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Role of Prospectus in Australia's Capital Market

Unit Learning Outcomes Addressed:

  1. Explain and apply the regulatory framework that applies to the financial accounting for corporations
  2. Account for the financing company operations - issuing of shares, debentures, share options, and the forfeiture and re-issue of shares 
  3. Generate financial statements and disclosures as required by the accounting standards

Assessment Task Description

Investors in Initial Public offerings

Initial public offerings (IPOs) are an important part of Australia’s capital markets. IPO is a method used by successful privately owned companies to raise funds for additional growth and expansion. Institutional investors comprise the bulk of IPO investment and often help determine the pricingDirectors and owners have to assess the advantages and disadvantages of listing company on Australian Securities Exchange (ASX), given the cost and additional ASX listing requirements. Year 2017 was the strongest performing year for IPOs in the last five years with 115 listings and total market capitalization of $11.1bn and 6.7bn of capital raised. Investors need to be able to make informed decisions about IPOs to ensure that capital is invested efficiently. For companies to continue raising capital efficiently, it is important that investors have confidence in the regulation of IPOs. IPO disclosure also plays an important role in ensuring that informed secondary trading occurs once the company is listed. Australian securities investment commission (ASIC) aims to support confidence in our capital markets by closely regulating IPOs. ASIC reviews a significant proportion of prospectuses and often obtain corrective disclosure if the prospectus appears to be deficient. ASIC also provides extensive guidance for companies and their advisers on how IPOs are to be conducted.

Instructions:

Select a company from the table named “Upcoming Floats” listed on page 5 & 6.  Table has a hyperlink for each company; click the hyperlink to access the company’s website. Download a prospectus for the selected company from the company’s website. Groups are not allowed to do the same company and should discuss their selection with their tutor prior to commencing their group report.

Refer to the marking guide (attached) for additional information and requirements. 

Required:

Review the prospectus of the selected company, relevant media reports from ASICs website, Australian Securities Exchange (ASX) website for performance of ASX Floats & IPO in 2017, for live scorecard for all IPOs listed in 2017, and academic journals for providing responses to the following requirement in your written group report.

  1. Explain how prospectus have a central role in ensuring Australia’s capital markets are fair and efficient.
  2. Outline ASICs broad role in the regulation and oversight of IPOs.
  3. Nature and details of the prospective fundraising, and the reasons why such funds are being raised for the selected company.
  4. Explain the rationale behind specifying a minimum subscription to be reached before shares can be allotted.
  5. Investigate how institutional investors make decisions about IPOs. (For adequately addressing this requirement you will need to access the relevant media reports from ASICs website and review at least 3 academic journals) 
  6. Outline the reasons for investors to be cautious about participating in public share.
  7. Comment on the success or otherwise of IPOs made in 2017. (For adequately addressing this requirement you will need to access the IPOwatch report for 2017 by accessing it from IPOwatch.com.au).

Answer

BA214 Corporate Accounting


A. Explain how the prospectus has a central role in ensuring Australia's capital markets are fair and efficient.

The prospectus is the paper presentation of the organisation where the organisations printed down their financial growth as well as defining the internal structure of the organisation. As per the Australian regulatory framework of stock exchange it has been highlighted that every organisation listed under the ASX and NSX have to prepare a prospectus in which they have to write about their number of shares as well as the price of the shares. Coffee Jr, Sale & Henderson (2015) commented that the prospectus has the detailed knowledge about the national firms of the nations that help the investors to judge where they are going to invest their money is safe for them or not. The statement has deduced that investors are the people who are investing their part of income in the market and hence they have full right to know about the returns or the profits of the organisation so that they can judge either they might get any returns or not. As the investors are now getting educated about the investment and all other terms regarding investments, hence under these conditions prospectus will help the organisations to create the good relationship with their investors. Apart from this, the prospectus is even helping out the organisations to present their brand image in the market because investors can compare the outcomes or earnings of the organisation with the help of prospectus. This has further helped the investors to get remedial knowledge about the organisations and promotes the fair and efficient growth of the organisation in the proposed market (Aobdia, Lin & Petacchi2015). The prospectus is the evidence of the financial growth of the organisation that further helps the investors to invest more amount in the market after choosing the right organisation or right type of market. From the perspective of the nation like Australia or any other nation, the prospectus is the printed layout of the organisation that educates the investors for future investments. The discussion has revealed that from the point of view of the Australian capital markets prospectus have the central role for fair and efficient trading in the market it connects the investors and the organisations in the market. Also, with the help of prospectus, the organisation can gain the trusts of their investors.

