How to apply for an IPO and listing on the CSE

ast week this column discussed about finding a Stock Broker, what the transaction costs are, internet trading and buying as well as selling shares. This week we will discuss about methods of Listing and take the readers through Listings at the Colombo Stock Exchange.

The Colombo Stock Exchange offers a market for trading in Securities. Listing Rules govern the listing of Securities on the Exchange and continuing listing in order to ensure the creation and maintenance of a market in which Securities can be issued and traded in an orderly and fair manner and which secures efficiency and confidence of all stakeholders in the operation and conduct of the market.

Pick and choose the kind of investment that best suits your needs

Methods of Listing:

A company may obtain a listing by one of the two methods described below.

1. Initial Public Offering (IPO)

An IPO can be conducted in either of the two ways given below.

* Offer for Subscription

An Offer for Subscription is an invitation to the public by or on behalf of a company to subscribe for its un-issued equity or debt securities.

* Offer for Sale

An offer for sale is an invitation to the public by, or on behalf of, holder(s) or allottees (s) of debt or equity securities already in issue.

2. Introduction

An Introduction is the listing of the Securities of an Entity on the Exchange without the requirement of an initial public offering. A company is entitled to be admitted to the official list of the Exchange through an introduction.

What is an Initial Public Offering (IPO)?

This is the first sale of securities by a company to the public. Colloquially, it is said that a company is going public. A company can raise money by issuing either debt (debentures) or equity. It can be through an Offer For Subscription or Offer For Sale. In the latter, existing shares are sold and the money collected will be directed to the existing shareholders while in the former new shares are crated and money collected is channelled towards the business of the company.

Public companies have a larger number of shareholders and are subject to rules and regulations. In Sri Lanka, listed public companies have to abide by the rules and regulations of the CSE in addition to complying with the provisions of the Companies Act. Additionally, they are subject to the regulation of the Securities and Exchange Commission of Sri Lanka (SEC). From an investor’s standpoint, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity.

Why go public?

By going public, companies can raise large amounts of capital. Being listed also has many other benefits.

* Because of the increased regulation and scrutiny, public companies can usually get better rates when they issue debt.

* As long as there is market demand, a public company can always issue more shares. Rights Issues and further IPO’s are conducted for this purpose.

* Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent, to the company.

* Most companies discover a value for their shares through a listing on a stock exchange.

* Access to a widespread shareholder base. The stock exchange puts forward companies a right of entry to a wide-ranging and mounting investor base, which contains both entity investors and plentiful local and international institutional investors.

* Low cost capital. The primary gain of raising capital from the market is that it eschews a number of the intermediation expenses apparent in the other forms of capital raising. Consequently, the market endows companies with capital at a cheaper cost.

There are two Boards at the CSE for Listing of Equity. They are the Main Board and the Diri Savi Board. Given below are the requirements that are needed to list on the said boards.

Main Board:

Eligibility to be listed

1. The stated capital representing shares for which a listing is sought should be not less than Rs. 100 Mn

2. A net profit after tax for three (3) consecutive years immediately preceding the date of application.

3. A Public Holding of 25 percent of the total number of shares for which listing is sought should be in the hands of a minimum of 1,000 shareholders holding not less than 100 shares each.

Diri Savi Board:

Eligibility to be listed

1. The stated capital representing shares for which a listing is sought should be not less than Rs. 35 Mn

2. Public Holding of 10 percent.

How can I get in on an IPO?

All IPO’s are publicly advertised. A good way to obtain information is by scrutinizing the CSE website or any of its regular publications where you are sure to find details of forthcoming new public issues.

The Process: When a company wants to go public, it usually first hires an investment bank. A company could theoretically sell its shares on its own, but, an investment bank is helpful in completing the listing process. They will usually attend to the necessary documentation and check for compliance with the rules and regulations and perfect the offer docum-entation/Prospectus. The investment bank will advise the company on the pricing and timing of a share issue. Generally the investment bank will assist the company throughout the IPO process and will manage the issue, even getting involved in marketing the issue through road shows etc.

