The journey of three entrepreneurs from the ideation phase to scaling up and, eventually, a listing in the public markets.
Going public is a major move for an organisation and a sign of natural progression that comes with scaling up and market expansion. We talk to three entrepreneurs to understand how they took their company from the ideation phase to listing in the public markets, their professional routines one year before the IPO, the changes they had to make to the way they run their companies and what has changed post listing.
All entrepreneurs agree that there is no perfect timing for an IPO and it depends on the organisation’s positioning in the market place, economic conditions, thought process of the management team, and the overall goals of the business. Integrated business service provider, Quess Corp’s founder & Managing Director, Ajit Isaac, believes that a company is ready to go public, when it is ready to take responsibility and the company and management have a compelling investment thesis and are able to communicate the same to the broader market, effectively. For Dr. B. S. Ajai Kumar, founder of HealthCare Global Enterprises (HCG Enterprises), the IPO was more a sign that his organisation is maturing and entering the next phase.
For most organisations, getting ready for an IPO also meant that new systems and processes had to be put in place. After all, for the first time, there is a whole lot of compliance-related deliverables and also the management has to get used to ‘making progress’, every single quarter. However, PN Vasudevan, the founder of Equitas Holdings, says that the company always adhered to systems and processes, as if it were a public limited company, keeping in mind the nature of its business. In the story, he talks about some of the most important aspects needed to deliver a good IPO, some unique challenges faced by Equitas, and how the company was changing its underlying business model right around the time of listing.
The three stories have been narrated to give you a perspective of what it takes for a venture to progress from idea to a successful IPO. Read on.
EQUITAS’ IPO JOURNEY!
Equitas Holdings raised Rs. 2,200 crore from the public in April this year. Incorporated as a company with a distributed ownership model, it was during this period when it changed its business model from that of an NBFC to that of a bank. The managing director and founder, P N Vasudevan, takes us through the various challenges and learnings he and his team had while planning for the company’s IPO.
For the founder of Equitas Holdings, P N Vasudevan, building a transparent company with high level of governance was always of utmost importance. And it was one of the main reasons why the company was ‘IPO ready’ right from the early days. When Equitas hit the bourses in April 2016, raising Rs. 2,200 crore, Vasudevan and team were working round the clock to ensure a successful listing, but one thing they didn’t have to do was to add systems and processes, for governance and compliance; That had been inculcated into the business process, right from day one.
Vasudevan says, “Usually, the merchant bankers study the organisation and make it IPO complaint which involves changes to the composition of the board, shareholder agreements and committee composition and eventually le the draft red herring prospectus (DRHP). In our case we had to do nothing at all.” In fact, there is Clause 49 in the listing agreement which describes the governance standards for a company in India. “On 26 July 2007, when the first board meeting was held, we were already Clause 49 compliant,” says a proud Vasudevan. When the company was started, some principals were laid down for Equitas. That it had to be an organisation run by a set of professionals with no owners; majority independent board supervising the organisation and governance standard complaint.
Through this story, Vasudevan describes some key strategies adopted by Equitas during the public offering process and some lessons learnt during this phase.
Why the IPO?
The company, originally registered as an NBFC, received its license to convert into a small finance bank in October 2015. Once the banking license came through, there was a condition that the 93 per cent stake holding by foreign investors in the company had to become less than 49 per cent. “In India, domestic institutions are not allowed to invest in unlisted stocks and hence, we had to come out with an IPO if I had to get domestic investors interested in our company,” explains Vasudevan.
However, the management took the decision to apply for an IPO even before it got its banking license. “Even if we had not got the license, we would have come out with an IPO as an NBFC,” says he. The reason being the company was growing and so was its capital requirement and SEBI’s rule that Indian VCs cannot invest in unlisted NBFCs did not help much. The only other option Vasudevan had was to seek a new investor to raise money. “In the private equity market, upto a certain size of investment, you get a large number of investors who are ready to pump in US $10 million to US $20 million in companies. When your requirement increases, the number of potential investors reduces and they want certain strategic relationship with the company,” adds he. They are not interested in just attending board meetings, but want more participation in themanagement and decision-making of the company. But, since the philosophy of the organisation was distributed ownership (was willing to give away a maximum stake of 9.9 per cent to investors), Vasudevan found it hard to raise funds from large PEs.
When asked why Vasudevan didn’t want a promoter run business? He says, “I was the one who started the company and I didn’t have money to be the promoter. I knew that this company will never be mine. And, I wanted to ensure that all decision-making and operations were extremely professional. Even my continuance here is only because the board approves my performance.”
Shareholding pattern: The fact that the company had no promoter was one of its biggest challenges. The company was high on governance standards and did not allow any shareholder to have more than 10 per cent stake, including Vasudevan. This, however, did prove to be a challenge at the time of the IPO as SEBI regulation for an initial public offering is such that whenever a company taps the capital market, the promoter should lock in 20 per cent of the post issue capital for a 3 year period. However, the company got an exception under one clause in the SEBI guideline. “In India, only L&T received it before us. A private company, L&T went public without a promoter and is still listed as a company without a promoter.” Equitas is the second company in that category where SEBI gave an exemption to the promoter clause,due to its governance structure.
Business model swap:Equitas operated as an NBFC for 9 years and received its license to convert into a bank in October 2015. During the IPO, the company could not give any forward looking statements. “When we led the DRHP, we mentioned that we have a license to convert into a bank in the next year or so. And beyond that we were not allowed to mention anything else,”states Vasudevan. This was a unique situation as people had a lot of questions on how the company raise deposits, brand and marketing strategies and its interest rates. So while the company’s entire business model was undergoing a dramatic change, it could not communicate on how it will manage that change. However, the company decided not to change the IPO timing and to counter this challenge, it put out a few strategic plans for the bank in its DRHP. “We were allowed to talk within that DRHP document. We highlighted our strengths as an NBFC, that is, large distribution, customer base and the fact that this particular customer base we serve, is not serviced by the mainstream banks even for liabilities,” says he.
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