This publication by RSM India group, published in April 2011, is general in nature and endeavors to to analyse certain significant aspects of tapping capital.

1. Accessing Capital
— An Insight

2. SECTION. PARTICULARS Page No.
I ACCESSING CAPITAL—NEEDS AND MODES 2-5
II SETTING UP THE ORGANIZATION 7
III FINANCIAL ASPECTS 9
IV MANAGEMENT ASPECTS 11-13
V PROSPECTIVE SHAREHOLDERS ASPECTS 15-19
VI INTERNAL GOOD MANAGEMENT PRACTICES 21-23
VII KEY STEPS – RAISING PRIVATE EQUITY OR GOING PUBLIC 25
Table of Contents

3. SECTION I
ACCESSING CAPITAL—NEEDS AND MODES

4. 2 of 25
SECTION I
ACCESSING CAPITAL-NEEDS AND MODES
1.0 NEED OF ACCESSING CAPITAL
The Indian economy is currently ranked as the 4th largest
economy in the world with a Gross Domestic Product of
US$ 4 trillion. It has been growing at an average annual rate
of 8% to 9% over the past 5 years making it one of the
fastest growing economies globally. This has seen
emergence of several organizations as market leaders in
their respective business segments and are witnessing
unprecedented growth. One of the key challenges in the
growth is the availability of “risk” or “equity” capital. In the
past 10 years, we have seen emergence of several such
organizations such as Adani Power, IRB Infrastructure,
Educomp and Welspun Corp. It would not be out of place to
mention the recent emergence of Facebook as a US$ 50
billion enterprise facilitated by raising capital through private
equity. It also enables discovery of enterprise valuation and
maximization of promoters’ share value.
The most important question for organizations before accessing capital would be “Why do we need Capital?” Some of the
factors which determine the need for capital could beare as under:
} To raise money for the growth and expansion of operations.
} To acquire existing business / companies.
} To diversify and reduce investor holdings.
} To provide liquidity for shareholders.
} To discover and enhance the Company’s enterprise valuation.
} To attract and retain talented employees.
Accessing Capital through external parties in the form of “Private Equity” or “Going Public” would bring about a major change
and considered a major milestone for any Company. It would also enable third parties to own the Company (limited to their
Equity Shares) and thus provide them a dual right of:
} Sharing the market potential of the Company’s Business; and
} Demand good results; information / reports regarding the operations and the conduct of the Company thereby resulting
in greater accountability.
2.0 MODES OF ACCESSING CAPITAL
2.1 General
} Traditionally, a private or public limited company would approach existing shareholders, associates of promoters for
equity / quasi equity funding and to banks / financial institutions for their debt funding requirements. In the present era of
Venture / Private Funding, various sources of capital are available and the company needs to look through a broad
vision to make utmost use of the available sources at the best suitable terms keeping in mind the overall objective of
maximizing shareholder value.
} Once companies carefully assess their capital requirements, they should analyze the various funding options available
and then short list / finalize zero in on the most optimum option which enables achievement of the organizational
objectives and also ensure maximizing of shareholder value.
} This is of utmost importance as the right source of capital at the right time and right terms can bring about a significant
change in the performance of the company.

5. 2.2 Sources of Capital
Some of the capital sources available for companies which can be tapped have been briefly indicated as under:
} Senior Debt / Secured Debt
This is the most common mode of funding used by business enterprises. The most common forms are term loans and
working capital facilities granted by banks and financial institutions. Senior debt or Secured Debt is debt that takes
priority over other unsecured or otherwise more "junior" debt owed by the issuer. In the event the issuer goes
bankrupt, this debt (interest and principal) must be repaid before other classes of debt and equity by the same issuer.
Senior / Secured debt is often secured by collateral on which the lender has put in place a first lien. Usually this
covers all the assets of the organization and is often used for revolving credit lines.
} Mezzanine funds
Mezzanine funds provide companies with subordinated debt for a certain period, say to 3-5 years. This typically has no
or low payments in the first few years, with either graduated payments in later years or a “bullet” payment upon
maturity. Mezzanine capital is a more expensive and riskier financing source than secured or senior debts, as it is an
unsecured and subordinated obligation in a company's capital structure (i.e., in the event of default, the mezzanine
financing is less likely to be repaid in full after all senior obligations have been satisfied). Additionally, mezzanine
financings, which are usually private placements, are often used by smaller companies and may involve greater overall
leverage levels than issuers in the high-yield market.
} Asset-based Lending
An asset-based lending is any kind of lending secured by an asset. If the loan is not repaid, the asset is taken. A
mortgage is an example of an asset-backed loan. However, the phrase is more commonly used to describe lending to
business and large corporations using assets not normally used in other loans, like inventory, accounts receivable,
machinery and equipment, exotic things like the value of pharmacy script files, a trademark, or whole assets of
intellectual property. This type of lending is generally resorted to when other sources of capital like capital markets or
secured / unsecured loans are exhausted / not viable. Such circumstances could arise on account of the dismal
performance of the Company and its grim financial / liquidity position.
} Institutional investors
Institutional investors are organizations which pool large sums of money and invest those sums in securities, other
investment assets etc. Types of typical investors include operating companies, banks, insurance companies,
retirement or pension funds, hedge funds, investment advisors and mutual funds. They act as highly specialized
investors on behalf of others. They invest in funds that hold a broad portfolio of investments in many companies. This
spreads and minimizes the risk.
} Export-Import Banks
Export Import (EXIM) Bank of India lends money to Indian companies to encourage production of goods for export.
EXIM Bank offers Export Credit facilities like Pre-shipment credit, Supplier's Credit, Project Exports, Exporters of
Consultancy and Technological Services etc.
} Vendor and Customer Financing
Organizations can resort to Vendor / Customer financing when there is a certain level of synergy / dependence on one
another. This can be in the form of better credit terms, financing / joint development of new innovations / technology,
and in certain cases, in the form of normal loans, debentures, equity participations etc.
