The economic landscape in emerging markets such as Brazil, China and India are beginning to show signs of life. These “greenshoots” are taking the form of IPOs, which are a leading historical indication that world markets are springing back to life.
Emerging Market IPOs on the Rise
As reported in the Financial Times in the article Santander Launches Brazilian IPO, the Spanish bank, launched an initial public offering of its highly-successful Brazilian outpost making it one of the world’s largest initial public offerings of the year.
In addition, the Wall Street Journal reported in its article, Sinopharm plans $1.2 Billion IPO, that Sinopharm Group Co., China’s largest pharmaceutical company, will attempt to raise up to $1.12 billion in an initial public offering in Hong Kong.
Not to be outdone by Brazil and China, India plans as many as 40 initial public offerings on the Bombay stock exchange in the next few months according to this article in Businessweek.
In reading about these recent deals, I was reminded that, as a corporate lawyer, I am primarily in the risk management business. When a client seeks my advice on the complex legal issues surrounding an emerging market transaction, I always stress temperance over exuberance. While it is easy for one to get carried away with an opportunity to participate in a major securities deal, counsel must advise a client of all the major risk associated with the listing. As I wrote in an earlier post, due diligence is an integral part of the process. This is particularly true of emerging markets since government oversight can fall short of the standards set by developed markets. Based on experience, market research and analysis, I’ve identified 6 risk factors which can undermine the IPO process in emerging markets:
- Potential conflicts of interest arising from the involvement of the candidates’ senior management in other competing but not openly disclosed businesses
- Litigation history of IPO candidate and key principals being omitted or insufficiently described in the prospectus;
- Inaccurate statements of academic qualifications and technical expertise when describing senior management background and experience;
- Undisclosed tax liabilities – a significant problem;
- Undisclosed environmental problems or fines; and
- Undisclosed industrial labor disputes in outlying areas
The main objective in this risk analysis framework is to ensure that public information including offering documents contain all material information about the issuer and its financial condition, and that no important information is omitted or understated. Careful analysis of these 6 key risk factors will minimize the likelihood of one succumbing to misplaced exuberance.
Trend to Watch: As the pace of emerging market IPOs picks up, look for more investors to be misled by omission or understatement of material information