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–>Stock market plays an important role in promoting economic growth and consumer confidence. Yet Pakistan stock market has been stagnant since the global recession in 2008 that hinders not only economic development but also industrialisation. In 2011, it witnessed four IPOs with a total size of Rs 1.8 billion in comparison with 17 IPOs in 2005.
The factors behind this downfall are not only worsening market conditions and weak economic fundamentals but also a lack of understanding about IPOs and capital market from business owners. Indeed, many CEOs and CFOs have a constant fear of losing control and disclosing corporate information when firms go public. Yet, they forget the long term benefits that IPOs bring to them, their companies and stakeholders.
Firstly, going public allows firm to have access to a massive and timeless pool of financial capital without facing certain risks or restrictions that incurred by other financing options. For example: borrowing from a bank will raise the amount of debt and increase interest payment. Moreover, as debt rises, so as debt to equity ratio; consequently, the firm’s credit rating will be affected. On the other hand, seeking for capital from venture capitalists involves several requirements that need to be fulfilled. A venture capitalist would also demand to be involved in the decision making of the firm which imposes certain restriction on the management board. By going public the company will be able to grow and expand while maintain its independence in decision making and governance. Thus, IPO is one of the most attractive and practical tool to upgrade production facilities, fund capital-intensive projects and secure the continuing growth of the business.
Secondly, the very fact that a large number of investors and institutional are confident to invest in the company’s IPO assure its owner about the value of the company and the possibility of achieving the maximum valuation of the business.
Secondly, the very fact that a large number of investors and institutional are confident to invest in the company’s IPO assure its owner about the value of the company and the possibility of achieving the maximum valuation of the business.
Thirdly, firms attract more media attention when it is listed on the stock exchange. Through wide media coverage, the company will be able to increase the visibility and recognition of its products and services. This, in turn, will boost consumer exposure to the company’s brand and enhance its marketing and promotion practices. As a result, it enables company to save a large amount of money on advertising or commercials. On the other hand, with the firm’s activities being addressed in financial reports by professional analysts, its credibility is enhanced and liquidity of shares is supported; thus, confidence among shareholders and business partners is raised.
Fourthly, a company listed in a stock exchange with sufficient financial reports and transparent corporate governance tends to get loans and extend them easily. In fact, banks and other financial institutions are often willing to lend public companies a larger amount of loan, under smaller collateral, for longer maturities and with lower interest rates as compared to their deals with private companies. Indeed, they are keen to work with public companies because of their credibility and reliability.
Not only financial institution but also partners and contractors are more confident about public listed companies than private one. Because of the rigorous legal, financial and corporate management review that listed companies have successfully passed during IPO, their credibility is assured. Hence, the confidence among partners and contractors creates a firm, stable and predictable business relations with the public company and enable the later to have an advantage in the negotiating table.
As for employees’ welfare, going public creates a new type of rewards: stocks and stock options. The option will not only give staff financial incentives but also motivate them to work and enhance company’s value. Moreover, a listed firm often gains better reputation compared to a private firm; hence, it attracts excellent professionals who are driven to generate profits and wealth. In fact, they become more efficient in their work and they are determined to increase company’s operational and financial efficiency to raise its market value and financial returns.
On the other hand, because of various due diligences that companies have to complete during the IPO process, managers are able to look at the company thoroughly and analyse it comprehensively. As a result, certain internal changes take place such as revamp of organisational structure, top management and its policy, improvement of work processors and quality control as well as a critical assessment of the business’s efficiency and effectiveness.
Finally, being listed in the stock market brings liquidity and provides solvency solution to firms. In addition, it enables managers to expand the enterprise through merger or acquisition or exit from the business by selling the firm to other companies. This can be done by selling shares during IPO (mostly adopted by the minority financial investors such venture capitalists) or at a later stage (usually preferred by the majority shareholders).
To the economy at large, listing increases the State’s revenue in terms of income tax and Capital Gain Tax (CGT). It provides opportunities to investors, mobilises savings and reduces dependence on the banking system, thus, the financial resources of the banking sector can be utilised for other purposes such as community development. In addition, a strong capital market will fasten the industrialisation process and strengthens capitalism. Besides, because of its strict observance and stringent punitive measures, stock market ensures the transparency and credibility of businesses and investors. More importantly with an effective and efficient listing system, it attracts foreign investors and maximise FDI.
These are a few out of many advantages that IPO brings not only to the listed company but also to the government and the economy.
As a result, Pakistan government and authorities have implemented different mechanisms to promote IPOs. The Securities and Exchange Commission of Pakistan (SECP) has put in place the Electronic-Initial Public Offerings (e-IPO) that enables companies to apply for subscription of shares and Corporate Bonds online through computers or mobile phones. The practice considerably reduces the time and effort needed to subscribe shares, hence improves efficiency. In 2008, SECP also introduced the concept of Book Building that gives companies another option when going public: bidding for IPO prices instead of setting a fixed price. Compared with the traditional offering, Book Building gives a fairer price to Investors at a lower cost for Issuer. The concept has been successfully used in India and many other countries; in Pakistan, the implementation of book building will remove many major barriers during the IPO implementation process and encourage companies to go public, apply or subscribe for shares.
Copyright Business Recorder, 2012