So what does it take for a company to be IPO-ready?

Up to 36 firms have made their market debuts so far in 2021 by listing on the domestic bourses. That’s an average of 4 IPOs a month. And in the process, these firms have raised a whopping Rs 60,288 crore, according to Prime Database.

Irrespective of a few recent muted listings, the IPO boom is well and truly on in India and CY2021 is poised to shatter several capital market records.  It’s a feeding frenzy for now with both overseas and domestic investors pouring in money as recent IPOs have witnessed massive subscriptions and strong listing gains.

Zomato and Tatva Chintan Pharma are classic examples of not only these handsome returns, but also indicate how the IPO pendulum today is busy swinging between new age, tech-led platforms and traditional firms.

In fact, in some cases, this ‘now or never’ kind of approach towards listing has led to jokes on M&A advisors complaining about losing out potential mandates to their capital market peers.

So what exactly goes into getting IPO-ready? What are the factors that make a difference and prepare an unlisted firm for the rigours of D-street? The IPO journey is a long, laborious and complicated one and firms usually kick-start preparations 12 -18 months earlier.

We analysed recent trends in the IPO market and linked them to specific cases. And compiled a few checklist items, too. Let’s take a look: 

Bolstering the Board

A high-pedigree  board of directors inspires confidence in the investment community and sends the right signal in terms of corporate governance.  And thus, many firms eyeing a market debut, keenly scout for the best talent in the market, be it relevant sector experts or quality independent directors.

For instance, veteran banker and former MD and CEO OF HDFC Bank, Aditya Puri joined the board of API Holdings, the parent company of IPO-bound medicine delivery platform Pharmeasy.

Similarly , former Sanofi MD Dr Shailesh Ayyangar, an industry veteran of 34 years joined the board of Bain Capital-backed IPO-bound Emcure Pharma in July.

AI-based travel app ixigo is another recent example. Days before filing its DRHP (draft red herring prospectus) with Sebi, the firm beefed up its board with six new independent members which included senior executives from the travel and hospitality space like former IRCTC chairman and managing director Pratap Mall, travel app Hopper founder Frederic Lalonde and Hamstede Living MD & CEO Rahul Pandit.

Rejig that Matters 

In some cases, firms opt for an internal restructuring exercise to spin off the vertical or business arm chosen for listing. Legal experts believe this should be ideally done well a few years in advance and not just before the IPO. That’s what happened in the case of Pune-based drug maker Emcure Pharma.

In 2019, the company decided to ring-fence its domestic business through a restructuring exercise as its US business was grappling with regulatory issues in that market.

It planned to demerge the domestic formulation business into a separate company and then take it public at a later date. Recently, the firm filed its papers with Sebi for a Rs 4,500-crore IPO, the second largest issue in the pharma sector in recent times, after the Rs 6,500-crore Gland Pharma listing last year.

Ditto, with Karsanbhai Patel-led Nirma group which has made a comeback to the capital markets with a Rs 5,000-crore IPO of its cement arm Nuvoco Vistas. An internal rejig process had begun a few years earlier, as part of which the Rajasthan cement plant was transferred to the firm to ensure all domestic cement assets were housed under the same umbrella.

Scaling up the M&A way 

Since the outbreak of Covid-19 which has provided a fillip to the digital economy, many new-age firms aspiring to list on the domestic bourses have been on the prowl for assets. These acquisitions are typically aimed at scaling up operations, opting for the phygital (physical+digital) route and plugging portfolio gaps or strengthening verticals. Capital market experts caution though, that such deals should be ideally struck in advance as there will be the inevitable pre-IPO requirement of combining financial statements.

By far the most audacious M&A bet was by online pharmacy PharmEasy, which is backed by private equity players like TPG and is eyeing a $1-billion IPO. The firm stunned the industry and markets by sealing a deal with diagnostics chain Thyrocare for Rs 4,554 cror—the first buyout of a listed firm by a startup unicorn.

Deal makers expect more such omni-channel transactions in the days ahead. They believe India Inc has realized that it can't really be fully-digital neither can it afford to be fully physical. It has to be a combination of both.  So will it be a digital company acquiring a physical company or vice versa?

