Understanding of Initial Public Offerings (IPOs)

By Stella Goh – Market Data Analyst | 25 September 2018

Initial Public Offering (IPOs) is a type a process happened when the private company issued new or existing shares to be sold to the general public in the primary market to raise funds. The capital gains from the sale of the shares will be used to buy machinery, land or repay for the loans/debts of a company. Most of the companies that offering IPOs are young companies, or the companies that have been operating for many years and finally decided to go for the stock exchange. Through the IPOs, the companies get its name on the stock exchange. IPOs is one of the ways for the young company to gain more access to market capital.

The Approval Process of IPOs in Malaysia

Adviser submits an IPOs application to Securities Commission

The company must apply for IPOs and must be complete for SC to meet its timeline charter of 3 months for consideration of the IPOs application. Incomplete application’s details may cause delays in review and the submission. Advisers may have a pre-submission consultation with SC to discuss the issues on IPO application.

Securities Commission evaluates IPOs application

Assessments will is make in accord with the provisions of Guidelines to review to ensure it complies with SC’s guidelines on Asset Valuation. Corporate governance will have record checks, and queries will be sent to advisers to seek clarification on issues identified to have a clarification meeting to discuss issues.

Securities Commission decides on IPOs application

The recommendation committee which includes senior management from different departments will convene challenges process to ensure the thoroughness and consistency in the recommendation of application tabled with the Issue Committee. They will meet to deliberate and decide on IPO application.

Securities Commission informs adviser of SC’s decision

The advisers/applicants have six months from the date of SC’s decision letter to implement the listing proposal of Applicant. If any rejection occurred, SC would conduct a post-decision meeting with the applicant to convey and discuss. They have one month time to reveal the rejection.

Adviser submits registration IPOs prospectus

The prospectus must not contain false and misleading, and there is no material omission of statement/disclosures.

Securities Commission registers the IPOs prospectus

SC will review and departments will conduct checks on compliance on approval conditions. Once registered, applicants must lodge the prospectus with Companies Commission of Malaysia. The prospectus will start to issue to investors over a period of minimum 5 market days.

Listing by Bursa

It will take around 13 market days minimum from the issuance of the prospectus before listing into Bursa exchange. Relevant SC departments perform post-approval follow-up on the terms and conditions of the approval and post- vetting on the prospectus.

How to Apply IPOs online?

Investors who are interested in subscribing IPOs must have a bank’s online account. They can log in to their bank account and click the “eShare” for the Maybank’s user, and then it will show you the IPOs list. Then, investors can select the IPOs that he wants to apply. By the way, investors are required to read through the Terms and Conditions of the eShare Application and Declaration and also the prospectus of the IPOs before proceeding. Then, the investors needed filling up the application form and proceed to the submission. However, it may be difficult to purchase the IPOs because there will be a limitation of people can only subscribe to it. It was due to the balloting process to determine who will successfully obtain the rights to purchase the pre-listing of the company shares. The people who failed may buy the IPO stock during the first day of IPO stock listed in the stock market.

How to Determine the Initial Public Offerings is Good or Bad?

Background of The Company

Investors need to consider a lot of things before invest in a new public company. They need to do some researches on the prospectus of the company before deciding to subscribe the IPOs. The prospectus served as overall information related to the company such as Business Models of the company, financial health, prospects, risks may face and so on.

The business model of the company will determine the company future direction and projection. Investors can look into what the company’s primary business is? Can the business sustain in a recession? Can the company maximise their profit in an economic boom? Let’s say the company’s primary business is operating under the food industry. Food is essential for everyone to survive. From this, we knew that this company could survive in all weather market.

Financial Highlight

Company’s past performance is a clear indicator of how the company has performed over the years, and we can use it to project the company future financial performance. If the company’s growth chart is volatile, an investor should refrain from investing in this type of company. However, if the company’s growth rate has been stable and growing over the years, there is a high probability that the company will perform well in the future. However, the financial data is limited because the Securities and Exchange Commission (SEC) only requires the income statement shows the current year plus the past two previous fiscal years of the company. Therefore, investors may be only able to look through the financial highlights of the company so they must also see other details in the prospectus.

 Risks

Investors must understand their risk tolerance when subscribing to the Initial Public Offerings (IPOs). The risk involved is higher when compared to a fixed deposit due to FD provides consistent rates of returns until the maturity date; regardless of market conditions.

Initial Public Offerings stocks do not provide a guarantee of returns and will not guarantee they will make money in their business, or the will pay you dividends. Investors have to be comfortable with the risks that they might lose all their money when they are buying the stocks.

 The Lock-Up Period

Investors must be careful on the lock-up periods of the Initial Public Offering after it successfully listed on Bursa Malaysia. When the company goes public, Bursa Malaysia requires the promoters of all applicants for Main Market not to sell, transfer or assign their entire shareholdings in the applicants as at the date of listing, for six months from the date of admission to Bursa Malaysia based on the lock-up agreement between them. Upon expiry of 6 months, all the insiders or substantial shareholder will be freely selling their stocks. Therefore, there will quite some shares up for sale and creating an excess supply that can cause the stock price to drop drastically.

Conclusion

Among all investment tools, Initial Public Offerings (IPOs) is one of the choices that investors can consider. Investors shall study and analyse the pros and cons thoroughly before making their investment decisions.