The Securities and Exchange Organization plans to reform policy related to initial public offering for “risky” and small-size listed companies, the SEO deputy for market supervision said.
Referring to new instructions announced by the regulator, Mehdi Parchini said the SEO will introduce a “combination process” for share offers of risky and small cap companies, the Securities and Exchange News Agency reported.
“This would facilitate listing of companies that are risky in terms of their financial performance,” Parchini said. “Accordingly, when a newly listed company is see as risky by the SEO, it will be required to offer its shares only to professional investors.”
In the new system, a portion or all of the shares on offer will be available to “eligible investors”, namely exchange-traded funds (ETFs) and mutual funds. Price discovery will be undertaken by managers of the funds and be the base price for trade in the secondary market.
The rule will apply to financially risky companies and firms whose value of free floating shares would be less than 5 trillion rials ($20 million).
Also known as public float, free float shares refer to the number of a company's outstanding shares owned by public investors, excluding locked-in shares held by company managers and officers, controlling-interest investors, governments and other private parties.
Up until 2015, IPOs in Iran were conducted through the auction mechanism, wherein the shares were offered at fixed prices set by the company. This, however, was sometimes associated with insider trading, creating serious issues in the process of going public.
For example, brokerage firms were allowed to buy bulk of shares via the IPO for their customers. However, in some cases the offered shares were distributed among a limited group of investors, especially highly rewarding shares.
To avoid rent-seeking, the stock market regulator lunched the book building mechanism to hold IPOs and distribute newly offered shares equally among investors.
Book building is a process by which an underwriter seeks to determine the price at which an IPO will be offered. Price discovery involves recording investor demand for shares before arriving at an issue price.
Under this framework the IPO issuing price is discovered only after the closing of bidding period and shares are equally offered to bidders.
Book Building Drawback
The method is currently common in the world and in Iran so far. Although the book-building process was an improvement over the previous method, Parchini said that it mainly benefits big companies because large numbers of investors take part in their IPOs due to high returns.
“This has complicated the listing of small companies and created difficulties”, he said, adding that financially risky companies will also be able to go public under the new setup.
Many companies are getting ready to enter Iran’s equity market, but their requests have been put on hold by the SEO due to reasons such as poor market conditions, obscure finances, lack of financial transparency and inability to meet the requirements of the regulator.
With the share market recovering from a deep downturn, more companies are expected to go public in the near future. IPOs normally return in a big way amid frenzy of buyers competing for a bigger slice of stakes of listed companies.
But with market indicators plummeting last summer, the shares of many listed companies dropped below the prices set at the IPO, undermining the trust of millions of investors and halving the turnout of investors.
Investor turnout reached its apex last September where 5.5 million partook. In the latest IPO last week, the number was 2.8 million.
Intro: In the new system, a portion or all the shares on offer will be available only to “eligible investors”, namely exchange-traded funds (ETFs) and mutual funds. Price discovery will be undertaken by managers of the funds and be the base price for trade in the secondary market
