Applying for an IPO?

The Colombo Stock Exchange (CSE) offers a market for trading in securities of listed companies and can purchase securities of a company when they make an IPO or from the stock market.

What is an Initial Public Offering (IPO)?

This is the first sale of securities by a company to the public. Colloquially, it is said that a company is 'going public'. A company can raise money by issuing either debt or equity.

It can be through an Offer for Subscription, where new shares are created and money collected is channeled towards the business of the company, or through an Offer for Sale, where existing shares are sold and the money collected will be directed to the existing shareholders.

Public companies have a larger number of shareholders and are subject to rules and regulations.

In Sri Lanka, listed public companies have to abide by the rules and regulations of the CSE in addition to complying with the provisions of the Companies Act.

Additionally, they are subject to the regulation of the Securities and Exchange Commission of Sri Lanka (SEC). From an investor's standpoint, the most exciting about a public company is that the security is traded in the open market, like any other commodity.

How can I get an IPO?

All IPO's are publicly advertised.

A good way to obtain information is by scrutinising the CSE website or any of its regular publications where you are sure to find details of forthcoming new public issues.

When a company wants to go public, it will use all media to invite the public to take part in its IPO.

They will also issue a Prospectus, a document which provides information about the company and the main objective of the issue of securities. Some of the contents of a Prospectus are: - Profile of the Company - Objectives of the issue - Particulars of the shares for which Application is being made - Basis of Allotment of securities among applicants - Cost of the issue - Directors - Management - Financial Information - Corporate Governance Practices - Reports by experts - Underwriting/Minimum subscription.

How to buy Shares from an IPO?

To purchase shares through an IPO, you should: 1. Obtain the prospectus of the IPO free of charge, from either the Managers of the Offer, or your Stock Broker Firm or from the CSE Website.

2. Read the prospectus carefully and determine whether you should subscribe for the issue. You can also speak to your investment advisor in this regard. 3. Fill in the form and decide the amount of shares that you wish to purchase.

4. Send in a bank draft or a cheque for the amount of shares subscribed for, along with the application form, to the Managers of the IPO. You can either post the documents or hand it in to the Managers personally.

When the subscription deadline is over, the Managers will collate all the applications received and ensure the applicants receive their subscribed shares.

However, if the issue is over-subscribed, you might not receive the full amount of shares applied for.

What are the factors that I need to keep in mind before deciding to apply to an IPO?

1. Track record of the promoters: Background and experience of the promoters, the management team and their expertise are some of the main factors that need to be considered as they will be the ones responsible for the profitability of the company.

2. Financials: The Company's balance sheet is a very important document and investors should look at it carefully.

A prospectus provides the audited annual accounts for the last three years and you can use this information to get an idea of the company's growth and focus.

3. Issue price: Investors need to decide if the issue is worth investing in at that price. One way of checking the valuation is to look at the Price-Earnings (P/E) multiple. The P/E multiple is the ratio of the share price to earnings per share (EPS is listed in the balance sheet). P/E of the issue should be compared with the industry average and the other companies in that sector.

If the investor applies directly, they will receive a share certificate. The investor could also request for his shares to be deposited directly in their respective CDS accounts and must specify this on the application form itself.

Book Building:

Book Building is when the issue price for the IPO is not fixed and a price band is provided for prospective investors to bid within. It is basically the process of generating a book of investor demand for the shares during an IPO for efficient price discovery. Usually, the issuer appoints an investment bank to act as a book runner. During a fixed period of time for which the subscription is open, the book runner collects bids from investors at various prices, between the floor price and the cap price.

When you buy shares, will you always gain?

No, you may not. Any form of investment has its own disadvantages, which may include an element of risk. That is why you should select the kind of investment that best suits your needs: (1) In terms of the return it generates.

(2) The risk you are willing to take. (3) Liquidity; meaning how quickly you want your investment to be converted back to cash.

An investment in shares may give you higher returns and offer liquidity. What you have to do is to decide what level of risk you are willing to take. After all, managing an investment is about managing the risks in it. However, once you purchase shares, your stockbroker will assist you in deciding what is best for your investment.

Do keep in mind that prices of shares may rise or decline not only due to the performance of the relevant company, but also due to several other factors such as interest rates fluctuations, the economic conditions of the country, political stability, and investor sentiment. One or more or a combination of factors may either increase or decrease share prices.

On the other hand political instability may drive down share prices. Therefore professional advice from a stockbroker is recommended if you are not quite aware of the market conditions.

Courtesy CSE