FTC to warn brokerage firms on IPO pricing

Sources familiar with the matter said Wednesday that the Fair Trade Commission will warn brokerage firms that underpricing initial public offerings on the stock exchange may be in violation of the antimonopoly law.

The FTC is expected to warn against the practice in a report that will be released soon in a bid to help newly listed companies get enough funding through the market. Share prices on the first day of trading in Japan often exceed IPO prices, with the arbitrage larger than that seen in Europe and the United States.

Since last year, the antimonopoly watchdog has asked companies that had recently completed an IPO about discussions held with stockbrokers that acted as underwriters in setting their IPO prices.

According to the survey, the FTC is expected to point out that by undervaluing a company at IPO, the underwriter may be abusing its position of power, which is banned under the antitrust law.

To set the IPO price, brokerages look at a company's current and likely future earnings, and indicate a share price range to potential investors to gauge interest and promote the company.

Securities firms tend to be conservative when setting IPO prices, because newly listed companies can lose faith in the market or run into difficulty raising capital if the stock price falls below the IPO price on debut.

The FTC s move follows a plan by the government last year to review the IPO price-setting procedure because entrepreneurs are struggling to secure funding in Japan.