INITIAL PUBLIC OFFERING (IPO) IN UZBEKISTAN: THEORY, PRACTICE AND LEGAL REGULATION

The article is aimed at disclosing of the legal nature of Initial public offering as a mechanism for attracting additional funds from joint-stock companies in Uzbekistan. The analyze of this mechanism is based on legal documents, regulating this process and practice in Uzbekistan, theoretical basics and foreign scientists‘ attitudes, then the experience of Initial public Offering of such foreign companies as FixPrice and Facebook. Additionally, the article examines in detail the advantages and disadvantages of companies entering the stock exchange and selling their shares to the public through an IPO. Based on the results of the analysis of national legislation and the practice of foreign companies on the Initial Public Offering, we compared the Initial and Secondary public offerings, their legal nature and distinctive features from each other. Also, we found out that the definitions of the concepts of IPO and SPO established by the legislation of the Republic of Uzbekistan are incorrect and therefore they do not coincide with the practice of IPO and SPO of national companies and foreign experience.

INITIAL PUBLIC OFFERING (IPO) IN UZBEKISTAN: THEORY, PRACTICE AND LEGAL REGULATION

ARTICLE INFO Keywords: initial public offering, secondary public offering, public company, stock exchange, securities placement, new issue of shares, diversification, shares, investment portfolio

I. Introduction With the development of economic

Batirova Kamolakhon, Lecturer, The Business Law Department Tashkent State University of Law e-mail: batirovakamola@gmail.com ORCID: 0000-0002-9125-5898

ABSTRACT The article is aimed at disclosing of the legal nature of Initial public offering as a mechanism for attracting additional funds from joint-stock companies in Uzbekistan. The analyze of this mechanism is based on legal documents, regulating this process and practice in Uzbekistan, theoretical basics and foreign scientists’ attitudes, then the experience of Initial public Offering of such foreign companies as FixPrice and Facebook. Additionally, the article examines in detail the advantages and disadvantages of companies entering the stock exchange and selling their shares to the public through an IPO. Based on the results of the analysis of national legislation and the practice of foreign companies on the Initial Public Offering, we compared the Initial and Secondary public offerings, their legal nature and distinctive features from each other. Also, we found out that the definitions of the concepts of IPO and SPO established by the legislation of the Republic of Uzbekistan are incorrect and therefore they do not coincide with the practice of IPO and SPO of national companies and foreign experience.

into the global economy, new formats of these relations are becoming increasingly

relations and the integration of countries important, which differ from traditional ones

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in that they have a complex character. It is also worth noting that in developed countries, a significant part of the national financial system is occupied by the securities market. The Uzbek securities market differs from others in that it is still considered young, but potential for future investors, including foreign ones. In order to further develop and attract the above-mentioned investors, it is necessary to apply modern methods of financing through the securities market and systematically form the legislative and theoretical basis of the national market [1]. One of these modern methods of financing through the securities market is IPO, that is Initial public offering. In foreign countries, the decision to going public is the most important decision in the life cycle of a private company, since in developed countries, the stock market is one of the main sources of corporate financing. Also, another factor that makes this decision significantly important is this stage in the life of the company means the process of transformation into a public company, that is, the company which shares are freely traded on the stock market. Regarding our country, the need to study the entry of companies on the stock exchange and the sale of their shares to an unlimited number of people is based on the current tasks to improve the country’s economy by transferring state assets to private hands. In this regard, the IPO process can be seen as the best way to privatize state-owned companies or shares in companies that are state-owned [2]. II. Research results and discussion What is an Initial Public Offering? An initial public offering or, in other words, an IPO means the initial sale of shares of a company (joint stock company) to an indefinite number of persons at a public auction. That is, by its legal nature, the IPO process means the process of transformation a private company to a public company and becoming open and accessible to all potential investors who want to purchase shares of this company.

