This is Part – VII of the Capital Market article series.
Introduction
The journey from a privately held, founder-driven enterprise to a publicly listed company is among the most consequential transitions a business will ever undertake. Going public isn’t just about raising capital but a radical reordering of accountability. It forces founders to share ownership with a broader body of shareholders. Indian capital markets have witnessed explosive growth in primary market activity, particularly through the SME IPO segment, and increasingly, institutional investors and retail participants are scrutinising not just the numbers on the offer document, but the quality of governance underpinning those numbers.
Consider the typical Indian promoter-driven company wherein the founder has shepherded the enterprise from inception. Be it making hiring decisions, setting and executing business strategy, controlling cash flows, taking business decisions to entering contracts, ensuring compliances, etc., every step is controlled and handled by the founder. Every step taken by the founder is towards the vision of the company’s success and future and is generally accountable to no one. But once a company aims to get listed, the tide changes. Investors commit capital on the assumption that the company is governed by enforceable rules and not personality of the founder. SEBI’s disclosure regime under the ICDR Regulations requires detailed disclosures around promoter holding, related party transactions, litigations, and conflicts of interest precisely because the regulator recognises that promoter-dominated companies carry inherent governance risks. The gap between the pre-IPO governance vacuum and post-listing governance expectation is where the most Indian IPO governance failures originate, especially SME IPOs.
Founder led and founder controlled
The distinction between leadership and control is not always self-evident. A founder-led company is one where the founding generation continues to set strategic vision, drive execution, and provide operational energy to the company. Subject to compliance with the Companies Act, 2013 and SEBI ICDR Regulations, the company is entirely compatible with public listing.
Conversely, a founder-controlled company in contrast is one where the structural architecture i.e., the board composition, information flow, decision making process, related party dynamics, etc., is executed in such a way that there is no meaningful check on the founder’s power. Control in this sense, is not about shareholding alone, but the absence of institutional counterweights.
Hurdles in listing for Founder Controlled Companies
In practice, founder control manifests through several identifiable symptoms, each of which must be diagnosed and addressed in the pre-IPO period:
• Substantive Deficiencies in Board Independence: Board composition remains heavily dominated by promoter family members or their nominees. While Independent Directors (IDs) may be appointed to satisfy statutory checkboxes, they often lack genuine independence, resulting in a passive board that fails to provide robust oversight or objective challenge to management.
• Opacity and Inadequate Governance of Related Party Transactions (RPTs): Transactions with promoter-owned or controlled affiliates are frequently structured to circumvent the material thresholds that trigger mandatory shareholder approval. Furthermore, disclosure mechanisms are often minimized, obscuring the true commercial substance and arm’s-length nature of these arrangements.
• Informal Governance and Extra-Boardroom Decision-Making: The formal Board of Directors is referred only for rubber-stamping or as a ratification body for decisions which have already been finalized by the promoter group in informal settings. Consequently, board minutes capture only the sterilized outcomes rather than the rigorous, independent deliberations required from a listed entity.
• Compromised Independence of Key Management Personnel (KMPs): Senior executives and KMPs are entirely dependent on the promoter family. This lack of professional autonomy prevents leadership from acting as an effective check-and-balance on founder behaviour.
• Asymmetrical Information Flow: The promoter group retains privileged and exclusive access to critical operational and financial data. This information transparently shared with the board of directors, leaving non-promoter directors structurally disadvantaged.
• Commingling of Personal and Corporate Assets: In founder-controlled companies, the lines between personal promoter wealth and corporate resources are often blurred. Pre-IPO remediation requires a painful unbundling of shared real estate, personal guarantees, corporate vehicles used for personal travel, or shared intellectual property (IP) registered in the founder’s personal name.
• Historical Non-Compliance and Informal Documentation: Closely held companies often treat secretarial compliance, labour law filings, or environmental clearances with a degree of informality. Bringing years of historical, ad-hoc documentation up to the rigorous, verifiable standard required for an offer document is a major pre-IPO bottleneck.
Ultimately, transitioning from a founder-controlled regime to a listed entity requires the dismantling of these deeply entrenched habits of informality. Overcoming them is not merely a box-ticking compliance exercise, but a critical corporate evolution which is necessary to bridge the governance deficit, secure regulatory clearance, and ensure shareholder trust.
