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19 Nov 2024
The surge in stock markets has led to an increased demand for independent directors as companies prepare to roll out IPOs. According to Prime Database, 166 companies that went public in the last three fiscal years have appointed a total of 513 independent directors in the two years leading up to their IPOs.
For example, Zomato added two independent directors in March 2021 and three more in April 2021, just before its IPO in July 2021. Similarly, Doms Industries appointed four independent directors in July 2023 ahead of its December 2023 IPO, and Bharti Hexacom added three independent directors four months before its April IPO this year.
"Currently, 65% of the companies we work with for onboarding independent directors are pre-IPO," said Shweta Rao, head of Vahura OnBoard. She recently facilitated the appointment of three independent directors for Hyundai Motors, which is preparing for an IPO.
Companies often start appointing independent directors eight months to a few months before filing the draft red herring prospectus (DRHP). They engage professional search firms to assemble their boards, ensuring they have the necessary skill sets.
Listing regulations require most listed companies to have a board of at least six directors, half of whom must be non-executive, with at least one female independent director. Additionally, one-third of the audit committee and its chairperson must be independent.
Divya Momaya, founder of Mentor My Board, noted that small and medium-sized companies typically recruit independent directors from their network shortly before the IPO. Merchant bankers, auditors, or existing directors often play a significant role in these appointments.
However, joining a pre-IPO company carries risks for prospective independent directors. The sitting fee may not be a significant incentive, and there are several factors to consider. Sunit Mehra, partner at Hunt Partners, advises checking who else is on the board, the identity of internal and external auditors, any premature director resignations, the promoters' public profile, and conducting legal and tax due diligence.
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