What is an IPO?

A privately owned business becomes a publicly traded company using the initial public offering (IPO), which involves the initial making its shares available to the public. In simpler terms, it’s when a company sells its first shares to the public to raise capital from outside investors and list its stock on a stock exchange.

For a variety of reasons, companies may apply the use of the public offering technique. On the other hand, companies with financial resource shortages are provided to the public to make investments or pay off their debts without going to bank loans or borrowing. Successful companies with high expansion rates aim to expand their activities and fund their investments.

A prospectus must be drafted in this case and approved by the Capital Markets Board (“CMB”) before a company may be made available to the public or listed for trading.  The CMA has granted authority to the CMB to regulate and supervise the securities markets in Turkey.

Companies may offer their shares to the public in several ways, depending on the situation.  Companies can limit the ability of current shareholders to purchase additional shares by increasing their equity, limit the public’s access to portion of their shares that reflect the existing capital through joint sales, or use both approaches together. There are many conditions for an IPO and companies should be careful in the process. What are these conditions and steps according to the regulations of the Turkish law system?

What Are the Conditions of an IPO?

1. Regulatory Authorities

Companies seeking to go public must first reach out to intermediary institutions and enter into an underwriting arrangement. For the public offering, the institution in question must be an approved intermediary institution. The procedure of an initial public offering is realized with the contract’s signing.

Companies must enter into a contract with the Capital Markets Board of Turkey (“CMB”) in order to open their capital to the public. They are thus subject to the Capital Markets Board of Turkey’s oversight and judgment.

The Turkish Capital Markets Board (CMB): The CMB is the governing regulatory body in charge of regulating all aspects of Turkey’s capital markets, including IPOs. To ensure accessibility and secure investors, it must develop and enforce regulations.

Officials from Borsa Istanbul and CMB inspect the company’s headquarters, general operations, market value, and features; these institutions are also informed. The company’s public offering officially begins after the rightness of this data is verified.

2. Eligibility and Requirements:

Eligibility Requirements: Enterprises planning to go public in Turkey must pass strict criteria established by the CMB. These requirements frequently involve a minimum track record of profitability, financial stability, and adherence to accounting and auditing standards.

Financial Statements: Enterprises have to submit audited financial statements that follow the regulations and standards of Turkish accounting.

3. Pre-IPO Preparation:

Employees of the accounting division, the public relations department, and middle management should make up the working group in issue. The working group should prepare a list of the steps that must be taken before submitting an application to the Turkish Capital Markets Board and Borsa Istanbul.

One of the intermediate institutions approved by the Capital Markets Board of Turkey must be the underwriting party. Companies that wish to go public must enter into a “Market Advisory Agreement” with a market advisor in order to make the required arrangements. The Stock Exchange determines the minimum requirements of this agreement. Depending on the size of the public offering, the underwriting agreement may be established with a single intermediate institution or a consortium of intermediary institutions.

The enterprise, which has agreed to go public, must also submit to the CMB the draft changes it has to make to its articles of incorporation.

Consider a scenario in which certain clauses in the company’s articles of incorporation (also known as its articles of association) prevent the circulation and transfer of shares which can be traded on the Exchange and restrict the shareholders’ ability to make use of their rights. In that situation, the Articles of Incorporation should be amended to eliminate these clauses.

3.1 Financial Statement Preparation and Independent Auditor Selection:

Companies who wish to participate in a public offering must comply with the Capital Markets Legislation while preparing their financial tables and must undergo an independent audit by an authorized company. Companies ought to choose an independent audit firm approved by the CMB in this situation and sign an “audit engagement agreement’’.

4. Pricing and Allocation:

Share prices are set based on several variables, such as market conditions, investor demand, and business performance. The pricing procedure may be subject to special guidelines or norms from the CMB.

One of the most important phases in the IPO process involves establishing the IPO price, which is determined by several factors unique to the firm that are out of its control. For a successful public offering and for the price performance of the shares when they are offered in Borsa Istanbul, it is crucial to reflect the public offering price realistically.

The public offering price of the company’s shares is set by the intermediate institution; Borsa Istanbul and CMB have no impact on the pricing. The third day after the price determination report and registration statement have been released is the earliest that the public offering can begin.

Book-Building procedure: A book-building procedure is frequently used in Turkish IPOs. Institutional investors enter the share quantities and purchase prices they wish to make. The final IPO price is determined by this process. There are numerous techniques used in this procedure, including:

Book Building at Fixed Price Method:

 Using the results of the initial research, the issuer/shareholder chooses a specific price and the quantity of shares to be sold. Investor bids are obtained when this is submitted to the appropriate investor groups. Finally, the investors who purchased the shares are given their shares.

Book Building with Price Bids:

In the book-building method with price bids, the issuer/shareholder establishes a minimum offer price and accepts offers over it.

Book Building within a Price Range: 

Book Building within a Price Range establishes a Base Price and a Ceiling Price, with a 20% Maximum Difference between the Base Price and the Ceiling Price.

There are other methods such as ‘’sales in the exchange’’ and ‘’sales without book building’’ but we will not mention these topics as detailed as above because they are not commonly used.

5. Publicly Traded Companies Obligations:

Method of Paying Dividends: 

Publicly traded companies must pay dividends at rates that are not less than those set by Turkey’s Capital Markets Board.

Independent Audit obligation:

The annual financial statements of joint-stock entities with shares traded on the stock exchange must be constantly inspected. A limited independent audit is required for semi-annual financial statements. Along with access to the financial accounts, the audit report is made public.

the obligation to make an announcement, the drafting of financial statements and reports, submission to the board and the exchange:

The Board and the Exchange must receive the annual financial reports and independent audit reports from partnerships whose shares are traded before they can be published in the Market bulletin.

Disclosure of Special Conditions to the Public:

Public joint stock companies (JSC) must submit the special circumstances disclosure they will create to the Board, and joint stock companies with shares that are traded on the Exchange must submit them to the Exchange in the event of a special condition.

CONCLUSION:

In conclusion, IPOs are profitable arrangements for entities looking to expand their resources for company-based activities. As seen, there are many arrangements needed from a company to start an IPO process. So, it is crucial for companies to be assisted with good legal service.