This article is written by Ramanuj Mukherjee, CEO and Yavanika Shah, Associate Consultant, LawSikho.

Have you ever wondered what it takes for a company to go public? How many lawyers, investment bankers, CAs and CS have to work on a company like SBI Cards or IRCTC doing an IPO? How much do they get paid? What are the skills needed to do those jobs?

Why do companies publish these cryptic, unreadable, lengthy prospectus in a strange language? Why not just advertise on TV and newspaper enticing the common people to buy their shares as they entice people with buying soaps or mobile phones?

Have you thought about how the company decides on an offer price for its shares? What is book building and underwriting?

Do the mind-boggling complexities that go into the listing of stocks, or regulation of listed companies garner your curiosity? 

Going public is the ultimate dream of every startup founder! Or even every high growth business for that matter.

In fact, this is their investors’ dream too! 

Everyone wants to be able to exit their investments at a valuation that multiply their initial investment. However, who will finally buy out the VCs and PE investors and even the founders someday? Public investors, of course. And that happens when an IPO takes place.  

You must have noticed how excited the media gets when a Silicon Valley tech company goes for an IPO! Remember the time when Facebook went public?

All the richest people in the world, from Bill Gates to Mukesh Ambani, see their fortunes rise and fall based on the value of their shareholdings in their various listed companies.

Why do private companies go public?

There are a lot of reasons that a company may decide to go public. Mostly, it is to secure capital to expand and offer an exit to existing private investors. Not only retail investors but many large financial institutions such as hedge funds, family offices, mutual funds, insurance companies, and pension funds invest in listed companies. In order to ensure fair play in the market, government through regulators like SEBI and in some cases MCA and RBI has introduced many different laws, regulations, and rules that are stringently implemented. 

Failure to implement these rules or any manipulation can majorly impact the economy or the trustworthiness of the market, scaring away investors. This is the primary reason that we have voluminous and watertight laws and regulations in place for any listing of new companies, as well as operations of companies already listed. 

Why is Capital Markets a sought after area of law practice?

IPO investment documents, due diligence, structuring securities, dealing with multiple intermediaries, massive list of compliances involved, necessary regulatory approvals and most of all managing everything within a limited window of time can often be a hard nut to crack. 

An IPO of a large enough company can require hundreds of lawyers working on due diligence, compliances, and documentation.

The intensive planning and strategizing that the process requires is hard to be matched even in corporate law firms. Companies and service providers such as investment banks and law firms have to plan an IPO for anywhere between one to two years before they actually go public!

Capital market is undoubtedly one of the highest value, most resource-intensive and super-premium areas of law practice that is reserved for only the biggest law firms. 

What kind of problems do IPOs often run into?

We all have seen how WeWork’s IPO turned into a massive flameout, despite having raised private funding worth tens of billions of dollars and backing from SoftBank. This mostly happened after the company made disclosures in its Draft Red Herring Prospectus regarding certain practices on the run up for their IPO. These issues were picked up by mainstream analysts and written about extensively, which resulted in the listing eventually failing to go through as credibility of the company plummeted.

While not all IPOs fail in this way but many of them happen under the shadow of a bunch of risks, which sometimes materialize and IPOs run into trouble. Here is a list of IPOs that had to be pulled out in 2019, for example. Such situations call for the expertise of Capital Markets lawyers as well. Whether the IPO goes through to has to be canceled, capital markets lawyers always make money!

While all of it does make capital markets a very interesting field to specialize in, it also, at the same time very demanding. From drafting and reviewing the drafts to parlays with regulators and negotiations with key stakeholders in the process, it is usually difficult to describe a capital markets lawyer’s usual day. 

Except one thing, they spent their initial years couped up in their office either doing a Due Diligence or drafting voluminous documents that need extremely careful language. When they become more senior, they may spend more time in meetings, negotiating and making the deal possible by overcoming various hurdles.

On most days, the transactions are time-bound and can lead to unexpected problems and challenges at any point. An eye for details and an in-depth understanding of capital market regulations and processes is absolutely necessary to succeed in this area of work. 

We list down different kinds of work a capital markets lawyer undertakes:

#1 Due Diligence

Due diligence for capital markets transactions is the most vigorous kind of legal due diligence. It calls for the highest level of scrutiny since it deals with raising money from the public at large. Any kind of mistake can lead to a financial disaster for a lot of people!

Mostly, junior lawyers are entrusted with the task to undertake the due diligence before the company initiates its procedure of drafting the prospectus. 

