MOEX: How IPOs Are Conducted on the Moscow Exchange, Bookbuilding, and Settlements
The Role of the Moscow Exchange and Features of the Russian IPO
Initial Public Offerings (IPOs) on the Moscow Exchange represent a multi-stage process of transforming a private company into a public one, thereby opening access to capital for a broad range of investors. Over the last decade, the Russian IPO market has experienced several waves of activity, and today the Moscow Exchange holds a leading position among Eastern European trading platforms, offering issuers a full spectrum of infrastructural services from listing to post-trade support. The mechanism for conducting IPOs on MOEX is aligned with international standards and largely adopts the best practices of the London Stock Exchange, making Russian placements understandable and appealing to global institutional investors. At the same time, the exchange adapts procedures to the nuances of Russian legislation and the characteristics of the local market, creating a hybrid model that combines Western transparency standards with national regulatory requirements.
Preparing a Company for Going Public
IPO Exit Strategy
The decision to conduct an IPO is never made spontaneously; it is the result of long-term strategic planning, which can take several months to several years. Companies turn to public markets for various reasons: some require capital to scale their businesses or implement large investment projects, others seek liquidity for existing shareholders, while still others view public status as an opportunity to enhance corporate reputation and trust among partners and clients.
Choosing Underwriters
The first critical decision is the selection of underwriters—investment banks that will guide the entire transaction from start to finish. In Russian practice, for large IPOs valued at over several billion rubles, companies typically form a syndicate of several banks, with one acting as the lead underwriter or book runner, while the others serve as co-managers. This structure allows for risk sharing and ensures broader coverage of potential investors through the client bases of multiple financial institutions.
Timelines and Corporate Restructuring
The timelines for Russian IPOs can vary significantly based on transaction complexity and company readiness. The minimum period from decision-making to the commencement of trading is three to four months for relatively simple transactions where a company lists existing shares solely on the Moscow Exchange without concurrent listings abroad. However, most IPOs require six to nine months of preparation, while the most complex transactions with an international component can extend for a year or more.
Legal Structure and Due Diligence
Russian corporate law sets clear requirements for the legal structure of an issuer planning to go public. The company must be transformed into a public joint-stock company, which requires approval from a qualified majority of shareholders—75% of votes in the case of reorganization from a private joint-stock company or unanimous decisions from all participants in the case of conversion from a limited liability company. These stringent requirements protect the rights of minority shareholders and ensure the deliberateness of strategic corporate decisions.
Financial Model and Investment Story
Alongside legal procedures, the company undergoes comprehensive financial and legal due diligence, organized by underwriters together with external auditors and legal consultants. This process can uncover potential risks that need to be addressed prior to listing, ranging from gaps in real estate documentation to complex tax structures or unresolved lawsuits. The results of due diligence directly affect the company's valuation and investment attractiveness. A central aspect of preparation is the development of a detailed financial model and investment story, termed the "equity story" in professional jargon. This is not merely a set of financial forecasts but a cohesive narrative about why this business warrants investor attention, what competitive advantages it possesses, how it plans to grow, and what returns it can provide to shareholders. A compelling investment story can significantly enhance demand for shares and justify a premium valuation for the company.
Listing and Requirements of the Moscow Exchange
Listing Level Hierarchy
The Moscow Exchange's listing system is structured around a three-tiered hierarchy, where each level reflects the degree of reliability and investment attractiveness of securities. The third tier represents basic admission to organized trading with minimal requirements; the second tier stipulates stricter criteria concerning financial transparency and corporate governance, while the first tier represents the highest echelon of listing available only to the most reliable and substantial issuers.
The Importance of the First Tier for Institutional Investors
Inclusion in the first-tier quotation list has particular practical significance for Russian companies, as only such securities can be incorporated into the portfolios of non-state pension funds according to regulatory requirements. Given that pension funds represent the largest segment of institutional investors in the Russian market, first-tier listing often becomes a prerequisite for the successful placement of a substantial volume of shares.
