Post on 02-Jun-2018
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Overview ofUnderwriting & Pre-IPO Placements
APRIL 2013
By : Muhammad Farid Alam, FCA
Chief Executive Officer AKD Securities Limited
Pakistan IPO Summit - 2013
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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
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Underwritings
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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
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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
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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?
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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
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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.
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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
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Insights of Underwriting in PakistanUnderwritings
Traditional Role
Underwriter = Underwriter(non-fund based)
New Role[
Underwriter = Equity Investor
(non-fund based & fund based)
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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
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Book Building
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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
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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
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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
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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.
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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
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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
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Pre-IPO Placements
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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
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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.
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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
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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
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