Economy, Business And Markets

Book Building to Make Debut as Integral Part of IPOs

Book Building to Make Debut as Integral Part of IPOs
Book Building to Make Debut as Integral Part of IPOs

Iran’s equity market will no longer witness Initial Public Offerings (IPOs) except in accordance with the book building process, which aims to fix the highest market price for shares and securities, increase transparency in allocations to the investors and reinvigorate the equity market; Manager of Exchanges Surveillance at the Securities and Exchange Organization (SEO), Mahmoud-Reza Khajenasiri, said in an exclusive interview with the Financial Tribune.

Noting that the IPOs are an indispensable part of any equity market, with many companies lining up to be listed at the stock market, Khajenasiri said: “The required instructions and regulations for book building have already been set and conveyed to the Tehran Stock Exchange (TSE) and the Iran Fara Bourse (IFB) a few months ago.”

Some market analysts believe that irregular IPOs have exacerbated drainage at the equity market, with unsettled investors selling off their shares in a bid to grab lucrative opportunities through buying the IPOs. Critics stress that fresh inflows should be attracted by the IPOs, which they say has been largely neglected. Nonetheless, despite numerous demands from the companies, Khajenasiri asserted that only a few IPOs have been launched over the past two years.

He further noted that the SEO is striving to bolster the stock market by enticing new retail and institutional investors. “An internationally accepted and efficient price discovering mechanism for IPOs, book building is expected to bolster the equity market by attracting fresh inflows,” he said.

Book Building is basically a process used in IPO for efficient price discovery. During the period for which the IPO is open, bids above or equal to the floor price are collected from investors at various prices. The offer price is determined after the bid closing date.

 Equity Market’s Perspective

The equity market has been grappling with grim macroeconomic indicators over the past two years. Moreover, the credit crunch has been squeezing the listed companies, leading to dramatic nosedives at the TSE; however the companies’ earnings did not change accordingly. “The prevailing under-pricing of the listed companies is also partly due to the government’s monetary policies,” Khajenasiri said.

“TSE’s sentiment was further deteriorated by the systematic risks surrounding various industries and slashing expectations on refining companies, petrochemicals, and iron ore suppliers, in addition to the global slowdown in the base metal and cement markets,” Khajenasiri explained.

Stocks have lost more value compared with the respective companies’ earnings, which resulted in dramatic decline in Price-Earnings ratios, said Khajenasiri, adding: “Such a downward trend clearly indicates that lack of liquidity is the most crucial problem in the equity market.”

Noting that most ambiguities that endangered the listed industries have now been settled, Khajenasiri said: “The equity market’s transparency has been considerably boosted compared with the previous trading year.”

He believes that most of the stocks have already touched their rock-bottom values, and that it is less likely to expect more retreat at the stock market.

Khajenasiri referred to the ongoing nuclear negotiations between Iran and the P5+1 (the five permanent members of UN Security Council plus Germany) as the most crucial concern for the investors. “Any breakthrough in the nuclear negotiations will subsequently entice both local and institutional investors to flock to the equity market.”

 Foreign Investment Gateway

Planning for the post-sanctions era is a top priority for the SEO, said Khajenasiri, adding that to address the lingering issues and pave the way for attracting international fund managers, a new committee has been established at the SEO under his supervision.

“The committee will focus on preparing the necessary regulations and data required for portfolio investments and promoting Iran’s equity market in the world,” he explained.

Regulations are being reviewed and modified to make them more suitable for hosting international fund managers. Changing some laws and preparing the essential infrastructure to host the international investors is high on the agenda.

An online portal, ‘Foreign Investment Gateway’ is designed to feed foreign investors with the required data. Its initial phase will be launched in late June. All information about the listed companies’ performance, financial statements, regulations, financial institutions in Iran including mutual funds, investment banks, and data processing companies, overall data about exchanges, guideline for investing in Iran, etc. will be available on the website.

Hosting international conferences, taking part in relevant international exhibitions, and organizing tours of the capital market are also among the SEO’s core plans to highlight the tremendous opportunities in Iran’s fast emerging market.

Responding to the Financial Tribune questions on the challenges of investing in Iran, Khajenasiri said money transaction remains the biggest issue due to existing sanctions –imposed by the West over Iran’s nuclear program.

The SEO is also seeking to prepare the ground for collaboration with foreign financial institutions, said Khajenasiri.

“A leading foreign financial conglomerate, which is already an investment portal for more than 50 stock markets in the world, has already suggested a proposal to cooperate with Iran’s equity market,” said Khajenasir, adding that collaborating with such a giant company could lift many of the challenges on the way. “Having an international financial instrument could practically link Iran to the world equity markets,” he noted.