IPO: a new, young company or an old company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IPO:
An initial public offering refers to the first time a company publically sells
shares of its stocks on the open market; it is also known as going public. It
can also be explained as it’s a process by which a private company can go
public by sale of its stocks to general public. It could be a new, young
company or an old company which decides to be listed on an exchange and hence
goes public. Companies can raise equity capital with the help of IPO by issuing
new shares to the public or the existing shareholders can sell their shares to
the public without raising any fresh capital.

Advantages
of IPO to the company:

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·        
The IPO is an exciting time for the
company. It means it has become successful enough to require much more capital
to continue to grow.

·        
It’s often the only way for the company
to get enough cash to fund a massive expansion

·        
The IPO allows the company to attract
top talent because it can offer stock option. It can pay the executives little
wages up front. It promises they cash out later with the IPO.

Disadvantages
of IPO to company:

·        
The IPO process requires a lot of work.
It distracts the company leaders from their business that can hurt profit. They
must hire investment banks because they help company go through the
complexities of the process. These banks are expensive.

·        
The business owners may not be able to
take many shares for themselves. Instead their original investors require them
to put all the money back into the enterprise, even if they take the shares
they may not be able to sell them for long years.

·        
They could loss ownership control of
their business. Board of director could even fire them.

·        
A public company faces intense scrutiny
from regulators like Sarbanes-Oxley act because many details of the company’s
business and its owners become public that could give valuable information to
its competitors.

 

Why
company initiate IPO:

The most common reason for a
company to initiate an IPO is to raise additional capital and to establish a
trading market for its shares. Other reasons may include monetization of the
investments of early private investors. The funds raised may be used for
meeting financial needs of the company such as financing new projects/ventures,
expansion of existing business, and repayment of expensive loans etc.

 

 

 

 

 

Process of issuing IPO in Pakistan

 

The IPO process can be very complicated.
There are certain steps you must take along the way. These steps will help
insure that your IPO is successful.

Planning for the IPO
Process

First of all we need to determine
that whether it’s a good time for IPO or not. It is very important to choose
the ideal time to go public. Then we need to do planning in detail that what we
want to achieve by examining the financial wants and needs.

It is very much helpful for
business to act like a public company even before it goes public. This can be
done a few years in advance of the IPO. Prepare a business plan and developing financial
statements.

Choosing Underwriters

Most of the companies used underwriters
so that these underwriters help them in IPO. The key of having a successful
offering is to choose the right underwriters. Because these underwriters are
responsible for buying and selling the securities to public. They are also
responsible for investigating your business to verify the financial information
which is given to the investors. The selection of IPO should be done at least
few months before the IPO date.

Filing a Prospectus

A prospectus is issued for each IPO
and is circulated and published at least 7 days before beginning of
subscription. Prospectus should be published in at least one Urdu and one
English language newspapers. Law allows publication of the prospectus in a bridged
form.

Your business must be registered or
must file a registration statement with the Securities and Exchange
Commission of Pakistan (SECP). In this statement there is detailed information
about the offering. This statement also contains the information about the
business, its financial history and also about the future plans. Once the
registration statement filed with the SECP it becomes the preliminary
prospectus. This preliminary prospectus is also called red herring. Because red
ink is used on the front page to indicate that certain information may change.
The prospectus is a legal document which explains the securities offered to
public.

The SECP itself will examine the
registration statement during the “cooling off” period and based on these
examinations SECP inform the business if any necessary changes needed. After
doing certain changes this statement becomes the official prospectus. This
prospectus is used by the public which help them to determine that whether they
want to purchase the securities for sale

IPO Promotion

A company/ business that go public
have to market the IPO. Company’s representatives and underwriters go on a
“road show” and make numerous presentations to potential investors.

 

 

Final Offering Price
and Amount

During
the above mentioned cooling off period, underwriter published an initial
prospectus which contains all the essential information regarding the company.
The date related to issuing the stock and the price has not been stated in the
prospectus, for these are not identified at this time. After that the
underwriter and the company meets to decide the price of the stock. This
decision of price is highly dependent on the current market condition. Then choosing
the final offering price and the amount of securities to be sold are very key
decisions. The expected demand and the market conditions need to be examined
very closely. These final decisions are usually made right before the offering.

Selling on the Stock
Market

The IPO is declared effective a few
days after the final prospectus is received by the potential investors. And
this declaration is done after the stock market has closed. The securities will
then be available for trade the very next day. The IPO will then hopefully be very
successful and provide new capital for the
business for their present and future plans.

Regulations of IPO

These Regulations shall be called
the Public Offering Regulations, 2017.

·        
“Abridged Prospectus” means condensed
form of the Prospectus containing such information and disclosures as mentioned
in Second Schedule to these Regulations

·        
 “Act” means the Securities Act, 2015 (III of
2015)

·        
 “Application Supported by Blocked Amount” means
an application for subscription to shares or bidding, where money is blocked in
the applicant’s or bidder’s respective bank account

·        
“Banker to an Issue” means a scheduled
bank licensed by the Commission as a Banker to an Issue.

