IPO stability fund requirement seen as encouraging for investors

By Keren Concepcion G. Valmonte, Reporter

REQUIRING a stability fund for companies planning to go public with a secondary share component may help ease investor worry and it may also “provide better cushion” against volatility, analysts said.

“This will somehow be a positive step for investors so as to make them confident to place their investments on IPO (initial public offering) with secondary share offering within the near term,” Diversified Securities, Inc. Equity Trader Aniceto K. Pangan said in a text message on Friday. 

In a televised interview last week, Philippine Stock Exchange President and Chief Executive Officer Ramon S. Monzon said the local bourse is looking into requiring a stabilization fund for companies with a secondary share component in their offering.

This came after shares of Medilines Distributors, Inc. plunged 30% on its first day at the stock exchange on the first week of December. The company’s public offer comprised 550 primary shares and 275 million secondary shares. 

“We’re looking at anywhere from 10% to 15% of the base offer,” Mr. Monzon told the ABS-CBN News Channel’s Market Edge on Dec. 16.

A stabilization fund is deployed by issuers through their underwriters to support the company’s stock price at the secondary market for a limited time. 

COL Financial Group, Inc. Chief Technical Analyst Juanis G. Barredo said requiring a stability fund is “a reasonable idea to study.”

“It may provide [a] better cushion for extra-ordinary volatility on listing day. The size of it may need to be examined though to see if it would be viable for the company to provide such as an anchor,” Mr. Barredo said in a Viber message on Friday.

He added that firms going public may “think twice” about being overly priced “as such contributes to the possible stretch back that may be encountered, thus reducing volatility.”

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that an issue’s price valuations would “fundamentally matter.”

“The underlying price valuations would fundamentally matter,” Mr. Ricafort said in a separate Viber message on Sunday. “If the IPO price is seen as either priced at a premium, fair value, or at a discount based on estimated earnings, future cash flows/income, and book value.”

A stabilization fund may also be “an added feature” for the public offering. 

“Having a stability fund would also be part of the branding or value-added offered by the issuer, together with the issue managers, an important signaling for the market,” Mr. Ricafort said.