} Spin-Off’s
Organizations which wish to 'streamline' their operations often sell less productive or unrelated subsidiary businesses
as spinoffs to third parties, thus resulting inflow of cash.
} Private Equity
Private equity consists of equity securities in companies that are not publicly traded on a stock exchange. The most
common investment strategies in private equity are: leveraged buyouts, venture capital, growth capital, distressed
investments and mezzanine capital. In leveraged buyouts, the private equity firm buys majority control of an existing or
mature firm whereas in venture capital or growth capital investment, it invests in young or emerging companies and
rarely obtains majority control. Private equity investors tend to focus more on long-term growth than short-term profits.
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6. } Going Public
Going public refers to a private company’s Initial Public Offering (IPO), thus becoming a publicly traded and owned
entity. Organizations usually look towards the option of Going Public to raise capital in order to expand their business
activities and leverage on the growth prospects of the Company. On the other hand, Private Equity Investors / Venture
Capitalists use IPO’s to offload their investment in a company.
In this publication, we have focused on private equity and IPO as the modes of raising capital as it requires a
completely different perspective as compared to debt finance.
2.3 Private Equity Funding
Private Equity is an investment by a financial investor in an unlisted enterprise by way of “risk capital”. The funding is
essentially based on the business plan, promoters’ background and track record, sector outlook, growth prospects rather
than the security and collaterals. The exit for the financial investor is generally through IPO or sell out rather than repay-
ment by the enterprise. From an enterprise perspective, the private equity increases its ability to assume greater risks and
unleash its growth potential without the prospect of financial distress. It also increases the enterprise’s ability to raise debt
thereby providing greater growth prospects. In several cases, the private equity investor may be able to supplement the
promoters in improved management practices, financial controls and reporting.
} PE Investor can come from three routes:
− Angel Investment
− Venture Capital Investment
− Private Equity Investment.
} Angel investment comes at the earliest stage of formation of a company, sometimes even at the ideation stage.
Although the amount of invested money is much lesser in value, since angels chip in at the earliest stages of the
business, the risk involved is the highest.
} Venture capital investment comes at later stages of the enterprise and includes higher levels of investments.
Companies which can promise to grow fast, backed by strong market demand, can attract venture capital. This comes
more from venture funds than from individuals.
} Private Equity comes once a company is well established and is looking for large value funds for rapid expansion. PE
investors generally take lesser stake in companies than venture funds.
2.4 Initial Public Offering
} Initial Public Offering (IPO) is considered to be one of the key goals for several; entrepreneurial ventures. A well
planned IPO has several benefits, some of them being:
− IPO raises Cash with almost no interest cost (in case of Equity)
− Public Companies may get better rates when they issue debt on account of increased public scrutiny and
disclosures.
− Trading in the Open Markets means liquidity. A public company has access to more, and often deeper, sources of
capital than a private company.
− The price discovery for the shares of the Company is established. This helps in ascertaining the market
capitalization of the company and opens up other opportunities to the Company management to work on
improving / optimizing of the market capitalization.
} The actual preparation and process of going public can be time-consuming, expensive, challenging as well as distract-
ing to the business. The company has to deal with a broader stakeholder group than before, as well as comply with
additional regulations and reporting requirements. A company must be ready to meet shareholder, regulatory, and
market expectations from day one. The company will also be under far greater public scrutiny.
} Although IPOs are among the most rewarding decisions for organizations, they can also be most daunting. Companies
considering an IPO should carefully assess their organizational and market readiness for going public, as well as
determine whether leaving the private sphere is indeed the right move for them.
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7. 3.0 DETERMINATION OF MODE – IPO VS. PRIVATE EQUITY
} In the present context, several growth oriented companies are proposing to access capital through any of the following
modes:
− Private Equity and/or
− Going Public
} The determination and timing of the mode of accessing capital (other than the traditional mode of Debt) is very essential
as it could make the difference between success and failure. The above matter becomes extremely critical when an
Organization needs to select the mode between Going Public vis-à-vis PE Investor.
} Considering the implications of “Going Public” to be enormous compared to PE Investing, the Company should answer
the following basic question: “Whether the Market and Organization is prepared for Going Public”. The need for
capital does not ideally justify the reason / logic for Going Public and the same needs to be planned in a phase manner
well before.
} Once an Organization goes public, there is no looking back. The Organization needs to raise and answer a number of
questions before deciding to Go Public or for that matter even going for PE Investor. Some of the questions to be
answered by the Organization before taking any decisions have been discussed hereinafter.
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8. SECTION II
SETTING UP THE ORGANIZATION

9. 4.0 GENERAL
4.1 In order to make the private equity or IPO a successful exercise, strategizing and adequate preparation is critical.
The strategies can be broadly bifurcated into two aspects:
− Changes required internally within the Organization.
− Assistance required from external agencies.
4.2 Changes Required Internally Within The Organization.
Once the Organization decides to raise “private equity” or “Go Public”, it is important that it starts thinking; acting and
functioning like a Public Company. This requires colossal changes in the mindset of the personnel associated with the
Organizations specifically the Top Management and Key Executive Team / Head of various Business Units.
4.3 Assistance Required From External Agencies
For raising “private equity” or an IPO, it is imperative that an organization identifies an External Agency, who shall guide and
hand hold the Organization throughout the whole process (Co-ordinator). The said Co-ordinator shall support the
Organization in identifying the key players within the Organization who could be involved in raising “private equity” or “Going
Public” and also assist the Organization to hire the services of other external agencies such as Merchant Bankers etc.
