Last week, it was argued that large initial public offerings (IPOs) are what we need to bring the market back to its peak. Investors respond positively to companies with strong narratives. Size is one of them as large offerings can attract the attention of foreign investors who have an appetite for chunks and not chips, just like we saw with the Petron and SM Investments IPOs in the 1990s and early 2000s. Like a stone dropped in a pond, a massive IPO can make a big splash and trigger an outsized wave in the market.

But is this the way to jumpstart the market?

In part, yes, but as mentioned last week, a single IPO, no matter how large, cannot do it alone.

More importantly, how we jumpstart the market is an equally important element of any plan.

Realizing the importance of a plus-size IPO, the Philippine Stock Exchange (PSE) proposed a special consideration, an exemptive relief for large-size IPOs that would enable them to list with a 15-percent public float, which is below the regulatory requirement of 20 percent.

The Securities and Exchange Commission (SEC) has recently given its approval to the plan, which contains a requirement that the company must achieve a 20-percent public float within two years.

On the surface, special considerations may be frowned upon. There is a fairness angle to it since: 1) there are issuers that are compliant and have worked hard to be compliant: and 2) changing the rules means you can change them again.

Viewed with a strategic lens, exemptions can become a point against the reputation of the market. This is why the SEC emphasizes that the 20-percent requirement is still in effect, and this is just a short pause and there must be a necessity for the exemption.

Having said that, the argument for exemptive relief is a real one. Daily market turnover is only around P6 billion, and maybe on a good day around P8 billion. If you ask the market to absorb a billion US dollars in shares in one go, there is a high chance that it may not be able to do so, and the IPO would result in many unsold shares. Because we follow firm commitment underwriting, this means the investment bank takes on the full risk.

As an analogy, this is like giving a chunk of beef to a small dog that currently eats kibbles. And somebody has to eat the beef regardless of its state — uneaten or half eaten.

Ultimately, this will boil down to a business decision. An emerging market with a limited number of listings (and several delistings) has a growth risk and the potential to become a frontier market. The listing cog needs to start moving. Again, quality IPOs beget IPOs.

As in the case of Petron and SM, they were like the beacon IPOs that gave confidence to other companies to tread into the unknowns of the market. But it was not just them. Prior to Petron’s IPO, we had the IPOs of Universal Robina, Jollibee Foods and SM Prime Holdings.

The other IPOs that raised more than a billion pesos before SM’s 2005 listing were Manila Water and International Exchange Bank (iBank, which later became part of Union Bank of the Philippines) in the year before.

There is always a trade-off in any decision. While there are strategic risks in accommodating large-sized IPOs, an inflexible approach does not help in setting the necessary market conditions for recovery and growth. This is why the soft-hard IPO approach by the market managers that takes into account the short- and long-term health of the stock market is a balanced one that all investors can agree with.

If we can get over that, the next step is for the underwriters to plan a successful offering, which means distribution and valuation — our next topic.