From Private Company to Listed Public Company: The Governance Transition Most Founders Underestimate

This is Part-II of the Capital Markets articles series.

For many founders, the Initial Public Offering (“IPO”) is viewed as the ultimate validation of years of building, fundraising, and scaling. It represents access to public capital, increased market credibility, liquidity opportunities, and recognition.

What is often underestimated, however, is that an IPO is not merely a fundraising exercise but a governance transformation.

The transition from a closely held private company to a publicly listed entity fundamentally changes how a business operates, takes decisions, handles information, manages promoters, and responds to scrutiny. Founders who have spent years making quick, founder-driven decisions suddenly find themselves navigating board oversight, independent directors, institutional investors, disclosure obligations, analyst expectations, whistleblower mechanisms, related party restrictions, and continuous regulatory supervision.

In India, this governance transition is not simply a matter of “best practice”; it is embedded into a legal framework driven primarily by the Companies Act, 2013, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”), and evolving expectations of regulators and investors.

In IPO processes today, governance preparedness becomes just as important as financial performance.

The Founder-Led Structure that Works in Private Markets Often Fails in Public Markets

Most private companies, especially founder-led businesses and startups, are built around speed and flexibility. Decision-making is concentrated among founders and a small management circle. Internal controls evolve gradually. Documentation may be functional rather than exhaustive.

Once listed, a company effectively becomes accountable to a far wider stakeholder base, including public shareholders, institutional investors, stock exchanges, regulators, analysts, and the media. Governance failures that may have remained invisible in a private setup suddenly become public issues capable of affecting valuation, investor confidence, and even regulatory action.

As a result, many IPO-bound companies realise that the more time-consuming exercise is often not preparation of the Draft Red Herring Prospectus (“DRHP”), but the clean-up of historical governance and compliance gaps.

Private setups frequently treat statutory documentation as an administrative afterthought. During pre-IPO due diligence, it is common to uncover major compliance friction points, such as undocumented or backdated board minutes, a lack of clear shareholder approvals for past bonus share issuances, or unfiled Form MGT-14s under the Companies Act for historical borrowing limits. While these can often be regularized through late-filing or compounding processes with the Registrar of Companies (RoC), discovering them late can throw off a planned public filing timeline by months.

Governance Due Diligence Has Become Far More Aggressive

Historically, IPO diligence exercises focused heavily on financial disclosures, material contracts, litigation, and sectoral approvals. Today, governance diligence has become equally significant.

Merchant bankers, legal counsel, auditors, and institutional investors now closely evaluate the board composition, promoter influence and control structures, related party transactions, internal controls, documentation of historical approvals, risk management systems and compliance culture across subsidiaries and group entities.

This increased focus reflects the continued strengthening of governance requirements under the LODR Regulations and other regulatory updates, coupled with greater transparency arising from the centralised availability of Companies Act filings on the MCA portal. Independent Directors are also scrutinising governance standards more closely, making it important for companies to maintain a credible and experienced pool of Independent Directors.

In several IPO processes, governance deficiencies have directly delayed filings, triggered additional SEBI queries, or resulted in extensive pre-IPO restructuring exercises.

A common issue is the discovery that many historical decisions were not formally approved at the board or shareholder level despite being commercially implemented years earlier. While private companies often function operationally despite such gaps, public market regulators expect documentary precision.

Independent Directors Are Not Merely a Compliance Requirement

One of the most misunderstood aspects of the public company transition is the role of independent directors.

Under the LODR Regulations and the Companies Act, listed companies are required to maintain a specified composition of independent directors on the board and key committees such as the Audit Committee, Nomination and Remuneration Committee, and Stakeholders Relationship Committee.

Many founders initially approach this as a check-box exercise, appointing familiar industry contacts or passive board members to satisfy regulatory requirements.

Independent directors today are expected to actively question management decisions, review governance practices, monitor related party transactions, oversee financial controls, and evaluate risk frameworks. Institutional investors increasingly scrutinize whether boards are genuinely independent or promoter-controlled in substance.

Related Party Transactions Become a Central Risk Area

In founder-driven businesses, commercial arrangements with promoter entities, family-controlled businesses, or group companies are often common and commercially justified.

However, once a company seeks listing, related party transactions (“RPTs”) become one of the most heavily scrutinized governance areas.

Under the LODR Regulations, material related party transactions require enhanced approvals and disclosures, with related parties often restricted from voting. Investors and regulators closely examine whether such arrangements are conducted on an arm’s length basis and whether public shareholder interests are adequately protected.

Many companies are required to unwind, restructure, document, or terminate such arrangements prior to listing.

Disclosure Culture Is Often the Hardest Transition

Private companies are accustomed to confidentiality. Whereas, public companies operate in an environment of continuous disclosure.

Under the LODR Regulations, listed entities are required to disclose material events promptly, including litigation developments, regulatory actions, management resignations, defaults, frauds, acquisitions, restructuring exercises, and other price-sensitive information.

Information that would previously remain confined within management discussions may now require stock exchange disclosure within strict timelines. Internal communications, investor interactions, and even strategic decisions must be evaluated through the lens of disclosure obligations and insider trading regulations.

In Sum

The transition from a private company to a listed public company is therefore not merely a compliance exercise. It requires founders to accept a fundamental shift in how authority, accountability, and transparency operate within the organization.

The most successful IPOs are therefore not necessarily those with the strongest growth story alone but those where governance maturity evolves alongside business scale. Because in public markets, governance is no longer a background function. It becomes part of the company’s core identity.

–Authored by Mallika Agrawal, Associate and Sanchith Shetty, Associate under the guidance of Riddhi Dutta, Senior Associate and Archana Balasubramanian, Partner.

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