IPO13 Farid Alam

8/11/2019 IPO13 Farid Alam

1/24

STRICTLY PRIVATE & CONFIDENTIAL

Overview ofUnderwriting & Pre-IPO Placements

APRIL 2013

By : Muhammad Farid Alam, FCA

Chief Executive Officer AKD Securities Limited

Pakistan IPO Summit - 2013


2/24

STRICTLY PRIVATE & CONFIDENTIAL 3

Table of Contents

Underwriting Meaning

Need

Underwriters Responsibilities

Insights

Selected Underwriting transactions

Book Building

Insight

Mechanism

Illustration

Benefits of Book Building

Book Building vs Traditional Offering

Pre-IPO Placement

Meaning

Who are Pre-IPO Investors

Rationale for Pre-IPO Placement


3/24


Underwritings


4/24

STRICTLY PRIVATE & CONFIDENTIAL

Meaning of Underwriting

3

Underwritings

Underwriting means

To assume financial responsibilityfor; guarantee against failure

OR

To agree to buy the stock not subscribed at a fixed time and price


5/24


Underwriting is an independent assessment on valuationRegulatory Stance:

Premium Issue - Underwriting Mandatory

100% Equity Financed Projects Underwriting Mandatory

As per Companies (Issue Of Capital) Rules, 1996 all premium issue

The issue shall be fully underwritten and the underwriters, not being associatedcompanies, shall include at least two financial Institutions including commercial

banks and investment banks and the Underwriters shall evaluate the project intheir independent due diligence reports

At Par Issue UnderwritingRecommended

Rationale

Probability of failure is minimized

Need for UnderwritingUnderwritings


6/24


Who can Underwrite?Underwritings

As per the Balloter, Transfer Agent & Underwriters Rules ANY Companyincorporated under the Companies Ordinance of Pakistan can be anUnderwriter

It is the Underwriters responsibility to conduct proper due diligence of thecompany along with its business model and has to submit a proper DueDiligence Report to the relevant Exchange and the SECP

As per the proposed rules for Underwriters 2013 only the following specificinstitutionscan underwrite:

Scheduled Banks

DFIs

House Financing Companies Investment Finance Companies

Leasing Companies

Corporate Brokerages

Fetching Underwriters was already a verycumbersome job which will now become furtherdistressed.

INSURANCE COMPANIES?


7/24


Responsibilities of an UnderwriterUnderwritings

Underwriter needs to:

Critically review the transaction viability by reviewing bothtechnical as well as commercial feasibility

Scrutinizethe transaction related assumptions

The Underwriting process includes the following Documents:

Underwriting Agreement

Due diligence report on the transaction to be sent to regulators

Undertaking as per rule4 of the Balloters, Transfer Agents, and Underwriters

Rules, 2001

Undertaking on NonJudicial Stamp Paper regarding no buyback /

repurchase agreement from the Underwriters


8/24STRICTLY PRIVATE & CONFIDENTIAL 8

Traditional Underwriting vs Book Building UnderwritingUnderwritings

The following are the differences between the traditionaland Book Building (BB)Underwriting:

Under BB, the Book Runner has to underwrite the BookBuilding portion under which an underwriter is responsible

to subscribe the defaulted portion of the underwrittencommitment.



Insights of Underwriting in PakistanUnderwritings

Over the years soliciting underwriting has become difficult due to:- stretched valuationexpectation by the issuer- readily available viable alternatives in the secondary market

An underwriter (Financial Institution) is bound to regularize itsposition within 3 months of take-up:

Theshares acquired in excess of 5% limit due to the underwritingcommitments will be sold off within a period of three months.

(PR)

While pricingis being challenged by the short termmarket events,Companies are still looking to IPOs as long term viable option for

accessing capital. Interim volatility has not discouragedCompanies opting for listing which certainly bodes well for theoverall outlook of the capital markets



Insights of Underwriting in PakistanUnderwritings

Traditional Role

Underwriter = Underwriter(non-fund based)

New Role[

Underwriter = Equity Investor

(non-fund based & fund based)



Underwritings

This transition in role has invariably resulted in more scrutiny bythe Underwriter as there is high probability of Take up

The new role of underwriter requires changes in the underwritingagreement to broadly address issues concerning a minority partner

Section 82 of the Companies Ordinance 1984 covers underwritingand take-up commission and requires authorization by articles orsuch rate as may generally or in a particular case fixed by SECP

Underwriting Commission has varied from 0.75% - 1.5% dependingon risk profile of the transaction. The more riskierthe transaction

the higher the Underwriting Commission

Recently Take-up Commissions have been on the higher side dueto higher probability of under subscription

Insights of Underwriting in Pakistan



Book Building


13/24


What is Book Building?Book Building

Traditionally a company intending to raise funds from the public had thesoleoption of going for a fixed price IPO

However, fortunately enough as part of the initiative to develop capitalmarkets, SECP formally launched the Book Building rules in April 2008,thereby starting a new era of listing and the first ever IPO via BookBuilding was advised by AKD Securities Limited

The issue was a great successand in the past couple of years AKD SecuritiesLimited is accredited with several offerings latest being TPL DirectInsurance Limited

The Book Building mechanism may be new to Pakistan, but has been

widely practiced in public offerings globally

India has been a leading player in Book Building as 92%of new listings inIndia since last 5 years have been through the Book Building process


14/24


Mechanism of Book BuildingBook Building

75% - 25% Split - A minimum of 25% of total offer size has to be offered togeneral public with remaining being offered to financial Institutions and HighNet Worth Individuals (HNWI)-individuals with net worth of at least PkR1.0mn