5.0 GETTING STARTED
} Raising “private equity” or IPO readiness involves the acceptance and implementation of change — not just in
management, but every aspect of business, organization and corporate culture. This means allocating time and
resources for educating internal organization on factors pertinent to operating as a public company and achieving
success in the public domain. Adequate time must be allowed to build your legal, financial, technological and risk
management infrastructure. Provide time to address key financial and reporting issues, including stock option issuance,
revenue recognition practices and segment reporting processes, and to provide achievable guidance and forecasts. Act
like a public company: Hold meetings with your current investors to review drafts of quarterly/annual filings and press
releases and to answer those challenging questions prior to the raising “private equity” or IPO.
} Organizations successful in their raising “private equity” or IPO have often spent around 18-24 months or more building
business processes and infrastructure, recruiting executive and advisory talent, getting in front of financial and reporting
issues and mustering the essential board of directors’ commitment to raising “private equity” or go public.
} Before commencing on the raising “private equity” or official IPO process, it is imperative that the Organization ensures
the following
− Develop a comprehensive action plan, detailing the areas, responsibility and time lines.
− Develop necessary infrastructure to address the requirement / compliances required by a Public Company
− Check and develop mind set of personnel at the helm the affairs to match public company expectations.
− Check and develop adequate public positive visibility for connecting with various stakeholders.
SECTION II
SETTING UP THE ORGANIZATION
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10. SECTION III
FINANCIAL ASPECTS

11. 6.0 CAPITAL STRUCTURE
Companies needs to ensure that appropriate capital structure in terms of authorized capital, enabling approvals etc are in place
before proceeding for raising “private equity” or an IPO.
7.0 ATTRACTIVE TRACK RECORD
} A track record of profitability and growth and outdoing the industry averages in terms of profits and growth on a consistent
basis has better prospects of receiving a favorable response from potential investors. Also a consistent upbeat trend in
the financial and operating performance over the past few years is one of the critical aspects for the success story of
raising “private equity” or IPO.
} Sometimes even if an organization does not fulfill all the above criteria (say for e.g. a established track record), the
investors may still perceive these companies positive and having enormous growth potentials based on the constructive
characteristics such organization possess (e.g., a highly respected management that has generally lead other companies
to prosperity).
8.0 PROSPECTS FOR HIGH GROWTH
} High-growth companies, which also offer the potential for significant future growth and have typically matured beyond the
“start-up phase” to attain a certain level of revenues and profitability, are generally considered as good bets in the
investing community.
} Companies whose products and services have been accepted in the market over the years duly supported by an attractive
growth plan, have better prospects in raising “private equity” or going public.
} An attractive / unique business proposition (i.e. product or service) with a competitive edge and appropriate market
thereof.
9.0 A STRONG EQUITY GROWTH STORY
} Especially in today’s uncertain markets, enterprises raising “private equity” or IPO candidates must tell a very exciting
story as investors will scrutinize your company and its bottom line performance much more closely than before. In
uncertain times, investors will demand even greater details, explanation and transparency about the use of funds in the
prospectus and during road shows.
} Investors seek companies with business models that have performed well in the downturn, a solid track record, an
actionable plan to sustain growth and that are well able to service their interest and debt. You must also consider whether
there is an appetite within the investment community for your equity story in your particular sector.
10.0 RAISING “PRIVATE EQUITY” OR IPO PROCEEDS SHOULD FUND GROWTH
} Investors typically prefer to invest in companies using funds to grow the new company, who will put the money back into
the business to expand, funding R&D, marketing and capital expenditures.
} The Company should have a clear plan in place regarding the usage of the capital accessed and how far the same would
enable the Company to achieve sustained higher growth rate.
11.0 BENCHMARK YOUR COMPANY’S PERFORMANCE TO ENSURE COMPETITIVENESS
} Market leaders have usually been way ahead of their competitors and comparable companies in practically every aspect
of their performance before raising “private equity” or the IPO. The business fundamentals need to be strong and sustain-
able.
} Companies will need to benchmark performance to demonstrate competitiveness with industry peer group/s.
SECTION III
FINANCIAL ASPECTS
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12. SECTION IV
MANAGEMENT ASPECTS
‘The best way to predict the
future is to create it.’
- Peter Drucker

13. MANAGEMENT ASPECTS
12.0 BUILD AN EFFECTIVE MANAGEMENT TEAM
In any mode of accessing capital, the quality of leaders is a critical factor for the investors to determine whether to invest in the
Company or not. The term “Leaders’ would include the Board of Directors, the Chief Executive Officer, along with other
busIness heads such as Chief Operation Officer, Chief Financial Officer etc.
} In raising “private equity” or an IPO, the investors want to be sure that the management running a company is not a “one-
man band.” This may require adding individuals with public company experience in marketing, operations, development,
and finance including a CFO who has previously been through the raising “private equity” or IPO process.
} The core team in the Company should have collective experience and understanding of raising “private equity” or the IPO
process. The Board of Directors of the Company should be of sufficient size, structure, quality and depth, with individual
expertise in strategic planning, industry, business development through organic growth or M&A activity and past involve-
ment in a successful liquidity event. Selecting the right team of external advisors like attorneys, underwriters, auditors,
transaction specialists, investor-relations professionals and others is also imperative.
} Once the company raises “private equity” or goes public, a significant amount of executive time will be devoted to
investor / stakeholder relations and communications. With reduced CEO and CFO oversight, the executive team and
managers must be well equipped to oversee the day-to-day operations of the company. The investment community will
look to the CEO to articulate the company’s vision and business strategy. The CFO must own the financial model and
translate strategy into financial results. The company should also begin harnessing key talent a full one to two years in
advance to prepare the team for the IPO. The compensation plans will also be under public scrutiny.
13.0 BOARD OF DIRECTORS
13.1 General
} The Board of Directors should have an optimum combination of
executive and non-executive directors (NEDs) – Independent and
otherwise with not less than fifty percent on the board comprising of
Independent non executive Directors. They should have sufficient
knowledge of the business specifically in the case of raising “private
equity” or an IPO. The Organization should have the right board in
place before raising “private equity” or the IPO with a good mix of
skills, including industry contacts, technical knowledge, business de-
velopment, marketing, strategic planning, acquisition integration and
financial expertise.
