If we look at today’s dynamic world of commerce, capital is the main fuel for growth and transformation for businesses at every stage of their journey. As everyone knows, companies often initiate their capital-raising efforts through early seed funding and continue with successive financing rounds, such as Series A, Series B, and beyond. During these phases, companies typically issue equity to angel investors, venture capitalists, and private equity firms to progressively dilute the ownership stake held by the original promoters.

Structuring Capital: Equity, Debt, and Hybrid Instruments

While equity financing is favored in early stages, debt financing is generally less attractive due to the high risk it brings for nascent business models. Furthermore, debt brings inherent servicing risks, which can be burdensome for a company, especially in its early phases. Hence, organizations often rely on hybrid instruments which include Compulsorily Convertible Preference Shares (CCPS) or Compulsorily Convertible Debentures (CCDs). Both of these instruments are regulated under the Indian Companies Act. Also to note, these instruments provide investors with a fixed return and an option to convert their stakes into equity based on predetermined valuations.

Additionally, convertible notes and SAFEs (Simple Agreements for Future Equity) are popular in early-stage financing. Having said that, they do not provide the same protections as CCPS or CCDs and hence are viewed more as contractual agreements rather than secured instruments. It also comes with contingent terms that may not be lucrative for all investors. So to understand, each instrument serves its own purpose; balancing between investor protections and the organization’s growth ambitions.

Navigating the IPO Pathway

When the company is ready for an Initial Public Offering (IPO), a thorough preparation process is of utmost importance. The decision to go public is transformative and calls for a meticulous strategy, which is typically led by the Chief Financial Officer (CFO) and executed through a dedicated IPO Project Management Office (PMO).

This PMO is composed of senior leaders with relevant expertise and commitment. The members are tasked with structuring, organizing, and managing the IPO process. Hence, a well-coordinated and closely knitted IPO team can efficiently navigate the timeline, regulatory requirements, and operational demands of this complex undertaking.

Additionally, a successful IPO is predicated on a compelling equity story that highlights the company’s growth narrative, industry position, and future potential. So to say, this story should be backed by a robust financial model which typically covers a three- to five-year forecast based on historical performance and strategic goals. And from an Investors’ lens, they seek confidence in business models demonstrating solid fundamentals, sustainable growth, and competitive market positioning. It is also important that the equity story should also benchmark the company’s performance against industry peers to optimize valuation.

Structuring the IPO: Offer for Sale and Primary Issue

During the IPO stage, another crucial aspect would be to determine the optimal issue size. One should know that the IPO structure typically comprises two parts, i.e., the Offer for Sale (OFS), which allows existing shareholders to liquidate a portion of their holdings, and the primary issue, which generates fresh capital for the company. Given this situation, investors tend to favor IPOs where the funds raised are directed toward growth initiatives. This includes business expansion or debt reduction, rather than excessive promoter divestiture, which could signal a lack of long-term commitment.

IPO Eligibility and Regulatory Compliance

Under SEBI’s ICDR regulations, IPO eligibility is defined either through the Profitability Route or the QIB (Qualified Institutional Buyers) Route. To speak of Profitability Route, the company must meet specific financial benchmarks which include net tangible assets of at least INR 3 crore over the preceding three years and a minimum average pre-tax operating profit of INR 15 crore. For companies that do not satisfy these criteria, eligibility can also be achieved by meeting QIB requirements, provided at least 75 percent of the offering is allocated to QIBs, thereby ensuring institutional backing for the issue.

Now to delve into the most critical document in the IPO process is undoubtedly The Draft Red Herring Prospectus (DRHP). As the primary disclosure document, the DRHP requires thorough preparation. This is typically overseen by the compliance team, in tandem with the Book Running Lead Managers (BRLMs) and legal advisors. Furthermore, the DRHP includes sections covering risk factors, industry and company overviews, financial statements, corporate governance practices, and offer structure. So, each statement and representation within the DRHP must be backed by verified data, often substantiated through certifications from statutory auditors or independent accountants. This rigorous due diligence, though intensive, is fundamental to establishing transparency and building investor trust.

