MTI reveals power and pitfalls of IPOs

With a number of IPOs popping up recently, there was much discussion on how companies make headway to achieving this target and open themselves to the market to most often than not to know their value in the market.

By Sunimalee Dias

Discussion was centred on how different organisations adopted processes before, during the launch and after, in carrying out an IPO. This was brought to the fore with expert advice by the Colombo Stock Exchange (CSE) at the recently-held MTI Corporate Finance IPO Forum in Colombo.

Pre IPO: Rationale and enabling

At the pre-IPO stage, the company must identify the need to go public, and set forth to prepare the company for the listing process. In this respect the company must take into consideration the rationale and be enabling.

Rationale is the strategy formulation process that starts with identifying the actual need for an IPO. There can be many key drivers for a listing decision. These may be attributed to a number of objectives such as expansion and growth via new product line ups, market entry strategies and capital structuring requirements.

Odel CFO Nishan Fernando speaking on the occasion observed that in starting out to go public, it must be understood that this will provide you with the access to a larger pool of capital.

While it is possible to finance growth up to a certain level, however later it is necessary to infuse through equity. As a result it is important to forecast the plan for up to three to four years and have a clear understanding of exactly what is the gearing that is required to be maintained.

“When you’re a private company you don’t know the value of your company but the market will give value,” he said.

It was pointed out that most family companies entering their second or third generations were found to commence vanishing as the one company would now be shared among many family members that will grow to be large.

Fernando observed the need to bring in specialised skills that will come in which is an advantage of listing. He explained that once the company goes public it is likely to receive inquiries from overseas investors and other ventures and this adds visibility.

While this is expected to take a minimum of about six months to about one year to go through the preliminary arrangements, prior to going public it is also essential to be focused on a strong credible business plan, Fernando said.

In striving for such a business plan, the company would also require a strong credible team with independent and non executive directors who will have to familiarise themselves with the workload. This calls for key management personnel who could be considered as credible and competent people.

“It’s important that the company has a transparent group structure,” he said, adding that subsidiaries must be brought under the group as subsidiaries to highlight a quality structure.

In addition, in the pre-IPO stage, companies ought to have a clear balance sheet with any loans or advances taken or given to directors cleared by the time of launching the IPO.

A clear understanding of future investor relations and plans for it right from the beginning and in this respect, Fernando explained that it was about one and a half years ago that Odel commenced preparation of its quarterly accounts. This allowed for the company to be ready and well trained by the time they were to go public.

“In an IPO investors expect a quick game. Timing wise you need to be ready to go public and not forecast and then go public,” it was noted.

As part of the pre-IPO stage the company must also be enabling in that once the decision is made, the company needs to develop the strategic plan mapping out a clear direction for achieving the objectives identified in the funding decision.

In readiness for an IPO, it should also ensure all compliance requirements are addressed. This includes board composition and structure, financial accounting and reporting systems and risk management systems, along with the right executive teams.

One such company that is currently working on its pre-IPO stage is Clean Co Lanka or better known as ‘Drive Green,’ the vehicle emission testing organisation. Having an employee base of about 300 people with 52 fixed stations and 82 mobile units in operation, the family-owned business was highlighted as one such organisation that is likely to have concerns regarding accountability to publishing accounts.

The company’s Executive Director Asgi Akbarally said that competency that was missing in sectional heads was fixed and they also concentrated on branding and marketing and communication plans.

Launch IPO: Listing and promoting

Moving onto the launch phase it was observed that this involves meeting the listing requirements of the CSE and promoting the company’s shares among potential investors. These steps need to be planned simultaneously.

Listing being one of the key areas of the launch phase ensures that once the initial planning is completed, the company will submit its application to the CSE, along with the important decision with regards to timing of the Listing. The valuation of the company is also a key aspect at this stage.

In carrying out this listing process, CSE CEO Surekha Sellahewa asserted that it was important for companies to engage in providing timely information to the public.

The CSE currently has 239 listed companies with 27 broker firms. Currently a discussion paper is to be set out on revising the Diri Savi Board eligibility criteria. However, when questioned later during the discussion stage as to why this was the case, she was not forthcoming with a reply as it was observed this was too early to be discussed in public and was only being considered.

She quickly glanced through some of the main requirements pertaining to being listed company with those on the Diri Savi Board required to provide half yearly financials. Sellahewa was keen to note that due to the fact that speculation was likely to arise among the traders and investors there was a need for any disclosure to be made on price sensitive information.

In the promotion of a company, Marcom (Marketing and Communication) activities are crucial to attract the right investors and hence the success of an IPO. This would involve communicating the company’s value proposition developed based on the company’s earning potential to the potential investors. The development of a compelling value proposition, interacting with stock brokers, institutional and retail investors, are some of the critical spects. MTI CEO Hilmy Cader pointed out that with any IPO it was imperative that there be “communication and conviction” that could lead to over subscription. He pointed out there was need to have a “holistic approach” in what to promote and how to, and whom to convince.

