INITIAL PUBLIC OFFERING (ISSUANCE PROCESS)

 

Initial public offering (IPO) is a way of a company raising equity capital, where shares of a company are issued or sells new or existing securities for the first time when the company is going public.  When a company issue shares, not only it can raise fund, but also it can give a better position to secure business models and investors will feel safer dealing with public listed companies. To be a Shariah-compliant IPO, the issuer must comply with the rules of the Shariah Advisory Council and be free from elements of non-halal business conduct and interest (riba). So, during the pre-IPO stage, a potential issuer may request to the SC for a review of its securities in order for the SAC to classify them as Shariah-compliant.

To issuance Initial Public Offering, there is a process that need to be faced by the company. First step that a company need to take is to select an investment bank. The investment bank soon will advise company on its Initial Public Offering and also need to provide underwriting services to the company. Thus, to select the most eligible investment bank for their company, the company will choose the investment bank based on a few criteria:

1.      Reputation.

2.      The quality of research.

3.      Industry expertise

4.      Distribution

5.      Prior relationship with the investment bank.

            The second step is the underwriting process and registration statement by the investment bank. The investment bank, also known as an underwriter, operates as a broker between the issuing firm and the general public in order to assist the issuing company in selling its initial set of shares. So, as an underwriter, the bank must draft the following documents:

            1.  Engagement Letter

                     2.  Letter of Intent

            3. Underwriting Agreement

            4. Registration Statement

            5. Red Herring document

The third step is pricing. The effective date is set once the Securities and Exchange Commission approves the IPO. The issuing company and the underwriter decide on the offer price (i.e., the price at which the shares will be sold by the issuing company) and the specific number of shares to be offered the day before the effective date. The offer price is significant because it is the price at which the issuing business raises funds for its own purposes. IPOs price are often underpriced. If an IPO is underpriced, the investors of the IPO expect a rise in the price of the shares on the offer day. Which it will increases the demand for the issue.

The next step is stabilization. The underwriter is responsible for providing analyst recommendations, after-market stabilization, and the creation of a market for the shares issued after the issue has been brought to the market. Stabilization efforts can only be carried out for a specified time, but during that time, the underwriter has the flexibility to trade and affect the issue's price since price manipulation regulations are suspended.

The last step is the transition to market competition. Once the "silent period" imposed by the SEC expires, the final stage of the IPO process begins 25 days following the initial public offering. During that period, investors migrate on market forces for information about their shares during this time. After the 25-day period has passed, underwriters can submit estimates for the issuing company's earnings and value. As a result, after the issue is made, the underwriter takes on the responsibilities of advisor and evaluator.