DIRECTIONS FOR PLACEMENT OF SHARES IN THE STOCK MARKET BY THE METHOD OF INITIAL PUBLIC OFFERING

ABSTRACT

This article provides comprehensive directions for the effective placement of shares in the stock market utilizing the Initial Public Offering (IPO) method. The article covers introduction to IPOs, outlining the significance of IPOs as a financial tool for companies to raise capital and go public, discussing the vital steps companies need to take in preparation for an IPO, including financial audits, regulatory compliance, and the establishment of a compelling value proposition, This article sets the stage for a comprehensive exploration of Azerbaijan's evolving capital market landscape, shedding light on the economic dynamics, regulatory frameworks, and strategic initiatives shaping the financial trajectory of the nation. The collective efforts outlined herein seek to position Azerbaijan's capital market as a dynamic and attractive avenue for issuers and investors alike, contributing to sustained economic growth and financial development.

АННОТАЦИЯ

В данной статье представлены комплексные направления эффективного размещения акций на фондовом рынке методом первичного публичного размещения (IPO). В статье рассматривается введение в IPO, описывается значение IPO как финансового инструмента для компаний по привлечению капитала и выходу на биржу, обсуждаются жизненно важные шаги, которые компании должны предпринять при подготовке к IPO, включая финансовый аудит, соблюдение нормативных требований и создание убедительное ценностное предложение. Эта статья закладывает основу для всестороннего изучения развивающегося ландшафта рынка капитала Азербайджана, проливая свет на экономическую динамику, нормативную базу и стратегические инициативы, формирующие финансовую траекторию страны. Описанные здесь коллективные усилия направлены на позиционирование рынка капитала Азербайджана как динамичного и привлекательного направления как для эмитентов, так и для инвесторов, способствующего устойчивому экономическому росту и финансовому развитию.

Keywords: stock market, IPO, shares, capital, financial development.

Ключевые слова: фондовый рынок, IPO, акции, капитал, финансовое развитие.

INTRODUCTION

The Initial Public Offering (IPO) process stands as a pivotal moment in the lifecycle of a company, representing a strategic move towards accessing public capital markets. This document aims to provide comprehensive and strategic guidance for the effective placement of shares in the stock market through the method of an Initial Public Offering. As a financial mechanism, an IPO serves as a transformative step for companies, enabling them to raise substantial capital, enhance visibility, and catalyze growth. Simultaneously, it offers investors an opportunity to participate in the early stages of a company's public journey. The journey towards an IPO is multifaceted, requiring meticulous planning, adherence to regulatory frameworks, and strategic communication. Through this guide, we delve into the various stages of the IPO process, offering insights into the critical considerations that both companies and investors must address to navigate this complex terrain successfully [4].

Our exploration begins with the preparatory phase, where companies lay the foundation for a successful IPO by conducting financial audits, ensuring regulatory compliance, and crafting a compelling narrative that resonates with potential investors. Valuation strategies are then examined, providing an understanding of the methodologies employed to ascertain the optimal pricing of shares. The subsequent sections address the intricacies of marketing and roadshows, shedding light on the importance of effective communication in generating interest and demand among investors. Regulatory compliance is underscored as a non-negotiable aspect, emphasizing the need for companies to navigate the regulatory landscape seamlessly.

The role of underwriting and syndication is explored in detail, elucidating how underwriters and syndicates play a vital role in the issuance and distribution of shares, contributing to the success of the offering. Post-IPO stewardship is discussed, highlighting the responsibilities that companies must shoulder to maintain transparency, build investor relations, and uphold market confidence.

Directions for placement of shares in the stock market by the method of initial public offering

Initial public offering or IPO (Initial Public Offering) is the first public sale of a company's shares to the general public. During an IPO, a company issues shares and places them on the stock exchange, and any interested investor or investment fund has the opportunity to purchase the securities.

