India’s primary market has faced criticism for hosting IPOs that are deemed overvalued, with issues ranging from inflated pricing to lackluster performance post-listing. A new trend gaining attention is founders stepping down from their executive positions shortly before their companies go public.
The recent instance involves boAt, a popular Indian brand specializing in audio products and wearables. Co-founders Aman Gupta and Sameer Mehta have transitioned from their operational roles to non-executive positions just weeks before the company’s Rs 1,500 crore IPO.
As per the Draft Red Herring Prospectus (DRHP) of the company, both founders have resigned from their respective roles as Chief Executive Officer and Chief Marketing Officer, opting to continue as non-executive directors. The IPO comprises a Rs 1,000 crore offer-for-sale (OFS) and a Rs 500 crore fresh issue.
This move has sparked discussions regarding whether it signifies a routine professionalization process or raises concerns for potential investors. Abhishek Kumar, a SEBI-registered investment adviser and the Founder of SahajMoney, emphasizes the significance of the timing of this decision.
Kumar suggests that the founders stepping down just a month before the IPO prospectus filing raises questions about their motives, particularly as they transition from operational roles with salaries to non-executive roles without compensation. He speculates that this strategic move could be an attempt to distance themselves from potential accountability for the company’s performance post-IPO.
Regarding investor perceptions, Kumar notes that such actions are typically viewed as warning signs by the market. Founder exits, especially in conjunction with other concerning factors like leadership changes or stagnant growth, can raise doubts about the company’s long-term prospects.
When considering whether the founders’ departure before the IPO serves as a wealth unlocking strategy, Kumar highlights the structure of public offerings. During IPOs, founders often sell their shares through offer-for-sale components when shifting to board roles without operational responsibilities. In the case of boAt’s IPO, the substantial Rs 1,000 crore through OFS compared to the Rs 500 crore fresh issuance suggests that existing stakeholders, including founders and early investors, would benefit more from the capital raised than the company itself.
Kumar cautions that such decisions could influence investor confidence and impact the IPO’s reception. Factors such as market sentiment, brand reputation, and valuation perceptions will ultimately determine subscription levels, potentially overshadowing any red flags in favorable market conditions.