Know your exchange before listing on it

Companies decide on an Initial Public Offering or an overseas listing for various reasons. Similarly, the choice of the exchange is dependent on several factors. However, though each exchange has its unique requirements and expectations, there are a number of key areas that must be addressed universally while preparing for the listing.

Financial reporting

A company seeking a listing on Indian exchanges would need to prepare its consolidated financial statements in accordance with the Generally Accepted Accounting Principles in India (Indian GAAP). This may be a challenge if it’s being done for the first time. Additionally, under Securities and Exchange Board of India (SEBI) regulations, financial statements of the past five years should be restated for changes in accounting policies, audit qualifications and other specific matters. Depending on the nature of adjustments, the efforts may vary for each company.

The financial reporting requirements are significantly more complex for overseas listings. Most overseas exchanges require statements compliant with either the International Financial Reporting Standards (IFRS) or the US Generally Accepted Accounting Principles (US GAAP). Additionally, depending on the exchange, the industry sector and the requirements of investment bankers, the company may also have to provide additional quarterly information or details of recent acquisitions. Compiling the information for audit can be complex and time-consuming, and often proves a bottleneck in meeting IPO timelines. The complexity arises due to information gaps, increased rigour around the financial information, and the need to perform these tasks alongside ongoing operations of the finance department.

The financial information presented in the IPO document would be subjected to greater scrutiny by investors, analysts and regulators. For example, certain policies followed by the company historically may not be aligned to those of industry peers, or may not be viewed favourably by regulators.

The company’s financial reporting and information systems also require attention. They should support extraction of data to generate up-to-date financial statements and insightful management reports not just for IPO documents and road shows but also meet post-listing obligations. Investor confidence can be easily shaken by errors that are identified later and it is critically important to deliver quality reports on a consistent and timely basis.

Internal controls

Many jurisdictions insist on minimum internal control requirements either at the time of listing or subsequently. These may relate to the quality of internal controls, their documentation and testing, and compliance certification from the senior management and/or auditors. Additionally, listing in certain markets such as the US may require compliance with regulations such as the Foreign Corrupt Practices Act (anti-bribery regulation) and the Sarbanes-Oxley Act. This can be a challenging process for several companies.

Corporate governance

When going public, companies are often required to restructure their board and audit committees, but the actual composition will largely depend on individual market requirements. Most markets have no formal rules on who can become a company director. However, it is often beneficial for IPO companies to select members who have either experience with public companies, deep insight into the business, or a reputation for fair and considered judgment.

Again, depending on the market selected for listing, a company may need to comply with additional corporate governance requirements such as establishing a whistleblower policy or an ethics hotline.

The act of going public may also require a behavioural change on the part of executives. Openness and transparency are key aspects of dealing with shareholders, and many of the more entrepreneurial executives will find their plans and decisions scrutinised by the investing public.

Regulatory environment

The preparedness should also be gauged in the context of the market’s regulatory environment. For example, in the US, given the high level of regulatory and investor scrutiny and the high costs of non-compliance, extra preparatory efforts may be required.

Experience shows that companies often underestimate the effort needed or start too late, leaving them incapable of meeting the planned IPO timelines. Given the short windows available to close the IPO, this can prove fatal.

(Jamil Khatri is Global Head of Accounting Advisory Services, KPMG)

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