A company cannot simply issue new shares and go public immediately. Before that, it has to go through several stages in which investment banks, lawyers, marketers and many other specialists will be involved. To be listed on the stock exchange, a company must have a good business history and prepare transparent financial statements for several years. For example, only a company with an initial capitalization of at least $50 million can list its shares on the New York Stock Exchange. [3]

The initial stage of the company's IPO is the longest stage, it can last from several months to several years. During this period, the company should evaluate its business, asset structure and corporate governance. Then it calculates at what price and how many shares should be issued and accordingly determines the future capitalization of the company. It is also important to assess the degree of financial and information transparency. This helps to increase the confidence of investors in the company and increases its reputation. In addition, the prospective issuer is obliged to submit quarterly financial statements to the public under stock exchange trading rules.

Based on the results of the analysis, the company decides whether it is profitable for it to sell its shares at a public auction. The board of directors should consider all the pros and cons and give an opinion on whether the company should go for IPO or not. After that, the company signs an agreement with the underwriter - and the next, preparatory stage of the IPO begins. The underwriter is usually an investment bank with which the company has a contract, and it is involved in all preparations for listing the shares on the stock exchange. Usually, several underwriters work on an IPO. In addition, the stock exchange and brokers where the shares will be placed are selected. The underwriter evaluates the company and, taking into account the market conditions, determines the parameters of the upcoming IPO, the number of shares, the price and the period during which it will be issued. [2] Then, the company, together with the underwriter, prepares a prospectus for the regulator of the country where the IPO will take place. In Azerbaijan, IPO operations are supervised by the Central Bank, and in the United States, the Securities and Exchange Commission (SEC). The prospectus contains detailed information about the company - information about management and shareholders, financial reports, dividend policy. The company also explains why it chose to raise funds, how many shares it plans to issue, timing of the placement, etc. must explain. If the information specified in the document meets all the requirements of the regulatory body, the IPO date is set. In addition to the prospectus, the underwriter and the issuer prepare an investment memorandum - a document that contains the information necessary for investors to decide whether or not to invest in the company. Finally, an advertising campaign is launched to increase the interest of investors in the placed securities. Company representatives meet with potential investors and brokers during visits to major global financial centers such as London, New York, Hong Kong or Tokyo. At the "Road Show" or Road Show, the management discloses information about the company's activities and stock placement to investors. The Road Show usually lasts two to three weeks. [8]

During the Road Show, initial offers for the issuer's shares are collected. Large investors get the right to buy the shares before the official placement. Based on the collected applications, the underwriter receives information about how many shares investors want to buy and at what price. Incidentally, the underwriter has the right to pre-IPO by reselling the shares after the placement.

The final stage or listing is the beginning of circulation of securities on the stock exchange. With the start of trading on the stock market, it finally becomes clear how effective the IPO is. If the value of the securities is adequate to the market conditions, then the issuer can hope for the formation of a stable reputation in the stock market and an increase in its capitalization.

During the initial public offering of shares (IPO), investors may be offered shares of additional and (or) main issues. They are given in the Figure 1.

Figure 1. Shares Offering to Investors

(Source: Author’s Own based on the articles summary and internet research)

PPO (Primary Public Offering) is an initial public offering of additional (new) issue shares to an unlimited number of individuals. This is a "classic" IPO option. SPO (Secondary Public Offering) is a secondary public offering of shares in the main issue (shares of existing shareholders) to an unlimited number of persons. An IPO should be distinguished from a PO (Public Offering), which is a public offer of company shares for sale to the general public. Follow-on ("additional placement") is another proposal that the additional issue of company shares to an unlimited number of individuals. The company's shares have already been listed on the stock exchange. There are several main purposes for conducting an IPO, the importance of which may vary depending on the specific situation, such as raising capital in the company where IPO gives the company access to capital from a wider range of investors or the availability of shares traded on the capital market provides the most objective assessment of the company's value, which can be used as a tool to assess the performance and motivation of managers or as a benchmark for mergers and acquisitions. The company's shareholders have the opportunity to sell all or part of their shares, thereby capitalizing on the company's expected future profits. After an IPO, the liquidity of shareholders' capital also increases dramatically, for example, banks are more willing to lend against listed (public) companies than private (private) companies. After the IPO, the company goes public, reports are clear and transparent, which is a priority for most companies. [2]