Contents of prospectus:

Given below are the some of the contents of Prospectus

- Corporate Information of the Company

- Objective of the issue

- Particulars of the shares

How to buy shares from an IPO:

When a company decides to list through an IPO, the company will ensure plenty of media coverage is given for the subscription of the company shares. As an investor, you can buy those said shares through an IPO by:

1. Getting the prospectus of the IPO free of charge, from either the Managers of the Offer, or your Stock Broker Firm or downloading it from the CSE Website.

2. Reading the prospectus carefully and determining the amount of shares you would like to subscribe to. You can also take your investment advisor’s advice with regards to the application.

3. Filling in the form and deciding the amount of shares that you can/want to purchase.

4. Sending in a bank draft or a cheque for the amount of shares subscribed for along with the subscription form to the Managers of the IPO. You can either post the cheque or hand it in to the Managers personally.

5. When the subscription deadline is over, the managers will collate all the applications received and will ensure the applicants receive their subscribed shares. However, if the issue is over-subscribed, you might not receive the full amount of shares applied for.

What are the factors that I need to keep in mind before deciding to apply to an IPO?

Track record of the promoters: Background and experience of the promoters, the management team and their expertise is one of the main factors that needs to be considered as they will be the ones responsible for the profitability of the company.

Financials: The company’s balance sheet is a very important document and investors should look at it carefully. Investors should look at not just the current balance sheet but also that of the last three to four years to get an idea of the company’s growth and focus.

Prospectus: Read the prospectus for the company carefully. The prospectus has all the details about the company, the risk factors and the company’s financial.

Issue price: Investors need to decide if the issue is worth investing in at that price. One way of checking the valuation is to look at the Price-Earnings (P/E) multiple. The P/E multiple is the ratio of the share price to earnings per share (EPS which is listed in the balance sheet). P/E of the issue should be compared with the industry average and the other companies in that sector.

The prospectus and application forms are available with Member firms, Managers to the Issue and the CSE Website. The prospectus gives the details required by potential investors on the background of the company going in for an IPO. The investors, who want to purchase shares of the IPO, can do so directly from the company or through Member firms and Trading Member Firms. If the investor applies directly, they will receive a share certificate. If the investor applies, wants his shares to be deposited directly in their respective CDS accounts, then he should mention so on the application form.

Book Building: Book Building is when the share price for the IPO is not fixed and a price band is provided for prospective investors to bid within. It is basically the process of generating a book of investor demand for the shares during an IPO for efficient price discovery. Usually, the issuer appoints an investment bank to act as a book runner. During a fixed period of time for which the subscription is open, the book runner collects bids from investors at various prices, between the floor price and the cap price. Dialog Telecom PLC and Lanka IOC PLC used this method when conducting their IPOs.

Can an already listed company conduct another IPO?

A public issue of Shares is technically an Initial Public Offering. Even a listed company can conduct a Public Offer by issuing new shares, in addition to the shares which are currently in issue.

HDFC Bank is one such listed company that issued new shares to the public through an IPO.

Can a Private Company be listed at the CSE?

No, a private company must be converted to a public company first and the company may then submit an application for listing at the CSE.

Can a Statutory corporation be listed at the CSE?

Yes. A Statutory Corporation can be listed at the CSE.

Can a Company list any type of Shares?

Yes. Any type of shares can be listed at the CSE; however, the company, in the first instance, should list its voting shares, prior to applying for listing of other classes of shares.

When you buy shares, will you always gain?

No, you may not, Any form of investment has its own disadvantages, which may include an element of risk. That is why you should pick and choose the kind of investment that best suits your needs:

(1) In terms of the return it generates,

(2) The risk you are willing to take,

(3) Liquidity; meaning how quickly you want your investment to be converted back to cash.

As discussed earlier, an investment in shares may give you higher returns and offer liquidity. What you have to do is to decide what level of risk you are willing to take. After all, managing an investment is about managing the risks in it. However, once you purchase shares, your stockbroker will assist you in deciding what is best for your investment.

Do keep in mind that prices of shares may rise or decline not only due to the performance of the relevant company, but also due to several other factors such as interest rates fluctuations, the economic conditions of the country, political stability, and investor sentiment. One or more or a combination of factors may either increase or decrease share prices. For example, if interest rates are decreasing there is a tendency for more investors to opt for the stock market and the result is increasing share prices. On the other hand political instability may drive down share prices. Therefore professional advice from a stockbroker is recommended if you are not quite aware of the market conditions.

Source: CSE.