As mentioned before, going public through IPO is not an easy decision. Also, for the reason that the Initial Public Offering process is closely related to both benefits and costs. According to a number of academics, basic drawbacks and benefits of Initial public offering are these: Improved ability to borrow- By going public, a firm increases its net worth and improves its debt-to-equity ratio. A lower debt-to-equity ratio gives the firm the ability to borrow money at better terms in the future. Gaining access to an alternative source of funding to banks is probably the most frequently cited market entry benefit, and is explicitly or implicitly present in most models. The opportunity to raise funds in public markets should be particularly attractive to companies with large current and future investments, high leverage and high growth rates. All of these factors should be positively related to the likelihood of an IPO. Enhanced ability to raise equity - the IPO provides to the company a better approach of financing their ventures having the chances to offer their equity or issuing a modern one in arrange to have more capital. After an IPO, the company has the chance to have their stock within the showcase for future value based financing strategies. Increasing liquidity. The liquidity of shares means the demand of investors for these objects of civil legal relations, the level of their quick sale on the market and without tangible losses in price. An IPO improves the liquidity of a company’s shares, which in turn means that existing shareholders can benefit from a higher valuation of their shares [3]. Adequate price. This goal is closely related to the previous goal, that is, increasing the liquidity of shares. Setting an adequate price during an IPO means that the free market itself will form a decent and objective price for the company’s shares, which cannot be said about a private placement of shares, where shares are often

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undervalued. According to financiers, it is often the revaluation of shares that is more important than the financial activity of the company itself. For example, the “Investor Sentiment Hypothesis” directly affects stock prices during an IPO.

Asset Diversification – A company’s public offering provides its owners with opportunities to diversify their assets. This can be achieved directly, by leaving the company and reinvesting in other assets, or indirectly, by raising new equity capital after the IPO and acquiring stakes in other companies. If diversification is an important motive when deciding to go public, then we should expect that riskier companies are more likely to go public, and controlling shareholders will sell most of their shares at the time of the IPO or soon after.

Increasing prestige – IPO can increase corporate prestige and accordingly interest of customers, suppliers and potential investors. According to the studies of some scientists, the recognition of the company’s securities affects the price of these securities even more than the financial statements of these companies. In accordance with Merton’s theoretical analysis, it was found that, firstly, the value of a security increases in the eyes of investors, secondly, the expected return decreases in the eyes of investors, thirdly, the above two factors increase the peculiar risk of a security, and fourthly , financial and investment activities are increasingly recognized by investors. In this case, the concept of the Prestige of the company means recognition not only among investors, but also among potential consumers of the company [4]. This factor can serve as a trigger for consumer confidence in the company’s products.

However, this mechanism also has several drawbacks:

Costs. The process of preparing for the initial offering of shares, the process itself and after IPO the ongoing activities require huge amounts of money. For example, the company needs to pay a stock exchange initial and annual fees, pay underwriter’s commission, which can be approximately 7-10% of the total initial offer. In addition, the company will have to pay out of its own pocket for legal, accounting and auditing services, as well as separately for the costs of the company’s road show. Then, by going public, the company makes commitments to submit reports to regulators and investors, which also means transaction costs. There are direct costs associated with preparing these disclosures, as well as indirect costs for disclosing confidential information to competitors [5].

Relations with investors – A company will have to hold formal meetings of the board of shareholders and devote significant time to regulatory reporting Information disclosure - The operations and financial statements of a public company must be open to the public. Confidential information will be available to competitors, customers, employees, and others. Information must be disclosed not only when the company initially goes public, but also on an ongoing basis.

Pressure to Maintain the Growth Model – The company will be subject to periodic internal and external pressure to maintain its current growth rate. If earnings decrease from the established trend, shareholders may sell their shares and, as a result, reduce their price.

Loss of control. The current owners may lose control of the company. For example, in 2021, the Russian company FIX PRICE held an IPO and placed its shares on the London Stock Exchange at a price of $9.75 per share. 178.37 million were placed - about 21% of the total number of issued shares.

Regarding the legal regulation of IPO in Uzbekistan, it is only possible to mention that in 2017 the Decree of the Cabinet of Ministers of the Republic of Uzbekistan was adopted, approving the Regulations on the procedure for conducting primary (IPO) and secondary (SPO) public offerings of shares on the stock exchange [6].