In 2021, there were 422 IPOs in the European market in the amount of 75 billion euros, and in 2020, 135 IPO transactions involving 20.3 billion euros took place. IPO volume in England reached 16.8 billion pounds. According to the PwC IPO Watch Europe 2021 annual study, there were 2,682 IPOs worth $607.7 billion in the global market. [1]

The top 10 European IPOs in 2021 were over €20 billion, including the following IPO transactions: InPost (€3,220 million), Volvo Cars (€2,315 million), Vantage Towers (€2,217 million), Allfunds Group (€2.164 million), Autostore (€2.127 million), Auto1 Group (€1,833 million), Azelis Group (€1,771 million), Deliveroo (€1,757 million), Dr Martens (€1,684 million), Acciona Energia (€1,509 million). The most active exchanges in 2021 are London (100 IPOs for €19,462 million), Stockholm (78 IPOs for €11,850 million), Amsterdam (24 IPOs for €11,366 million), Frankfurt (18 IPOs for €9,609 million) and Olo (54 IPOs for €5,912 million) shares. InPost's largest IPO in Europe took place on the stock exchange in Amsterdam. [6]

In 2021, the total number of IPOs in the United States reached 1,000, and the amount of funds raised was 315 billion dollars, before this figure did not exceed 200 billion dollars. This data was published by Dealogic analysts at the end of December 2021. According to their calculations, more than 50% (606) of initial public offerings on the stock exchange came from SPAC projects, of which 298 entered the stock market in the first quarter of 2021. Many SPAC deals have been accompanied by private equity investments (PIPEs) that allow companies to raise additional funds. [7]

The largest US IPO in 2021 was that of American hybrid car maker Rivian Automotive (about $12 billion). Other large initial public offerings include the IPO of China-based taxi service Didi Global ($4.4 billion), South Korean online retailer Coupang ($4.6 billion) and equity trading platform operator Robinhood Markets ($2.1 billion). [4]

Despite record IPO activity in 2021, share price dynamics after initial public offerings have been rather weak. About two-thirds of companies that went public through traditional IPOs in 2021 traded below their offering prices.

In Azerbaijan, the Baku Stock Exchange implemented stimulating measures in the direction of increasing access opportunities for issuers and investors to the capital market. In order to increase financing directions from the capital market in the private sector, the listing requirements were simplified, and the incentive tariff regime was implemented for issuers and investors. Also, the Baku Stock Exchange has implemented a mechanism for awarding investment companies that provide underwriting services with prizes for stimulating the mass offer of corporate securities. In 2020, the total trade volume of securities on the Baku Stock Exchange amounted to 12,902,026,738 Azerbaijani Manat (AZN). Compared to 2019, the secondary market trading volume increased by 47%, while the corporate securities market overall experienced a significant boost of 89%. Repo transactions saw a remarkable growth of 92% year-over-year. Notably, equity trading volume surged by 7100% in the primary market and 900% in the secondary market. The total market capitalization of the Baku Stock Exchange on the last trading day of FY2020 reached 3,957,888,532 AZN. It's worth mentioning that throughout 2020, 1 AZN was equivalent to 0.59 USD, as indicated by the official currency rate provided by the Central Bank of Azerbaijan. The volume of corporate securities excluding mortgage bonds constituted 210 million manats in 2020, 470 million manats in 2021 and 500 million manats in 2022 (Figure 2). As it can be seen from Figure 2, in 2021 44% increase is observed in comparison with 2021 that is a vast increase. In 2022, in Baku Stock Exchange Market the public offer constituted 76% and private offer constituted 24%.

Figure 2. Total Trade Turnover on Baku Stock Exchange 2020-2022

 (Source: Baku Stock Exchange)

Figure 3: REPO Operations 2020-2022

(Source: Baku Stock Exchange)

As can be seen from Figure 3, in 2020, the REPO volume on corporate securities faced 268% increase, but in 2021 dropped down by 90%, in 2022 it went up rapidly by 2694%. It shows vast development in REPO market within a year. The ratio of the REPO volume on Corporate Securities to the total REPO volume rose up by 0,82% in 2020, dropped down by 1,66% in 2021 and went up by 1,96% in 2022.

