A capital market is not only an intermediation between investors and companies that need capital, either debt or equity, but also creates an opportunity for entrepreneurs to professionally start and manage their business ideas by establishing new companies. Of course, the question arises as to how the capital market can be an attraction for entrepreneurs.
Based on data on initial public offerings (IPOs) on the Indonesia Stock Exchange (IDX) from 2010 to 2018, around 80 companies were still under 10 years old. Most of them are listed on the development board.
Most of those young companies operate in trade, manufacturing, followed by infrastructure, utilities & transportation; property, real estate & building. Some other industries, such as mining, agriculture and finance, also contribute to creating young companies that meet the requirements for an IPO.
According to the IPO data, the average IPO companies experienced underpricing where the first-day closing price was higher than the offering price. Underpricing is positively welcomed from the investing public because they are willing to pay more than the IPO price.
Interestingly, the percentage of underpricing in the development board is relatively larger, on average, than that in the main board. This means that small companies are more likely to be welcomed by public investors.
The current IPO requirements have accommodated start-up companies to be listed on the IDX. The regulation gives the opportunity for young companies to sell their equity shares to the public. Those that have been established for more than a year can propose to sell their shares to the public by being listed on the IDX development board.
In addition, companies can have negative earnings for listing on the development board. This provides opportunities for companies in the introduction and growth phase to raise new capital from the equity market. However, they have a further requirement to have positive earnings in their earning forecasting in the second year after listing.
The rules for the value of assets required by the IDX for companies on the development board are also relatively easy, including a minimum Rp 5 billion (US$345,000) for the value of net tangible assets. Other requirements must have audited financial statements with WTM status. Then there are some requirements that relate to corporate governance such as independent commissioners representing a minimum of 30 percent of the company's board of commissioners, the existence of an audit committee and a company secretary.
The existence of IDX development boards indirectly aims to give hope to entrepreneurs to expand their business because of the potential to get new equity capital through the offering of company shares to the public. With the requirements that are relatively not too complicated for listing on the development board, raising new capital through selling equity securities on the IDX is relatively easier for entrepreneurs.
The benefit is not only for the founder, but also for venture capitalists (VCs). They see the ease of the IPO process as a prospective exit strategy when they invest in Indonesian start-up businesses. In the literature on strategic finance, IPOs are a popular exit strategy used by VCs (such as Yip, Su, & Boon Ang, 2009). Therefore, the attraction of IPOs on the IDX could lead to more VCs investing their funds in Indonesian start-ups.
IPOs may not only be seen in terms of potential capital, but also from a corporate governance perspective. The requirements and due diligence process by the IDX and the Financial Services Authority (OJK) certainly need good management to achieve minimum requirements. Independent commissioners are required to make a company appoint a commissioner who has no relationship with the majority or control shareholders.
Furthermore, IPO companies must be concerned with their internal audit, proven by the existence of an audit committee. This aims to prevent misleading public information that will have an impact on investment risks. Therefore, by the presence of independent commissioners and audit committees, they can control executives and apply the concepts of accountability and transparency. This requirement aims to see whether a company has been well prepared to meet the financial disclosure requirements.
Capital requirements, operating income and revenues required in the IPO process, will also discipline entrepreneurs to manage their assets and resources professionally by managing all their company's activities properly. Even though companies may have negative earnings at the time of the IPO, they must promise positive earnings to investors after two years they get Tbk (publicly-listed) status.
Being a Tbk company may be not easy, because companies must disclose all their financial information to the public. Accountability is the main key for Tbk companies. They must report their audited financial statements annually through mass media.
Providing opportunities for small and medium-sized enterprises (SMEs) on the IDX has been started by the OJK and IDX by providing concessions to go public, especially on the development board. They may learn from the success of Regulation A in the United States in providing opportunities for small businesses for listings on effective exchanges. The regulation is a specific regulation for SMEs with the ease and lightness of the listing process, unlike processes in the traditional listing process.