“That is a function of who has the capital and who has a better management team to drive the combined business,” Sourav Mallik, Joint MD, Kotak Investment Banking had told Moneycontrol in an earlier interview.

Recently, Moneycontrol was the first to report that IPO-bound Delhivery, the logistics startup, backed by marquee investors such as Carlyle, Softbank and Tiger Global Management, had sealed a $200 million deal to acquire a 100% stake in Spoton, a rival logistics player.

So what was the strategic rationale here?

Well, Delhivery is more of an e-commerce logistics player while Spoton is primarily a trucking and road logistics player. "So this acquisition will bolster Delhivery’s  traditional wing and Spoton’s B2B backend capability is also something of interest to Delhivery,” sources told Moneycontrol.

The hyper-active ixigo makes it to this list as well!  In August, it purchased the business and operations of Hyderabad-based bus ticketing and aggregation platform AbhiBus, following a swift recovery in bus ticketing volumes.  This was ixigo’s second acquisition in 2021. In February 2021, it acquired train booking app Confirmtkt.

Hiring Beyond Boards 

It’s not sufficient to merely have in place a board of A-listers. Firms advising IPO aspirants believe it is vital to also strengthen the finance function (consider a new CFO) with executives who have worked earlier in listed firms.

Here’s what a May 2020 EY report said about the key role played by CFOs on the road to an IPO -

“The months before an IPO are a whirlwind of activity for a CFO. There will be unplanned hitches and obstacles, so they need to build a team that can support them and manage stresses throughout the process. But CFOs often find it challenging to meet the greater regulatory, reporting, governance and audit standards required of publicly listed firms. They also have the tough—but exciting—task of working with the CEO to sell the IPO story to investors”

Incidentally, food delivery major Zomato, which had a bumper listing in July, promoted its head of corporate development, Akshant Goyal, to CFO position in November.

One can also consider hiring executives with previous experience with listings. For instance, recently a large unlisted pharma company which is evaluating an IPO, poached a capital markets banker for a finance role.   The Company Secretary is another key hire to be kept in mind.

Recasting Reporting of Finances

An extremely significant part of a firm’s IPO journey is to ensure transparency in its financials with proper, timely disclosures and this aspect applies to companies across all sectors, irrespective of size or business model.

Financial information forms the base of an IPO-bound company’s equity strategy. According to the regulations, an issuer company is required to prepare the restated consolidated financial statements for the three previous years. For instance, if the DRHP is being filed in FY20-21, then FY17-18, FY18-19 and FY19-20 are the three years to be considered.

According to Yash Ashar, Head (Capital Markets) at Cyril Amarchand Mangaldas, “Preparing financial statements in a timely manner , regularly, is a key aspect for IPO preparation. Companies should start preparing these every quarter, subjecting them to review ( and audit for the full year) and presenting them to their board.”

Ashar adds, “Starting 7-8 quarters in advance of the IPO is advisable. This would hold them in good stead during the IPO process and of course beyond.”

In an EY report from February 2021 titled “Restatement of financial statements: An important milestone in the IPO journey, Sandeep Khaitan, Partner and National Leader Financial Accounting Advisory Services (FAAS), EY India said, “We have often experienced IPO timelines being significantly missed due to the quality of financial reporting or not being adequately ready as per the requirement of the Securities and Exchange Board of India (SEBI), which is incremental to the audited financial statement of any company planning to undertake an IPO. “

Rounding up the Checklist

That’s not all. Listing jurisdiction is also an important criteria. It was earlier felt in some quarters that the new-age club of tech/digital companies backed by top private equity investors would be better valued and appreciated in mature, overseas markets.

There was an extended debate on India versus US listings, but the spectacular success of the Zomato IPO seems have tilted the scales in favour of the desi bourses for the time being at least.

According to Sai Venkateshwaran, Partner, Assurance and Head  (CFO Advisory) at KPMG India, tax and legal structure, corporate governance , regulatory compliance (insider trading norms, FCPA/anti-bribery laws), establishment of an investor relations function  and systems and processes related to internal control systems, cyber security, etc. are a few other areas which are part of IPO readiness.