·        
“Bid” means an intention to buy a
specified number of securities at a specified price

·        
“Bid Amount or Bid Money” means the
amount equal to the product of the number of shares bid for and the Bid Price

·        
“Bid Collection Center” includes
designated offices of the Book Runner, specified branches of any scheduled bank
and offices of any other institution specified by the Book Runner where bids
are received and processed

·        
“Bidder” means an investor who makes a
bid for subscription of shares in the Book Building process

·        
 “Bidding Period” means the period during which
bids for subscription of shares are received

·        
“Bid Price” means the price at which Bid
is made for a specified number of shares

·        
“Book Building” means a process
undertaken to elicit demand for shares offered for sale through which bids are
collected from the Bidders and a book is built which depicts demand for the
securities at different price level

·        
“Book Building Portion” means the part
of the total Issue which has been allocated for subscription through Book
Building

·        
 “Book Building System” means an online
electronic system operated by the Designated Institution for conducting Book
Building.

·        
“Book Runner” means a securities broker
or a scheduled bank who holds a valid license from the Commission to act as an
Underwriter

·        
“Centralized E-PO System (CES)” means a
centralized system through which applications for subscription of securities
through Public Offering can be made electronically through internet, Automated
Teller Machines (ATM) and mobile phones

·        
“Commercial Paper” means an unsecured
debt security with a maturity of not less than 30 days and not more than one
year

·        
Companies Act” means Companies Act, 2017

·        
“Consultants to the Issue” means any
person licensed by the Commission to act as a Consultant to the Issue

·        
“Consolidated Bid” mean a bid which is
fully or partially beneficially owned by persons other than the one named
therein.

·        
“Debt Securities Trustee” means a person
licensed by the Commission under the Act and appointed as a Debt Securities
Trustee by an Issuer of debt security

·        
 “Designated Institution” includes the
securities exchange, central depository and clearing company to provide Book
Building System

·        
“Dutch Auction Method” means the method
through which Strike Price is determined by arranging all the Bids in descending
order based on the Bids Prices along with the number of shares and the
cumulative number of shares bid for. The Strike Price is determined by lowering
the Bid Price to the extent that the total number of securities offered under
the Book Building Portion are subscribed

·        
“Floor Price” in case of book building
means the minimum price per share set by the Issuer in consultation with
Consultant to an Issue

·        
“Green Field Project” includes a project
that is being newly built by the Issuer and has not commenced commercial
production/operation

·        
 “Green Shoe Option” means a pre-determined
number of securities to be issued by the Issuer in case of over-subscription of
the issue

·        
“Issuing and Paying Agent” means a
Financial Institution appointed by an Issuer of Commercial Paper under these
Regulations as an Issuing and Paying Agent

·        
“Limit Price” means the maximum price a
prospective Bidder is willing to pay for a share under the Book Building method

·        
“Limit Bid” means a bid by the Bidder at
a Limit Price under the Book Building method

·        
“Limited Liability Partnership (LLP)”
means a partnership registered under the Limited Liability Partnership Act,
2017

·        
“Minimum Bid Size” means the Bid Amount
equal to 6 million rupees under the Book Building method

 

 

Regulatory bodies

There are about 18 regulatory
bodies in the country: the State Bank of Pakistan, the Securities and Exchange
Commission of Pakistan, these two are related and concerned.

SECP: The Securities
and Exchange Commission of Pakistan (SECP) is the Official
Financial Regulatory Authority in Pakistan whose mission is to develop a
modern-day and well-organized business sector and a business
market based on comprehensive governing principles, in order
to boost financing and promote economic growth and success in
Pakistan

The current instruction of the SECP
includes the following

·        
Regulation of corporate sector and
capital market

·        
Supervision and regulation of insurance
companies

·        
Supervision and regulation non-banking
finance companies and private pensions schemes

·        
Oversight of various external service
providers to the corporate and financial sectors, including chartered
accountants, credit rating agencies, corporate secretaries, brokers, surveyors
etc

The
SECP is divided into the following 5 divisions

ü  Company
Law Division

ü  Securities
Market Division

ü  Specialized
Companies Division

ü  Insurance
Division

ü  Law
Division

 Other regulatory bodies in our country are

 the Competition Commission of Pakistan, the
Pakistan Electronic Media Regulatory Authority, the National Electric Power
Regulatory Authority, the Oil and Gas Regulatory Authority, the Drug Regulatory
Authority, the Civil Aviation Authority, the Pakistan Nuclear Regulatory
Authority, the Pakistan Standards and Quality Control Authority, the Public
Procurement Regulatory Authority, the Private Education Regulatory Authority,
the Pakistan Medical and Dental Council, the Pakistan Engineering Council, the
Pakistan Nursing Council, the Pakistan Tibb Council, the Pakistan Veterinary
Medical Council and the Pakistan Environmental Protection Agency. Besides,
there are prime regulators such as Election Commission of Pakistan (ECP), NAB,
FBR and others.