Securities industry must be more transparent about setting IPO prices

It is important to have a system that enables start-ups to raise enough capital necessary in the stock market when they go public. The securities industry should be more transparent about how a decision is made regarding the initial public offering (IPO) price, which affects the amount of funds that can be raised.

How much a newly listed company receives is determined by its IPO price — at which shares are sold to investors prior to the start of actual trading — and the number of shares issued. The opening price is the price fetched in the first transaction after a company’s market debut.

Opening prices in Japan are 50% higher than the IPO price on average, much higher than in such countries as the United States and Germany, where the average increase is about 20%.

Since opening prices can also be seen as the actual value reflecting the evaluation of the market, it is only natural that listed companies want to believe that they should have been able to raise more funds.

The Fair Trade Commission has compiled a survey report on the process for determining IPO prices, in response to the government touching on the matter in its growth strategy last year.

The FTC said in its report that if a dominant securities firm unilaterally sets a low IPO price, doing so could be seen as a problem under the Antimonopoly Law. No specific case of this was found, it said.

The IPO price is based on a theoretical price calculated in accordance with a company’s financial condition and other factors, and determined in talks between a securities firm that serves as the lead managing underwriter and the company going public. In many cases, however, the securities firm takes the lead in making the decision.

In determining IPO prices for low-profile start-ups, it is a common practice to set them at a certain discount to theoretical prices. According to the report, about 60% of securities firms surveyed said they had applied discount rates ranging “from 20% to less than 30%.”

Responses to the FTC survey included a case in which one listed company was told by a securities firm that “a 40% discount is necessary because the pandemic is affecting the market.” Another respondent said, “We asked for an explanation of the basis for the calculation, but we couldn’t get anything.”

The securities industry must sincerely listen to complaints from listed companies and make efforts to improve the situation.

One respondent said in the survey, “I heard there’s a tendency to lower IPO prices so it’s easier for securities firms to sell them to individual investors.”

If the opening price exceeds the IPO price, investors who bought shares at the IPO price in advance will make a profit, leading to speculation that this tactic is being used to lock in blue-chip clients.

The securities industry denies this, but it needs to strive to realize the formation of fair prices to avoid causing any suspicion.

The Japan Securities Dealers Association is studying ways to improve the situation. It plans to proactively disclose information used for the calculations, in a bid to clarify the basis for setting IPO prices. It should thoroughly implement this as soon as possible.

— The original Japanese article appeared in The Yomiuri Shimbun on Feb. 7, 2022.