This is Part – VI of the Capital Markets article series.
Introduction
The decision to take a private equity–backed company public is among the most consequential events in that company’s lifecycle. It marks the transition from a closely governed, contractually ordered private structure to a publicly accountable company regulated by the Securities and Exchange Board of India (SEBI) being subject to the constant scrutiny of market participants. The founder and PE typically enter into an agreement at the time of investment that governs their relationship for the foreseeable future covering aspects such as board control, exit mechanisms, voting rights, tag along and drag along rights, etc. Built on the foundation of this agreement, the company steadily evolves, successfully navigating any initial hurdles between founders and investors. Friction intensifies as an IPO approaches as going public restructures board composition, voting rights, and decision-making whilst imposing a substantially increased compliance burden. PE investors seek to preserve contractual protections while founders aim to retain operational control and regulators demand a transparent, rules-based governance framework. Managing these competing imperatives is the central challenge of any PE-backed IPO.
The Rights of a PE in a Company pre-IPO
The Shareholder’s Agreement (SHA) acts as the foundational document determining the relationship between the founders and the investors (PEs). Each duty, obligation and right of the parties is detailed to the ‘t’ in the SHA. Understanding its architecture is essential to appreciating the conflicts that emerge as a company approaches listing.
• Equity Structure and Anti-Dilution
PEs typically hold Compulsorily Convertible Preference Shares (CCPS) which get converted either upon an IPO or any triggering event, with anti-dilution protections structured either as ratchet mechanisms or basis weighted average. Upon IPO, they get converted into ordinary equity, and the conversion ratio depends on the pre-IPO valuation which is relative to the IPO price. If the IPO price is below the last investment round price, then the company would have to issue additional shares either by raising capital or by founders selling their stake to the investors. Large scale pre-IPO equity issuances to PEs to satisfy anti-dilution obligations may push down the available public float, requiring issuance of fresh equity through the IPO’s Offer for Sale (OFS) component or fresh issue component to compensate. This in turn affects the economic outcome for all parties. This creates substantial friction by complicating the issuer’s capital structure. Consequently, it often obstructs promoters from meeting their minimum contribution and lock-in obligations under SEBI (ICDR) Regulations.
• Governance
Governance rights are a critical part of the SHA containing board nomination rights, observer rights, quorum requirements which would validate board action in the presence of representative of the investor and extensive reserved matters. Many reserved matters that are legally unproblematic in a private company setting become difficult or impossible to preserve after listing. The provisions in the SHA typically encompass amendments to constitutional documents, new equity issuances, debt incurrence above specified thresholds, Related Party Transactions (RPTs), material changes in business, etc. However, these special governance rights directly conflict with the SEBI (LODR) Regulations.
Under the Companies Act, 2013, certain matters require due approval of either all classes of equity shares or specified class of equity shares and additionally the LODR, provisions dealing with board composition, conjointly operate to ensure that no single shareholder class can permanently veto ordinary governance decisions of a listed company. A PEs contractual right to block a RPT, for example, cannot contractually override the audit committee’s power to review and recommend or reject that transaction.
• Exit Rights
Standard PE clauses, such as Right of First Refusal (ROFR), Right of First Offer (ROFO), tag-along rights, drag-along rights, and veto powers are incompatible with LODR frameworks as listed entities are legally bound to guarantee equal treatment and unrestricted share transferability for all shareholders and hence, these pre-IPO rights of the PE under the SHA cannot survive post-listing. Many PEs choose to sell their holdings post listing of the IPO cashing in on the listed gains and making profits, but in such instances, they too are bound by lock-in requirements. Having backed Groww since its inception with an initial 19.87% stake, Peak XV Partners (PE entity) recently locked in a monumental return during the listing of Billionbrains Garage Ventures, the parent of Groww. The firm turned its original ₹232 crore investment into a staggering value of approximately ₹22,000 crores. The PE ended up selling 16.87% stake in the company, once lock in ended and reaped the profits making it their biggest and most successful exit in Indian startup history.
Consequently, the majority of PEs rights outlined in the Shareholder Agreement (SHA) are either significantly altered or rendered entirely obsolete post-listing. Once a company transitions to the public market, its internal governance falls squarely under SEBI’s purview. In this public ecosystem, rigorous transparency becomes paramount, as the company operates with capital drawn from the public.
