The Bank of Russia has published a report with final proposals for changes to IPO regulation, taking into account consultations with market participants. Based on these proposals, the Bank of Russia plans to prepare amendments to the current regulation by the end of 2025.
The report presented by the Bank of Russia reflects proposals related to the implementation of best practices in the process of preparing companies for IPOs.
We support the general approaches of the Bank of Russia and most of the practices outlined in the report, and we would like to highlight the Bank of Russia's proposals, which, in our view, may have a positive impact on the quality of potential transactions, change the procedure for preparing issuers for public offerings and (or) significantly reduce the timeframe for preparing companies for transactions.
Transparency of allocation
The Bank of Russia proposes to fix the issuer's obligations to publish as part of a statement of material fact:
The inclusion of an obligation to disclose relevant information is in line with the general trend towards ensuring equal access to information for retail and institutional investors. At the same time, it is important to note that it is often difficult to predict the exact principles of allocation due to possible changes in the structure of allocation in the course of bookbuilding. We believe that for these reasons the Bank of Russia publishes “preliminary” data.
Disclosure of information on share price stabilization
In continuation of measures to increase transparency in IPO transactions, the Bank of Russia proposes to establish an obligation for the issuer to disclose information on the mechanism of share price stabilization after the initial public offering.
The Bank of Russia plans to establish an obligation to disclose the size of the stabilization package, the stabilization period, the name of the stabilization agent, a description of the stabilization tools, and the expected share of shares in free float at the end of the transaction without the use of stabilization and with its full use. At the end of stabilization it will be necessary to disclose a material fact with the results of stabilization.
This step is correct from the point of view of availability of information at the market about number of shares in free float and general understanding of movement of quotations for the security during the stabilization period. Relevant factors allow a wide range of investors to forecast more correctly the changes in the market price of the issuer's shares.
At that, it should be noted separately that majority of deals on the domestic market, shares of which were falling after opening, demonstrated the following dynamics: regardless of the size of stabilization package the stabilization mechanism did not help to smooth the falling of shares' value. Thus, it turns out a situation when the issuer has to buy back securities, which he has just placed, for nothing. Also at present only stabilization “from below” is applied, when the stabilization agent should buy back securities from a certain level in order to prevent the fall.
The purpose of stabilization, in our opinion, is to smooth the difference between supply and demand in a small period after the beginning of public circulation of securities. For these reasons it would be appropriate to discuss the application of stabilization not only “from below” but also “from above”. This, in its turn, raises the question of the necessity to apply smart stabilization and smart lock-up.
Disclosure of information on restriction of alienation (encumbrance) of shares
In order to create uniformity in the composition of information for informing investors about restrictions on alienation (encumbrance) of shares, the Bank of Russia plans to fix in the regulation the obligation of issuers to disclose the following information:
Disclosure of relevant information at all stages of the transaction will allow investors to form an idea of the presence/absence of probability of a potential increase in the number of the Issuer's shares in free circulation in the short-term period and, accordingly, provide investors with the necessary amount of data and comfort when making investment decisions.
Development of model (standard) documentation required for IPO
The Bank of Russia plans to initiate work on standardization of documentation regulating certain processes in the IPO and development of recommendations for the introduction of best practices in the market of public offerings.
Possible areas for such standardization may include conditions for restrictions on alienation (encumbrance) of shares, stabilization mechanisms, other documents and procedures within the framework of public offerings.
In our opinion, standardization of documentation regulating the terms of restrictions on alienation (encumbrance) of shares may be a good step towards ensuring compliance with the obligation to disclose information on restrictions on alienation (encumbrance) of shares by issuers, simplifying the procedure and reducing the time for approval of contractual documentation setting out the relevant terms.
The report presented by the Bank of Russia reflects proposals related to the implementation of best practices in the process of preparing companies for IPOs.
