In the Philippines, a company may list its shares on the exchange through one of two ways: Initial Public Offering (IPO) or Listing by Way of Introduction.
IPO vs. Listing by Way of Introduction
When a company conducts an Initial Public Offering (IPO), they undergo a book-building process where investor demand for the IPO is determined to support efficient price discovery. Once the IPO offer price is set, potential investors may then buy shares from the underwriter during the IPO offer period.
The listing date is announced and ultimately the stock is listed on the exchange. Upon listing, the stock starts trading in the secondary market and new investors, including those who weren’t able to participate during the offer period, may start buying and selling said shares. Ownership of these shares is then transferred from the company to the public.
This IPO process proves to be a bit cumbersome and costly for most companies, which is why the Philippine Stock Exchange (PSE) offers an alternative way, that is, Listing by Way of Introduction (LBI).
In this process, the company planning to list shares does not anymore have to undergo the lengthy public offering process. Instead, upon PSE approval of its listing application, the company’s stocks are listed on the exchange and automatically starts trading.
How to List by Way of Introduction
The PSE suspended the implementation of LBI in February 2010 following a review of the LBI rules. In particular, the PSE wanted to address valuation concerns surrounding companies that list by way of introduction. In March 2011, the PSE lifted the suspension of LBI and started implementing the newly-approved Amended Rules on Listing By Way of Introduction.
As per the amended LBI Rules, there are only five (5) instances where listing by way of introduction is allowed:
- 1. the securities sought for listing are already listed or traded or will simultaneously be listed on another stock exchange or, subject to the approval of the Exchange, are listed on another trading market;
- 2. the securities of an unlisted issuer are distributed by way of property dividend by a listed issuer to shareholders of that listed issuer;
- 3. where a holding company is formed and its securities are issued in exchange for the securities of one or more listed issuer or issuers is withdrawn at the same time the securities of the issuer are listed;
- 4. where listing of securities in an exchange is mandated by law or by the SEC, in the exercise of its powers under the Securities Regulation Code; and
- 5. where public offering of securities is mandated by law or applicable regulations; provided that the applicant company secures a clearance from the relevant agency stating that such agency does not object to the listing by way of introduction of the securities of the company; provided further that a company which is considered as a ‘closely held corporation’ as such term is defined under Section 127 (B) of the National Internal Revenue Code of 1997, is NOT qualified to list by way of introduction under this subsection (e). A subsidiary company that is qualified to list under subsection (e) hereof cannot list its holding company which does not meet the requirements of this section.
Listing Price and Valuation Requirements
The amended LBI rules outlined the criteria in determining the initial listing price of a company’s stock. The stock’s valuation, as per the amended rules, must be “duly supported by a fairness opinion prepared by an independent and reputable firm.” These firms may include investment banks, financial advisory firms, and accounting firms duly registered or licensed by the SEC and accredited by the PSE.
For companies listing through Rule (a) where stocks are already listed in another exchange, the PSE has approved the initial listing price to be the Peso equivalent of that stock’s closing price in the other exchange. This was used in the case of Del Monte Pacific Limited (DMPL) that listed on June 2013 and whose listing price was the closing price of the stock in the Singapore Exchange a day prior to its listing in the PSE.
LBI Lock-up Rules
The PSE Amended Rules on LBI also specified lock-up rules for majority stockholders. The lock-up rule states that groups or individuals who own at least 10% of the newly-listed company’s outstanding shares are not allowed to sell their shares within a specified period.
If the company is listed on the PSE’s First Board, the owner’s shares are locked-up for 180 days. If the company is listed on the PSE’s Second Board, the lock-up period is 1 year. Finally, if the company is listed on the SME Board, majority owners are prevented from transferring their shares within 2 years after the initial listing date.
Trading Band Requirements
The Amended LBI Rules also suspended the “Trading Band” requirement for stocks listing by way of introduction during the initial listing date. The Trading Band prevents a security’s price from fluctuating wildly during a trading day. PSE stocks follow a set price floor and price ceiling, and cannot go beyond these trading bands on any given trading day.
The price floor in the PSE is 40% and the price ceiling is 50%. For an example how the trading band is applied, read the article PSE Trading Band: Price Floor and Price Ceiling of Philippine Stocks.
Companies listing through way of introduction are exempted from the Price Floor and Price Ceiling requirement but only during its initial listing date. After the initial listing day, the trading band is reinstated.
Philippine companies that used LBI
Several Philippine companies have availed of LBI as an alternative way of listing shares on the PSE.
One example is Del Monte Pacific Limited (DMPL) which listed on June 10, 2013. The PSE approved DMPL’s listing since DMPL complied with the Amended LBI Rules, specifically Rule (a) which allows listing for “securities [that] are already listed or traded or will simultaneously be listed on another stock exchange”. Del Monte’s stocks have been trading in the Singapore Stock Exchange since 1999 (see Del Monte (DMPL) stock lower on first trading day).
Another local company that used LBI as a way to list its shares on the PSE is Yehey Corp., digital marketing company today offering services such as web design and development, web management, digital public relations and reputation management, social media marketing, digital research and strategy (see Yehey IPO: Stock rises 170% on first trading day).
Yehey Corp. (stock code: YEHEY)’s listing was approved through Rule (b) — “the securities of an unlisted issuer are distributed by way of property dividend by a listed issuer to shareholders of that listed issuer”. Yehey’s parent company Vantage Equities, Inc. (stock code: V) distributed to its stockholders in 2007 a total of 84.79 million YEHEY common shares as property dividends. The Property Dividend resulted in the distribution to Vantage shareholders of one (1) YEHEY share for every twenty (20) common shares of Vantage held as of record date.
Philex Petroleum Corp. (stock code: PXP) also used Rule (b) when it listed by way of introduction in 2011. During that year, parent company Philex Mining (PX) distributed PXP stocks as property dividends to PX shareholders of record as of June 8, 2011. PX shareholders were given one PXP share for every eight (8) shares of PX held as of said record date. PXP started trading on the exchange in September 2011.