Checkpoints to pass through to get listed
Transitioning from an unlisted company to a listed company, needs an entity to go through several hoops. The additional compliances under the SEBI Act and along with SEBI Regulations increases a drastic amount of compliance burden for which neither the founders nor the previous management is prepared or ready for. SEBI’s regulatory architecture governing IPOs and the company is layered. While SEBI ICDR Regulations governs the overall IPO process itself such as eligibility, governance, governance, pricing, etc., the SEBI LODR Regulations governs the ongoing governance obligations post listing.
SEBI ICDR Regulations
These regulations operationalise governance through mandatory disclosures. The offer documents highlight several items such as related party transactions, litigations, details of the business, industry, group company disclosures, promoters and promoter group, lock in regulations, object of the issue, etc., forcing the issuer companies to document and disclose the governance arrangements that will govern the post listing conduct of the company. A critical aspect herein is the licenses which are needed by the company to perform its daily operations. If they aren’t in order, the core of the company as well as the need of the IPO is displaced.
Critically, the offer document review process conducted by SEBI for mainboard issuers and stock exchange for SMEs, involving active examination of these disclosures. Post filing of the draft offer documents, SEBI or the stock exchange, depending upon where the issuer company is eligible to raise capital, active examination of the disclosures is done. Any red flags in their findings leads to them asking for more clarity, specificity and structural changes if necessary for the purposes of compliance and listing of the company.
SEBI LODR Regulations
These regulations establish the baseline governance architecture for listed companies. Certain key provisions with direct implications for founder-controlled companies include:
a) Need of Independent Directors on the Board of Directors: The regulations mandate for the need of independent director representation on the Board of the listed companies. They provide objective oversight, protect shareholder rights, prevent conflict of interests, etc., and ensure management practices remain ethical and transparent.
b) Formation of Board committees: Board committees such as Audit committee, nomination and remuneration committee, stakeholder relationship committee, etc., are formed by the board for approving and performing certain functions such as approving and verifying RPTs, oversee and resolve grievances from shareholders, managing leadership succession, setting compensation ceilings, etc. These committees help streamline decision making, manage heavy workloads, and provide specialized expertise into complex corporate issues.
c) Framework of RPTs: Disclosure of RPTs ensures financial transparency, prevents the siphoning of company funds, and protects minority shareholders. By bringing internal dealings with executives or affiliates to light, these disclosures mitigate conflicts of interest and maintain market trust.
These requirements are, however, minimum standards. SEBI has calibrated them for operational feasibility across a diverse listed company universe. SEBI’s minimum governance requirements are a floor, not a destination and hence for companies emerging from years of founder-controlled management, meeting just bare minimum requirements is insufficient.
Transition – building a pre-IPO governance Roadmap
The following provides a framework calibrated to the realities of founder-controlled companies preparing for getting listed on the Indian exchanges.
a) Structural Reform: The company commences its transition by focusing on structural reforms such as board reconstitution, RPT infrastructure, financial reporting hygiene.
b) Compliance Infrastructure: The pre-IPO phase is critical for the company not only to rectify the previous non compliances and errs committed while filing, but also to setup a practise and system of compliances for post listing obligations. It is critical to identify the historical non compliances and resolve them before they surface during the review of the draft offer documents by SEBI and stock exchanges.
c) Drafting of offer documents: The final pre-IPO phase includes the drafting of the offer documents, wherein the governance work continues. It includes the legal diligence of corporate records, material contracts and documents, litigations, IP, statutory payment to employees, environmental compliances, in house policies, etc. A strong management and leadership act as key moats for the business which are a critical juncture for the approval of IPO.
The governance culture which a company establishes before listing determines the vulnerability to enforcement after listing. The IPO is the beginning of a company’s journey and not its end.
In Sum
In conclusion, an IPO is not a change in valuation alone; it is a change in how power, accountability, and decision-making are exercised within the company. For founder-driven businesses, the transition to public markets requires more than legal compliance: it demands a real shift from personality-led control to institution-led governance. Companies that address board independence, related party transactions, internal controls, and documentation well before filing are far better placed to earn regulatory confidence and investor trust. Ultimately, the strength of a listed company lies not in how much authority the founder retains, but in how effectively that authority is balanced by transparent systems, independent oversight, and a culture of compliance.
–Authored by Sanchith Shetty, Associate under the guidance of Riddhi Dutta, Senior Associate and Archana Balasubramanian, Partner.
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