A couple of rules are being contemplated to be introduced for future initial public offerings (IPOs) at the Colombo Stock Exchange (CSE) to empower potential investors to make better decisions in subscribing to new share issues.
CSE Chairman Vajira Kulatilaka said that the rules are being adopted from the trend setting Dialog Axiata IPO, which took place 10 years ago. The offer was managed by NDB Securities, of which he is currently the Chairman.
“I call it trend setting, because we gave every potential investor a sheet with assumptions and how we did the valuations. We gave the models used also. At the last board meeting we approved a rule to do so in the future. Similarly book dealing was done, and now we’ve come up with the rules to do book dealing in this country,” he said.
He said that the valuations rule, and the yet to be approved book building rule, will make IPOs more transparent by giving more information to potential investors.
The book building rule would compel IPO companies to invite institutional investors to provide valuations on the IPO, figures which would then have to be provided to all potential investors.
“Companies will have to get valuations from institutional investors, and then go to retailers. Currently, it’s hard to get valuations from all investors without the proper IT systems, but during the Dialog IPO we managed to get valuations from retail investors too,” Kulatilaka said.
The new rules come at a timely juncture, as several controversial IPOs had taken place at CSE in the past few years.
Some IPO prospectuses had quoted overly optimistic valuations and assumptions and resorted to bad accounting practices. Some IPOs had been undertaken with the intention of settling past debt, and have not engaged in market trading or adhered to the governance practices of CSE following their IPOs.
Certain stock brokers had advised investors not to subscribe to such shares in the past.
With the valuation sheets provided by the IPO companies, and the book building figures provided by institutional investors, potential shareholders could have a say in the share price before the opening of an IPO.
“This is one step forward. When there’s competition, we can expect the market to come up with their own IPO valuation through bidding, like the Treasuries auctions,” Kulatilaka said.(CW)
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