B. Outline ASICs broad role in the regulation and oversight of IPOs.

Australian Security and Investment Commission (ASIC) welcome opportunity to make a submission to the Senate Economic Reference Committee on the inquiry into consequence and cause of collapse retailers in Australia. The three strategic priority of ASIC is to inform and confirm financial and investors consumers, efficient and fair financial markets and effective licensing and registration. The role of ASIC in oversight and regulation of IPOs (Initial Public Offering) could be stated as ASIC  do not approve, endorse and verify the content of prospectuses but every prospectus must be sequenced with ASIC prior to any security offered to the public (Pearson 2016). To check if the issuer has lodged any prospectus ASIC's Offer list database must be checked. In addition, ASIC also reviews several prospectuses to assess whether disclosures materialize to conform to the law. However, the assessment is only based on information provided where it may not know in case the company failed to disclose information that is negative. Companies need not meet any merit-focused condition to list, but they just have to meet profit or asset test and decrease number of shareholders. This could include money they improve in IPO.  

Apart from all this, ASIC plays a role in regulating private equity funds, where it is often structured as unregistered managed investment plan as fundraised actions are commonly limited to wholesale and sophisticated investors. Most machinists of classified equity funds would be needed to hold Australian financial services licence in agreement with s911A of Corporation Act to process any advice, dealing and custody services in context to interests in funds and relevant financial products. In addition, ASIC also play important part in regulating corporate takeovers where it focuses on administration of takeovers provisions of Corporation Act that ensures that ‘Eggleston Principles' are observed which confirms that acquisition of control over voting interests and voting shares takes position inefficient, informed and competitive market (Bessell, Powell & Richardson 2017).  Also with including, the appropriate procedure that is followed as the preliminary compulsory acquisition of interests and voting or another type of securities under Pt6A.1.

C. Nature and details of the prospective fundraising, and the reasons why such funds are being raised for the selected company.

As per the perspective of an organisation funds or finance is the major requirement and this is the major reason an organisation is always looking for the right way or source to raise funds for the future growth. In the market there are several kinds of sources are available those are helping out the organisations for raising funds from the market those are like venture capital, loan and borrowing, merchandising and trading. All these are the respective terms or sources that help organisations to raise prospective funds from the organisations like GeoCrystal Limited, Kleos Space S.A, Power Asia Limited and Rongyu Pharmaceuticals Limited etc. Williamson, Luke, Leat & Furneaux (2017) commented that for an organisation the most important task is to raise executive funds from the market and for that the organisations are primarily going with trading and loans and borrowings. The statement has deduced that the authorities of the organisations can lead a business only if they have adequate funds in the organisation because every single activity in the organisation is demanding funds to complete. Hence, in such situations, trading and loans and borrowings are the effective functions for the organisations. Hai& Heckman (2017) added to the discussion that by the help of trading an organisation can issue their shares in the market at some par value that are further purchased by the investors as per their choice of risks. Those amounts are utilised by the organisation in the form of conversion of cash inflows into final production. The entire process helps the organisation to utilise the funds of the public in the business and in return pay them the interest or dividend.The loans and borrowings help the organisations to get immediate funds with a minimum payout of the tax amount (knowhownonprofit.org, 2018). The option loan and borrowing help an organisation to get immediate funds, which is generally raised by the organisations from any of national or local banks or any of financial institutions. 

D. Explain the rationale behind specifying a minimum subscription to be reached before shares can be allotted.

The minimum subscription is defined as the minimum amount of shares a company is required to obtain from the public among the total issue by the end of the closure date. Otherwise, the companies shall be held liable for refunding the entire amount which has been received. In different countries the amount of the minimum subscription is different, and it is a noteworthy fact that this amount of minimum subscription should be exclusive of the cheques which have not been cleared. In other words, the minimum subscription is the number of shares against which the amount received by the shareholders is sufficient (Zou et al., 2017). This minimum subscription amount is set for a few specific purposes. From the director's point of view, this is set because of the following reasons,

  • In order to purchase the important and inevitable assets for the company.
  • In order to pay the elementary expenses as well as obtaining the commission on the share sales.
  • If the two of the aforesaid purposes are served them, it can be used for paying for the loan.
  • In order to use for the working capital
  • In order to serve any other key purposes

This amount of minimum subscription must be mentioned appropriately in the prospectus of the company. As per the guidelines outlined by the governing authority of the country the minimum share issue specifies that before issuing any shares or debentures what amount must be received by the company. In most of the cases, this governing authority specifies a percentage of the minimum subscription before starting to allocate the shares or debentures to the public. Therefore, it can clearly be observed that the minimum subscription is a method which ensures the company is meeting certain standards. If the organization does not follow this specific framework and starts to issue the shares without attaining the minimum subscription, it may be subject to legal jurisdiction.

E. Investigate how institutional investors make decisions about IPOs. (For adequately addressing this requirement you will need to access the relevant media reports from ASICs website and review at least 3 academic journals)

The term IPO which is an abbreviated form of the initial public offerings is the first and foremost sale of stocks which are issued by an organization. Before the incidence IPO, the company is regarded as private where there are a comparatively lower number of shareholders which primarily consists of early investors who are the founders, families and friends. As well as the professional investors who are the angel investors and the venture capitalists. At the same point in time, the public on the other side of the spectrum public takes into account everybody else in the market (Abraham, 2015). Any institutional or individual investors who were not involved with the company during the initial stages as well as the people who are interested in buying the share of the company. Until and unless the company is offering its stocks to the public for sale, the public remains incapable of investing in the company. The public companies usually sell a specific portion of its stocks to the general public which is to be traded in the stock exchange.