In this case, it is necessary to parse the definitions of these two mechanisms

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according to the mentioned before Decree:

Initial public offering (IPO) - distribution of additional shares by a joint stock company (initiator of the IPO) to an unlimited number of investors on the stock exchange.

It is also important to give a definition of the Secondary public offering (Secondary public offering or SPO), which is established as the sale by a shareholder (SPO initiator) of his shares to an unlimited number of investors on the stock exchange; Now, for a correct assessment of the legislative interpretation of these concepts, it is necessary to disassemble them in parts.

So, as mentioned earlier, according to the legislation of the Republic of Uzbekistan, the Initial Public Offering (IPO) is the distribution of additional shares by a joint stock company (initiator of the IPO) to an unlimited number of investors on the stock exchange.

Based on this definition, we can make the following conclusion that the Uzbek legislator defines:

First, during the initial public offering of shares, the company carry out only the placement. According to the legislation of the Republic of Uzbekistan, placement of securities — disposal of securities to their first owners.

Secondly, in this financing mechanism a company offers shares of additional issue to the general public on the exchange, that is, new shares that are issued in addition to existing ones.

As a result, we understand that according to the legislation of the Republic of Uzbekistan, during an IPO, a company offers a wide range of investors and alienates to the first owners exactly new shares of the company that were not previously owned by anyone.

However, a national practice of initial public offering is very different from legislative regulation. For instance, the Decree of the President of the Republic of Uzbekistan dated March 18, 2022 No. PP-168, the purpose of which is to further privatize and reduce the participation of the state in sectors of the economy, defines the obligation to sell state-owned shares in such banks as Qishloq Qurilish Bank, JSC “Halq banks”, JSCB “Microcreditbank”, JSC “Aloqabank”, JSCB “Agrobank”, JSC “Uzmilliybank” through initial public offering (IPO) on the stock exchange. This means that the current and state-owned shares must be sold through the Initial Public Offering, which clearly contradicts the norm established by the Regulations on the Procedure for Conducting Initial (IPO) and Secondary (SPO) Public Offerings of Shares on the Stock Exchange. The difference between the practical approaches and legislative regulation of the processes of public offering of shares makes it necessary to study the theory and foreign experience in this area in order to understand which approach is correct.

The US Securities and Exchange Commission defines an initial public offering in this way: This is the procedure in which a company offers its equity shares to the general public for the first time [7]. It’s worth noting that it doesn’t specifically say which issue shares should be offered: new or existing. Further, as the Commission notes, existing shareholders may sell their shares in an IPO if their shares are listed and registered as part of the offering. Most large IPOs involve only new shares that a company sells to raise capital. However, in some cases, shares held by existing shareholders are included in the IPO and the shareholders are referred to as “selling shareholders”. Proceeds from sales by the selling shareholders do not go to the company, but instead go to the selling shareholders.

In addition, all academic papers examining both the legal and financial nature of IPOs, also analyze the goals and motivations for companies to conduct an Initial Public Offering. One of these goals and benefits of going public is “Diversification of the shareholder’s portfolio”. Diversification of an investment portfolio means a variety of financial instruments that are included in an investment portfolio. That is, funds

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should be directed not only to one type of financial instruments and only one company, but also include other types of financial instruments (bonds, investment units, crypto assets, precious metals, etc.). A public offering of a company’s shares provides its owners opportunities to diversify. There are two ways of diversification: 1. To exit the company and reinvesting in other assets, or 2. indirectly by raising new equity capital after the IPO and acquiring stakes in other companies [8]. Albornoz and Pope have explained in their work [9] that owners of a private company tend to invest heavily in their company and are therefore overly exposed to risk. Therefore, in order to minimize the risk associated with this situation, they diversify their risk by conducting an IPO for their company. Therefore, the propensity to IPO should increase with the share of the founder in the company preparing for the IPO. Also, an important fact, found out by such Swedish scientists as Rydqvist and Hogholm [10], is that in 1970-1991 Swedish firms went public to liquidate the investments of their owners, and not to finance economic growth. Based on the theoretical approaches of foreign scientists, one of the main motives for carrying out an initial public offering is precisely the restructuring of existing shares and their transfer to new investors. Also, now it would be appropriate to analyze foreign practice in this sphere. In 2021, the Russian company FixPrice held its first IPO on the London Stock Exchange. As a result of the IPO, the founders of the company, Sergey Lomakin and Artyom Khachatryan, also sold “a considerable part” of their shares in this company. That is, the company placed shares on the London Stock Exchange at a price of $9.75 per share. 178.37 million shares were offered - about 21% of the total issued shares. These two founders of Fixprice had owned rior to the IPO, the above founders each owned 354 million shares