Managing Due Diligence Challenges

Particularly in data accuracy, document alignment, and cross-functional coordination, the due diligence phase of the IPO process is marked by some of the process pressing challenges. Here, legal teams and BRLMs often demand exhaustive data on every aspect of operations, financial performance, market positioning, and regulatory compliance. Hence, preparing an all-encompassing fact book and devising a Virtual Data Room (VDR) enables efficient information flow while also maintaining a structured repository for all essential documentation.

Adding to the aforementioned challenges, few other key challenges during this phase also include alignment across internal and external auditors, legal counsel, and BRLMs. Furthermore, certificates such as comfort letters, eligibility certifications, and financial statements must adhere to precise wording and formats; even slight discrepancies can lead to delays or compliance issues. For instance, statutory auditors might refuse to verify data not explicitly aligned with audited financial statements. Similarly, it is important to maintain clarity on roles and responsibilities, secure necessary permissions, and ensure precise documentation throughout the due diligence process is vital.

Pricing and Valuation Considerations

Pricing the IPO is a very delicate balance between the company’s valuation ambitions and investor expectations. Ideally, the Initial Public Offering price should strike a perfect balance that mitigates equity dilution for promoters while still leaving sufficient growth potential for investors. Adding to this, valuation methodologies can also include comparisons with recent mergers and acquisitions in similar sectors, price-earnings multiples of industry peers, forward EV/Sales ratios for early-stage companies, and discounted cash flow (DCF) models.

Now let’s delve into some of the crucial external factors which include market sentiment, investor appetite, and sector trends. All these aforementioned parameters play a significant role in IPO valuation; these qualitative aspects can significantly influence the final offer price. Here, the goal would be to create an attractive proposition for investors while supporting the company’s financial objectives.

Preparing for Roadshows and Investor Presentations

When DRHP has been filed, the company can then proceed with listing applications to the stock exchanges (BSE/NSE) and begin organizing investor roadshows. These roadshows will provide the senior leadership team, in collaboration with the BRLMs’ marketing team, the much needed opportunity to showcase the company’s value proposition to prospective institutional and retail investors.

During these presentations, the company must communicate a strong narrative around its financial performance, strategic vision, and long-term growth potential. Additionally, engaging with institutional and anchor investors in this pre-IPO phase can immensely aid companies in generating momentum, building confidence, and securing commitments that will further enhance the public reception of the IPO.

Insuring Against Risk: Directors and Officers Liability Insurance

Today, numerous companies consider securing Directors and Officers (D&O) liability insurance before the IPO. This is carried out due to the stringent disclosure requirements and regulatory scrutiny. So why is it important? The answer is that this insurance can safeguard the organization and its leaders against potential misstatements or omissions in the offering documents; hence covering legal expenses and penalties associated with SEBI regulations and the Companies Act.

Conclusion

So to conclude, overseeing the IPO process is a transformative endeavor that extends beyond financial planning and regulatory compliance for a CFO. So, it is important for businesses to devise strategic foresight, coordinate seamlessly across multiple teams, and also garner in-depth understanding of investor psychology. So, right from crafting a compelling equity story to managing due diligence and structuring an appealing offer, each stage of the IPO demands meticulous attention and a commitment to transparency.

And if the IPO is executed effectively, one can definitely unlock significant value for the company, its shareholders, and new investors. This can support the organization’s ambitions for sustained growth and market leadership. Furthermore, through the collective efforts of its leadership, advisors, and partners, a company can robustly position itself for long-term success by building a solid foundation for its journey as a publicly traded entity.

About the Author

Shashidhar SK is a seasoned Finance and Governance professional with extensive expertise in Corporate Finance, Business Transformations, Treasury, Fundraising, IPOs, QIPs, Investor Relations, Private Equity, M&A, and Business Restructuring. He possesses strong skills in compliance for listed companies, Company Secretaryship, and legal matters, alongside proficiency in Financial Reporting under IGAAP and USGAAP. His experience encompasses establishing systems and processes in Corporate Finance, negotiating international contracts, and managing complexities in revenue recognition, technology transfer, and intellectual property. He specializes in Cost Estimations, Pricing, Corporate Governance, Governmental Affairs, and Business Continuity Management, with a focus on ERP and SAP S/4HANA implementations. Shashidhar also has a robust network of relationships with Indian and global bankers, institutional investors, Private Equity firms, and financial intermediaries, making him adept at supporting startups and scaling businesses.