There are specialized teams being set up in many firms that cater specially to large DDs. These are sometimes called Transaction Support Groups. Apart from Capital Market teams, one could get a job in these teams too.

Global law firm Clifford Chance has a specialized and captive LPO set up in Gurgaon to deal with this kind of work (and other stuff too). 

#2 Drafting of Red Herring Prospectus and other documents

Red herring prospectus is a draft prospectus circulated by an entity ahead of a public stock or bond offering. It lacks certain details such as the number of shares being offered or the initial price and is circulated to generate interest in a potential upcoming sale of shares or bonds.

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The red herring prospectus needs to mention disclosures to the public by the company. These disclosures are therefore put in a certain language that discloses the risks to the potential shareholder. Further, various disclosures need to be verified by experts like taxation lawyers or environmental lawyers. All this can take months to be drafted and is a critical part of raising capital from the public.

Apart from DRHP, there are other documents that capital market lawyers have to draft such as placement documents, offering circulars or information memorandums. Lawyers are also tasked with drafting/reviewing and negotiating the underwriting agreement, depository agreement, escrow agreements, etc.

#3 Strategizing/Deal Structuring

Strategizing a capital market transaction requires a very high level of expertise in the field. Since the transaction deals with the public at large, every little thing that goes in writing need not only be verified but all the risks involved with putting the information in public domain need to be calculated.

There are many critical strategic decisions to be made, from the place and bourse of choice for listing, to whether the money would be raised through debenture issue, QIP or IPO, to what would be the terms and conditions, including exits of strategic investors and even which underwriter to go with – all of these are critical decisions to make. Finding initial backers to ensure that the IPO is guaranteed success even before launch is also a common practice. Getting the timing right is also critical, and senior lawyers put their heads together to figure out all possible hurdles ahead, including any regulatory difficulties.

Business concerns, timing, materializing important details about the requisite amounts, all these together form a part of deal structuring that can take months of collaborative efforts by the partners working with regulators as well as the lawyers. 

#4 Legal and Regulatory Advice

There is a lot of legal and advisory work that goes into planning and executing an IPO or debenture issue. It requires thousands of hours of work to ensure the company is ready to be listed on an exchange. 

A first-time borrower in the debt capital markets also requires a lot of lawyers’ time to prepare it for the new transaction.

Lawyers have to advice on issues like disclosure standards, prospectus liability issues, due diligence defence, cross-border legal and regulatory issues, conflicts between the corporate law requirements in two jurisdictions, double taxation issues that arise in connection with the returns that international investors get on their investments and other complex issues.

Companies and investors approach law firms years ahead of time in anticipation of IPO to help portfolio companies to achieve IPO-readiness. Law firms may then come up with an elaborate plan of action that requires further legal support for implementation.

When foreign subsidiaries are involved, or if a company is listing in a foreign stock exchange, law firms also provide support of liaisoning with foreign counsels and regulatory authorities.

Even after the company is listed, the process does not stop. The company then needs lawyers who would ensure that their IPOs comply with the SEBI regulations and all the necessary disclosures are made efficiently as well as effectively.

#5 Seeking Regulatory Approvals

There is a huge list of regulatory approval that the company needs at every stage of the transaction. Even before the drafting of the draft red herring prospectus, several regulatory filings essential to the company as well as the book-running lead-managers (BRLM) would need to be undertaken. The preparation of the financial statements as per the ICDR regulations, finalization of the business model and plan for the prospectus, obtaining regulatory clearance for the IPO are a few of the examples.

All these procedures involve the BRLMs, legal counsels working together with SEBI and the stock exchange.

A demanding specialization, capital markets calls for intensive long documents to be drafted and vetted with perfection. A plethora of high priority cases that demand long hours and communication with so many different parties adds to the complexities in the process. 

So why do lawyers still choose it? 

Maybe for the satisfaction, they would get in closing the transaction and listing it on the stock from the scratch. 

What do you think? What are the things we missed out that are a part of a capital markets lawyer’s day?

Do let us know by commenting below.

To know more about building a career in capital markets,  you can watch the webinar on career opportunities in capital markets by Ramanuj Mukherjee here.

You can also check out and download free course material for our Certificate Course in Capital Markets, Securities Laws, Insider Trading and SEBI Litigation here. Enrollment for the batch closes on the 14th of January. 

Here are other courses that might interest you:

DIPLOMA

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Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions)

Diploma in Intellectual Property, Media and Entertainment Laws

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Certificate Course in Legal Practice Development and Management

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.