Why, When, Where, How of IPOs: How companies raise money from share markets

By Sandip Khetan

Indian stock markets and many around the world are touching historic highs. Boardrooms of unlisted companies are discussing ways and means to assess the timing of their Initial Public Offers (IPOs). An IPO is a landmark event in the life of any company. Every promoter dreams to make the company public.

Some of key questions which we continue to deal with management in the boardroom pertain to why go public with an IPO, which is the right market to list it and what it takes to make it successful. In this article, we have shared some of our perspectives on the above areas for readers to benefit them and to make them understand the intricacies of the IPO journey as well decision-making around it.

Why IPO?

Management needs to consider several matters before rolling out an IPO. These include:

Investors are keen on investing in companies which operate in a high growth area or have been able to demonstrate with their business model the ability to operate in an environment which offers sustainable growth over a longer term. So, companies need to be very comfortable in addressing the ‘why’ of an IPO with a compelling equity strategy in their business, including considerations of other sources of capital.

Many companies with strong business models and ability to generate and source growth capital wish to take out an IPO to create shares as a currency for future mergers and acquisitions. This helps them provide a way to monetize their existing stock options as offered to employees and key management personnel, create a better brand in the marketplace to attract customers and better talent, and expand in different geographies.

When to do an IPO?

The question that often arises with regards to an IPO pertains to its timing. It is never an easy answer as markets are often volatile. Hence, it is important for a company to look at its business model and spend time to prepare for listing at a short notice. Some of the key factors which contribute towards deciding the timing of an IPO are listed below:

When the management can demonstrate significant visibility in terms of its business model and positive cash flows or very strong growth in near- to medium-term, it adds to a company’s compelling equity strategy. Investors often like to invest in growth businesses so that they can reap higher returns as compared to matured businesses that are already listed and are available for investments.

Which sector is the company operating in and what is the flavor of the market at a particular point in time. For example, currently businesses in pharma, technology, fintech and renewable energy are high in terms of investors focus and companies operating in these sectors should look at mining investors interest sooner than later.

Where to list?

It is important to consider the regulatory environment of the company, its long term-strategies and its outlook before deciding the markets to list. Some of the key matters that can help in decision-making are:

Tax and valuation considerations: This can often determine the markets in which companies eventually list their shares. Companies which are incorporated in India, look at India as the obvious choice to raise capital. Indian capital markets offer significant amount of depth and several companies have raised billions of dollars successfully.

Purpose of the roll-out: Some of the companies in renewable, media, technology, ecommerce and fintech sectors are actively looking at raising capital overseas. Valuation considerations and profiles of existing investors influence these companies’ decision-making skills.

Meeting requirements of the market that company’s plans to list an IPO: To determine which stock exchange to list is a key decision that companies need to take early in the journey of the IPO process as every destination requires (though overlapping on many fronts) different things. Companies may miss the opportunity to time the market, if they are not clear on the exchange they want to eventually list.

How to list?

Once a company has crossed the hurdle of decision-making around the purpose, timing as well as exchange on which they want to potentially list, the bulk of the work starts in terms of the preparation towards the listing. Some of the key factors which the company needs to keep in mind are outlined below:

The company needs to reassess existing governance framework to ensure that it is in line with regulatory requirements. It essentially involves inducting independent directors on the board, setting up committees (e.g., audit committee, risk management committee and nomination committee) and also putting together the framework to ensure integrity in the whole process of decision-making and external reporting.

The company is required to dedicate a significant amount of time to consolidate financial statements in the form and shape as required for a listed company. It also needs to assess this based on the market in which it wishes to list its IPO. It is also essential for the company to reassess its historical financial statements and reports issued by its auditors.

A significant amount of time and effort may be required to align reporting and legal entity structure. This may involve a legal process or externalization of the holding company. Thus, the company needs to plan this appropriately and may require to incur significant costs to achieve the optimal legal structure for eventual listing.

Overall, an IPO is one of the most exciting milestones in the lifetime of a company. It requires a significant amount of time and bandwidth from the management’s end. It is almost an irreversible decision; hence, it is important for management and company’s board to evaluate all options and consult appropriately while planning this journey.

(Sandip Khetan is Partner and National Leader, Financial Accounting Advisory Services at EY India. The views expressed are his own.)