} NEDs should be inducted six months in advance of raising “private equity” or the IPO if possible. A NED with experience of
raising “private equity” or an IPO, who is able to challenge board debate and provide constructive suggestions to the
Board. Such a Board can be a great asset in the lead-up to raising “private equity” or an IPO.
} Directors can improve board performance by:
− Having loyalty to shareholders, not management
− Challenging management to simplify and explain the business
− Serving as ambassadors and promoters of the business
− Carefully evaluating executive remuneration plans
− Improving audit committee oversight of risk management
} One of the best sources of objective advice can come from an independent or outside director. A company should not wait
until the last minute to begin its search for qualified outside board members. A potential board member unfamiliar with a
company may be reluctant to join the board immediately prior to raising “private equity” or an IPO, since a director has
personal liability for information contained in or omitted from the registration statement.
SECTION IV
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14. 13.2 Appointments To The Board
Companies should issue formal letters of appointment to Non-Executive Directors (NEDs) and Independent Directors. Such
formal letters should form part of the disclosure to shareholders and should be put up in the website of the company and the
stock exchange where the company is listed. The letter should specify:
− The term of the appointment;
− The expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to
serve and its tasks;
− The fiduciary duties that come with such an appointment along with accompanying liabilities;
− Provision for Directors and Officers (D&O) insurance, if any;
− The Code of Business Ethics that the company expects its directors and employees to follow;
− The list of actions that a director should not do while functioning as such in the company; and
− The remuneration, including sitting fees and stock options etc, if any.
13.3 Complementary Skills
Public company boards often require a different skill set than private company boards. The Board will require a substantively
disparate mix of audit, governance, compensation and compliance specialists, corporate strategists and experienced
executives in business development via organic and M&A growth, capital markets involvement, industry experience and basic
financial literacy. The Board members must have the individual capacity to meet the substantial annual time commitment that
may be required.
13.4 Nomination Committee
14.0 INDEPENDENT DIRECTORS
} The companies may have a Nomination Committee comprising of majority of Independent Directors, including its
Chairman. This Committee should consider:
− Proposals for searching, evaluating, and recommending appropriate Independent Directors and Non-Executive
Directors [NEDs], based on an objective and transparent set of guidelines which should be disclosed and should,
inter-alia, include the criteria for determining qualifications, positive attributes, independence of a director and
availability of time with him or her to devote to the job;
− Determining processes for evaluating the skill, knowledge, experience and effectiveness of individual directors as well
as the Board as a whole.
} With a view to enable Board to take proper and reasoned decisions, Nomination Committee should ensure that the Board
comprises of a balanced combination of Executive Directors and Non-Executive Directors. The Nomination Committee
should also evaluate and recommend the appointment of Executive Directors.
} A separate section in the Annual Report should outline the guidelines being followed by the Nomination Committee and
the role and work done by it during the year under consideration.
14.1 Appointment Of Independent Directors
} Independent Director shall mean a non-executive director of the company who apart from receiving director’s remu-
neration, does not have any material pecuniary relationships or transactions with the company, its promoters, its direc-
tors, its senior management or its holding company, its subsidiaries and associates which may affect independence of
the director;
− Is not related to promoters or persons occupying management positions at the board level or at one level below the
board;
− Has not been an executive of the company in the immediately preceding three financial years;
− Is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the
following:
• The statutory audit firm or the internal audit firm that is associated with the company, and
• The legal firm(s) and consulting firm(s) that have a material association with the company.
− Is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect
independence of the director.
− Is not a substantial shareholder of the company i.e. owning two percent or more of of voting shares.
− Is not less than 21 years of age.
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15. } Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of
independent directors and in case he is an executive director, at least half of the Board should comprise of independent
directors. Provided that where the non-executive Chairman is a promoter of the company or is related to any promoter or
person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board
of the company shall consist of independent directors.
} The typical board candidate search process is quite similar to recruiting a CEO or other C-level executive. Directors’
compensation should be both appropriate and attractive. Their identification must be strong and practical. With intense
individual scrutiny and liability for public company directors in today’s post-Enron and WorldCom environment, substantial
time and effort is required to identify, appoint and groom a qualified board of independent directors. For successful IPO
performers, establishing the board of directors is often a top priority in preparing for the IPO journey.
14.2 Attributes Of Independent Directors
} The Board should put in place a policy for specifying positive attributes of Independent Directors such as integrity,
experience and expertise, foresight, managerial qualities and ability to read and understand financial statements.
Disclosure about such policy should be made by the Board in its report to the shareholders. Such a policy may be subject
to approval by shareholders.
} All Independent Directors should provide a detailed Certificate of Independence at the time of their appointment, and
thereafter annually. This certificate should be placed by the company on its website, if any, and in case the company is a
listed company, also on the website of the stock exchange where the securities of the company are listed.
15.0 REMUNERATION COMMITTEE
15.1 Remuneration Committee
} The board may set up a remuneration committee to determine on their behalf and on behalf of the shareholders with
agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pen-
sion rights and any compensation payment.
} To avoid conflicts of interest, the remuneration committee, which would determine the remuneration packages of the
executive directors may comprise of at least three directors, all of whom should be non-executive directors, the Chairman
of committee being an independent director.
} All the members of the remuneration committee could be present at the meeting. The Chairman of the remuneration
committee could be present at the Annual General Meeting, to answer the shareholder queries. However, it would be up to
the Chairman to decide who should answer the queries.
15.2 Remuneration Of Independent Directors (IDs)
} In order to attract, retain and motivate Independent Directors of quality to contribute to the company, they should be paid
adequate sitting fees which may depend upon the twin criteria of Net Worth and Turnover of companies.
