Importance of Corporate Governance in IPOs

Corporate Governance - IPO

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Every business enterprise functions with and around many stakeholders. The various stakeholders of a business enterprise include suppliers, customers, creditors, debtors, capital contributors, management, regulatory authorities and the government. Business organizations have to collaborate and work with these stakeholders. The level of interaction and collaboration with each of these parties is also determined by the kind of business and the form of entity.

A sole proprietorship concern or a partnership firm has relatively lesser regulatory burden as they are run on a smaller scale usually. A company form of business entails a higher level of scrutiny from the authorities and accountability to the shareholders and other stakeholders. Unlisted companies and closely held companies have relatively lesser accountability. This is because their shares are not held by the general public, and the number of shareholders is bound by a legal limit.

Listed companies, on the other hand, are heavily accountable to the governing authorities. Right from the IPO (Initial Public Offering), the listing on the stock exchange, to bonus or rights issue, debt raising activity, payments to shareholders by way of dividends or other bonuses, corporate debt restructuring and liquidation or transfer of ownership of shares – every activity is regulated by the governing body. SEBI (Securities and Exchange Board of India), BIS (Bureau of Indian Standards) and stock exchanges, NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are some of the regulators of listed companies in India.

An IPO (Initial Public Offer) is the first step for a company to list itself on a stock exchange. Through the IPO, the company raises funding (equity share capital) directly from the general public. There are several procedures and regulations related to the IPO process that have to be abided by any company wishing to launch its IPO. As mentioned earlier, post listing companies are regulated by the authorities to a great extent.

‘Corporate Governance’ is defined as the systems and procedures through which the listed companies are controlled and directed. It defines the roles and responsibilities of the various stakeholders of a company with each other – managers, shareholders, auditors, regulators, creditors etc. Corporate governance enhances the ability of the company to have an equitable relationship with each stakeholder.

Here are some of the reasons why corporate governance is important in the case of IPOs:

  1. Improves appeal for new investors: In the case of an IPO, a fresh issue of shares is made by the company to the general public. If the company has a corporate governance structure in place with a clear business model, systems and procedures, it improves the overall appeal of buying a share for the investor of IPO.

  1. Strengthens compliance: After a successful IPO run, the company is listed on the stock exchange. It then comes under the regulatory purview of several authorities. An established corporate governance structure also ensures timely compliance with the laws, as it helps to establish the procedures and responsibilities of the company’s management with respect to compliance norms.

  1. Facilitates transparency in dealings: Corporate governance mechanisms aid in a higher level of compliance and as a result bring more transparency in the company’s dealings with internal as well as external stakeholders. It also brings ethical practices and fixes a moral responsibility on the management to conduct fair dealings.

  1. Organised management: Management is defined as the process of planning, organising, strategising, coordinating, executing and controlling the action plans of a company’s vision and mission. Planned management actions are possible if a corporate governance strategy is in place before the IPO is brought out.

  1. Long-term strategic alignment: A business strategy gets better implementation if it is backed by a corporate governance framework. Governance fixes responsibility and formulates procedures for a healthy alignment of actions to goals.

  1. Underwriter support: Before an IPO, companies approach underwriters who guarantee the purchase of a certain number of shares if the share applications run short of expectations. This ensures a smooth IPO run and future listing on the exchange. Underwriters also place corporate governance important before providing any form of guarantees to any company.

  1. Signalling and credit rating: With a robust corporate governance framework, companies command better respect in the marketplace. It brings a signalling effect on the market about strong internal controls and also helps to garner stronger credit ratings for the company. Credit rating agencies are entrusted with the responsibility of assessing the credit strength and debt repayment capacity of corporates. They also rate IPOs. Corporate governance is one of the parameters by which rating agencies judge credit-worthiness of companies looking to list.

IPOs are the pathway for a company to expand, diversify and raise additional funds from the public. Having a corporate governance structure in place enables the company to secure its goodwill in the market that how does IPO work. It also builds a sense of confidence in the market about the company’s business and way of functioning.

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