Quantitative Requirements and the Distinction Between Listing and IPO
The quantitative criteria for inclusion in the first listing tier are quite stringent, filtering out smaller companies. The minimum free-float share volume must total no less than 3 billion rubles, while the share of such shares in the total number of common shares cannot be lower than 10%. These requirements ensure adequate liquidity of the securities and prevent price manipulation by majority shareholders. For the second tier, the threshold is lowered to 1 billion rubles and the same 10% free-float, making it accessible for mid-sized companies. It is essential to understand the distinction between listing and an actual IPO, as these terms are often confused even by seasoned market participants. Listing represents the inclusion of securities in the exchange list and their admission to organized trading, while IPO refers to the process of initial placement and sale of shares to investors. A company may obtain a listing without conducting an IPO if its shares are already traded on another recognized international exchange and meet the requirements of the Moscow Exchange—in this case, it refers to a secondary or direct listing.
Company Age and Reporting Requirements
The Exchange's requirements regarding a company’s operational history vary by level: for the first level, a company must have operated for at least three years, while the second level requires one year. These restrictions are designed to ensure a 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 Setting the Placement Price
Bookbuilding is regarded as the most complex and accountable stage of the entire IPO process, as it is here where the price at which the company will sell its shares to investors is determined. The procedure begins with establishing an indicative price range—the corridor within which the final placement price is expected to lie. This range is calculated by the underwriters' analytical team based on the fundamental valuation of the company and current market analysis.
Marketing Campaign and Road Show
Before opening the book for applications, the placement organizers conduct a large-scale marketing campaign, the central element of which is the Road Show—a series of presentations for potential institutional investors in key financial centers. In a typical Road Show for a major 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 two to three weeks, holding dozens of meetings with funds, asset management companies, and large individual investors.
Investment Story and Analytical Reports
Each meeting during the Road Show features a detailed presentation of the company’s business model, competitive advantages, financial metrics, and growth strategy. Investors pose tough questions regarding business risks, the quality of corporate governance, plans for utilizing the raised capital, and expected investment returns. Investor reactions to the Road Show provide organizers with preliminary insights into demand and may lead to adjustments in the initial price range prior to the official commencement of bookbuilding. Analysts from the syndicate of underwriters prepare extensive research reports containing a comprehensive evaluation of the company, industry analysis, positioning against competitors, and investment recommendations. These documents are distributed among institutional clients of the banks and serve as a basis for investment decisions. The quality of analytical work directly influences the perception of the IPO by the professional community.
Order Book and Price Range Reevaluation
The bookbuilding process typically lasts from several days to two weeks, during which investors submit applications indicating the desired number of shares and maximum price they are willing to pay. The placement organizers consolidate these applications into a single “order book,” which represents a schedule of aggregate demand at various price levels. If demand at the upper boundary of the range exceeds supply several times (leading to oversubscription), this may serve as the basis for increasing the placement price above the initial range.
Methods of Company Valuation for IPO
Valuation of a company 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 creating a detailed financial model over a five to ten-year horizon, forecasting future free cash flows and subsequently discounting them to present value using the WACC rate. The terminal value of the company, which reflects its value beyond the forecast period, is usually calculated using the perpetual growth formula or based on exit multiples. The comparable companies method relies on applying market multiples of public peers to the financial metrics of the business being evaluated. Analysts select a group of companies with similar business models, sizes, and geographical presence, calculate key multiples such as P/E, EV/EBITDA, or EV/Sales for them, and then apply median or weighted averages to the respective metrics of the issuer. Choosing the correct group of comparable companies is critical for obtaining an adequate valuation.
Allocation and Fair Distribution
Principles and Systems for Share Distribution
After closing the order book and determining the final placement price, the moment of truth arrives—allocation, that is, the distribution of the available shares among all investors who submitted applications. In the case of significant oversubscription, where overall demand exceeds supply by several times, allocation decisions become extremely sensitive and can impact the long-term success of the placement.
