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63THEORY AND PRACTICE OF THE IPO IN RUSSIA Адамия Тамара Теймуразовна, Боввен Татьяна Григорьевна, Шевелёв Руслан Аскерович
РЭУ им.Г.В. Плеханова, г.Москва, Россия [email protected]
This article discusses the main challenges and the prospects of Russian companies floating to the international market public offering (IPO)
В данной статье рассматриваются основные проблемы и перспективы
выхода российских компаний на международный рынок публичного размещения акций (IPO)
Key words: stock, market, initial, public, offering, raising, capital
At the present stage of the development of the Russian stock market IPO is one of the most pressing topic.
In the domestic literature abbreviation of IPO or Initial Public Offering is translated as an initial public offering. Primary placement implies that previously the company's stocks were not publicly traded, and the publicity means that the shares are distributed among an indeterminate number of investors.
It should be noted that the Russian legislation does not provide a clear definition of the initial public offering. However, the current regulations govern the individual stages of the process. The main documents are:
- Federal Law "On the Securities Market" dated 15.04.06, № 51-FZ;
- Federal Law "On Joint Stock Companies" dated 31.12.05, № 208-FZ;
- FFMS Order "On approval of the Regulations on the organization of trade in the market of securities" dated 12.01.06, the № 06-4 / pz-n;
- FFMS Order "On approval of the Regulations on Disclosure of Information by Issuers of Securities" dated 12.01.06, the № 06-6 / pz-n;
- FFMS Order "On approval of the securities issue Standards" from 12.01.06, the № 06-7 / pz-n;
- Order of FFMS "On recommendations to the application of the Code of Corporate Conduct" from 04.04.02, № 421 / r.
And although the Russian legislation in the field of securities market is underdeveloped, the positive is that some regulations were adopted in the past two or three years, while the necessary changes in others were made according to the development of the Russian IPO market.
IPO is a long and complex process. It requires high financial and time costs as well as the presence of a team of professionals who know all the subtleties of IPO procedures.
If there are problems, many Russian issuers are considering IPO as a real opportunity for raising additional capital.
Since the IPO is a very common method of raising funds in the international capital markets and is becoming popular in Russia, this work will be devoted to this method.
The main purpose of this work is the theoretical basis of problems and prospects of the use of IPO mechanism in Russia, the characteristic of the existing international and emerging domestic practice of initial public offering of securities.
Realization of this goal has led to the following tasks:
- Theoretical justification of the content of IPO as an alternative source of raising capital;
- Determination of the strengths and weaknesses of the methods of IPO
IPO as an alternative source of raising capital
Nowadays, the company sources of investment can be:
■ Retained earnings (one of the most common sources of financing investment projects);
■ Budgetary funds and state loans (capacious source, although an access to it is very problematic);
■ Bank loans (in a relatively rapid expansion of the banking system, this source is becoming quite popular);
■ Bond issues placed by companies on the open market.
These sources of investment are classified as well-known and quite popular among Russian companies. However, they all have their drawbacks.
Retained earnings is highly dependent on the prevailing economic conditions, the company position in the market. Relying on this source in the implementation of a long-term project, the impact of which will be felt in a few years, is risky.
Getting the budgetary funds is always a waste of time and there are significant time costs associated with numerous bureaucratic delays. Only companies with a high degree of government involvement can seriously consider this source of investment.
Bank loans are, on the one hand, an over-reliance on one creditor, on the other hand, are the need for the return of borrowed funds at high interest rates.
Finally, bond issues include ensuring the necessary flow of payments on the coupon payments, which in the case of long-term project can become heavy. In addition, the bond issues in the Russian conditions are quite often accompanied by the requirement of the offer, which also makes it difficult to use them for financing capital projects.
The marked disadvantages of raising capital sources listed above are overcome by the use of such sources as the Initial Public Offering (IPO). This is clearly demonstrated in Table 1.
Table 1. Advantages of PO over other investment sources
Disadvantages of the source of investments Benefits of IPO
Retained earnings: * Dependence on the prevailing economic conditions A large one-time receipt of capital. Independence on the future economic situation
Budgetary funds and state loans: * Costs associated with red tape Efficiency of resource flows, absence of bureaucratic delays. Lack of obligations (including social programs)
Bank loans: * Dependence on one creditor; * Return of borrowed funds at high rates Independence from a particular financial institution. The lack of future payments
Bonds: * Provision of coupon payments; * Raising funds for a specified period No obligation on servicing the loan. An unlimited period of raising capital
Thus, the IPO is the standard procedure laid down in the legislation of most countries with market economies.
However, in the Russian legislation the concept of «Initial Public Offering» does not exist. The Federal Law "On securities market" gives the following definition: A public offering of securities, public circulation of securities, listing of securities.
IPO is a procedure for the placement of securities, usually common or preferred shares in the open market in order to attract capital. This privately owned company goes into the status of the public companies. This gives a number of benefits, at the same time it imposes significant obligations.
