Iran Fara Bourse, the junior equity market, plans to offer shares of a railroad company based on new rules guiding initial public offerings.
Rail Pardaz No’Afarin Company is to go public on Monday and the IFB for the first time will enforce rules governing IPOs for small companies and those with poor financial performance.
The small company plans to offer 5% of the stake comprising 371 million shares worth 1.23 trillion rials ($4.4 million), according to a notice posted on the IFB website.
Along with many small companies, the newly listed company’s IPO was postponed several times because prevailing IPO mechanisms were incompatible for small companies.
Last month, the Securities and Exchange Organization, the capital market regulator, announced new mechanisms to reform policies related to IPOs for “risky” and small listed companies.
The framework involves preset procedure, known as book building used for companies with normal market cap, and a new mechanism for offering shares of potentially risky and small cap companies.
Under the framework, a newly listed company considered risky by the SEO is allowed to sell shares only to professional investors.
Accordingly, 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 the funds and be the base price for trade in the secondary market.
The rule applies to companies whose value of free floating shares would be less than 5 trillion rials ($20 million). 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.
Facilitating Agenda
The new mechanism is expected to facilitate listing of myriad of small companies and those that are seen as risky in financial terms. Many companies want to enter the equity market, but their requests have been put on hold by the SEO.
Up until 2015, IPOs were held through the auction mechanism, wherein shares were offered at fixed prices set by the company. This, however, was sometimes reportedly associated with insider trading, creating serious concern about the process of going public.
To avoid rent-seeking, the stock market regulator launched 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.
The method is currently common in the world and in Iran. Although the book-building process was an improvement over the previous method, it mainly benefits big companies because large numbers of investors take part in their IPOs due to high returns.
