Vaulting into the IPO league

For entrepreneurs and private equity investors, an Initial Public Offering is an important milestone in the evolution of the company. At times, companies listed on Indian stock exchanges attempt to list overseas for various reasons. Based on past experience, let's look at some of the key considerations, challenges and opportunities involved in preparing for an IPO. Although the capital markets are currently subdued, any IPO involves long and careful preparation, so it would help to gear up in advance.

Depending on a company's objectives and maturity, there could be several reasons for planning an IPO. These include access to new sources of funding, providing a profitable exit to existing investors, building visibility and reputation in local or foreign markets (Indian software services, for instance, listed on US exchanges to attract global customers), incentivising employees through stock options, and overhauling the company's governance structure.

Disadvantages in going public

However, there are also several drawbacks to going public that may not always be obvious at the beginning. A key challenge is the significant time, resources and cost required not only to ensure a successful IPO, but also operate as a publicly-listed company. Many senior executives have realised that the time spent on the IPO process may divert attention from the core business. Further, it may require significant investments in systems and processes to comply with additional regulatory norms. These challenges intensify for an overseas listing (especially in the US) thanks to the more stringent regulatory requirements (both for IPO and ongoing compliance) in several markets abroad. Non-compliance can prove costly either through loss of reputation, depressed share prices or financial penalties. Lastly, public companies are obliged to report their financial statements and business strategy to the external world, which can end up giving competitors an undue advantage.

The benefits and drawbacks should be evaluated carefully before embarking on an IPO or overseas listing. Alternative sources of capital such as banks, private equity, and merger and acquisition options for existing investors may be explored too.

Picking the right exchange

Once a company decides on an IPO or overseas listing, an important decision pertains to the choice of the exchange. This will determine not only the IPO roadmap and the preparation needed, but also the long-term changes in the company's structure, systems and processes. Achieving the highest valuation for the IPO is a core consideration for many companies. For example, it is widely believed that US capital markets offer better valuation for emerging sectors such as Internet and e-commerce, as compared to Indian markets.

Market regulation is another important factor. Companies must understand the complex web of regulations governing each exchange and gauge the organisation's ability (and willingness) to meet them. As mentioned, these requirements are more stringent in many overseas markets. This explains why only a few Indian companies have listed overseas. However, greater regulation can have a positive impact on investor confidence, contributing to greater liquidity and depth in such markets.

Lastly, selecting an exchange with a high concentration of industry peers can have its benefits. In part, this is because such markets benefit from having highly-experienced analysts with deep insight into that sector. Such markets fetch higher valuations, as investors in other markets may not understand as well the company's business and may apply a discount for the perceived risk.

Other factors such as the legal structure of the company and, consequently, its ability to tap an overseas market without listing in the Indian markets are also relevant when selecting an exchange for listing. The NYSE Euronext, NASDAQ OMX, London Stock Exchange and Hong Kong Stock Exchange remain some of the largest global exchanges. The depth of the Indian capital market is also significant as reflected in the fact that both the National Stock Exchange and the Bombay Stock Exchange are among the world's top exchanges by market capitalisation.

Once the company has decided on the exchange, the hard work and heavy lifting for the IPO process commences. The current preparedness of the company would determine the time and effort required for the IPO process and to meet post-listing requirements.

Jamil Khatri is Global Head of Accounting Advisory Services, KPMG

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