Introduction

Initial public offering (IPO), is one of the basic components of a capital market. It enables a
company to establish a trading market for its shares as shares sold through Public Offerings are
listed at the Securities Exchange for trading and quotation of their prices. IPOs not only enable
companies to raise funds from the capital market for meeting their financial needs, but also
provide the public opportunity to own and participate in the growth of a formerly private
company. Investment in IPOs by its nature can be risky and speculative. It is advisable for the
investors to do their own research by studying the prospectus and understanding the risks
involved before investing their money. This Guide provides the investors with information they
should consider when investing in the shares or any other security of a public limited company
through an IPO.
Through IPOs, the corporates can offer different securities in the form of equity, quasi equity or
debt. The most common securities issued in our market are ordinary shares. IPOs are made
through a prospectus issued, published and circulated with the approval of Securities and
Exchange Commission of Pakistan (SECP) under the Securities Act, 2015 (the Act). In addition
to ordinary shares, other securities such as preference shares, Sukuk, PTCs, and TFCs etc. can
also be issued through IPOs. Normally, IPOs include only new shares that the Issuer sells in
order to raise capital. However, in some cases shares held by existing shareholders are sold
through IPOs. The proceeds from the sales by selling shareholders do not go to the Issuer, but
instead go to the selling shareholders. Selling shareholders may include sponsors/promoters and
other early investors seeking liquidity of their investment.

.What is an IPO?
IPO is the first time sale of securities by a company to the public. It is one of the modes of
fundraising from the capital markets. IPOs, also known as the Primary Market bring together
companies that need funds and investors who have surplus funds for investment.

An initial public offering (IPO) refers to the process of offering shares of a private corporation to
the public in a new stock issuance. Public share issuance allows a company to raise capital from
public investors. The transition from a private to a public company can be an important time for
private investors to fully realize gains from their investment as it typically includes share
premiums for current private investors. Meanwhile, it also allows public investors to participate
in the offering.

Going public is an enormous undertaking and the decision to go public requires careful
consideration and planning. Experts recommend that business owners consider all the
alternatives first examine their current and future capital needs, and be aware of how an IPO will
affect the availability of future financing. Lindsey suggested going public when the stock
markets are receptive to new offerings, the industry is growing rapidly, and the company needs
access to more capital and public recognition to support its strategies for expansion and growth.
The most common reason for a company to initiate an IPO is to raise additional capital and to
establish a trading market for its shares. Other reasons may include monetization of the
investments of early private investors. The funds raised may be used for meeting financial needs
of the company such as financing new projects/ventures, expansion of existing business, and
repayment of expensive loans etc.
The public market opens up a huge opportunity for millions of investors to buy shares in the
company and contribute capital to a company’s shareholders' equity. The public consists of any
individual or institutional investor who is interested in investing in the company. Overall, the
number of shares the company sells and the price for which shares sell are the generating factors
for the company’s new shareholders' equity value. Shareholders' equity still represents shares
owned by investors when it is both private and public, but with an IPO the shareholders' equity
increases significantly with cash from the primary issuance.
The number of IPOs being issued is usually a sign of the stock market's and economy's health.
During a recession, IPOs drop because they aren't worth the hassle when share prices are
depressed. When the number of IPOs increase, it can mean the economy is getting back on its
feet again.

IPO Process:

According to the Corporate Finance Institute, there are five steps in the IPO process.
Select an investment bank
The first step in the IPO process is for the issuing company to choose an investment bank to
advise the company on its IPO and to provide underwriting services. The investment bank is
selected according to the following criteria:
 Reputation
 The quality of research
 Industry expertise
 Distribution, i.e., if the investment bank can provide the issued securities to more
institutional investors or to more individual investors
 Prior relationship with the investment bank.
Due diligence and regulatory filings:
The second step is the due diligence and regulatory filings. It occurs three months before the
IPO. This is prepared by the IPO team. It consists of the lead investment banker, lawyers,
accountants, investor relations specialists, public relations professionals, and SEC experts.
The team assembles the financial information required. That includes identifying, then selling or
writing off, unprofitable assets. The team must find areas where the company can improve cash
flow. Some companies also look for new management and a new board of directors to run the
newly public company. The SEC will investigate the company. It makes sure all the information
submitted is correct and that all relevant financial data has been disclosed.
Pricing:
The third step is pricing. It depends on the value of the company. It also is affected by the
success of the road shows and the condition of the market and economy. After the SEC approves
the offering, it will work with the company to set a date for the IPO. The underwriter must put
together a prospectus that includes all financial information on the company. It circulates it to
prospective buyers during the roadshow.
After the IPO is approved by the SEC, the effective date is decided. On the day before the
effective date, the issuing company and the underwriter decide the offer price (i.e., the price at
which the shares will be sold by the issuing company) and the precise number of shares to be
sold. Deciding the offer price is important because it is the price at which the issuing company
raises capital for itself. The following factors affect the offering price:
 The success/failure of the roadshows (as recorded in the order books)
 The company’s goal
 Condition of the market economy
IPOs are often underpriced to ensure that the issue is fully subscribed/ oversubscribed by the
public investors, even if it results in the issuing company not receiving the full value of its
shares.
Stabilization:
The fourth step is stabilization. It occurs immediately after the IPO. The underwriter creates a
market for the stock after it's issued. It makes sure there are enough buyers to keep the stock
price at a reasonable level. It only lasts for 25 days during the "quiet period."
Transition:
The final stage of the IPO process, the transition to market competition, starts 25 days after the
initial public offering, once the “quiet period” mandated by the SEC ends.
During this period, investors transition from relying on the mandated disclosures and prospectus
to relying on the market forces for information regarding their shares. After the 25-day period
lapses, underwriters can provide estimates regarding the earning and valuation of the issuing
company. Thus, the underwriter assumes the roles of advisor and evaluator once the issue has
been made.

Whether we should invest in IPO or not?

It is not a question of simply yes or no because it depends upon different conditions that varies
from company to company after reading or deeply analyzing those conditions or things we are on
answer of yes or no. It is critical to read and understand the prospectus and consider the
following aspects that are provided in detail in each prospectus. Those conditions or
circumstances which are taking into account by an investor before investing in IPO are as
follows:
 Company / group profile, history and its management;
 Nature of the business, business model/strategy of the company;
 Principal products or services and their markets;
 Significant suppliers and customers on whom the issuer's business depends, its
competitive landscape and strategy to manage the risk of competition;
 Financial and operating position of the Issuer and comparison thereof with financials of
the peers;
 Capitalization of reserves during recent years;
 Purpose of the Issue;
 Uses of the IPO proceeds/public money
 Issuer's history with respect to payment of cash dividend and its policy for future
dividends. Restrictions, negative covenants, if any, etc. with respect to payment of
dividend;
 Offer price and rationale disclosed for charging premium, if any, to the face value;
 Auditor's certificate on balance sheet and income statements, issued and paid up capital,
and explanatory notes thereto;
 Breakup value and earning per share;
 Past regulatory and financial defaults by the issuer, its associates, sponsors, substantial
shareholders and group companies;
 Overdue loans of the Issuer, its associates, sponsors, substantial shareholders and group
companies;
 Outstanding legal proceedings; and
 Risk factors including those specific to the issue, Issuer, capital market, industry and the
economy.
These above mentioned points or conditions must be taking into consideration before doing the
final decision of investment in any company.