In the previous article of this series, we established that certain foundations are absolutely critical and non-negotiable for an IPO journey. During this time, a high degree of self-motivation is required because there is no regulatory force for building these foundations.
The real action starts when the company formally decides to go for an IPO. As a major first step, key consultants and advisors are appointed. These include merchant bankers/ lead managers/ BRLMs, legal counsels, company lawyers, bankers’ lawyers, registrar, transfer agents, advertising agencies and other third-party consultants such as independent chartered accountants and research report agencies, etc.
From then on, a company typically gets listed within 8-12 months. The key activities include DRHP preparation and submission, responding to SEBI & stock exchanges’ observations, updating DRHP and filing RHP, roadshows, determination of valuation and price-band, anchor investor allocation, opening/closing the issue and allotment and listing!
I normally say this journey of listing has two aspects:
1. Business/ strategy
2. Administrative/ hygiene
The business or strategy aspect is all about creating a convincing story about the company and the business. Then, this story is presented in DRHP and during roadshows, which includes facts about the industry you operate in, macro-trends and sentiments, business model, past performance and track record, future conviction to revenue growth, profitability and cash flows (though not explicitly mentioned), risks and their mitigations, the company’s positioning in the market, competitive advantage, etc. This determines the success of the IPO and valuation.
Think of this as how you sell your story in the market and why a new investor should invest in the company. This is a very strategic aspect. Both CEO and CFO along with other senior leadership play a significant role during this stage, with support from bankers and advisors.
The administrative or hygiene aspect is about preparing and filing DRHP and RHP, responding to the queries of SEBI and stock exchanges, and seeking their approval. This sounds simple, but is actually brutal. This entire process is mostly managed and supported by bankers/ lawyers and the management team work in very close coordination with them.
The management team collects and gathers all the historical information, data and supporting documents and provides it to the bankers and lawyers. This aspect is brutal for the management team, as significant historical information is required to be gathered along with comprehensive evidence and proof. It requires a very passionate and committed team, ready to burn the midnight oil on almost a daily basis for many months.
Some critical information to be incorporated in the prospectus that requires significant focus of the management team includes:
● Risk factors: Don’t leave any potential risk, be it internal (related to the business) or external (related to India or the offer document). Companies should be very open and transparent in thinking about any potential risk, which may emerge in future.
● Restated financial statements: CFOs should avoid changes in restated financials due to past errors or policy changes, as it is not perceived positively. This implies that past three years audited financials should be error free. Ideally there should be no past errors and changes in the accounting policies for the restated financials. Past qualification, if any, must be resolved before restated financial statements. Changes due to new accounting standards are acceptable.
● Capital structure: This is one of the most complicated chapters of the prospectus. It captures the entire history and building up of the capital structure including issue of capital, bonus issuance, split of shares, preference shares, CCPS, their conversions terms and ratios, promoters holding, selling shareholder-wise details, lock-in details, shareholding higher than threshold, ESOP details, KMP shareholding.
All of this information needs to be supported by evidence or related documents.
● Objects of the offer: Details on future use of the IPO money needs to be provided including year-wise utilisation; that is, where and how funds will be deployed, as well as funds required for each object need to be supported by valid documentary evidence such as purchase orders from vendors or signed contracts.
● Determination of KPIs: This is a relatively new requirement. It concerns the determination of KPIs in the prospectus and their disclosure every quarter till IPO funds are utilised over the next 3-4 years. KPIs refer to those performance indicators which the board and management generally use to review the performance of the company, including the operational matrices. This can be quite tricky as sometimes KPIs are quite sensitive from a competition perspective, and the company may not like to disclose the same in DRHP. However, the regulators tend to compare them with those of peers and there might be a push from their side. A lot of strategic thinking goes behind their determination.
● Industry and business overview: This is the most strategic part in the entire prospectus. It covers the industry in which the company exists — its positioning in the market, past performance, future growth prospects, etc. Business overview includes business activities of the company, financial and operational matrices, competitive strengths and strategies of the company.
● Management discussion and analysis (MD&A) of financial conditions and results of operations: This is another very strategic chapter covering all activities, products and services of the company, competitive edge, positioning in the market, past financial and operational performance, accounting policies, explaining balance sheet items, etc. Potential investors focus significantly on risk factors, industry and business overview and MD&A.
● Legal information: All outstanding legal cases, including civil, criminal and tax cases need to be disclosed. The management needs to ensure completeness and accuracy with high diligence. Any wrong or incomplete information can delay the DRHP approval timelines. Companies should also manage and minimize unnecessary noise and complaints from disgruntled employees, vendors, customers and even from the competition. All of these can delay the approval time.
The next big question: which parties are involved in the IPO journey?
● Merchant bankers and lead managers oversee the entire IPO journey. They prepare the offer document, coordinate with SEBI and stock exchanges, and help in pricing, valuation and marketing of the IPO along with PR firms.
● Lawyers ensure legal compliance, disclosures and governance, and also help manage regulatory risks.
● The research report agency is another most important advisor. It should have thorough knowledge of the industry and position the company competitively in their report.
● The independent chartered accountant (ICA) is very crucial in this journey, as they practically verify and confirm every number in the offer document that come from outside the audit reports and industry reports issued by other advisors. The CFOs must appoint a very diligent ICA, as it ensures the sanctity of the offer document and gives significant comfort to the CFO.
● Company Secretary plays a significant role in the IPO journey — a very important contributor, as she/ he is both a custodian as well as filter for most of the information in the prospectus.
Roadshows are a very critical piece of the entire IPO journey. This is where promoters, CEO and CFO meet potential investors and present the crux of entire DRHP in a few slides. This is the most relevant and strategic activity in the entire journey.
Most of the times, potential investors come prepared for the meeting and the discussion revolves around providing clarification on various points rather than presenting slide by slide. Key points normally discussed include how company is managing the top risks, how it is different or better than the competitors, stability and quality of the management team, conviction to future growth, governance and compliance standards, etc.
This is an opportunity for potential investors to judge the quality of the management, a big factor in their decision-making.
My advice to the team attending roadshows is to be honest and transparent (of course, this does not mean disclosing information beyond what is captured in the offer document). This goes a long way in building trust.
The aim should be to ensure that the market does not discount the management team on their face value. This really helps in building the book and achieving the expected valuation. Failing this milestone means failing the IPO, hence its extremely critical and strategic.
Until listing, there are plenty of other activities that are neither easy or simple, but manageable with time and support from all the stakeholders/ advisors.
Now it’s time to ring the bell and cherish the listing!
