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IPO Route: Alternatives & Challenges for the Entrepreneurs

, June 15, 2018, 0 Comments

ipo-route-entreprenuers-marketexpess-inTaking the company public can be an overwhelming, yet rewarding experience. Taking this route is similar to an acid test since it provides a validation of the company’s product offerings and the confidence in the management among the investors.

A massive exercise and diligent planning are often required on the road to the IPO. But the question is – Is the company ready to incur the many expenses and take the possible risks (and not just the rewards) of going public?

Let us look into the various preparations that go into making a successful IPO.

It is important to assess the company’s current performance, state of affairs, the ambitions and visions of the founder/entrepreneur. This is important to gauge if the company is ready to take the IPO plunge. Not being ready could cost the company in terms of reputation, money or/and further business (besides the emotional cost and the time investment).

Secondly, each company is different and each follows its own path for its IPO. Planning a successful IPO could often entail a dramatic change in/addition to the functioning of a company by way of adding additional infrastructure, building transparency procedures, complying with reporting requirements and setting up investor communications. The importance of an experienced professional team to plan and execute the various requirements cannot be overlooked. All relevant compliances and regularization of any pending laws – labor, environmental or industry-specific laws must be done.

The capital structure may need to be restructured and eligibility conditions of the exchanges need to be fulfilled. Full disclosure of litigation and risk matters need to be considered.

The leadership team must be aware in advance of all kinds of risks and rewards of this form of funding. Consideration must be given to all available alternative ways of financing by way of a comparative analysis of their risks, rewards and regulations.

Competent set of intermediaries must be engaged by the company. This would include merchant banker, registrar to issue, depositories, market makers, bankers to issue and advertising agency. A good team ensures there are no irregularities in the process leading to a successful IPO-whether it is a fresh issue of shares or an offer for sale.

The drafting of Offer Documents must be done as per LODR Regulations, SEBI ICDR Regulations, Exchange requirements, and other applicable laws. Effort should be made to disclose all material information that might affect the shareholders’ interest.

A desirable and proper valuation of the company would require the company to be competent in its industry and to be able to demonstrate the potential for growth in revenues and profits. Also, the company’s vision and plan for the utilization of funds gathered – expansion across geographies or product offerings or even considering newer markets- must be clarified.

The structuring and appointment of a proper board of directors, including independent director, woman director, company secretary and CFO would include ensuring they are not disqualified and are competent as per the provisions of the applicable Laws.

Market sentiment plays out as an important factor while considering this option of funding. In other words, the timing of the issue is critical.   Waiting for the right time to get a desired valuation of the company is important.

These considerations are some of the essential decisions, that an entrepreneur or company would have to consider while planning for an IPO.

It is important to mention that going public should ideally be a late stage financing option (after all other options of funding have been exhausted or ruled out).

The entrepreneurs seeking capital for fulfilling its vision, expansion and/or strategic needs can also look at various other alternatives for funding and/or expansion.

  • Private Equity Funding
  • Angel Funding
  • Private Debt Funding
  • Loans
  • Hybrid Financing
  • Reinvestment of the profits
  • Strategic Alliances/Joint Ventures/M&A
  • Bootstrapping
  • Working capital financing, including trade credit, factoring, and short-term loans

These options need to be considered keeping in mind the pre-funding and post-funding capital structure of the company, the need for taxation and/or any tax saving implications. Other key considerations to bear in mind are the return for investors, interest costs and the ability of the founder to repay the debt.

Despite all the challenges and alternatives, IPO unlocks the true potential and value for the company by providing it with not only long-term funds, but also visibility, credibility, and trust of the investors/ public.​

The opinions expressed in this article are the author’s own and do not reflect the view of MarketExpress – India’s first Global Analysis & Sharing Platform or the organization(s) that the author represents in his personal capacity.

Disclaimer: The information should be considered only for information & educational purpose. Kindly check the relevant applicable laws and other publicly available information and informed guidance of experts before making any decision.