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Risk Management Oriented Approach for IPO and Listing of Equity Shares

May 3, 2012 Dr. Paritosh C. Basu


Discussion Flow and Objectives
Emerging economic environment
Perceptions & Imperatives

IPO and Equity Listing
Considerations - Why, How, Where with risk oriented approach

Enterprise Risk and Governance Management
Dimensional analysis for sustenance

It is a journey with long term performance strategy – Let us begin


Emerging Economic Environment - Perceptions and Imperatives

United Nation believes

Source: The Economic Times, January 18, 2012

Emerging Economic Environment … 2
Reported realities 1. 80% of South Asia’s GDP is from India 2. India’s growth reflects moderation in domestic demand 3. Household spending curbed by continuous price increase 4. Growth decelerated due to a. Head winds of borrowing costs b. Slowing global growth and c. Heightened uncertainties - Policies 5. South Asian Govts. have limited space with which to introduce fiscal stimulus measures due to large fiscal deficits Inferences one can draw 1. India can continue to grow due to drivers from within 2. If India has to grow, corporate performances have to grow and be sustained
Source: The Economic Times, January 19, 2012

Emerging Economic Environment … 3

December, 2011

Emerging Economic Environment … 4

Reduction of ~ $ 23 trillion


Emerging Economic Environment … 5


Questions for Introspection in Given Environment
Does your entity or group have Inherent substance to position itself with sustained performance? A story to tell with duly evidenced plan? Pillars of strength to support present activities without the IPO funds? Leadership abilities with change management attributes for future needs?


IPO and Equity Listing
Considerations - Why, How, Where with Risk oriented approach


Why, How and Where of IPO and Listing Shares
Why - Objective Access to new funding Value addition for existing investors Build brand and market awareness Higher incentives to employees through stock option Compulsive up-gradation and broad basing of corporate governance How - Process Create environment through change management Deploy resources for IPO and Listing Sustaining Price and Credibility Break the shell of protected confidentiality and be more transparent Meeting quantum jump in compliance and governance standards Commitment of expenses for all these

Why, How and Where of IPO and Listing Shares ... 2
Where - Jurisdictions to choose from US, UK, SG, HK, India Risk Register – Approach for planning, operating monitoring and reporting Market Trend – Industry specificity like Metals, IT & ITES, Manufacturing Minority Interest - Extent of dilution Valuation – Premium over face value Ease of listing – Accounting, Disclosures, Corp Gov., Sustainability Reporting Post listing Requirements – Compliance, Reporting, Sustaining price Marketing considerations – Pilot Fishing, Corner Stone, Retail Investors Income Tax – Considerations vis-à-vis corporate jurisdiction

Use wisdom - Look before you Leap

Why, How and Where of IPO and Listing Shares … 3
US - SEC Listing, Application of SOX 404 with Top down risk assessment Issuers are required to publish information concerning the scope and adequacy of the internal structure and procedures for financial reporting Auditors attest to and report on their assessment of effectiveness of the above
(SAS - 72 provides guidance to auditors about procedures to be followed for providing report after due diligence)

Need therefore is to identify and assess – by both Management and Auditors Significant financial reporting accounts or disclosures Material financial statements risks within these accounts or disclosures Which entity-level controls would address these risks with sufficient precision Which transaction-level controls would address these risks in the absence of precise entity-level controls The nature, extent, and timing of evidence gathered to complete the assessment of in-scope controls


Why, How and Where of IPO and Listing Shares … 4
UK Listing Authorities – Financial Reporting Practices Statutory Auditors to review and provide comfort to Board before ITF Meeting on Extent, Quality, Speed, Effectiveness and ‘Top Down Risk Oriented Approach’ for Enterprise Risk Management Framework (ERM) Functioning of Audit Committee Internal audit including scope and approach CFO’s oversight Operations reporting including procurement and tendering Arms’ length basis of conducting inter Group Co. transactions Volatility management – Interest, Currency Exchange , Commodity, Policy IT General Control (ITGC) and Information Safety Formal documentation and review of SOPs Directors’ Responsibilities Statement’ to include affirmative statements on True and fair view of assets, liabilities, financial position and profit MD&A includes fair review of developments and performance Description of principal risks and uncertainties

If you don’t know what you don’t know, then you don’t know how to fix it


Enterprise Governance and Risk Management
Dimensional analysis for sustenance


Dimensions of Corporate Governance
Risk and Performance Management

Legal and Regulatory Boundaries

Disclosure and Transparency

Corporate Governance

Independence and Value Orientation Business Practices and Ethics

Potential Risk Exposures arising out of an IPO
Regulatory risks Compliance requirements from stock exchanges Additional corporate governance restrictions Increased regulatory scrutiny More transparent publication of financials Substantial restrictions and fines for insider trading violation Shareholder related risks Alleged errors, omissions and misstatements in prospectus Increase in number of shareholders leading to higher litigation Changes in geographical distribution of shareholders Stock market volatility increases potential for higher fall Projections and earnings guidance Counterparty risks – potential indemnities to be provided to sponsors and underwriters on statements in prospectus Employee risks – changes in pension plans

Tailor made six years’ Insurance Policies are available for covering risks of Directors and Officers

Risk Exposure Profile
Map every ‘Cash Generation Unit’ vs. Risks

External Risks – Reforms, Market, Technology,

Competitor, Natural, Legal, Regulatory, Political
Currency Exchange Customer Success Human Resource Secrecy Liquidity Image Erosion Financial Credit Goal Congruence Health & Safety R&D Fraud


Operational & Environmental Strategic

Cost of Capital

Leadership, Product Profile, Product Image Life Cycle, Business Portfolio, Business Erosion Model, Communication, Organ. Structure, Business Alliances Product / Service Pollution Failure GAAP Conversion

Info. Reliability

Brand Compliance Erosion Direct and Indirect Taxes 17

External Reporting

Style of Governance since the Economic Crisis – Strategy Formulation
McKinsey Quarterly Survey – July, 2011

Source: Indian Management, August 2011

CFO and his team have to believe – ‘Self help is the best help’


Further Thoughts


Thank You