In the context of the development of the national capital market, the essence of the IPO is that when the issuer makes a public offer of its shares, the investors who buy those shares invest their funds in the company's assets and become joint owners of the enterprise. By buying shares, investors can expect to receive future income from their invested funds, that is, through the appreciation of the stock exchange rate and the payment of dividends.

Depending on the area of stock placement, certain additional requirements are required. The requirements for inclusion of securities in the first-level quotation sheet in Azerbaijan are:

• The issuer must be registered in accordance with the legislation of the country in which it is registered and must operate within 3 years prior to applying to the stock exchange for listing;
• The issuer must be organized in the form of an open joint-stock company (for registered shares and registered bonds) or in the form of a closed joint-stock company (for registered bonds);
• Bankruptcy proceedings should not have been started in relation to the Issuer for which a listing application was submitted during the 3 years prior to the submission of this application, or it should not face bankruptcy problems from time to time during the mentioned period;
• There should be no significant changes in the issuer's management bodies within 6 months prior to the date of submission of the application for listing. Changes in the management bodies of the issuer are considered significant when at least half of the members of its supervisory board or management board have been changed;
• The register of the owners of shares and bonds must be carried out by a registrar who is a professional participant of the securities market;
• Total capital should not be less than 5,000,000 manats;
• The issuer must have obtained an annual net profit based on the results of each of the last three financial years;
• The issuer must prepare financial statements in accordance with IFRS;
• If the Issuer applying for listing is a parent company, the Issuer must prepare a consolidated annual report prepared in accordance with IFRS;
• The issuer must be audited by an independent auditor in accordance with the requirements of the ABS (audit opinions must be unconditionally positive; only one year audit opinion can be conditionally positive);
• Must disclose its charter at its head office and/or website;
• The supervisory board must have at least 3 members, and at least one third of them must be independent directors;
• The issuer must have an internal audit committee;
• Acts with the concerned person must be carried out in accordance with the existing legislation.

The requirements for inclusion of securities in the second-level quotation sheet are:

• The issuer must be registered and operate in the territory of the Republic of Azerbaijan;
• The issuer must have operated for at least 1 year prior to the date of its application to the stock exchange for listing;
• Financial statements must be prepared in accordance with the requirements of the legislation;
• Must pass an audit conducted by an independent auditor.
• The issuer pays the appropriate fee determined by the Board of Directors of the Exchange for the inclusion of securities in the listing. [5, p. 52-53]

One of the main goals of the capital market is to increase activity in the financing of the real sector by the securities market. Although there has been significant progress in the financing of the real sector through corporate bonds in Azerbaijan, there are still some obstacles in the activation of the stock market. Factors such as lack of strong development of corporate governance standards in the private sector in Azerbaijan, low level of awareness of the capital market and instruments of the population and business subjects create restrictions on the attraction of capital by the securities market. In accordance with the action plan for the development of the capital market in the country, the Central Bank is working on the compliance of the legal framework with international standards, the development of the market infrastructure, as well as the support of demand and supply in the market [2].

Challenges for the institutional development of the stock market also require the modernization of the market infrastructure. In this direction, it is envisaged to create a centralized operating system covering trading and post-trading operations in the capital market through the Central Bank, to conduct operations on the emission and trading of securities in accordance with modern technological standards, and to create remote trading opportunities on the stock exchange for investors. In addition, the creation of a single portal between the Central Bank, the National Depository Center and the Baku Stock Exchange to increase the flexibility of issuers' financing procedures from the capital market has also been started. Thanks to the application of this system, it will be possible to carry out processes in the registration of securities electronically within a single window system.

