What is Listing by Way of Introduction?

You’re likely very familiar already with Initial Public Offering or IPO — a way to introduce a company’s shares of stocks to the public for the very first time– but have you heard of a related stock market listing method called Listing by Way of Introduction?

In the Philippines, a company may list its shares on the Philippine Stock Exchange (PSE) through either one of two ways: Initial Public Offering (IPO) or Listing by Way of Introduction.

What’s Listing by Way of Introduction (LBI) and how is it different with an IPO? When is a company eligible to conduct an LBI? Here are details of this unique market listing method called Listing by Way of Introduction.

IPO vs. Listing by Way of Introduction

First things first: what’s the difference between IPO and Listing by Way of Introduction?

When a company conducts an Initial Public Offering (IPO), it undergoes a “book-building process” where investor demand for the IPO is determined to support “efficient price discovery.” Don’t get overwhelmed by that definition. It simply means that the company and the underwriters that the company hired will conduct a sort of “roadshow” to entice potential investors to subscribe to the shares during the IPO offer period.

During the offer period, the IPO underwriters get to determine overall demand for the company’s stocks and will adjust the IPO offer price as needed, thus leading to “efficient price discovery.” Once the IPO price is finalized and announced, potential investors may then buy shares from the underwriter during the offer period.

The listing date is announced and ultimately the stock is listed on the exchange. Listing on the exchange simply means the stock becomes available to the general public as it starts trading in the PSE — the “secondary market” (as opposed to the “primary” market when shares were first offered to brand-new investors who availed of the shares during the IPO).

New investors, including those who weren’t able to participate during the IPO offer period, may now start buying and selling said shares through the PSE. During the IPO, ownership of shares is transferred from the company to the public.

During secondary trading in the PSE, ownership of shares is simply transferred from one investor to another. The company is no longer involved in the transaction during secondary trading in the PSE, although of course the company has the responsibility to record who holds and owns the shares at any given time.

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 to list stocks, that is, via Listing by Way of Introduction (LBI).

In Listing by Way of Introduction, the company listing shares does not anymore have to undergo the lengthy book building, underwriting, and public offer process explained above. Instead, upon PSE approval of its LBI listing application, the company’s stocks are automatically listed on the exchange and immediately starts trading.

How to List by Way of Introduction in the PSE

How is listing by way of introduction done?

First, a short history. The PSE suspended the implementation of Listing by Way of Introduction (LBWI) in February 2010 following a review of the LBWI 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 LBWI process and started implementing the newly-approved Amended Rules on Listing By Way of Introduction. As per the amended LBWI Rules of the PSE, a company can only conduct Listing by Way of Introduction in any of these five (5) scenarios.

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.

If the company meets any of the eligibility requirement above, they only need to secure the PSE’s approval to list via LBI. Once approved, the company does not anymore have to do book-building or conduct primary shares offering. The company’s shares will automatically be listed and will start trading in the PSE at a specified date.

Listing Price and Valuation Requirements in LBI

If there’s no “efficient price discovery” which happens during an IPO offer period, how does the public determine the fair price of a company listing by way of introduction?

The amended LBI rules outlined the criteria in determining the initial listing price of that 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, though, that are listing through Rule (a) where stocks are already listed and traded in another exchange, the PSE has approved that the initial listing price be equal to 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.

Meanwhile, in the case of Altus Property Ventures Inc. (APVI), a company whose shares were distributed as a Property Dividend by Robinsons Land Corp. (RLC), its initial price of 10.10 per share was based on the valuation and fairness opinion conducted by an independent company, Navarro Amper & Co.

Dynamic Pricing for Shares Listed by Introduction

Now this is where it gets interesting and exciting for stock traders.

The amended PSE rules on LBI suspended the “Trading Band” requirement for stocks listing by way of introduction but only on the first trading day. The Trading Band prevents a stock price from fluctuating wildly during a trading day. This means share prices of PSE stocks follow a set price floor and price ceiling, and cannot go beyond these trading bands on any given trading day.

Beginning March 2020, the price floor in the PSE is 30% (reduced from 50% previously) and the price ceiling is 50%. What this means is that, on a given trading day, the stock price cannot go below the price floor of 30% and also cannot go above the price ceiling of 50%. For examples on how the trading band is applied, read our article PSE Trading Band: Price Floor and Price Ceiling of Philippine Stocks.

But for shares that were listed by way of introduction, this trading band limit is lifted which means prices follow dynamic pricing in the PSE. Simply put, sky’s the limit regarding price floor and price ceiling! It can go beyond 50% in terms of price increases, but also means it can go more than 30% for price decreases.

This was evident in the case of Altus Property Ventures, Inc. (APVI), which rose a spectacular 2,276% to reach an intra-day peak of P240.00 from its initial listing price of P10.10 during its first trading day on June 26, 2020. The APVI stock eventually closed at P18.50, still up a whopping 83% on its first trading day.

Again, companies listing through way of introduction are exempted from the Price Floor and Price Ceiling but this exception only happens during the initial listing date. After the first trading day, the trading band (or price floor and price ceiling limits) is reinstated.

Stock Price Performance after Listing by Way of Introduction

How did stocks that listed by way of introduction perform, especially during their first trading day? We revisited these stocks and summarized their stock price performance below.

As we can see, except for Top Frontier Investment Holdings, Inc. (TFHI) which listed on January 2014, all stocks that recently used the LBI method experienced an unprecedented price surge on their first trading day.

PXP Energy Corp. (PXP), previously called Philex Petroleum Corp., rose a massive 616.7% on its first trading day in September 2011 — rising from its initial listing price of P1.20 to close at P8.60.

The stock price of Rockwell Land Corp. (ROCK), meanwhile, rose in May 2012 from its initial listing price of P1.46 to close at P4.90 per share — a gain of 235.6% during the first trading day alone.

More recently in June 2020, Altus Property Ventures Inc. (APVI) surged 83.2% on its first trading day, rising from its listing price of P10.10 to a closing price of P18.50.

Trading Lock-up Rules for LBI Shares

The PSE Amended Rules on LBI also specified lock-up rules for majority stockholders. The lock-up rule for LBI shares in the PSE is 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.

Philippine Stocks that Listed By Way of Introduction

Here are several examples of Philippine companies that availed of LBI as an alternative way to list their shares in the Philippine Stock Exchange (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).

Philex Petroleum Corp., now called PXP Energy Corp. (PXP) used Rule (b) when it listed by way of introduction in 2011. During that year, parent company Philex Mining Corp. (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.

As mentioned earlier, Altus Property Ventures, Inc. (APVI), a real estate firm that owns and operates Robinsons Place Ilocos Norte mall in San Nicolas, Ilocos Norte, also listed in the PSE by way of introduction after being distributed as a property dividend to eligible Robinsons Land Corp. (RLC) shareholders of record as of August 15, 2019. The property dividend was paid to RLC shareholders at a ratio of one (1) APVI share for every 51.9384 shares of RLC held by the investor.

In 2012, Rockwell Land Corp. (ROCK) distributed 3.18 billion common shares or 51% of its total stocks outstanding as property dividends to shareholders of Meralco (MER). Meralco shareholders then received one (1) share of ROCK for every 2.818 common share of MER owned.

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. (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.