"Going public" through an initial public offering of its shares ("IPO") can be an efficient source of direct funding for many joint stock companies. The means in which companies may offer their shares to the public may vary according to the particular circumstances of each company. For example, a company may offer its current shares (owned by current shareholders) to the public in the classic IPO format, or may go public through a capital increase (whereby the pre-emption rights of the current shareholders are not exercised).
A public offering of shares requires a vast amount of preparation. Articles of association must be amended in line with the requirements of the Turkish Capital Markets Board ("CMB") and financial statements must be prepared in accordance with the standards applicable to publicly traded companies. An application for prior approval regarding the public offering which includes the offering circular is submitted to the CMB as a first step. If such application is positively received by the CMB, the offering circular is submitted to the stock exchange (together with all other documents and information also submitted to the CMB). The offering circular is one of the most important documents in the application package, and must be carefully prepared by the company's attorneys and financial advisors to avoid any confusion and/or rejection by the CMB.
For purposes of verification, the company (and its major assets and subsidiaries, if any) are inspected by the officials of the CMB and the stock exchange. Offering circulars are required to be drafted in accordance with the applicable legislation (i.e. contain all matters required to be included in an offering circular). This includes complete and accurate information regarding the shares to be offered, the activities and financial condition of the company, and a full disclosure of all risks associated with any potential investment in the company. In the event that the CMB takes the view that the offering circular does not accurately and transparently reflect the current situation of the company, the application for its public offering may be rejected. However, it is noteworthy that even if the CMB approves an offering circular, it does not indicate that the CMB has itself conducted an independent study on the company and approved its financial condition. Offering circulars are examined by the CMB only in terms of compliance with the applicable regulations of the CMB, and not on the "quality" of the investment. In other words, the concept of caveat emptor remains in effect. Upon completion of the application process, the offering circular is announced and the IPO process commences.
An IPO affords several advantages to companies. First of all, it is a proven method of funding for companies in need of cash for expansion or debt reduction. For substantial amounts of fundraising, the cost of an IPO is much less compared to conventional debt financing obtained from banks and other financial institutions as it does not involve repayment of any principal or interest to the investors. Although interest expense and the time pressure of repayment of a debt is obviated, it must remembered that there will be ongoing costs associated with being a public company such as audited financial statements and the preparation and submittal of quarterly reports. On the positive side, going public generally enhances the reputation of a company. This is primarily because listed companies are under strict scrutiny by the CMB and must abide by numerous rules and standards, including corporate governance principles and material event disclosure requirements. Such a high level of scrutiny inevitably results in a considerable amount of trust in the company in the eyes of the public. Furthermore, statutory requirements imposed on listed companies pave the way for such companies to evolve from being mere "family businesses" to professional entities (at least theoretically) motivated by the interests of all shareholders, family and public alike.
As stated above, companies whose shares are traded publicly are required to be transparent in all their affairs and transactions. In this respect, pursuant to the communiqués of the CMB, listed companies are required to regularly disclose their financial statements prepared in line with IFRS or the principles mandated by the CMB, alongside independent audit reports prepared by unrelated licensed professionals. Material event disclosure requirements serve to maintain transparency and protect the interests of the investors by ensuring that they are kept informed about all significant matters that may affect their investment decisions. CMB's Material Events Communiqué (Serial II No.15.1) sets out the principles applicable for disclosures to be made by listed companies. Such disclosures are required to be made accurately and in a timely manner.
Prior to 2010, the minimal number of public offerings and unsettling fluctuations in the capital markets were a concern for Turkish capital markets regulators. Inconsistent, burdensome, and downright byzantine bureaucratic procedures and regulatory requirements served as deterrent factors for companies to go public. After the 2008 financial crisis that severely affected both the international and local capital markets as well as the global financial sector, it became crucial to strengthen the Turkish capital markets system if Turkey wanted to remain a sustainable emerging market investment destination. With such concerns in mind and also in line with the constructs and requirements introduced by the new Turkish Commercial Code (Law No. 6102), the regulatory framework for Turkish capital markets has undergone major changes in recent years. These were designed to facilitate the IPO process, achieve harmonization with the European Union legislation, encourage companies to go public, and boost the number of IPO's and secondary offerings, thus ensuring robust growth for the Turkish capital markets. Following such amendments, not only has interest in IPO's significantly grown, but also it has become possible to trade foreign capital market instruments in the Turkish capital markets. This is considered a major breakthrough for Turkey in terms of its efforts to integrate into the global markets.
Recent regulatory developments in the Turkish capital markets have fostered trust not only with the local capital markets but also upon local investment and finance institutions. However, although many new laws and communiqués have been introduced in recent years, it remains to be seen if the current framework will suffice to eliminate prior concerns. With that sole caveat, in comparison to the previous investment environment, the current framework stands out as sophisticated, proactive, and in alignment with the global marketplace.
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