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 allottee(s) of debt or equity securities already in issue.
2. Introduction
A company is entitled to be admitted to the official list of the Exchange through an Introduction where the company has 10% of its equity held by the public.
What is an Initial Public Offering (IPO)?
IPO is an acronym for Initial Public Offering. This is the first sale of stock by a company to the public. A company can raise money by issuing either debt (debentures) or equity. A company issues shares to the public for the first time through an IPO. 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 to the existing shareholders while in the former new shares are created and money collected is channeled towards the business of the company.
Companies fall into two broad categories: private and public. A privately held company has fewer shareholders and its owners are not obliged to disclose information publicly about the company.
It usually is not possible to buy shares in a private company. You can approach the owners about investing, but they are not obligated to sell you anything. Public listed companies, on the other hand, have sold at least a portion of the shares to the public and these shares trade on a stock exchange. This is why an IPO is also referred to as "going public."
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. If you have the cash, you can invest.
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 stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
• 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.
• Most companies discover a value for their shares through a listing on a stock exchange
How can I get in on an IPO?
All IPO’s are publicly advertised and written about in the business pages of any newspaper. A good way to obtain information is by scrutinizing the CSE web site 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 first hires an investment bank. A company could theoretically sell its shares on its own, but realistically, an investment bank is required. There is also requirement at the CSE that every company listing application is sent through a registered sponsor. The sponsor usually will attend to the necessary documentation and check for compliance with the rules and regulations and perfect the offer documentation / Prospectus. The Investment bank will advice 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.
Things to Consider Before Buying
No History It is hard enough to analyze the stock of an established company. An IPO company is even trickier to analyze since there probably will not be a lot of historical information. Your main source of data is the Prospectus, so make sure you examine this document carefully. Look for the usual information, but also pay special attention to the management team, how they plan to use the funds generated from the IPO, and details regarding the allotment of shares.
Flipping This is reselling a hot IPO stock in the first few days to earn a quick profit. This is not easy to do, and you maybe be discouraged by your broker. The reason behind this is that companies encourage long-term investors who hold their stock, not only traders. There are no laws to prevent selling your IPO stock in the first few days. Many IPOs that have big gains on the first day will come back to earth as the institutions take their profits.
Avoid the Hype Since IPOs only happen once for each company, they are often presented as "once in a lifetime" opportunities. Of course, some IPOs soar high and keep soaring. But others may not. The lesson is that one must not buy a stock only because it's an IPO - do it because it's a good investment.
The prospectus and the application forms are available from Member firms, Managers to the Issue and the CSE Website. The prospectus gives the details required for potential investors about the background of the company going in for an IPO. The Investors, who want to purchase shares of an 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 applied through a Member firm, they will deposit the shares in their respective CDS accounts.
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