Initial public offering
is when firm issue his shares for the first time to general public. Usually
these kind of companies are younger that’s why they offer shares to general
public for the purpose of raising their capital. For investor or general public
IPO is very risky investment because they are going to buy new shares of
company, which lacks historical data. So the risk in this initial public
offering is very high because no one knows the rating and credibility of these
new shares except the company. For the company, IPO is beneficial because
company will get cash which can be further used in expansion of their business.
The main disadvantage of IPO to company is that it comes with tax. Company will
have to pay tax on their earning but they have benefit of bankruptcy cost of
A company can sell his
shares in two ways, he can sells his shares by itself or go to IPO underwriter.
Usually underwriter is investment firm or bank. IPO underwriter plays critical
role in whole process of IPO. Underwriter is playing a role of middle man
between the general public and company. Underwriter purchases the shares at
discounted price from company and sells it to investors. Underwriter ensures
the company that he will sells his securities in profitable rates which gives
them handsome profit margin. But the main disadvantage to underwriter is that,
underwriter bear total risk of security. Underwriter will be accountable if
they not able to sells the company share at defined price. Basically
underwriter playing double game with general public and company. Underwriter gives
surety to general public that he will give affordable shares prices with
respect to risk of shares or securities. Underwriting take underwriting fees from
general public and company.
The most important book
or document of company is prospectus which provides key information to make IPO
happens. This prospectus contains key information regarding the underwriter,
shares, shares price, financial plan, risk factors and legal obligation which is
mandatory to purchase or sells its securities/shares.
legal Requirements of IPO
for listing to the Stock Exchange
A company that aims to
list its shares/securities in stock exchange will make the request or
application to stock exchange under section 9 of the Securities and Exchange
Ordinance. The application under section 9 will be made on guided format by
stock Exchange. Any share that offered to general public must b listed in stock
exchange so that holder of share able to exit
of shares by company through IPO
A company can raise his
capital and expand his business by offer securities/shares to general public.
Whenever a company intends to raise his capital by selling share to general
public, it s required company must be registered in stock exchange under
section 57 of the companies ordinance.
of sales of share by existing shareholder to the general public
A person who owns more
than 10% of company shares can make sales offer of those shares in totality or
in part to general public through the offer of the sales document after
approval of Commission under section 62.
criteria of listing
A public limited
company or corporate body must have minimum 200million rupees paid up capital to
apply for listing his shares on Stock Exchange. Under section 2 company
ordinance forbids private limited companies to issue or offered shares to
general public. Foreign companies who have business in Pakistan are also
eligible for listing their share on Stock Exchange.
The prospectus of
company that are going to published or offer to general public for the purpose
of providing information must contain authentic information (reports, materials)
as required under section 53. The prospectus should contain all those
information on which investors can make appropriate decision. While drafting
the Prospectus the issuer and managers are advised to consult the contents of prospectus
and match them with the defined standard of Stock and Exchange. All the
employees (Directors, signatories, promoters and other persons) of the company
who are involved in making the prospectus make sure that no misstatement
mentioned in prospectus or any wrong information that mislead the investors or
size and allotment of capital
The minimum paid up
capital required for listing the share is 200m rupees. Those companies who are listing on stock
exchange for the first time they must follows some points which are given
In case of post issue paid up capital to
issue the company on stock exchange is up to 500m rupees, then company will
have to issue or offered 25% of that paid up capital to general public.
In case capital of issuing company is
beyond 500m, public offer would be at least 125m 12.5%.
Thos companies who are
already listed on stock exchange the allotment of capital to the general public
should be at least 100m rupees.
and publication of prospectus in short form
The prospectus is
mandatory to be distributed to stock exchange at where the company is listed or
intend to be listed. All the banks must be accessed or make available at the
registered office of issuer/company. The prospectus is mandatory to published
at least one in Urdu and one in English Newspaper such as dawn etc. To minimize
the cost of company, law allows company to publish and distribute the prospectus
in short form in term of section 53 of the ordinance.
law and guidelines applicable on IPO and listing
There are some major laws;
policies applicable on offering of securities to general public and listing of
company on stock and exchange are given below:
Part V of the Ordinance namely,
“Prospectus, Allotment, Issue and Transfer of shares and debentures, Deposits
etc.” mainly section 53, 57 and 62 and second Schedule. Section 461 of part XIV
of the Ordinance, in case the issuer is a foreign company. The said Ordinance
is available at the link:http://www.secp.gov.pk/corporatelaws/pdf/CompaniesOrdinance984-17-03-2011.pdf
Section 9 of the Securities and Exchange
Ordinance, 1969 which is available at link http://www.secp.gov.pk/corporatelaws/pdf/secord1969_sep08.pdf
The Companies (Issue of Capital) Rules,
1996: The said rules are available at the link
The Securities and Exchange Rules, 1971:
The said rules are available at the link http://www.secp.gov.pk/Services/laws_policies.asp#rules
Guidelines for the preparation of
Prospectus: The said Guidelines are available at the link http://www.secp.gov.pk/otherlinks/GuidelinesChecklist/Guidelines.pdf
Listing Regulations of the Stock
Exchanges: The said regulations are available at the link http://www.kse.net.pk
http://www.lahorestock.com and http://www.ise.com.pk
For listing the company
on a stock exchange, following principles should be followed
Application to stock exchange under
section 9 of the stock and exchange ordinance.
In the situation of issuance of new
shares by company, application to SECP under section 57 of company ordinance.
In situation of divestment by any
shareholder of the issuing company, application to SECP under section 62 read
with 57 companies’ ordinance.
After the approval of SECP under section
57 or 62, as according to the case, acceptance of stock exchange for allocation
of dates for publishing or printing the prospectus, beginning of bidding
period. The period for public subscription would not be earlier than seven days
from the publication of prospectus.
of offering shares
The most used procedure
of offering the shares to general public are Book Building and Fixed Price.
Some features of these processes are given below:
According to this process
the offer price is set by the company or offerer, (according to situation). The
price of share is divulged in the prospectus, where the issuer of the shares
gives the detail of factors that justify the issue price. In this procedure,
investor purchase the share at the price that already defined by issuer. 100% advance
payment is needed to pay by investor for the shares.
In this process, 20%
price of shares is offered by the issuer or company on which investor are
allowed to bid on these shares and final prices is finalized by the issuer
after the closing of the bid.10% advance payment shall be paid by qualified
institutional buyers, while others categories of investor would pay 100% advance
along with the application .
The cost of listing to
issuing the company on the stock exchange involves stock exchange fee, SECP
fee, underwriting fee, and commission of bankers.
Charged by SECP, STOCK EXCHANGE AND THE BROKERS
fee are given below
In situation of post IPO paid up capital
of the issuing the company is up to 1 billion rupees, the fee of 100,000
In situation of post IPO paid up capital
of the issuing the company is above rupees 1 billion, the fee of rupees
The Initial fee charged
by Stock exchange is the one percent of paid up capital of the issuing Company.
Broker commission is up
to one percent of the amount of received application.