MOEX: How IPOs are Conducted on the Moscow Exchange, Bookbuilding and Settlements
The Role of the Moscow Exchange and the Features of Russian IPOs
An initial public offering (IPO) on the Moscow Exchange is a multi-stage process that transforms a private company into a public entity, providing access to capital for a wide range of investors. Over the past decade, the Russian IPO market has experienced several waves of activity, and today the Moscow Exchange ranks among the leading trading venues in Eastern Europe, offering issuers a full spectrum of infrastructure services, from listing to post-trade support. The mechanism for conducting IPOs on MOEX is aligned with international standards and largely borrows best practices from the London Stock Exchange, making Russian placements comprehensible and attractive to global institutional investors. Concurrently, the Exchange adapts its procedures to the specifics of Russian legislation and the characteristics of the local market, creating a hybrid model that combines Western standards of transparency with an understanding of national regulatory requirements.
Preparing a Company for the Stock Market
IPO Exit Strategy
The decision to conduct an IPO is never made spontaneously; it is the result of long-term strategic planning that may take anywhere from several months to several years. Companies approach public markets for various reasons: some require capital for scaling their business or executing large investment projects, others seek to provide liquidity to existing shareholders, while some view public status as an opportunity to enhance corporate reputation and trust among partners and clients.
Selecting Placement Organisers
The first critical decision is the selection of placement organisers, namely investment banks that will accompany the entire transaction from start to finish. In Russian practice, for large IPOs amounting to several billion roubles, companies usually form a syndicate comprising multiple banks, with one acting as the lead organiser or bookrunner, while the others serve as co-managers. This structure allows for risk distribution associated with under-subscription and ensures a wider reach to potential investors thanks to the client base of several financial institutions.
Timelines and Corporate Transformations
The timelines for Russian IPOs can vary significantly depending on the complexity of the transaction and the readiness of the company. The minimum duration from the decision to the start of trading is three to four months for relatively simple transactions, where the company lists already existing shares solely on the Moscow Exchange without parallel listings abroad. However, most IPOs require six to nine months of preparation, while the most complex transactions with an international component can extend beyond a year.
Organisational and Legal Form and Due Diligence
Russian corporate legislation establishes clear requirements for the organisational and legal form of the issuer planning a public offering. The company must be transformed into a public joint-stock company, which requires approval from a qualified majority of shareholders — 75% of votes when reorganising from a non-public joint-stock company or unanimous consent from all participants when transforming from a limited liability company. Such stringent requirements protect the rights of minority shareholders and ensure the soundness of strategic corporate decisions.
Financial Model and Investment History
Alongside legal procedures, the company undergoes a comprehensive financial and legal review — due diligence — organised by underwriters in collaboration with external auditors and legal consultants. This process may uncover potential risks needing rectification before the offering, ranging from documentation gaps related to real estate to complex tax structures or unsettled legal disputes. The results of due diligence directly influence the company's valuation and investment attractiveness. A key element of preparation becomes the development of a detailed financial model and investment history of the company, referred to in professional jargon as the equity story. This is not merely a set of financial forecasts but a coherent narrative about why the business deserves investors' attention, what competitive advantages it holds, how it plans to grow, and what returns it can offer to shareholders. A compelling investment story can significantly boost demand for shares and justify a premium valuation for the company.
Listing and Requirements of the Moscow Exchange
Hierarchy of Listing Levels
The listing system of the Moscow Exchange is structured around a three-tier hierarchy, where each level reflects the degree of reliability and investment attractiveness of the securities. The third tier represents basic access to organised trading with minimal requirements, the second tier entails stricter criteria regarding financial transparency and corporate governance, while the first tier — the highest echelon of listing — is accessible only to the most reliable and large issuers.
The Significance of the First Tier for Institutional Investors
Belonging to the first-tier quotation list holds particular practical value for Russian companies, as only such securities can be included in the portfolios of non-state pension funds according to the regulator's requirements. Given that non-state pension funds represent the largest segment of institutional investors in the Russian market, a first-tier listing often becomes a prerequisite for successfully placing a significant volume of shares.
