IPO companies in Hong Kong must submit the margin amount with their listing orders, but this is not the case for other countries in Asia.
The term “margin amount” refers to a minimum guaranteed value of shares that the IPO company will issue at the time of listing. During an IPO process, an investment bank typically assists companies with raising capital through an initial public offering (IPO) on a stock exchange. When taking on such tasks, investment banks set aside a pool of money as collateral and then offer that money as security for new shareholders’ first trades.
This ensures that investors will receive total value for their investments if those trading securities ever become unmarketable due to market conditions or charge-backs from brokers. The margin amount protects investors because it guarantees that even if they were to sell their securities quickly (which often happens during investment rounds with small companies), they would still receive the initial value of those securities.
The margin amount is not required for certain Asian countries, despite its necessity for domestic and international investors. Most recently, Indonesia became one of these countries. As this trend continues throughout Asia, analysts believe that more IPO companies will opt-out of including this field on their order forms instead of faster turnaround times.
What are the advantages of submitting the margin amount before entering?
Retain the total value of the security
Retaining the total value of the security ensures that investors are protected, their initial investments are not diluted, and they receive securities at the same value as what was initially offered.
Advantage 2: Investment banks are protected against charge-backs
As margin amounts continue to become more obsolete, many investment banks will also potentially remove this field from their order forms to increase turnaround times of these processes. Removing this field reduces the time it takes for investment banks to process orders by allowing them to avoid manually entering information into a separate system before submitting it. Investors typically sell their securities quickly after receiving them when investing in small companies.
Because of this tendency, order forms without margin amounts can be seen as prioritising speedy processing over accuracy leading some analysts to believe that informal payments between brokers will rise.
Decreased transaction costs for investors
Decreasing the number of fields on order forms corresponds to decreased transaction costs for investors. As fewer fields are required, manual entry is not needed and the time taken to type in this information decreases. It ultimately reduces the level of fees that investors must pay.
Speedy processing times
Speedy processing times means faster turnarounds for companies seeking capital through an IPO on a stock exchange. Additionally, faster turnaround times increase the likelihood of companies listing on more exchanges, increasing their exposure within Asia’s markets.
Less paperwork means that investment banks will have less work to process orders. Less time required for submitting forms reduces the number of transactions that must be finalised before the margin amount can be returned, offering an increased likelihood of completing multiple IPO listings on a given day. It ultimately results in smaller workloads for analysts and more opportunities for other engagements.
Why was it required in the past?
In the past, margin amounts were required for IPO companies to ensure that their share value does not get diluted. It would occur if the security price fell below its offering price and then rose back up before investors could sell them. This potential risk is nonexistent when using an order form without a margin amount because investments are not protected.
It is expected that investment banks will implement new regulations and procedures to track all transactions and manage the potential risks of omitting this field on order forms. Many analysts believe that informal payments between brokers will rise because of these regulations due to increased pressure from clients who want faster turnaround times.
Will margin be required for other Asian countries?
Other Asian countries such as Vietnam and Thailand already require other fields for order entry, such as the number of securities desired and the country/local currency code. In these countries, margin amounts are not required. It is anticipated that more IPO companies will opt-out of including this field on their order forms in place of faster turnaround times.