} The IDs may not be allowed to be paid stock options or profit based commissions, so that their independence is not com-
promised.
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16. SECTION V
PROSPECTIVE SHAREHOLDERS ASPECTS

17. SECTION V
PROSPECTIVE SHAREHOLDERS ASPECTS
16.0 BUILD A POSITIVE PUBLIC IMAGE
} A positive image with potential investors and those who influence that buying
decision (e.g. financial analysts, stockbrokers, the financial press, and industry
publications) long before going public can enhance the initial sales effort and
maintain the public’s interest in the stock in the aftermarket. A positive image
cannot be developed overnight; so the earlier a company gets started, the
better. Creating or enhancing a company’s image may require hiring a public
relations firm to help get the company’s “story” out prior to the offering and
maintain positive external communications and shareholder relations after it
has gone public. Other ways a company can enhance its public image include
adding analysts and business press editors to its mailing lists, participating in
trade shows and conferences that are attended by analysts, and publicizing
key employee appointments.
} Public relations firms, experienced in investor relations, working with the business press and financial analysts, can be
extremely valuable advisers and facilitators in this process. They can help you to:
− Develop lists of analysts and business press editors who follow your industry and regularly provide them with news
releases and information about your company.
− Identify the most respected analysts in your industry and target them for either special focus or interviews with you or
other members of senior management.
− Obtain invitations to trade association and technical conferences where companies can present themselves to both
the press and analysts who frequently attend to keep current in their field.
− Ensure that you are effectively present in all the key happenings / forums relating to your industry / markets etc.
} PR as an effective tool is to be used much before a Company decides to go public or approach for PE funding. This is
required to create the right messaging to the target audiences about the strengths of the Company, its prospects, industry
prospects, leadership abilities of its senior management etc.
} Hiring an expert
Whether you recruit an experienced investor-relations officer (IRO), engage the services of a seasoned consultancy, or
both, the presence of an investor-relations specialist will ease management’s burden in executing proactive, credible and
value-driven financial media relations and institutional-investor targeting.
} A positive image in the market
Here are some ways you can get started developing a positive image: Begin a financial public relations program. It is
important that you begin trying to raise your public image with the appropriate people at least a year before you plan to go
public. In these conversations, do not mention any possible offering. Many entrepreneurial companies publicize one or two
key individuals, such as the founder or a chief scientist or technologist. Financial analysts and the business press, how-
ever, like to probe more deeply into the company. Hence, demonstrating your depth of management and operating talent
is important. Trade associations, investment banking firms, venture capital conferences, and business media organizations
frequently have conferences at which your company can present itself to the press and analysts. The key analysts will
likely attend shows where you exhibit.
Make a special effort to demonstrate your product and introduce your key managers and engineers, but limit your
discussions to non financial information or publicly disclosed financial results as applicable to your ownership status at that
time.
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18. 17.0 POLICIES THAT INSPIRE SHAREHOLDER CONFIDENCE
} The media and general public placed partial blame for the 2009 financial crisis on poor corporate governance. Many
believe that boards failed to understand and manage risk and incentives appropriately.
} With the charges of fraud and market manipulation that arose out of the financial downturn, investors are placing a
premium on corporate governance and high stock exchange standards.
18.0 AUDITORS
18.1 Statutory And Internal Auditors
} Before going public or approaching PE funds, a
Company should do a critical evaluation of the
stature of its Statutory Auditors and Internal
Auditors.
} Investors per se are concerned about the stature
and credibility of the Statutory Auditors and
Internal Auditors of the Company. As such
reputed and well known audit firms are normally
preferred to over small and unknown firms. Apart
from bringing in the required competency and
scale up capabilities, such firms also brings in a
great amount of respectability and also help in
instilling confidence in the minds of investors.
18.2 Audit Committee
} The Audit Committee of the Board should be the first point of reference regarding the appointment of auditors. The same
are presently mandatory for listed companies. A number of Companies, although not listed use audit committees as
effective tools to control and regulate audits / reviews thereby instilling confidence in the minds of all the stake holders.
} A qualified and independent audit committee shall be set up, giving the terms of reference subject to the following.
− The audit committee shall have minimum three directors as members. Two-thirds of the members shall be
independent directors.
− All members of the audit committee shall be financially literate and at least one member shall have accounting or
related financial management expertise
− The chairman of the Audit Committee shall be an independent director;
− The chairman of the Audit Committee shall be present at Annual General Meeting to answer shareholder queries;
− The audit-committee may invite such of the executives, as it considers appropriate (and particularly the head of the
finance function) to be present at the meetings of the committee, but on occasions it may also meet without the
presence of any executives of the company. The finance director, head of internal audit, and a representative of the
statutory auditor may be present as invitees for the meetings of the audit committee;
− The Company Secretary shall act as the secretary to the committee.
} The Audit Committee should have regard to the profile of the audit firm, qualifications and experience of audit partners,
strengths and weaknesses, if any, of the audit firm and other related aspects.
} To discharge its duty, the Audit Committee should:
− Discuss the annual work programme and the depth and detailing of the audit plan to be undertaken by the auditor,
with the auditor;
− Examine and review the documentation and the certificate for proof of independence of the audit firm, and
−
− Recommend to the Board, with reasons, either the appointment/re-appointment or removal of the statutory auditor,
along with the annual audit remuneration.
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19. 18.3 Audit Committee: Role and Responsibilities
The role of the audit committee shall include the following:
} Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the
financial statement is correct, sufficient and credible.
} Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the
statutory auditor and the fixation of audit fees.
} Approval of payment to statutory auditors for any other services rendered by the statutory auditors.
} Reviewing, with the management, the annual financial statements before submission to the board for approval, with
particular reference to:
− Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms
of clause (2AA) of section 217 of the Companies Act, 1956
− Changes, if any, in accounting policies and practices and reasons for the same
− Major accounting entries involving estimates based on the exercise of judgment by management
− Significant adjustments made in the financial statements arising out of audit findings
− Compliance with listing and other legal requirements relating to financial statements
− Disclosure of any related party transactions
− Qualifications in the draft audit report.