(41.66%) of the company, now they own 301 million shares (35.43%). During the Initial Public Offering, both Lomakin and Khachatryan sold 52.9 million of their shares each, the cost of such a package was $516 million. Each of these two founders of FixPrice owned 354 million shares (41.66%) of the company, now each of them own 301 million shares (35.43%). During the Initial Public Offering, both Lomakin and Khachatryan sold 52.9 million of their shares each, the cost of such a package was $516 million [11]. The first IPO in the history of the Republic of Uzbekistan was held by the national joint-stock company “Quartz”. Starting from December 5, 2017, over 4.5 million shares of JSC “Quartz” were put up for public sale. In four months, brokers accepted applications for the purchase of shares from the population. The auction was held on April 4th. As a result, 54% of the total volume of shares issued by Quartz was sold in the amount of more than 7.5 billion soums. Having taken note of that analysis, we can conclude that Initial public offering does not mean at all only the placement of new shares of the company among an unlimited number of persons, but shares of the existing issue can also be sold, that is, secondary shares that previously were someone else’s property. Then what is the difference between the Initial Public Offering and the Secondary Public Offering? Secondary public offering (SPO) is a public sale of shares in a company that has already gone through the IPO process. During the secondary public offering process, existing shares and those held by one of the current shareholders are offered to the general public. As mentioned earlier, this process is conducted by the company that has already passed the Initial Offer of Shares. In foreign practice, Secondary public offering is often divided into two types: Dilutive secondary offering and Non-Dilutive secondary offering.

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Dilutive secondary offering is also known as Follow-on public offering. In this case, company issues and carries out the placement of new shares. From the point of view of the current shareholder, the FPO is always undesirable, since the shares of shareholders are diluted due to the issuance of additional securities [12]. Dilution in this type of placement is caused by the fact that the number of outstanding shares of the company has increased, resulting in a decrease in earnings per share on existing shares. Primarily, a dilutive secondary offering is used when a company needs equity capital to be used to pay down debt or meet future financial goals. When a company uses a dilutive secondary offering, the share price often declines [13]. A non-dilutive secondary offering is a type of public offering where existing shareholders want to sell their shares to other investors. One of the main features of a non-dilutive secondary offering is that the shares held by the company’s current shareholders are not diluted, unlike the first type of secondary offering. The non-dilution secondary offer is mainly used after the end of the lock-up period. An example of such an offer to the general public of securities can be the experience of Facebook founder

Mark Zuckerberg, when he decided to sell part of his shares in this company on the stock exchange in 2013 [14]. III. Conclusion The initial public offering of shares is one of the most widespread topics today. The popularity of this mechanism is justified by a number of its advantages as a way to raise funds. Uzbek companies also was not an exception in conducting IPOs. However, the history of Uzbek initial public offerings is very short, which began in 2017 with the adoption of the Regulations on the procedure for conducting initial (IPO) and secondary (SPO) public offerings of shares on the stock exchange. However, the analysis carried out in this article shows that the legislative establishment of the concept of IPO in Uzbekistan does not coincide with practice and theory. In this case, it is important that the legislative regulation is also consistent with both national practice and foreign experience. Accordingly, it is necessary to amend the legislation of the Republic of Uzbekistan on the regulation of the Initial Public Offering and give the following definition: IPO - initial sale of shares of a company (joint-stock company) to an unlimited number of persons at a public auction.