STRICTLY PRIVATE & CONFIDENTIAL

Overview of
Underwriting & 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

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Underwritings
Underwriting means


To assume financial responsibility for; 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 valuation
Regulatory 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 associated
companies, shall include at least two financial Institutions including commercial
banks and investment banks and the Underwriters shall evaluate the project in
their independent due diligence reports

At Par Issue Underwriting Recommended
Rationale
Probability of failure is minimized
Need for Underwriting

Underwritings
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Who can Underwrite?

Underwritings
As per the Balloter, Transfer Agent & Underwriters Rules ANY Company
incorporated under the Companies Ordinance of Pakistan can be an
Underwriter

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

As per the proposed rules for Underwriters 2013 only the following specific
institutions can underwrite:
Scheduled Banks
DFIs
House Financing Companies
Investment Finance Companies
Leasing Companies
Corporate Brokerages



Fetching Underwriters was already a very
cumbersome job which will now become further
distressed.
INSURANCE COMPANIES?
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Responsibilities of an Underwriter

Underwritings
Underwriter needs to:

Critically review the transaction viability by reviewing both
technical as well as commercial feasibility
Scrutinize the 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 Underwriting

Underwritings
The following are the differences between the traditional
and Book Building (BB) Underwriting:

Under BB, the Book Runner has to underwrite the Book
Building portion under which an underwriter is responsible
to subscribe the defaulted portion of the underwritten
commitment.
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Insights of Underwriting in Pakistan

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

An underwriter (Financial Institution) is bound to regularize its
position within 3 months of take-up:
The shares acquired in excess of 5% limit due to the underwriting
commitments will be sold off within a period of three months.
(PR)

While pricing is being challenged by the short term market events,
Companies are still looking to IPOs as long term viable option for
accessing capital. Interim volatility has not discouraged
Companies opting for listing which certainly bodes well for the
overall outlook of the capital markets
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Insights of Underwriting in Pakistan

Underwritings

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 by
the Underwriter as there is high probability of Take up

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

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

Underwriting Commission has varied from 0.75% - 1.5% depending
on risk profile of the transaction. The more riskier the transaction
the higher the Underwriting Commission

Recently Take-up Commissions have been on the higher side due
to 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 the
sole option of going for a fixed price IPO

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

The issue was a great success and in the past couple of years AKD Securities
Limited is accredited with several offerings latest being TPL Direct
Insurance 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 in
India since last 5 years have been through the Book Building process
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Mechanism of Book Building

Book Building

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

The Lead Manager (LM) & Book Runner (BR), with the consent of Offerer,
sets a floor price which is the minimum bidding price an investor can bid at

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

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

Book Building
A bid by a potential investor can be a Limit Bid, Strike Bid or a Step
Bid

a. Limit Price: A specific price an investor is willing to pay
b. Step Bid: A series of limit bids at increasing prices
c. 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 final
determined 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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Illustration

Book 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 2
Institution - D X 1.00 45.00 Strike Order Day 2
HNWI - C X 1.00 46.00 Strike Order Day 3
Institution - 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
Date Category of Order Bidder
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 which
the 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 globally over the
fixed price IPO methodology

A fair mechanism of 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 Supply mechanism as oppose to
fixed price under traditional method

Lower issue cost compared to traditional method resulting in cost savings

Offerer also has the option to select the quality of investors


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Traditional Offering vs Book Building

Book Building
Features Traditional Offering Book Building
Pricing
Price at which securities are offered
/ allotted are known in 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 closure of 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
higher side
The cost of the transaction is
significantly reduced as the public
portion is smaller and hence fixed
costs are reduced
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Pre-IPO Placements
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Meaning of Pre-IPO Placements

Pre-IPO Placements
Pre-IPO Placement means

When a portion of an initial public offering (IPO) is placed with
private investors right before the IPO is 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 Investors

Pre-IPO Placements
Pre-IPO Investors are the ones who takes the initial bet on the
project. 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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Rationale

Pre-IPO Placements
The concept behind pre-IPO placement is to place some portion
of the transaction to the investor before going to the public
thereby increasing the likelihood of public subscription

However there is a lock-in period (6 months) for the pre-IPO
investors which prevents them from selling immediately post
listing, thus pre-IPO placement encourages long term
investment in the Company


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Rationale

Pre-IPO Placements
The price at which the shares are offered to the pre-IPO
investors acts as a ceiling for the general public offering

Pre-IPO Investors profile acts as a leading indicator of the
transaction 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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