Home >Markets >Stock Markets >The legal moves startups make before going public

The stellar listing of Zomato Ltd last week has paved the way for more new-age technology startups to pursue initial public offerings (IPOs). Mint takes a look at the changes a company must make to its structure to meet regulatory compliances for the public company tag.

What’s in a name? Actually, a lot

In order to achieve the IPO milestone, a company must change its name—a company has to go from “private limited" to “limited". This change has to be approved by the board and shareholders, and an application has to be made to the registrar of companies (RoC) to implement it. Private companies have various restrictions on share capital such as a limit on the number of people who can be shareholders and limits on trading of the shares. Converting to a public company removes these restrictions, and the change is mandatory for any company that wants to list on stock exchanges.

Next, the change in capital structure

Startups are tightly owned by a few founders and venture capital investors, who prefer to invest through convertible instruments. IPO aspirants must change all such instruments to plain equity shares. However, the number of actual convertible instruments that are allocated to investors are small in number, and each individual share may be priced so high that they will be practically untradeable. Hence, before going public, firms tweak the capital structure by issuing bonus shares or splitting shares to create more shares, so that each individual share is now priced at a level that it can be easily traded in the stock market.

IPO frenzy
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IPO frenzy

Control issues? Special rights need to be removed

A firm may need to amend its memorandum of association (MoA) for suitable changes to its capital clause. It may also have to amend its articles of association (AoA) in accordance with the Companies Act 2013 and the stock exchange rules, and change or remove any special management or ownership rights available to one or more shareholders.

The board and top management overhaul

As startups prepare to go public, they need to comply with many corporate governance norms. A firm needs to appoint independent directors, set up committees such as the audit committee and the risk management committee. For a public firm, the board needs to have a combination of executive and non-executive directors with not less than 50% of them comprising non-executive directors. If the chairman is a non-executive director, at least one-third of the board is required to be independent.

Finally, it’s time for full disclosures

A company selling shares to public for the first time needs to make a whole lot of disclosures in the draft red herring prospectus (DRHP). These include details relating to the promoter and promoter group, comprehensive details on the use of the proceeds to be raised from the IPO, details of ongoing litigations of the company, its subsidiaries and the promoters and directors, latest financial numbers as per relevant accounting standards. It can take anywhere from one to three months just to prepare DRHP.

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