Decision to get listed
Getting listed on the exchange is a huge milestone in any company’s journey. It’s a big day not only for the founders but also those people who entrusted it with their capital in the initial days of setting up. The fundamental source of founder-investor conflict is the question of who controls the IPO decision itself such as its timing, the selected bankers, the valuation band, the OFS quantum (if any), and the post-IPO governance structure. Many SHAs are silent on the mechanism for making these decisions, assuming implicitly that the parties will negotiate in good faith when the time comes. The reality is often otherwise, creating complex regulatory and contractual hurdles for companies eyeing the capital markets.
While PE’s interest is to maximise the exit value at the earliest commercially optimal time, the founder’s interest is to go public at a time and valuation that reflects the company’s long term potential, with the added glaze of ensuring that they retain sufficient control to execute the business plan without short-term market pressure.
Where an SHA gives PE investors a right to compel an IPO after a specified date, but market conditions at that date are unfavourable due to any reason, the founder may resist such a move on the grounds that it would destroy the value of the company and diminish overall shareholder value. PE investors may argue that the founder’s resistance is biased and in the absence of express SHA provisions for resolving this deadlock, these disputes typically proceed to arbitration or result in prolonged negotiations that themselves delay the IPO.
The ongoing tussle between Westbridge Ventures and Shaadi.com provides a small glimpse of what an investor is capable of doing if the plans of IPO are not followed by the founders. Westbridge invested in the matrimonial company and the parties agreed on certain exit rights, being, (i) IPO within a 5 years (ii) sale of its shares to third party (excluding competitors) (iii) redemption of buyback provision if the IPO is not completed within 5 years, and (iv) drag along rights if company fails to buyback shares within 180 days of exercising the buyback option. It was decided that if an IPO was not completed within 5 years, Westbridge could redeem all its shares and if necessary, “drag along” all other shareholders (including founders) to sell their shares to a third party. The 5 year period for getting listed ended in the year 2011. The PE wanted to exit and hence started looking for buyers, including competitors. While the matter is sub judice, the battle has become such that the founders are on the verge of losing the company which they built and set up.
Investors have also pushed companies to go public in many cases. This was evident when Softbank had inserted an IPO condition (if company does not undergo an IPO within 5 years then they would be free to sell stake even to competitors) in its funding round for Paytm. While Paytm ended up getting listed in the next two years itself, the performance of the stock was poor impacting the overall shareholder value including Softbank’s investment too.
Generally, PEs structure the path of an IPO in such a way that they are able to maximize their investment returns, achieve liquidity for the investors and capitalize on a market environment that values the company at higher price as compared to the private buyers. The aim is not to let the founders of the company high and dry but ensure business continuity and maximise shareholder profitability. Hence, it is critical to understand that for any company to get listed, the overall macroeconomic and microeconomic factors must be investigated rather than just the aim of exiting the company to book profits.
Structuring for IPO readiness
Appointment of various stakeholders such as Merchant Bankers, RTAs, Bankers and preparation of Offer Documents does not make a PE backed company IPO ready. It is critical that a foundation of governance, transparency and compliance must be built over time so as not only to make the company prim and proper for an IPO, but create a system to make it ready for post listing obligations.
Some of the critical path items that must be completed before a PE backed company decides to take a step toward capital markets are as follows:
i. Capital Simplification: It is critical for an IPO that all convertible instruments shall be converted into equity shares prior to filing of the Offer Documents.
ii. Board Reconstitution: The BOD shall be reconstituted as per the Companies Act, 2013 and SEBI LODR Regulations.
iii. Rigorous disclosures: The Offer Documents require the entailing of detailed disclosures which provide a view on the company’s governance, history, associated risks and capital evolution.
In Sum
In conclusion, the transition of a PE-backed company into a listed entity is not merely a procedural milestone but a shift in control, compliance, and value creation. From the investor’s perspective, an IPO is the clearest route to unlock returns and achieve liquidity, while from the founder’s perspective, it is a critical stage that must protect long-term vision, operational control, and business stability. This creates a natural tension between exit value and strategic continuity. A successful IPO therefore depends on early alignment between founders and investors, along with a well-structured capital base, strong governance, and complete disclosures to ensure that both sides benefit from a smooth and sustainable transition into the public market.
-Authored by Sanchith Shetty, Associate under the guidance of Riddhi Dutta, Senior Associate and Archana Balasubramanian, Partner.
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