On the other hand, an institutional investor is characterized as non-banking personnel or an organization responsible for the trading significantly large amount of securities in terms of volume or in terms of the dollar. The trading amount should be large enough that it will automatically qualify for certain preferential treatments and obtaining lower commissions. It is a widely discussed fact that the institutional investors are not always capable of making the right investment decisions (Mazouz, Mohamed, Saadouni & Yin, 2017). If the stock prices go down, these investors are left with nothing but extensive loss. Henceforth, all these institutional investors attempt at making the appropriate decision while attempting IPO. It has been pointed out by the author that the emotion, culture, personality, gender and many of the other factors are there which may affect the decision-making activity of the investors. However, institutional investors are considered to be in a comparatively advantageous position in comparison with the individual investors as they do operate in a structured institution. For instance, a forum or a committee and it is quite evident that before taking any action they recheck and rebalance the activities. The institutional investors are knowledgeable enough to safeguard themselves for the losses. These investors make optimum use of their knowledge base so as to carry out the functions in a well-organized manner so that the previous problems do not get repeated (Che-Yahya & Abdul-Rahim, 2015). Therefore, it can be stated that these institutional investors are experienced enough and possess significant knowledge about the market. This, in turn, helps them to come up with innovative solutions and determine whether the company should work with the initial public offering or not.

F. Outline the reasons for investors to be cautious about participating in public share.

The following are a few reasons because of which the investors are needed to be cautious before investing in public share. The first and foremost among them is that the investors are sometimes observed to be setting up a benchmark price for the shares which they are holding. This benchmark price may be the purchasing price, but at the same point in time, it could also be the maximum amount that has been touched by the stock. The future decisions are made on the basis of this price. Henceforth, in a falling market, if the investors anchor a price, it could lead them to hold a stock usually longer than they should.

If the stocks prices purchased by an investor drops, the investor must not buy more of those shares to bring down the average purchasing price. The investors are sometimes observed to be making an attempt to cover their loss by purchasing more of those same shares at a lower price. Abraham (2015), stated that if the fundamentals have deteriorated already them attempting to average is simply analogous to a catching a falling knife. The losses will worsen further if the investors purchase more of the stock.

Furthermore, the investors should also take into consideration the market trends and patterns. This is because the emergence of a recession or inflation may affect the stock prices aggressively. Henceforth, taking note of the market situation will help them to stay alert about the upcoming event which may affect their profitability. The sudden emergence of a recession will certainly blow down the stock market due to which the investor may incur huge losses.

G. Comment on the success or otherwise of IPOs made in 2017. (For adequately addressing this requirement you will need to access the IPO watch report for 2017 by accessing it from IPOwatch.com.au).

The initial public offering as per IPO 2017 assessed that Cann Group has a higher listing with 796.7% of return from initial public offering in the marketplace. It has been observed that market capitalisation has been earned by the company in the present year observed to be $287,498,173. In the present year, the initial public offering is most of the firms listed have been successful as per the returns reported in the IPO listings It has been observed that increase in shareholder investment in different companies has helped to enhance the performance of IPO ore significantly. In the listing, tare are companies such as Mayur Resources has not been applied any form o IPO in the present year (IPO Watch, 2018). It has been stated in the present year there has been an increase in demands of most of the products in the marketplace. It has certainly helped the business entities to emulate its products and push the sales volume certainly.

The initial public offering defines the ability of the firm to issue are in the market and earn the relevant amount of funding from the . The company listed in IPO are reliable for issue share in the market. Thus, in the resent status, most o the company was able to earn 75% to 800% growth and revenue generation of the firm It is beloved that the shares are part of the profit that is divided in several; ashore that is issued in the mat place. From the listing, it can be stated that a firm name Area Resources has been able to increase its public offerings from the market by 40%. It has observed that the market return of the company has been grown by 185% (IPO Watch, 2018).

As per the analysis, the market capitalisation of the firm has been evaluated $56965721 in the marketplace. It has been evaluated that the development of initial public offering of this firm has been the success for the particular year. The demand for its products it has increased in the marketplace. Thus, the company has been able to make more issue of funds in the market. This certainly helps the firm to make more reliable investments. As per the analysis, there are different companies has made little constitution towards initial public offerings. The business firm Audinate Group is one of the companies that have made less issue of shares in the market. In accordance to the listing provided, it can be assumed that the company has net market capitalisation. In the analysis, it can be observed that these companies might have fewer capitalisations to make the issue of shares or have been generating finds through a diminishing rate (IPO Watch, 2018).

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