“This creates a buzz for the brand,” he said, adding that marketing and communication was dependent on targeting the right audience.

In ascertaining what will convince the prospective shareholders, it was important to take into account the personalities themselves and the credibility or funds without simply riding the economic wave or the bull run or reverse logic of a bear run as an ideal investment opportunity.

Post-IPO: Complying and performing

After the initial listing process is completed, the company is faced with the most important task of living up to the expectations of its stakeholders. Among these stakeholders, the core groups to be satisfied are the investors and regulators. At this phase, the credibility of the strategic plan, financial projection and systems and corporate governance systems will be tested.

The company in complying needs to ensure that it complies with the regulations of the Securities and Exchange Commission (SEC) and the continuing listing requirements of CSE.

Ernst & Young Country Managing Partner Asite Talwatte speaking of the regulations noted that directors are to ensure compliance and there is a need for audited financial statements, quarterly or periodic compliances and on occurrence and prompt announcements by the company.

In ensuring compliance with the requirements set out to be a listed company there is need to have processes in place on corporate governance responsibility and it must be brought up by the Board of Directors.

A code of corporate governance initiated voluntarily should be adhered to in addition to a code of ethic by senior management; appointment of a compliance officer is a necessity to keep a check on the company’s progress in terms of compliance.

A complete monitoring process of compliance through reports to be sent to the board of directors must be initiated. In addition, an internal audit committee charter needs to be set out to ensure that processes, systems, controls and risks are reported to the head and taken up accordingly.

Performing to expectation is the effort put into the entire process that must materialise into Performance, in terms of qualitative and quantitative growth of the company. The performance will manifest itself in the maximisation of the wealth of its shareholders. There is no substitute for performing. Elaborating further on this topic was Hemas Holding CFO Malinga Arsekularatne, who noted that investors look at the broader aspect of a business.

The challenges faced by a company would be to meet up with the pressure to quickly invest the funds raised in the IPO but not end up in engaging this in bad projects with poor returns.

The pressures are also set on the company to show rigour and diligence but should not lack entrepreneurial spirit. Also, the company must not have an imbalanced and incompetent board, he said.

In responding to challenges there is a need to ensure a regular dialogue with shareholders are carried out in order to allow to find out investor expectation and know if the business is in line with that.

In this respect, he pointed out that with the Hemas Power going public, it was understood that compared to other business this was different with investors expecting high yield. As a result, the management needs to be communicating broad strategies and plans.

The role of the CEO and the top management is to engage more and more with the board, the media and investors and have a clear understanding of the regulatory process.

Issues before the Discussion Panel

DURING the interesting discussions that ensued, soon after the presentations were made by the respective speakers, there was much to be taken up and some of the key issues brought to light are highlighted.

Some interesting points were that in a private company the shareholders matches with going public but if the concern is to raise capital, it was observed that this was not right.

The process of taking an organisation and maturing it was also required to be carried at the pre-IPO stage with the market realising the potential.

A question was raised as to why Odel had not thought it was necessary to go in for options other than an IPO.

In response, Fernando noted that while Odel had looked at the option of entering into a private placement, however due to the longer duration involved, it was explained that the company though it wise to engage in the listing of the company with some major shareholders liquidating some shares to others.

It was pointed out that Odel wanted to enter the market to test it and also since they believed it was the right time to do so.

During the second discussion on the launch IPO phase, Ceylon Chamber of Commerce Chairman Anura Ekanayaka brought to light the huge shortage of investment funds and noted that there was a need to increase this from 25%-45% of the GDP in a bid to grow towards the 8% GDP target.

The gap needs to be filled, he pointed out, adding that this could be carried out by the domestic market.

The need to increase large companies with large market capitalisation to list was pointed out during the panel discussion where it was also noted that while some companies listed 10-15%, it would bring about more liquidity in the market and increase market capitalisation. And in the post war period scenario, there is a need for more companies to be listed on the CSE.

An Eminent Code of Ethics was called to be set in place and given due publicity in a bid t induce the public to follow those standards as this was likely to set the right pace for prospective new investors entering the market.

Such a code of ethics is currently not in place for those buying shares on the CSE; however, this is part of the voluntary code adopted by the CCC that is binding on the members that are part of it.

Currently the minimum requirement is for corporate governance to be correctly set out, but a code must not involve a box ticking approach alone.

In the final discussion stage on the post-IPO phase, it was highlighted that there needs to be more regulation with increased number of companies now going public and entering the market.

However, it was pointed out that this should not involve carrying out a policing of companies and investor activity.

In addition there was call for increased timely disclosure by companies in a bid to avoid keeping the investor longing for the price sensitive information that could spur the market.

It was pointed out that compliance and corporate governance must be looked at to improve on brand value.

Pix by Indraratne Balasuriya