The Journey to IPO

The Journey to IPO

Road to IPO: fulfilling a dream and a new beginning?

Ask an entrepreneur on the podium of an IPO listing ceremony, how are you feeling? and the words ‘a dream come true’, ‘a lifetime achievement’, will echo around. It is a monumental journey for most. It is also a step into a realm of new possibilities, welcoming a large family of new shareholders and the continuation of a vision, with increased responsibility and public-market scrutiny to deliver value.

First and foremost, a decision to go public is to be carefully evaluated. There is a lot at stake when a company decides to go public, hence when companies choose to go for an IPO, they must ensure that they have the right maturity and looked at the scenario with a different lens – use of proceeds, the scale of operations, infrastructure, proper governance and the ability to employ raised capital efficiently. Selecting the right market for listing is crucial in an IPO journey. Each market has specific requirements (though overlapping on many fronts) and a company’s market presence and recognition in those markets is another key ingredient.

The preparation for an IPO journey is akin to devising a strategic plan, where all vital stakeholders must align and collaborate. Just as in any well-coordinated endeavor, a company embarking on an IPO must ensure synchronization among its stakeholders. Just as expertise is showcased by a skilled individual, a company demonstrates its financial strength to attract investors. The seamless integration of all elements, similar to a successful collective effort, is crucial for a successful IPO process.

Market Landscape and Trends

In Q1 2023, there were four IPOs in the main markets, marking an increase from three in Q1 2022. However, the proceeds raised through the main markets experienced an 89% decline compared to the previous year, totaling only US$107 million. Despite the decline in proceeds, the number of deals witnessed a commendable 33% surge. Consumer Products and Retail, Diversified Industrial Products, Banking and Capital Markets, and Technology dominated the IPO landscape in 2022, showcasing their prominence.

The primary market in the early few months of 2023 has witnessed subdued activity. But companies are seizing this opportunity to fortify themselves for a powerful IPO launch in the coming year.

News with lag

Degree of preparation and timing are both keys. It needs to be appreciated that companies require about 12-18 months, if not more, of preparation. It can take 9 to 12 months from an IPO kick-off to launch. There is significant under- current preparation that may not be visible to the eyes in the newspaper, but there is movement towards company intending to launch its public offering prior to general elections next year.

The IPO market’s current trend resembles early 2022, where the performance of the secondary market influences IPO listings. IPO activity in 2022 saw significant growth during periods of high Sensex levels, especially in November. In addition, timing matters – companies tend to appear to launch their IPOs based on full-year March results or half-yearly September performance, as reflected by higher activity during May and November-December in the chart below:

Recent IPO experiences suggest a timeframe of 9-12 months, with SEBI approval averaging 3-4 months. Market volatility prompts companies to adjust IPO sizes, and preparation can take over 9 months.

In 2022, over 45 Companies filed their Draft Red Herring Prospectuses (DRHPs), with some successfully raising funds through IPOs. However, several companies withdrew their filings or had their offer documents returned by SEBI due to market conditions or regulatory compliance issues. Full compliance is essential before filing to meet regulatory requirements.

Although the flurry of technology IPOs have halted, in the broader context, India continues to remain a viable destination for companies to list. Standing as a testament to this, is the evolving presence of New Age Technology Companies (NATCs) in the Dow Jones Industrial average (or simply, the Dow), an index of 30 prominent companies listed on stock exchanges in the United States. In the past 60 years, NATCs have seen a consistent growth in their inclusion in the index from accounting for 0% of the index in 1959 to 10% in 1982, to 16.67% in 2003 and to 20% in 2022. This trend clearly places NATCs at a prominent place as the global economy develops and the Indian economy may move similarly.

The growth of this market sector is ever more crucial for a country like India which is taking rapid strides towards a developed and self-sufficient economy by creating employment opportunities and a wider social impact. While India has just taken a step into this market, the global economy has already seen the rise of NATCs and the enormous benefits that they bring with them.

Recent regulatory developments: The Securities and Exchange Board of India (SEBI) has introduced key amendments to enhance regulatory disclosures prescribed in Issue of Capital and Disclosure Requirements) Regulations, 2018, (‘ICDR Regulations’). ICAI has also issued a Technical Guide on Disclosure and Reporting of Key Performance Indicators (KPIs) in Offer Documents. Key requirements included in the ICDR Regulations and the Technical Guide are as follows:

a) Historical Key Performance Indicators Disclosure as required by the ICDR Regulations: Where KPIs have been disclosed in an Offer Document, SEBI has mandated comprehensive disclosures. These disclosures are required for a period which is co-terminus with the period for which the restated financial information is disclosed. KPIs disclosed are required to be certified by statutory auditor(s) or Chartered Accountants or firm of Chartered Accountants or Auditor or Cost Accountants (holding a valid peer review certificate from the respective Board) and approved by the Audit Committee. As per the Technical Guide - apart from the Audit Committee approval, the KPI disclosure may also be approved by the Board of Directors. Companies should provide comparisons with India-listed or globally-listed peer companies. In cases where direct comparisons are not feasible, explanatory notes should be included. Additionally, Companies are required to disclose changes in KPIs over time due to business additions or dispositions. Annual disclosure of KPIs is obligatory for a minimum of one year after listing or until all issue proceeds have been utilized, whichever is later.

b) Independent directors’ Committee Recommendation on Price Band: An independent directors’ committee of the issuer is tasked with evaluating the justification of the proposed price band based on quantitative factors and KPIs compared to the Weighted Average Cost of Acquisition (WACA).

In addition to the above, additional changes are expected. Companies must remain vigilant about meeting the demanding standards for listing and operating as a publicly traded entity.

One key area where SEBI on 20 May 2023 brought out a consultation paper proposing the reduction of timeline for listing of shares in public issue from the existing T+6 days to T+3 days. SEBI in its Board Meeting dated 28 June 2023 has approved the proposal for reducing the time period for listing of shares in public issue from existing 6 days to 3 days, from the date of issue closure. The revised timeline of T+3 days shall be made applicable in two phases i.e. voluntary for all public issues opening on or after 1 September 2023 and mandatory on or after 1 December 2023.

The shortened timelines aim to benefit both issuers and investors. Issuers will gain faster access to raised capital, while investors will have the opportunity for early credit. This will particularly aid qualified institutional buyers, reduce costs, and expand the reach of retail investors. Furthermore, it will mitigate investor exposure to market volatility. Setting up a detailed project plan with inputs from various stakeholders, both internal and external to the company, will allow companies to approach the IPO journey in a structured manner. Factors such as business model (scale & Total Addressable Market), compelling equity story, capital structure, quality of the board of directors (established well in- advance of a planned IPO) and governance (not approaching as a simple checklist), restated financial statements and establishing the right listed-company ready operations/ controls, are some of the typical long lead items. Companies with higher standards of governance, better financial positioning and preparation are the companies that will find it easier to list and be ready to tap the markets at the right time.

Preparation of restated financial statements for 3 years and relevant stub period can be time consuming and often a cause for delay in filings. Availability of data and system reports to fulfil this requirement in a timely manner requires early planning. Similarly, as referred to above, financial and non-financial information such as KPI (including financial, operating and non-GAAP financial measures) need to correlate to the overall equity strategy of the company and how this compares to peers. In addition, the practice of ESG disclosure is gaining prominence with comparison to international benchmarks and ratings, with many large investment houses seeking such information before making investment decisions.

Overall, successful companies look at the longer-term horizon in treating IPO not as a monetizing event but as to springboard to more milestones and greater success. Importantly, it is cohesively bringing all factors together.