Japan antitrust watchdog probes underwriter role in IPO pricing

Japanese authorities are looking into whether underwriters are pricing IPOs fairly.

Nikkei staff writers | Japan

TOKYO — The Japan Fair Trade Commission, the anti-monopoly watchdog, has begun investigating if securities companies and underwriters are pricing shares fairly in initial public offerings, Nikkei has learned. 

The move comes after the body noted that in many deals, the difference in offer prices before listing and opening share prices on debut have been larger than in Europe and the U.S. 

As a result, the listing company raises a smaller amount of capital, but investors come away happy with what is known as a “first-day pop.” Underwriters are known to be partial to this practice in order to garner financial support from investors. However, from the JFTC point of view, the investigation could open the way for underwriters to increase pricing for startups and allow them to raise more funds, given as Japan lags behind the rest of the world in nurturing young tech companies.

JFTC sent a questionnaire to about 100 domestic companies to ask if they felt they were able to sufficiently negotiate with underwriters in setting offer prices for their shares and if they were satisfied with the process. JFTC will also interview underwriters if it felt it necessary.

The commission will check for antitrust violations as it can be difficult for companies to replace lead underwriters. In Japan, underwriters conduct a test to decide if companies can file for listings, which gives them power over listees.

In the U.S. and many other countries, institutional investors put in bids for about 80% of stock on offer, influencing the final pricing of the deal. The role of underwriters in price-setting is therefore smaller than in Japan where retail investors typically buy 70% of shares on offer at prices determined by the deal makers. To encourage sales, underwriters tend to set offer prices conservatively.

Investor protection will also be considered in future reviews by the JFTC. In June, the Japanese government stipulated a review of the IPO pricing process as part of its growth strategy for the first time, putting a focus on nurturing startups.

The average first-day opening share price of Japanese companies that recently listed was about 1.5 times the offer price, while those of the U.S. and major European countries was 1.1 to 1.2 times. The amount of IPO proceeds in Japan was also low at an average of $36 million per deal in 2020, which makes only about one-tenth that of the U.S. and a quarter that of Europe.

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