corporate Governance for Companies going for an IPO”
1. Board of Directors
2. Senior Management including “Company Secretary”
3. Counsels
4. The Regulator
5. Merchant Bankers
6. Employees
Negligence and Ignorance to Corporate Governance requirements may result into IPO failures and losing many success opportunities. Since, the Offer Documents are conceived by the Investors as means of communicating with investors without having one-to-one personal meeting company officials. Hence, the Corporate Governance positioning must be positive to have positive spill over effect on earnings of investors and better valuations for companies in securities market.
At last, the proposal for an IPO requires the Companies to think about Corporate Governance arrangements thoroughly and rigorously to avoid any negative consequences of such failures.
Conclusion: “Corporate Governance is a Core Element for every fundraising activity.”
Author Bio
The basics of IPO are well-articulated in a lucid way. Thank you for posting this.