Essential compliances to be met pre and post IPO
Companies going public need to gear themselves up to meet various statutory requirements pre and post IPO. This piece gives a brief overview of the corporate governance part of the requirements.
Listed companies are required to publish financial results on a quarterly basis. The accounting and reporting systems need to be strengthened so as to facilitate quick and accurate reporting. Besides this, in the run up to an IPO one of the major challenges a promoter will encounter is to learn to share information and give in to a democratic system of decision making. Many of decision making powers enjoyed by Promoter in his capacity as the Managing Director or the Chairman become subject to scrutiny by the Board.
Listing related regulations make it mandatory for companies to share information; broad-base the board of directors to include participation of independent directors; setting up of board sub-committees for reviewing risk, financial information and material events of the company by independent committees.
Clause 49 of the Listing Agreement contains the rules on Corporate Governance. It is mandatory for all companies going public to comply with this code.
Before the IPO the Board of Directors of the Company will have to be reconstituted (if necessary) such that at least half of total number of directors are independent (one-third if the Chairman is non-executive). Simply defined, an independent director is a person who is a rank outsider. Thus, employees, relatives, major shareholders, vendors, customers, auditors etc can not be inducted as independent directors. Independent Directors are extremely scarce. According to Vatsaraj, Convenor of the Independent Directors’ Studies course jointly started by Bombay Chartered Accountants’ Society and S P Jain Institute of Management and Research, there was a requirement of about 30,000 independent directors by December 31, 2005 itself! You will have to start scouting for independent directors well in time It is important to note here that all major decisions of the company are taken by the Board by way of resolutions passed by majority. Annual operating plans, budgets, major business and legal concerns, details of business alliances are placed before the Board for review and approval as required.
The company is required to constitute certain committees of the board including the Audit Committee and Remuneration Committee.
The audit committee oversees the company’s financial reporting process, reviews the financial results including transactions with related parties, internal control systems, utilization of money raised from public in view of the stated purpose and also assesses risks of the Company. It has (atleast) three members with two-third being independent. The recommendations of this committee are mandatory and generally binding. Atleast four meetings are held each year.
The Remuneration Committee recommends the remuneration payable to Executive Directors including the Managing Director. All members of the committee are non-executive members.
The Board members and senior management of the company are bound by a internally mandated Code of Conduct. This Code is posted on the website of the company.
A Management Discussion and Analysis report (MDA) is included in the annual report sent to the shareholders annually. Corporate Governance norms make it mandatory for companies to share with investors its view on the industry and business of the company and carry out and publish a SWOT analysis. It must include Management’s view of various matters including industry structure and developments, opportunities and threats, outlook, risks and concerns. Similarly a report on Corporate Governance is also included in the Annual Report. It discloses all elements of remuneration package of individual directors including variable pay and ESOPs. Terms of constitution of various committees and attendance of Directors at the Board and committee meetings.
Listed Companies are required to protect price sensitive information and prevent misuse by insiders. Promoters and Senior Managers are prohibited from dealing in shares of the company if they have access to any information, which if known to public, could have an impact on the share prices. The companies need to follow strict rules with respect to proliferation of price sensitive information.
The management will do well to consider these issues and have a procedural framework in place well in time. The post-IPO compliance urgencies may not give adequate time for establishment of systems and processes. It is advisable to be ready atleast one quarter in advance and may be have a dummy run.
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written by Parker, March 07, 2011
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