Raising capital in public markets results in several additional obligations and responsibilities, especially when listing in regulated markets such as the US. Once listed, a company would need to invest in systems, processes, governance structures and management bandwidth to meet such obligations. Any failure or significant weakness in these areas could result in financial and reputational damage, which, in turn, could impact the company’s business performance and valuation.

Financial reporting

Listed companies generally report financial statements on a quarterly basis within stringent timelines. The statements are subject to an audit or limited review based on the company’s choice. While many large Indian companies elect to get their quarterly financial statements audited, this practice is not very common internationally. In the case of an overseas listing, the complexity increases due to the requirement for international reporting and other quarterly filings from the international exchanges or regulators. In either case, the quarterly reporting process often requires additional investment in information systems, processes and people. Any significant errors in such reporting may be viewed unfavourably by investors and regulators and could result in regulatory action in some cases.

Investor and regulatory scrutiny

A public listing results in greater scrutiny of business plans, corporate actions, performance and financial results by various stakeholders. Thus, while the analyst community may focus on business plans, performance and earnings estimates, regulators may focus on compliance and protection of minority rights. Other stakeholders such as the media and proxy advisory firms may focus on some or all of these aspects. For example, over the last few months, several analysts and proxy advisory firms in India have focused on corporate reporting practices and related party transactions.

This scrutiny may sometimes result in undue focus on short-term performance versus long-term business strategies. Additionally, concerns around reporting, business practices, related party transactions or other corporate actions impacting the interests of minority shareholders may have an adverse impact.

Companies would need to determine their strategy for managing analyst expectations on forward-looking information. For example, many companies that started the practice of providing revenue and earnings estimates have subsequently reconsidered it due to the intense pressure to meet these estimates on a quarterly basis. Similarly, companies would need to set up appropriate processes to ensure their reporting and governance practices and corporate decisions are in line with market expectations, and are supported by the independent directors and external specialists. Companies also need to set up appropriate processes to proactively and continuously deal with investors, analysts, regulators and the media.

Corporate governance

Unlike a closely held company, listed companies are required to have independent directors on the Board. This can be a significant change for entrepreneurial founders and executives, who may prefer to control all major operating decisions. Independent directors on the Board and the Audit Committee would also be involved in the review of financial reporting policies and processes, control environment, corporate actions, related party transactions and other corporate governance matters that can impact minority shareholders. Companies should have the right quality and number of independent directors to provide the right comfort level to external stakeholders. Further, companies should establish a mechanism for building trust, and facilitating open and honest regular communication between the executive team and the independent directors.

Additionally, depending on the requirements of the market chosen for the listing, companies should set up appropriate processes for addressing compliance requirements in the areas of internal controls, internal audit, insider trading and fraud risk management. The senior executive team, including the CEO, should be involved in monitoring the operations of the overall control environment.

Overseas listings

Several of the above requirements get more onerous in the case of overseas listings. Thus, either the specific compliance requirements of the overseas exchanges or regulators could be more demanding, or the monitoring of compliance could be more stringent. For example, US listings involve ongoing compliance with IFRS or US GAAP requirements, Sarbanes Oxley regulations and other provisions such as the Foreign Corrupt Practices Act.

Regulators such as the Securities and Exchange Commission, analysts and institutional investors carefully monitor these compliance and governance matters, with non-compliance often resulting in regulatory action (through fines or penalties) or investor action (through downgrades, lower stock performance or class action suits).

Lack of familiarity with these regulations may further compound the situation. Companies should deal with these requirements in a proactive and structured manner by investing in systems and processes, recruiting people with the right experience and seeking appropriate external assistance.

Public listing is a transformative step for any business, and it is imperative for companies to take steps to ensure a quick and smooth transition.

Jamil Khatri is Global Head of Accounting Advisory Services, KPMG in India

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