} Reviewing, with the management, the quarterly financial statements before submission to the board for approval.
} Reviewing, with the management, the statement of uses / application of funds raised through an issue (public issue, rights
issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document/
prospectus/notice and the report submitted by the monitoring agency monitoring the utilization of proceeds of a public or
rights issue, and making appropriate recommendations to the Board to take up steps in this matter.
} Reviewing, with the management, performance of statutory and internal auditors, and adequacy of the internal control
systems.
} Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing
and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.
} Discussion with internal auditors any significant findings and follow up there on.
} Reviewing the findings of internal investigations by the internal auditors into matters of suspected fraud, irregularity or
failure of internal control of a material nature and reporting the matter to the board.
} Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit
discussion to ascertain any area of concern.
} To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in
case of non payment of declared dividends) and creditors.
} To review the functioning of the Whistle Blower mechanism, in case the same is existing.
} Approval of appointment of CFO (i.e., the whole-time Finance Director or any other person heading the finance
function or discharging that function) after assessing the qualifications, experience & background, etc. of the candidate.
} Carrying out any other function as is mentioned in the terms of reference of the Audit Committee.
18.4 Certificate Of Independence
} Every company should obtain a certificate from the auditor certifying his/its independence and arm's length relationship
with the client company.
} The Certificate of Independence should certify that the auditor together with its consulting and specialized services
affiliates, subsidiaries and associated companies or network or group entities has not/have not undertaken any prohibited
non-audit assignments for the company and are independent vis-à-vis the client company.
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20. 19.0 CORPORATE GOVERNANCE OVERVIEW
} Top companies adopt the appropriate corporate governance practices that will protect shareholder interests. This will
involve working with your legal counsel on all corporate governance matters, including efficient pre- and post-IPO legal
structures and compliance with exchange-listing and other regulatory requirements.
} In the downturn, businesses of all sizes were hit by risks that were completely off their radars. Hence, investors are
increasing their scrutiny of risk and will pay a premium for strong risk management.
} Key success factors in managing risk include:
− Assignment of risk ownership.
− Internal risk communications.
− Understanding of enterprise-wide risk .
} Although enterprise risk management is still in its early stages for most pre-listed companies today, the larger public
companies are looking beyond internal controls around financial reporting to address the broader, enterprise and external
risks.
} Frequent and transparent communications with stakeholders regarding your company’s performance will be the key to
success as a public company.
20.0 MANAGING RISKS
} Creating a risk management framework is a way to manage a company’s risk prudently and effectively, and at the same
time allow management the confidence to achieve growth. In its oversight capacity, the board bears ultimate responsibility
for developing this process.
} Questions the board and audit committee should consider include:
− Does the board clearly delineate the risks that fall within the oversight of the audit committee?
− What are the company’s risk priorities?
− What are the most important areas of risk for the company?
− How are risk resources currently being allocated relative to the management of these areas of risk?
− What are the major business initiatives being considered and the significant risks associated with it ?
− How does the risk management program consider new business strategies, initiatives, and transactions, and those
that relate to external factors (e.g., new regulatory interpretations, focus areas)?
− Does management provide frequent updates to the board and/or the Risk Management Committees ?
− Are the risk updates prioritized, clear and concise (e.g., management uses a risk dashboard)?
− How does the company assure that its risk management programs do not cause it to become risk averse?
} Both from a listing requirement in the Indian Stock Exchanges and as a business requirement in the present day context,
every company should examine the need to conduct a study on the “Enterprise Wide Risk Identification and Management
Framework and Internal Control systems”. With businesses becoming larger and operating in different territories (both in
the national and global scene), the need for conducting this study at periodic intervals and having a on going tracking sys-
tem on the same is of utmost importance. Company should target to get such studies with professional help. Such studies
need to be mandatorily done for listed companies. For companies with external investors, the same may normally be a
pre-condition set by such investors. Having such a study done is a good business and governance practice.
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21. 21.0 CORPORATE COMMUNICATION PLANS
} Private companies are often unaware of the level of accountability
and scrutiny faced when going public. They often underestimate the
time and skill needed to handle public investors and to maintain
aftermarket support.
} The Company will need an investor-relations professional who has
the ability to build your strategy, work well with the bankers and is
familiar with your industry sector and potential investors. The
Underwriter, Lead bank and investor-relations professionals will
help you to market the IPO.
} Once the IPO is over, the process of retelling the investment story and fine-tuning your investment value proposition
begins. This will be a continual practice of communicating the intangible business drivers that provide growth and profit-
ability for the company, its position in the industry, developing a robust financial planning and analysis function and
providing appropriate and supportable guidance on financial performance and business milestones, providing a regular
update of forecasts and identifying any key business issues that could impact the company positively or negatively.
22.0 INSTITUTION OF MECHANISM FOR WHISTLE BLOWING
It is important that the Board processes and compliance mechanisms of the company are robust. For this purpose the
compliance audit of the company should be done by a qualified auditor (internal / external) and report submitted to the Board.
There should be a mechanism for whistle blowing with suitable safeguards against victimization of employees who avail of the
mechanism. It may also allow direct access to the Chairperson of the Audit Committee in exceptional cases.
23.0 ENABLING QUALITY DECISION MAKING
The Board should ensure that there are systems, procedures and resources available to ensure that every Director is sup-
plied, in a timely manner, with precise and concise information in a form and of a quality appropriate to effectively enable/
discharge his duties.