Quantitative Requirements and the Distinction Between Listing and IPO
The quantitative criteria for inclusion in the first-tier listing are quite stringent and exclude smaller companies. The minimum volume of freely traded shares must be at least 3 billion roubles, and the proportion of such shares in the total number of ordinary shares cannot be below 10%. These requirements ensure sufficient liquidity of the securities and prevent price manipulation by majority shareholders. For the second tier, the threshold is lowered to 1 billion roubles, with the same 10% free float, making it accessible for medium-sized companies. It is important to understand the distinction between listing and IPO, as these terms are often confused even by seasoned market participants. Listing refers to the inclusion of securities in the stock exchange's list and their admission to organised trading, while an IPO is the process of initial placement and sale of shares to investors. A company can obtain a listing without conducting an IPO if its shares are already traded on another recognised international exchange and meet the Moscow Exchange's requirements — in this case, it refers to a secondary or direct listing.
Company Lifespan and Reporting Requirements
Exchange requirements concerning the company’s lifespan also vary across tiers: for the first tier, a company must have operated for a minimum of three years, while for the second tier, it must have been operational for at least one year. These restrictions aim to ensure that there is sufficient operational history and audited financial reports for several periods, allowing investors to adequately assess the business and its prospects.
Bookbuilding and Pricing Mechanism
The Process of Determining the Placement Price
Bookbuilding is considered the most complex and critical phase of the entire IPO process, as it is at this stage that the price at which the company will sell its shares to investors is established. The procedure begins with the establishment of an indicative price range — a corridor within which the final placement price is expected to fall. This range is calculated by the underwriters' analytical team based on a fundamental evaluation of the company and an analysis of the current market conditions.
Marketing Campaign and Road Show
Prior to the opening of the bidding process, placement organisers conduct an extensive marketing campaign, with the central element being the Road Show — a series of presentations for potential institutional investors in key financial centres. In a typical Road Show for a large Russian IPO, the company's top management team, accompanied by representatives of the underwriters, visits Moscow, St. Petersburg, London, New York and other cities over the course of two to three weeks, holding dozens of meetings with funds, asset management companies, and major private investors.
Investment Story and Analytical Reports
Each meeting during the Road Show involves a detailed presentation of the company's business model, competitive advantages, financial metrics, and growth strategy. Investors pose challenging questions about business risks, the quality of corporate governance, plans for using the raised capital, and expected investment returns. Investors' reactions to the Road Show give organisers an initial understanding of demand and can lead to adjustments in the initial price range even before the official commencement of bookbuilding. Syndicate analysts prepare comprehensive research reports containing a thorough assessment of the company, industry analysis, competitive positioning, and investment recommendations. These documents are disseminated among institutional clients of the banks and serve as the basis for investment decisions. The quality of analytical work has a direct impact on how the IPO is perceived by the professional community.
Order Book and Reassessment of the Range
The bookbuilding process typically lasts from several days to two weeks, during which investors submit bids indicating the number of shares they desire and their maximum purchase price. Placement organisers consolidate these bids into a single “order book,” representing a schedule of aggregate demand at various price levels. If, at the upper end of the range, demand significantly exceeds supply (leading to oversubscription), this may serve as a basis for raising the placement price above the initial range.
Company Valuation Methods for IPO
Company valuation in preparation for an IPO is conducted using several methods, the results of which are then compared to determine fair value. The discounted cash flow method involves building a detailed financial model over a five to ten-year horizon, predicting future free cash flows, and subsequently discounting them to present value using the WACC rate. The terminal value of the company, reflecting its worth beyond the forecast period, is typically calculated using a perpetuity growth formula or based on exit multiples. The comparable companies method entails applying market multiples of publicly traded peers to the financial metrics of the business being appraised. Analysts select a group of companies with similar business models, scale, and geographical presence, calculate key multiples like P/E, EV/EBITDA, or EV/Sales for them, and then apply the median or weighted average figures to the issuer’s corresponding metrics. Choosing the correct peer group is critical to obtaining an accurate valuation.
Allocation and Fair Distribution
Principles and Systems for Share Distribution
After the closure of the order book and determination of the final placement price, the moment of truth arrives — allocation, that is, the distribution of the available number of shares among all investors who submitted bids. In situations of significant oversubscription, where total demand dramatically exceeds supply, the allocation decisions become highly sensitive and can influence the long-term success of the placement.
Traditional Approaches and Risks of Opacity
Traditionally, placement organisers held broad discretionary powers regarding share distribution, creating potential for abuses. Shares could be allocated in favour of “friendly” clients, short-term speculators willing to quickly sell stocks for profit (a practice known as flipping), or to the benefit of the underwriters themselves. Such opacity undermined trust in the IPO market and deterred serious long-term investors.
