A Private Company is proscribed from having more than 200 Shareholders. Private Companies get listed so that they can extensively raise funds from the Public. A listed company can trade its shares on the stock exchanges. Companies, like Reliance Power, have raised 11,560 crores in the past from Initial Public Offering. Much Private Equity /Venture Capital Investors who hold a considerable stake in the company look forward to a company going public for profitable exits as well. In this article, we are going to discuss the Role of Corporate Governance in the IPO Process, & the Intermediaries Involved during Initial Public Offer.
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Short Glimpse
A company’s IPO is unquestionably a major turning point in its development. During the course of a company, an Initial Public Offering (IPO) only occurs once. Since they now own a majority of the company, a large group of shareholders will be impacted by changes made during the IPO process. In addition, the management will be held more accountable for the group of stakeholders, which includes regulators, legislators, and other groups of people who are either directly or indirectly impacted by the company’s operations.
To serve society in a sustainable way, all of this necessitates adherence to morally upright and sensible business methods. In order to protect the interests of investors, the Securities and Exchange Board of India (Board), which has regulatory authority, creates legislative regulations. One of the mechanisms sought by corporations to raise money is to go public by becoming a “Listed Company,” which fulfills the aforementioned role.
Meaning of Initial Public Offer
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In an IPO, companies put forward the price/price band at which they would offer the securities to the public and the latter then subscribe to the securities. The intermediary’s appointment, compliances, and disclosures are stated in the Securities Exchange Board of India (Issue of Capital and Disclosure Requirements), 2018.
Intermediaries Involved during Initial Public Offer
The following intermediaries are appointed during the Initial Public Offer:
- Merchant Banker
- Underwriters
- Credit rating Agencies
- Legal Advisors
- Banker to the issue
- Book Running Lead Managers
- Stock Brokers
- Registrar to the Issue
- Compliance Officer
- Syndicate Members
Advantages of Going for an IPO
The following are the advantages of an IPO:
- Means of Fund Raising
- Enhanced Brand Image
- Higher Valuations of Companies
- Managing Shareholders Value
- Talent Acquisitions and Management
Disadvantages of Going for an IPO
The following are the disadvantages of an IPO:
- Sharing and Disclosing Sensitive Financial and Business Information
- Higher Compliance Cost
- Stricter Enforcement Mechanism
- Drastic Change in Company Structure
- Time Commitment
Meaning of Corporate Governance in India
The term “Corporate Governance” refers to the set of guidelines, connections, frameworks, and procedures that organizations use to exercise and regulate their authority. Corporate governance refers to the process of guiding an organization toward its goals by figuring out how to make wise strategic decisions. Success and economic expansion are ensured by sound corporate governance policies.
According to the Institute of Company Secretaries of India (“ICSI”), “Corporate Governance is the application of best management practices, compliance with the law in letter and spirit, and adherence to ethical standards for effective wealth distribution and management.” It is also the assumption of social responsibility for the long-term welfare of all stakeholders.
Therefore, corporate governance is the management, supervision, and control of diverse corporate processes in a way that ensures the integrity and reputation of the company are not jeopardized. Transparency and fairness are key corporate governance pillars that satisfy accountability and obligation to stakeholders.
Some of the important functions which have a reference in terms of enhanced Corporate Governance in the company, which inter alia generally include:
- Board Composition including Committees
- Corporate Compliance Framework/Compliance Calendar
- Policies
- Website Disclosures
- Efficient Reporting Processes
- Effective Management Information System (MIS)
- Investor Grievance Redressal Mechanism
- 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, groups require 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 lawmaker 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 on 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 the Companies Act, 2013) with the 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 another sector-specific legislative requirement.
The sole motive of this 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.
Conclusion
To summarise, organizing an IPO is similar to conducting an orchestra, where each instrument must play in unison with the others to attract more public interest in investing. The corporate governance framework that the company proposes to implement and the history of the company in terms of compliance with such measures, which results in more listing gain for investors and better value for firms, are vitally necessary for an IPO to be successful. Since long-term investors are responsible for a company’s long-term survival and give corporations opportunities for sustainable growth, every fund-raising activity forces the companies to put in place the necessary arrangements to meet the needs of the financiers.
Neglect and ignorance of corporate governance regulations may lead to IPO failures and the loss of several prospects for success. Since the Offer Documents are intended to serve as a medium of communication between investors and company executives without requiring in-person meetings, Therefore, Corporate Governance posture must be favorable in order to have a positive ripple impact on investor earnings and improved company valuations in the securities market. Finally, in order to avoid any negative repercussions of such errors, the proposal for an IPO necessitates that the Companies consider carefully and rigorously Corporate Governance procedures.