We support the general approaches of the Bank of Russia and most of the practices outlined in the report, and we would like to highlight the Bank of Russia's proposals, which, in our view, may have a positive impact on the quality of potential transactions, change the procedure for preparing issuers for public offerings and (or) significantly reduce the timeframe for preparing companies for transactions.
Transparency of allocation
The Bank of Russia proposes to fix the issuer's obligations to publish as part of a statement of material fact:
- information on preliminary shares of allotment among certain groups of investors;
- information on certain conditions under which investor bids are or are not satisfied in full; and
- information on approaches to share allocation in the case of applications from one investor through different brokers.
The inclusion of an obligation to disclose relevant information is in line with the general trend towards ensuring equal access to information for retail and institutional investors. At the same time, it is important to note that it is often difficult to predict the exact principles of allocation due to possible changes in the structure of allocation in the course of bookbuilding. We believe that for these reasons the Bank of Russia publishes “preliminary” data.
Disclosure of information on share price stabilization
In continuation of measures to increase transparency in IPO transactions, the Bank of Russia proposes to establish an obligation for the issuer to disclose information on the mechanism of share price stabilization after the initial public offering.
The Bank of Russia plans to establish an obligation to disclose the size of the stabilization package, the stabilization period, the name of the stabilization agent, a description of the stabilization tools, and the expected share of shares in free float at the end of the transaction without the use of stabilization and with its full use. At the end of stabilization it will be necessary to disclose a material fact with the results of stabilization.
This step is correct from the point of view of availability of information at the market about number of shares in free float and general understanding of movement of quotations for the security during the stabilization period. Relevant factors allow a wide range of investors to forecast more correctly the changes in the market price of the issuer's shares.
At that, it should be noted separately that majority of deals on the domestic market, shares of which were falling after opening, demonstrated the following dynamics: regardless of the size of stabilization package the stabilization mechanism did not help to smooth the falling of shares' value. Thus, it turns out a situation when the issuer has to buy back securities, which he has just placed, for nothing. Also at present only stabilization “from below” is applied, when the stabilization agent should buy back securities from a certain level in order to prevent the fall.
The purpose of stabilization, in our opinion, is to smooth the difference between supply and demand in a small period after the beginning of public circulation of securities. For these reasons it would be appropriate to discuss the application of stabilization not only “from below” but also “from above”. This, in its turn, raises the question of the necessity to apply smart stabilization and smart lock-up.
Disclosure of information on restriction of alienation (encumbrance) of shares
In order to create uniformity in the composition of information for informing investors about restrictions on alienation (encumbrance) of shares, the Bank of Russia plans to fix in the regulation the obligation of issuers to disclose the following information:
- on the intention to establish restrictions and (or) on the fact of their establishment - in the securities prospectus;
- on the fact of establishing restrictions after the registration of a securities prospectus - in the form of a statement of material fact;
- violation of obligations assumed by the Issuer's shareholders - in the form of a statement of material fact;
- decisions on removal of restrictions on transactions with shares, in respect of which restrictions were set - in the form of a statement of material fact.
Disclosure of relevant information at all stages of the transaction will allow investors to form an idea of the presence/absence of probability of a potential increase in the number of the Issuer's shares in free circulation in the short-term period and, accordingly, provide investors with the necessary amount of data and comfort when making investment decisions.
Development of model (standard) documentation required for IPO
The Bank of Russia plans to initiate work on standardization of documentation regulating certain processes in the IPO and development of recommendations for the introduction of best practices in the market of public offerings.
Possible areas for such standardization may include conditions for restrictions on alienation (encumbrance) of shares, stabilization mechanisms, other documents and procedures within the framework of public offerings.
In our opinion, standardization of documentation regulating the terms of restrictions on alienation (encumbrance) of shares may be a good step towards ensuring compliance with the obligation to disclose information on restrictions on alienation (encumbrance) of shares by issuers, simplifying the procedure and reducing the time for approval of contractual documentation setting out the relevant terms.