Incorporation: An IPO

By: Michael Russell

For a growing incorporation with increasing profitability and productivity, an Initial Public Offering (IPO) is the next logical step to take in order to obtain further financing. Once the corporation has fulfilled the requirements set by the authorities, going for listing is a fairly straightforward exercise.

A corporation that wants to go public has to fulfill the Stock Exchange's listing requirements and the Securities Commission's policies and guidelines. It must also comply with legal and accounting requirements as well as equity conditions imposed by the Ministry of International Trade and Industry.

As part of the listing process, the corporation will have to fulfill criteria like historical profitability, capital requirements, business activity and independence, background and continuity of key management.

A corporation that plan to list must also fulfill quantitative and qualitative criteria. Once it has done so, the merchant bank will examine its shareholder's strategy. For instance, if the shareholders want to focus on business expansion, the merchant bank will ensure the IPO is structured to facilitate funds for such expansion. If they want to realize as part of their investment, the merchant bank will include an offer for sale plus a public issue.

Through a public listing, a fast-developing corporation can tap funds from the capital market for business expansion activities. An IPO will help the business have greater diversity in funding activities. In a broader market-based environment, the corporation will have greater access to markets and opportunities for growth abroad or even acquisitions.

The IPO establishes a market-based value for companies, enabling promoters to gauge market acceptance of products and services while allowing for the realization of investments made in the early stages of growth.

One of the main disadvantages of an IPO is that the corporation would be subject to public disclosure requirements, corporate governance standards and accountability. An IPO will also result in dilution of control of the company.

Increased publicity of corporate transaction, financials and other aspects of the business's performance will mean changing the way a business operates. Another disadvantage is that the performance of a company's stock when going to market is influenced by the prevailing market conditions.

Other than assisting in a company's listing plans, the merchant bank will also try to help to improve the company's overall performance. For instance, if the company has debts, the merchant bank can securitize the debt by packaging it into a debt instrument and selling it. In this way, it'll improve the company's profitability by taking out the borrowings and removing the interest cost.

Good investment banking advisers will make the whole process easier for a growing corporation. In any listing exercise, they guide the corporation through various stages like moving into an environment of greater public scrutiny. They also help to transform a corporation from a one-man show into a company that can deal with investors and customers as well as negotiate with suppliers, auditors and the regulators.

Finally, some of the pertinent issues often overlooked by the corporations are the costs and added responsibilities placed on them post-IPO. Greater public scrutiny of accounts, periodical announcements, board composition restrictions and increased corporate governance are among the new responsibilities placed on a company post-IPO.