CONCLUSION

The Initial Public Offering (IPO) process is a complex and strategic financial maneuver that marks a significant milestone in a company's journey towards public exposure and capital expansion. As outlined in this comprehensive exploration, the IPO journey is a meticulous progression involving various stakeholders, including investment banks, legal experts, and marketers. The initiation of an IPO demands a thorough evaluation of a company's business, assets, and corporate governance during the preparatory phase. This involves the calculation of share pricing, determination of capitalization, and a comprehensive assessment of financial and information transparency. The scrutiny extends to regulatory compliance, with companies obligated to submit transparent financial statements regularly. The decision to proceed with an IPO is a critical one and involves the collective consideration of the board of directors, weighing the advantages and disadvantages of going public. Upon reaching a consensus, the company engages an underwriter, typically an investment bank, to facilitate the preparatory stages of the IPO. The subsequent stages involve the preparation of regulatory documents such as the prospectus and investment memorandum, providing potential investors with detailed insights into the company's operations, financial health, and future plans. The roadshow becomes a pivotal component, allowing company representatives to engage with investors globally, building interest and garnering initial offers for shares. The culmination of this elaborate process is the listing of shares on the stock exchange, signaling the beginning of public trading. The success of the IPO is contingent on factors such as accurate valuation, effective marketing, and market conditions. The objectives behind conducting an IPO are diverse, ranging from raising capital and assessing the company's value objectively to providing liquidity for existing shareholders and enhancing transparency.

In recent years, the global IPO landscape has witnessed significant activity, with numerous companies opting for public offerings to access capital markets. The European and U.S. markets, in particular, have seen substantial IPO volumes, with companies spanning various industries seeking to capitalize on favorable market conditions. Despite the record-breaking number of IPOs in certain years, the post-IPO share price dynamics have been diverse, with a considerable proportion of companies trading below their offering prices. This underscores the importance of meticulous planning, accurate valuation, and effective communication throughout the IPO process.

The development of the national capital market in Azerbaijan is accompanied by specific requirements for the inclusion of securities in the stock exchange's quotation sheets. These requirements, categorized into first-level and second-level, encompass criteria such as the issuer's registration, operational history, financial transparency, and compliance with international standards. The meticulous documentation and adherence to these criteria are vital for companies seeking to list their securities on the exchange. Despite the progress made in financing the real sector through corporate bonds, challenges persist in fully activating the stock market in Azerbaijan. Factors such as the need for stronger corporate governance standards, limited awareness of capital market instruments among the population and businesses, and other obstacles continue to impede the optimal utilization of the securities market for capital attraction.

To address these challenges and foster institutional development, initiatives are underway, including the modernization of market infrastructure. Plans involve creating a centralized operating system, aligned with modern technological standards, to facilitate seamless trading and post-trading operations in the capital market. The establishment of a single portal linking the Central Bank, the National Depository Center, and the Baku Stock Exchange is also in progress, aiming to enhance the efficiency of issuers' financing procedures through electronic registration of securities within a unified system. In line with the broader action plan for the development of the capital market, the Central Bank's efforts are geared towards aligning the legal framework with international standards, bolstering market infrastructure, and fostering demand and supply in the market. The collective pursuit of these initiatives aims to position Azerbaijan's capital market as a dynamic and attractive avenue for both issuers and investors, contributing to sustained economic growth and financial development.

In conclusion, the IPO journey is a dynamic and multifaceted endeavor that demands strategic planning, regulatory compliance, and effective communication. As companies navigate this intricate process, they unlock the potential for capital growth, increased liquidity, and enhanced transparency, setting the stage for sustained success in the public market.

References:

1. Deutsche Börse Group, https://deutsche-boerse.com
2. Economic Ministry of Azerbaijan. www.economy.gov.az
3. Hoover's IPO Central, http://www.hoovers.com
4. Lowry, M., Michaely, R., & Volkova, E. (2017). Initial public offerings: A synthesis of the literature and directions for future research. Foundations and Trends® in Finance, 11(3-4), 154-320.
5. Kərimova G., “Azərbaycanda maliyyə bazarlarinin  inkişafinin nəzəri və praktiki aspektləri”, Bakı, 2020
6. Serpil C., Hatice D.,  “Finansal pazarlar”,  İstanbul 2017
7. Ritter, J. R., & Scholar, C. E. (2020). Initial public offerings: Updated statistics on long-run returns. Warrington College of Business, University of Florida.
8. World Federation of Stock Exchanges, WFE, http://www.world-exchanges.org/