Innovative Mechanisms of the Moscow Exchange
The Moscow Exchange has taken significant steps to enhance the transparency of the allocation process by developing an innovative “Smart Allocator” system. This technological platform allows issuers and organisers to establish clear, objective share distribution rules in advance and automatically apply them to all submitted bids. Criteria may include bid size, declared investment horizon, the investor's history of participation in previous placements, and behaviour in the secondary market. The new IPO standards on the Moscow Exchange require participants to publicly disclose the allocation principles before the start of bookbuilding. Investors must understand the rules under which shares will be allocated, allowing them to more consciously formulate their bids and reducing the likelihood of subsequent claims regarding unfair distribution.
Segmentation and Working with Different Investor Groups
In the practice of Russian IPOs, it is common to segment the pool of placed shares into institutional and retail parts. Retail investors, submitting bids through brokerage accounts, may be allocated a guaranteed share of the total offering volume under special allocation conditions, such as priority for smaller bids or proportional distribution within their segment. This ensures accessibility of the IPO to a broad range of private investors and facilitates the formation of a diversified shareholder base. The institutional portion is typically allocated with an emphasis on attracting quality long-term investors — pension funds, insurance companies, sovereign wealth funds, and major asset managers. Organisers aim to achieve a balance between maximising demand and forming a stable shareholder base capable of supporting stock prices after the commencement of trading on the secondary market.
Settlements, Clearing and Commencement of Trading
Technical Infrastructure for Settlements
The final stage of an IPO is associated with the technical execution of transactions — settlements between investors and the issuer, carried out through the infrastructure of the National Settlement Depository (NSD). The NSD performs critical functions as a central depository and clearing centre, ensuring simultaneous and secure transfer of securities and funds between transaction parties. The process begins even at the bidding stage when brokers block the necessary sum of funds in their clients' investment accounts. This blocking guarantees that at the time of allocation, the investor will have sufficient funds to pay for the shares assigned to them. The size of the block is calculated based on the maximum possible allocation of the submitted bid and the upper price limit of the placement range.
Clearing and Settlement Execution
Following the completion of allocation and confirmation of the final distribution results, the NSD conducts clearing — the process of reconciling and netting the reciprocal obligations of all settlement participants. Clearing reveals the net positions of each participant regarding funds and securities, which are subject to final execution. Multilateral netting significantly reduces the number of actual payments and deliveries, enhancing the efficiency of the settlement system. The actual execution of settlements for the IPO occurs on a “delivery versus payment” basis, where the debiting of funds from investors and crediting of shares to them happens simultaneously and atomically. This mechanism entirely eliminates the risk of one party fulfilling its obligations while the other does not. The Russian settlement infrastructure ensures a high level of reliability for such operations due to modern technology and the redundancy of critical systems.
Settlement Cycle and Commencement of Trading
The standard settlement cycle on the Russian stock market is T+2, meaning that final execution occurs on the second working day after the transaction is concluded. However, modified schemes may be applied for IPOs depending on the structure of the offering, regulatory requirements, and the issuer's preferences. After shares are credited to the investors' deposits and unutilised funds are unlocked (in case of partial allocation of the bid), free trading of the shares begins on the secondary market. A significant milestone in the development of the Russian IPO market was the legislative change in 2015 that permitted conditional trading of certain foreign securities, similar to the practice of the London Stock Exchange. Prior to this, Russian law prohibited commencing trading of shares until full payment and issuance registration were completed, which created inconveniences when conducting combined placements on multiple exchanges simultaneously. The liberalisation of regulations facilitated the integration of the Russian market into the global financial system.
The Future of IPOs on the Moscow Exchange
Prospects for Development and Technological Innovations
The Moscow Exchange continues to develop and enhance the infrastructure for conducting public offerings, implementing new technologies and raising standards of transparency. The modern IPO process on MOEX represents a complex yet finely-tuned system that combines international best practices with consideration of the specifics of Russian regulatory frameworks and market environments. For companies, this means the opportunity to attract significant capital for business development and increase their market capitalisation, while for investors, it presents a chance to participate in offerings on predictable and fair terms with reliable protection of the rights and interests of all parties involved.