Infrastructure and implementation stages of the IPO
The duration of the stages of preparation and the IPO placement depends on many factors: the state and the current market conditions, the level of elaboration of documents, internal readiness of the participants, the complexity of the passage of the bureaucratic procedures, etc. The process can generally be divided into three stages: prior to placement, placement, after placement. In more detail, these steps are shown in Tables 2 and 3.
Table. 2 the first (preparatory) phase is described, Before which the company develops a strategy to move to the international financial reporting standards, to undertake the necessary structural reforms, to create public credit history (by placing a promissory note and bond issues).
Table 2. Measures aken by the action in the preparatory phase IPO
Period Actions
1. For at least 3-4 years before placing Formation of credit history: the use of lending instruments, promissory notes and bonds; fulfillment of credit obligations
2. For the 2-3 years prior to placing Making the transition of reporting systems to international standards (in the US GAAP or the IAS (IFRS), - US GAAP are more conservative with respect to IAS, and thus open the way to a greater number of alternatives among the sites)
3. More than 1 year prior to placing IPO Evaluation of alternative sources of funding in terms of the strategic goals of the company and the owners
4. More than 1 year prior to placing Choice of bank-underwriter and use it to: ■ Definition of placement options: placing volume, share prices (and the fair value of the package as a whole), platforms, transaction structure, the structure of the investors ■ Project plan development
5. More than 1 year prior to placing Implementation of pre-marketing: collection of the views of investors and investment analysts regarding the criteria for assessing the companies of the same type, the same industry, the same country on the selected type of sites by targeted investors
6. More than 1 year prior to placing Adoption of the decision by the Board of Directors on the issue (or additional issue) of shares. Preparation and publication of the minutes of the Board of Directors
7. More than 1 year prior to placing Formation of the project team, the choice of partners: ■ A financial advisor for creation of a core investment ■ Legal consultant for the formation of a transparent legal structure of the company ■ The auditor for certifying the company's financial statements in accordance with Russian standards and IFRS ■ Marketing consultant for determining the company's information policy, the organization of IR [14] and PR policies. IR agencies for the implementation of information support of the project ■ Agencies of executive search & board consultancy for findimg independent directors (often - foreign citizens) and their input into the Board of Directors ■ The auditor of corporate governance for determining the position of a corporate governance rating ■ Implementation of preparatory activities with the use of
them.
8. Before 11-12 months prior to placing Preparation of the decision on the issue of the securities prospectus. Adoption of the decision on the issue of the securities prospectus
9. Before the first 11 months or more prior to placing Preparation of analytical reports (duration of 6 months) for: ■ Industry and market, ■ Performance of the company, ■ The company's strategy, ■ Management of the company.
10. Before 10 months prior to placing Conducting due - diligence (by legal advisor, auditor, financial advisor, bank-underwriter)
11. Before first 9 months prior to placing State registration of documents in the Federal Financial Markets Service
12. Before 5 months prior to placing Preparation of the prospectus as a result of due - diligence
13. Before 5 months prior to placing Updating the valuation of the hosted package (according to the due-diligence and evaluation of market conditions)
14. Before 5 months prior to placing Disclosure of company information among a wide range of investors
15. Before 3 months prior to placing Determination of the price range
16. Before 0.5 - 1.5 month prior to placing Release of the preliminary prospectus. Carrying out an independent analysis of the prospectus issue by an auditor
17. Before 1-2 months prior to placing Organization of introductory road trial
18. Before a week prior to placement Release of the final prospectus. Carrying out an independent analysis of the prospectus by an auditor
It remains to add that the average time between the decision on the possible initial placement and the beginning of trading of Russian companies is about four years.
The second stage is the direct placement of securities. All the companies that listed their shares on the stock exchange, claim that the IPO is just beginning with this. A routine work with investors, organization of regular reporting of publications, support of the company's website, disclosure and correct supply of the so-called material facts from the life of the company require a constant operation IR-Service.
Table 3. Measures taken by the action after the IPO
Period Actions
1. Preparation and approval of the report on the issue by the Board of Directors, the publication of information about the material fact
2. Registration of the report on the results of the emission to the FSFM
3. The stabilization (within 30 days)
4. Organization of secondary circulation of shares on the stock exchange
5. Regular work with investors, preparation and publication of regular reports, supporting the corporate website (the profile of the investor), the disclosure of material facts from the life of the company, the release of analytical reports, conducting road shows, organization of conference -calls between the top management of the company and investment analysts, organization of presentations of top-management in international forums and discussion sites, organization of meetings of top managers with large investors or fund managers, the organization of press business support.
IPO is a well-structured process in which there are clearly distinguished independent activities carried out by relevant experts. It is the formation of a team of professionals that is one of the key components of a successful IPO.
During the IPO corporate governance is considered to be multidimensional and multifaceted.
Corporate governance is a reporting system to the shareholders who are entrusted with the current management of the company.
Corporate governance is the way of the company's management, which ensures the fair and equitable sharing of the results of performance between all shareholders and other interested parties.
Corporate governance is a set of measures and regulations that help shareholders to control the company's management and influence the management for maximizing profits and the value of the company.
Corporate governance is the system of relationships between the managers of the company and its owners for ensuring the effectiveness of the company's activities and protecting the interests of owners and other stakeholders.