The Lead Manager (LM)& Book Runner (BR),with the consent of Offerer,

sets a floor pricewhich is the minimum bidding price an investor can bid at

BR shall collect not less than 25% of application money as margin fromcorporate and 100%for HNWIs

An order book of bids from investors is maintained by the BR, which is thenused to determine the cut off/strike price through the Dutch Auction Method


15/24


Types of BidsBook Building

A bid by a potential investor can be a Limit Bid, Strike Bid or a StepBid

a. Limit Price: A specific price an investor is willing to payb. Step Bid: A series of limit bids at increasing pricesc. Strike Order: A bid for the specified number of shares at strike price

Offer to general public shall be equal to or at a discount to the finaldetermined strike price through the Book Building Process

Identities of the investors are kept confidential

Bidders have the right to revise or withdraw their bids during the bidding

period


16/24


IllustrationBook Building

Institution - A 15.00 5.00 5.00 Limit Price Day 1

Institution - E 14.50 6.00 11.00 Limit Price Day 3

Institution - B 13.75 4.00 9.00 Limit Price Day 2

Foreign Institution - A 13.00 3.00 12.00 Limit Price Day 2

HNWI - A 12.25 1.00 13.00 Step Order Day 3

Institution - C 11.25 11.00 24.00 Step Order Day 1

HNWI - B 11.05 20.00 44.00 Limit Price Day 2Institution - D X 1.00 45.00 Strike Order Day 2

HNWI - C X 1.00 46.00 Strike Order Day 3Institution - C 10.50 3.00 49.00 Step Order Day 1

Institution - B 10.25 4.00 49.00 Limit Price Day 2

HNWI - A 10.10 2.75 51.75 Step Order Day 3

Institution - C 10.05 6.00 57.75 Step Order Day 1

Total Shares Subscribed

Strike Price determined through

Dutch Auction Method

Bid has been revised and

placed at PkR13.75 per

share

Cummulative

Number of Shares DateCategory of OrderBidder

Price (PkR per

share)

Quantity (shares in

Millions)

Example:

No. of shares being offered 44mn

Floor price PkR10 per share

Bidding period 3 days

Setting Cut-Off Price The cut-off price is arrived at by the method of Dutch auction. In a Dutch

auction the bids are being placed at various prices and and the strike price is set as the price at whichthe required quantity (in this example 44mn shares) is achieved. For example, At PKR13/share

investors are willing to buy only 12.0 mn shares, therefore the price has to be lowered. The cut-off

price would have to be set at PKR11.05/share to sell the required quantity of 44.0 mn shares. All the

bid submitted at prices above the cut-off price will also be issued shares at the cut-off price and the

differential would be refunded. In case the bids for number of shares received at the strike price is

more than the quantity allocated for the BB portion, shares would be issued to such investors, who

have bid at cut-off rate, on pro-rata basis.


17/24


What is Book Building?Book Building

IPOs via the book building process are gaining popularity globallyover thefixed price IPO methodology

A fair mechanismof price discovery and demand for shares in the market

The greater control and flexibility of Book Building method provides

substantial benefits to both the Offerer and the Investor

Price is determined by the Demand and Supplymechanism as oppose tofixed price under traditional method

Lower issue costcompared to traditional method resulting in cost savings

Offerer also has the option to select the qualityof investors


18/24


Traditional Offering vs Book BuildingBook Building

Features

Traditional Offering Book Building

Pricing

Price at which securities are offered

/ allotted are knownin advance

Price at which securities will be

offered/allotted is not known in

advance to the investor. Only

indicative price range is known

Demand

Demand for the securities offered is

known only after the closureof the

issue

Demand for the securities offered can

be known everyday as the Book is

built

Investors

The Issuer has no discretion over

the quality of investors as the shares

are issued to the general public

The issuer can decide to allocate

shares to any investors falling within

the cutoff price range

Cost of the

Transaction

Includes certain fixed costs to be

borne by the Issuer that push the

overall cost of the transaction at a

higherside

The cost of the transaction is

significantly reduced as the public

portion is smaller and hence fixed

costs arereduced


19/24


Pre-IPO Placements


20/24


Meaning of Pre-IPO PlacementsPre-IPO Placements

Pre-IPO Placement means

When a portion of an initial public offering (IPO) is placed withprivate investors right before the IPOis scheduled to hit the

market

OR

Placement of some percentage of an initial public offering (IPO)

with investors,prior to the IPO


21/24


Who are Pre-IPO InvestorsPre-IPO Placements

Pre-IPO Investors are the ones who takes the initial beton theproject. Pre-IPO Investors can range from:

Family Members

Employees

Close Associates Financial Institutions

International Fund Managers (Hedge /Long Only Funds)

Corporate Backed Investors*

*Corporate backed as against financial Sponsor backed investor needs to be encouraged. This will add credibility and encourage the retail investors.


22/24


RationalePre-IPO Placements

The concept behind pre-IPO placement is to place someportionof the transaction to the investor before going to the publicthereby increasingthe likelihood of public subscription

However there is a lock-in period (6 months) for the pre-IPO

investors which prevents them from selling immediately postlisting, thus pre-IPO placement encourages long terminvestmentin the Company


23/24


RationalePre-IPO Placements

The price at which the shares are offered to the pre-IPOinvestors acts as a ceiling for the general public offering

Pre-IPO Investors profile acts as a leading indicatorof thetransaction success

Difference between Pre-IPO Investor & Private Equity Investor

Pre-IPO Investor invests in a Company that is going for listing

whereas it is not necessarily the case with Private Equity Investor


24/24


THANK YOU!