Historically, the initial public offering of the equities of companies listed on the stock market is mostly interesting for investors in Iran. However, as a result of the injustice involved in the allocation of equities, the mechanism that was used in the past for the initial public offering has always been objected by investors and those active in the capital market in Iran. These objections finally persuaded the authorities to change the method of initial public offering from the auctioning method to book building method, and as a result create a higher utility for investors. Considering that the book building method has been implemented for a few small cap. companies, it seems that this method has passed its trial period and will be approved by the authorities very soon as the dominant method.
The most important advantage of initial offering by book building, is ordering at various prices while with the previous method applicants could only put their orders at a unique price. On the other hand, orders by clients considering the number of shares which can be allocated to each client were not similar to the previous mechanism and each order will be put in the trading system according to the maximum volume announced at the price determined by the buyer. This mechanism focuses on the optimal allocation of equities and it is attempted that all the clients participate in this process with different analytical approaches.
The objective of the book building method is that each client, considering his own point of view IPO, put his order at the price he is willing to. However, the existence of a fluctuation range of 10 percent above and below the price determined by the underwriter has still led to objections by the investors. As a result of this limitation, investors register their orders at the maximum price and this in turn will create a purchasing que at the initial public offering of the stock. Consequently, in order to eliminate such predicament it would be better to remove the above mentioned limitation.
By implementing this method, market supervisor will allow orders to be put in the trading system for at least one session during two to three hours. Afterwards, based on the incoming orders` volume by clients or the underwriter’s tendency to put his own order, the supervisor will discover a price within the announced range at the trading system and so if the market demand was sufficient, the underwriter will offer the new share.
Considering the deficiencies of trading system, applying the above mentioned method with no doubt is an improvement, but there is still room for development in such mechanism. In case the authorities, after assessing the view points of those active at the capital market, attempt to eliminate such deficiencies, we can be optimist that finally an up to date and efficient mechanism has been considered for initial public offering. This fact will eventually lead to further transparency at the capital market and therefore encourage more investors in the medium term.