Russian companies increasingly attract funds by placing its shares on both Russian and foreign trading floors.
Russian IPO practices show that issuers opt for one of the main platforms: MICEX, NYSE, LSE. It is clear that each of them has its own specific advantages and disadvantages.
Reliability of investing funds in shares of Russian companies
According to a study conducted by NAFI, when the question about the reliability of investment of personal funds in the shares of Russian companies appeared, opinions were divided as follows. 22% of respondents thought it was quite safe investment. A little more, namely 30% of Russians believe that the IPO is unreliable and risky for investing in stocks. 45% of respondents rated reliability as neutral, and another 3% of the respondents found it difficult to assess the reliability of the purchase of shares of Russian companies.
It is to be noted that in assessing the prospects of investments in shares of companies conducting an IPO, in the respondents' answers profit coincides with reliability. In other words, among the respondents who considered buying stocks as a good investment of money (27% of the study sample), there is a large percentage of those who considered the purchase of shares as a safe investment of money (73% combined).
Thus, it revealed a kind of stereotype. In the field of investment of finance, as we know, the most favorable (or profitable) forms of investments of money are the most risky. Conversely, forms of investment with low profits are the most reliable and protected from all sorts of risks. It is possible that the respondents' answers, obtained in the course of the study, are defined as an insufficient level of financial literacy and awareness of the fundamental principle: "The higher the gain is, the higher the risk is."
Problems of development of the market of the primary offering of shares
The analysis of the experience of the development of the Russian market of public securities offerings allows us to conclude that in addition to the negative effects of the global financial crisis, there are also obvious problems that hinder the development of IPO in Russia. These problems can be divided into several groups.
Related problems connected with:
1. the legislation;
2. The infrastructure of the market of securities;
3. The parties of the IPO procedure (investors, issuers-companies);
4. Pricing mechanisms in the implementation of IPO transactions.
The main problems of the Russian stock market are still linked to the regulatory legal acts: on the one hand, the market is overly regulated, on the other hand, due legal provision is absent. There is also a problem of legal restrictions on the participation of investment and pension funds in the IPO. In the West, pension funds are the largest portfolio investors in the stock market, which have enormous resources. Thus, as the world practice shows, the investment and pension funds could significantly increase the inflow of "long-term investment."
For some Russian issuers compliance with the new corporate governance requirements is problematic. Although the majority of companies consider raising standards of corporate governance as an additional benefit from the IPO, rather than as an obstacle.
Such mechanisms as cross-ownership or offshore companies, are actively used by Russian companies in order to optimize taxes. This is negatively perceived by foreign investors as a circuit leading to a decrease in transparency and an increase in risk.
Trading for some issuers is not carried out every day, which significantly complicates the monitoring and limits the ability of investors, managers and brokers.
Prices are calculated on the merits by the issuers or underwriters, as a result, they do not always correspond to the real price. It happens that a month after the placement (after the end of the period of support for market-makers), trading in securities does not take place, and the price falls.
According to studies, for eight of the largest corporations in Russia, this figure does not exceed the average of 12%. A free float is in the range of 25-30% in the market. For comparison, in countries with developed markets, this figure reaches 80-90%.
Experts also doubt the popularity of Russia as various indices that determine the composition of investment portfolios take into account not all of the factors.
A low price of placement may be due to the limited financial capabilities of Russian investors, a low liquidity of the market or due to lack of examples of such public offerings of a particular industry.
So, the main directions for overcoming the problems of the development of the Russian IPO market are:
1. Improvement of the legal framework;
2. Improvement of the infrastructure of the stock market on the following areas: improvement of the competitiveness of the Russian stock exchanges, the establishment of an effective system of clearing, the creation of the Central Depository, etc .;
3. Expansion of the investor base: both from the institutional (mutual, insurance and pension funds), and from the part of citizens;
4. The further development of corporate governance principles. As a result, the solution to all these problems there will be positive changes in the initial public offering market.
For example, many companies will be able to gain access to the market, which would result in an increase in the number of IPO deals in the Russian financial market. There will be development of collective investment institutions, which will lead to an increase in the share of investment, aimed at long-term investments. Terms and conditions for transactions on the Russian stock market will be able to compete with similar conditions on international markets, with the result that Russian companies will be able to choose more and more domestic stock exchanges. Positive trends on overcoming all the above problems have emerged and the demand from domestic companies-issuers on conducting public offerings on the Russian stock exchanges is already forming. In addition, the Russian standards of the IPO are close to the standards accepted worldwide.
Prospects for the Russian IPO
In Russia there are about 200 non-public companies with the capitalization of more than $ 500 million each, which could potentially enter the IPO market. According to experts, the volume of securities offerings (both primary and secondary) in the past 3 years has given the increase of approximately 50% per year, with more than 40% of the public offerings of Russian companies are carried out on Russian stock exchanges.
Thus, according to experts, the dynamics of the market development of public offerings is generally positive and has a fairly wide scope for growth, however, in the long run experts forecast an increase in the share of placements in foreign markets.
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