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There have been debates over whether some newly listed companies in Japan have been able to raise enough capital when they go public. The securities industry and the government need to closely examine the problem and take necessary measures to improve the situation.
The Japan Securities Dealers Association (JSDA), an industry group of securities firms, has begun exploring a review of the process for determining the initial public offering (IPO) price at which shares are sold to investors before firms make their market debuts. The JSDA said that it would compile concrete measures for that purpose by the end of this year.
This is due to concerns from the government and other parties that IPO prices have been kept low. In Japan, the opening prices, which are the prices fetched from the first transaction after market debuts, are 50% higher than the IPO prices on average. The jumps seen in Japan are much higher than those seen in such countries as the United States, where the average increase is about 20%.
A company wishing to go public chooses a securities firm to act as a lead in the IPO process and its offering price is decided through consultations with the securities firm. It is said that before determining the IPO price, the securities firm listens to the opinions of such institutional investors as pension funds, insurance companies and investment funds, and assesses such factors as the level of demand.
The amount of funds raised by a newly listed company is determined by its IPO price and the number of shares issued. Therefore, even if the opening price rises significantly, it does not mean that the company will receive more funds.
For investors, the lower the IPO price, the easier it is to make a profit on the sale of shares, but companies complain that they could have raised more funds if the IPO price had been higher.
Many newly listed companies are start-ups. The government has included strengthening the nurturing of start-ups in its growth strategy. If low IPO prices are negatively impacting fund-raising efforts, that would be a problem.
Securities firms have the upper hand in determining the price of public offerings. There has been some suspicion that the securities firms keep the IPO prices low and allocate shares at low prices to their clients in order to corral good customers.
Selling low-risk, profitable newly listed stocks to blue-chip customers cannot be said to be salubrious.
The securities industry must examine the actual situation regarding sales of such stocks and reconsider the opaque practices. It is also advisable to create a framework in which securities firms are required to fulfill their accountability, and the appropriateness of an IPO is verified after a market debut if the opening price is significantly higher than the offering price.
The Fair Trade Commission has started investigating whether IPO prices have been kept unduly low. The FTC reportedly has asked listed companies to answer questions such as whether they were able to negotiate sufficiently with securities firms in calculating IPO prices, and whether they were satisfied with the IPO prices.
In many cases, securities firms are seen to hold a superior bargaining position over start-ups. The FTC should thoroughly investigate the matter.
— The original Japanese article appeared in The Yomiuri Shimbun on Oct. 7, 2021.