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22. SECTION VI
INTERNAL GOOD MANAGEMENT PRACTICES

23. SECTION VI
INTERNAL GOOD MANAGEMENT PRACTICES
24.0 EVALUATE CORPORATE GOVERNANCE PRINCIPLES AND PRACTICES
Given the level of interest by institutional investors and the investing public in corporate governance matters such as board
composition, structure, and process, including the nomination of directors, compensation practices, establishment of a code of
business conduct and ethics for employees and directors, the establishment of an internal audit function and related-party
transactions, it is important for companies to take a close look at their corporate governance principles and practices when
planning the public offering process.
25.0 DEVELOP BUDGETS AND MEASURE PERFORMANCE
} Throughout raising “private equity” or the IPO process, key stakeholders / underwriters will ask for financial projections and
will compare a company’s past performance to its past budgets. Proper budgeting systems should be instituted.
} A public company’s ability to meet its own earnings estimates and “The Street’s” earnings estimates can have a significant
impact on its stock performance. Therefore, accurate budgeting and forecasting is critical for a successful IPO, as the
market rewards achievers and punishes non-performers.
26.0 STRIKE THE RIGHT BALANCE
The Core delivery team must strike the right balance between managerial focus on raising “private equity” or the IPO transac-
tion and the day-to-day operation of the company. Remember that preparedness can help lead to a successful raising “private
equity” or IPO outcome, but all of the best financial engineering will not create business prosperity — only robust planning,
accurate expectations setting and strong operational execution will forge the path to long-term success.
27.0 CULTIVATE LENDER RELATIONSHIPS
} The team of advisors—attorneys, consultants, investment bankers, and accountants—can be instrumental in making intro-
ductions to new lenders, by leveraging their networks to identify appropriate funding sources and thus help you develop
relationships with multiple potential funding sources. They can also help you cultivate and manage relationships with cur-
rent providers of capital and prospective lenders, developing requests for proposals and negotiating terms, among other
things.
} Although the Company might end up tapping only one or two of the lending sources the process will cultivate, maintaining
relationships with a good number of them is a sound strategy.
28.0 REVIEW ALL RELATED-PARTY TRANSACTIONS AND MATERIAL CONTRACTS
} Generally speaking, the business has to be depersonalized before taking it public. One must disclose the names of highly
compensated individuals, the amount paid to them, and any special arrangements made with them. Shareholders’
agreements providing for rights of first refusal may have to be canceled; loans made by the company to members of man-
agement or by insiders to the company may have to be repaid; the fairness of the terms of contracts (such as leases)
between the company and insiders should be adequately documented and, if necessary, altered; and employment
contracts, stock option plans, and stock purchase plans may have to be entered into, revised, or canceled.
} Determine whether the company is legally positioned for an offering. In addition, arrangements, such as royalty
agreements, that need to be revised before taking the Company public. All these, needs to be examined for compliance.
} All material leases and contracts need to be reviewed for updating or revising them to reflect their current terms or to
provide more flexibility. Review of the balance sheet and off-balance sheet assets, like intellectual property) to determine
whether the legal ownership and existence of all your assets etc can be verified. All the documentation regarding
outstanding loans and notes and that there are no provisions in them that may cause to be in default as a result of the
actions you intend to take in going public need to be reviewed.
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24. 30.0 MAKE YOUR PACKAGE COMPELLING
Once the Company has been assessed and considered what a particular lender might be looking for, the next step is to create
a comprehensive, well-organized package with no information gaps, which is tailored to each of the targeted funding sources.
The package should not only include the request for capital and what the Company intends to do with the funding, but also
present a solid business plan mapping out a clear strategy and financial projections. Make sure the plan demonstrates that
clear understanding and delivery capability of the Company to manage the various situations arising. All data should be
presented accurately and clearly. Be transparent about any concerns, past or present, and about the plans for the future.
Build strong relationships with reputed Investment Bankers, Lawyers, Accounting Advisors / Auditors etc as this will help in
improving on Company’s credibility.
31.0 ESTABLISH INCENTIVE COMPENSATION PLANS
Developing a long-term incentive compensation plan is critical to keeping management and employees motivated. Today,
many companies establish such plans for the benefit of its management team and employees shortly after formation.
32.0 HAVE YOUR FINANCIAL STATEMENTS AUDITED AND RESOLVE POTENTIAL DISCLOSURE AND ACCOUNTING
ISSUES
A company that wants to raise “private equity” or go public needs to have audited financial information. It is easier and more
cost efficient to perform audits of financial statements in the normal course of business, rather than shortly before going public.
As a company gains financial sophistication, it should also begin preparing interim/quarterly financial statements. Investment
bankers may want to include unaudited financial information for the prior four or eight quarters in order to evaluate a company
positively. If such quarterly financial information is presented, underwriters typically require that it be reviewed by the com-
pany’s independent auditors. Issues arising out of audits not conducted according to required standards should be discussed
early on with their auditor.
The company’s financial statements included in an Information Memorandum or IPO registration statement will have to conform
to positions and practices prescribed by SEBI and Indian Accounting Standards, which may be different than the financial state-
ments a company previously prepared.
33.0 BUILD STRONG FINANCIAL FORECASTING SYSTEMS
} Define and implement, well in advance, the infrastructure of people, systems, policies and procedures that will enable the
production of quarterly and annual reports in compliance with regulations. This can facilitate regulatory compliance, protect
against risk exposure and provide guidance to meet or beat market expectations.
} Currently, compliance of the infrastructure with local and foreign regulations is a significant task, as a company may need
to change from its local accounting standard to IFRS standards (depending on the listing exchange’s requirements).
However, as more countries around the world require IFRS for listed companies, differences between local and foreign
regulations will diminish.
} How to improve your infrastructure:
− Improve budgeting and forecasting capabilities.
− Put financial statements in order.
− Prepare to comply with local securities laws.
− Address potential IPO accounting and financial reporting issues.
− Develop appropriate corporate, capital and management structures.
− Properly document transactions with owners and management.