Traditional Approaches and Transparency Risks
Traditionally, placement organizers possessed broad discretionary powers when distributing shares, which created the potential for abuses. Shares could be allocated in favor of “friendly” clients, short-term speculators ready to swiftly sell the securities for profit (a practice known as flipping), or in the interests of the underwriters themselves. Such lack of transparency 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 the innovative “Smart Allocator” system. This technological platform allows issuers and organizers to establish clear, objective rules for share distribution in advance and automatically apply them to all received applications. The criteria may include the size of the application, declared investment horizon, the investor’s history of participation in previous placements, and their behavior in the secondary market. New IPO standards on the Moscow Exchange require participants to publicly disclose the principles of allocation prior to the start of bookbuilding. Investors must understand the rules by which shares will be allocated, allowing them to formulate their applications more deliberately and reducing the likelihood of subsequent claims of unfair distribution.
Segmentation and Working with Different Investor Groups
In Russian IPO practices, it is common to apply segmentation to the pool of shares being placed into institutional and retail parts. Retail investors submitting applications through brokerage accounts may be allocated a guaranteed share of the overall placement with special allocation conditions, such as prioritization for small applications or proportional distribution within their segment. This ensures the IPO's accessibility to a wide range of private investors and contributes to the formation of a diversified shareholder base. The institutional part is usually allocated with a focus on attracting quality long-term investors—pension funds, insurance companies, sovereign wealth funds, and large asset managers. Organizers strive to balance maximizing demand and forming a stable shareholder base capable of supporting share prices after trading commences on the secondary market.
Settlements, Clearing, and Trading Commencement
Technical Infrastructure for Settlements
The final stage of the IPO is tied to the technical execution of transactions—settlements between investors and the issuer, which are conducted through the infrastructure of the National Settlement Depository. The NSD performs critical functions as a central depository and clearing center, ensuring simultaneous and secure transfer of securities and funds between the contracting parties. The process begins even at the application submission stage when brokers block the necessary amount of funds in their clients' investor accounts. This lock ensures that, at the time of allocation, the investor will have sufficient funds to pay for the shares allocated to them. The amount of the lock is calculated based on the maximum possible allocation according to the submitted application and the upper limit of the placement price range.
Clearing and Settlement Execution
After allocation is completed and the final results of the distribution are confirmed, the NSD conducts clearing—a process of reconciling and offsetting reciprocal obligations of all participants involved in the settlements. Clearing reveals the net positions of each participant regarding cash and securities that 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 the principle of "delivery versus payment," wherein deducting funds from investors and crediting them shares occurs simultaneously and atomically. This mechanism completely eliminates the risk that one party will fulfill its obligations while the other does not. The Russian settlement infrastructure ensures a high level of reliability for such operations through the use of modern technologies and back-up systems for critical functions.
Settlement Cycle and Trading Commencement
The standard settlement cycle on the Russian stock market is T+2, meaning final execution occurs on the second business day after the transaction is completed. However, modified schemes may be applied for IPOs depending on the placement structure, regulatory requirements, and issuer preferences. Once shares are credited to investors' depository accounts and unused funds are unlocked (in the case of incomplete allocation of an application), free trading of shares on the secondary market begins. An important milestone in the development of the Russian IPO market was the legal change in 2015 that allowed conditional trading of certain foreign securities, mirroring the practices of the London Stock Exchange. Prior to this, Russian law prohibited starting trading shares until their full payment and issuance registration was completed, which created inconveniences when conducting combined placements on multiple exchanges simultaneously. Relaxation of regulations facilitated the integration of the Russian market into the global financial system.
The Future of IPOs on the Moscow Exchange
Growth Prospects and Technological Innovations
The Moscow Exchange continues to develop and enhance its infrastructure for conducting public placements, implementing new technologies and raising transparency standards. The modern IPO process on the MOEX represents a complex yet well-oiled system that combines international best practices with consideration for the peculiarities of the Russian regulatory landscape and market environment. For companies, this means the opportunity to attract significant capital for business development and increase their capitalization, while for investors, it represents a chance to participate in placements under predictable and fair conditions, with reliable protection of the rights and interests of all parties involved.