29.0 DEVELOP NECESSARY INFRASTRCTURE TO PROVIDE FOR DETAILS TO ENABLE COMPLIANCE TO THE
REPORTING REQUIREMENTS WITH THE STOCK EXCHANGES
A Company listed in the Stock Exchange say for e.g. in the Bombay Stock Exchange has to regularly comply with the various
conditions / compliances as provided under the SEBI Regulations and the Listing Regulations apart from the regular
Companies Act Regulations which also substantially increase in case the Company is a listed Company. Some of the critical
compliances would include publishing of quarterly annual audited accounts, appointment of non-executive directors, which shall
even include independent directors, setting up of Qualified and Independent Audit Committee, compliances with additional
accounting standards and disclosures in the annual report, section on Corporate Governance in the Annual Report, obtaining
certificate regarding compliance of conditions of corporate governance, submitting a quarterly compliance report to the stock
exchanges at the end of each quarter, filing with the Stock exchange the shareholding pattern on a quarterly basis in the pre-
scribed format, payment of Annual Listing Fees, appoint Company Secretary etc.
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25. } Engage outside counsel, audit firm and other key advisors
− Validate 2–3 years of audited financial statements prepared in compliance with Indian Accounting Standards and SEBI
rules.
− Review significant accounting policies and company agreements.
− Review tax structure and compensation and benefits arrangements.
− Recruit qualified internal legal, finance and accounting personnel and validate public company board of directors'
qualifications.
− Adopt best-practice corporate governance and reporting processes.
34.0 FINANCIAL, ACCOUNTING, TAX, IT PROCESSES AND CONTROLS
} Timely financial reporting and effective internal controls become vital in a
public company. The commitment begins once the Company has prepared
and filed your initial listing application. An effective risk-taking culture can
only thrive within a solid framework of cost–effective internal controls.
} On a continuing basis, the Company will be required to file quarterly and
annual reports. The timeline for the financial statement close process is
significantly condensed. The schedule must allow for internal analysis and
increased levels of communication with internal stakeholders and external
advisors prior to the filings.
} Market leaders are developing methodologies for preventing and detecting fraud. They are also anticipating the increased
risks created by increased regulation (e.g., tax or climate change) and broadening the scope of their risk management
practices to include new areas, such as third-party and counterparty risk.
} An IPO is a tax minefield for the unwary, hence it is important to undertake extensive tax due diligence.
} Effective tax structures and reporting are keys, especially with the rise in demand for transparency worldwide. There will be
a need to establish or outsource a tax function and infrastructure appropriate for public company status. Your corporate
structure should:
− Minimize your company’s effective tax rate.
− Establish a tax-efficient structure and assess local incentives.
− Develop and improve your procedures to review tax issues.
− Manage tax risk and controversies.
} Typically, tax compliance requires approximately 50% of a tax department’s time. Historically, many reported material
weaknesses have been tax related.
} Tax structures and Reporting
Increased regulatory pressure, demands for transparency and globalization are increasing the strain on already tight
resource pools. In response to these converging factors, corporate leaders expect bottom-line contributions, timely deci-
sion-making support and accurate tax reporting with greater operational efficiency and more effective tax risk manage-
ment. By applying industry best practices that are appropriate for the Company’s unique environment, one can align the
tax function with the business objectives of company.
35.0 ADAPTABLE IT SYSTEMS TO FACILITATE FINANCIAL ANALYSIS AND REPORTING
} IT will be critical to helping the company capture, organize and assess relevant business information quickly and easily
thus enabling swift financial analysis and reporting.
} The Company should assess whether the current IT environment and infrastructure are aligned with the company’s
business objectives. The information systems must support a work environment of adaptability, innovation and
collaboration. IT must support a collaborative work environment that enables management to make informed business
decision.
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26. SECTION VII
KEY STEPS – RAISING PRIVATE EQUITY OR GOING PUBLIC

27. 36.0 SOME KEY STEPS – GOING PUBLIC
} Ascertain opportunities for raising funds through access to Capital market.
} Determine the appropriate Capital structure, promoters holding, broad business plan and application of funds raised.
} Finalize the fund raising plan with the target amount, pre and post issue shareholding of promoters and public, costs
involved, principal compliances and other related aspects.
} Brainstorming the various fund raising options and deciding the final option to be chosen.
} Finalizing Merchant Bankers, Banker to the Issue, Registrars and other
related agencies in finalizing the related terms / documentation etc with
them.
} Provide interactive support between the Merchant Banker / Other
related agencies and CDBL on a reasonable and best effort basis.
} Participating in meetings with Merchant bankers, institutional investors,
financial analysts and financial intermediaries (to be appointed by IT
Source).
} Compile / provide financial reporting for IPO (recasting of financial
statements for last 5 years). However this does not include attestation
work.
} Coordinate with the Auditors for getting the said financial statements
audited.
} Obtain the report on tax implications for inclusion in prospectus.
} Accounting compilation for recasting of financial statements for the IPO or any related attestation thereon.
} Media plan.
} Investor communications.
} Preparation of Business Plan.
} Finalization of placement plan.
} Finalizing the capital structure keeping in view the Promoter’s interest.
} Finalization of Means and Application of Funds.
} Appropriate profiling of the Board of Directors.
} Advising regarding SEBI and Company Law aspects based on specific requests.
} Finalization of appropriate Dividend and Bonus policy.
} Finalization of sizing of the issue (either private placement or IPO).
} Obtaining of the Tax Benefit report required.
} Finalization of Prospectus and other legal / commercial documentation.
} Preparation of presentations to be given to the Indian Institutional investors / FIIs etc.
} Finalizing the pricing of the issue either for private placement / IPO.
} Go live
SECTION VI
INTERNAL GOOD MANAGEMENT PRACTICES
25 of 25

28. For further information please contact:
RSM Astute Consulting Group
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www.astuteconsulting.com
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April 2011
© RSM Astute Consulting, 2011