STRICTLY PRIVATE & CONFIDENTIAL Overview of Underwriting & Pre-IPO Placements APRIL 2013 By : Muhammad Farid Alam, FCA Chief Executive Officer – AKD Securities

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

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


Underwritings

STRICTLY PRIVATE & CONFIDENTIAL

Meaning of Underwriting

3

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


“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

RationaleProbability of failure is minimized

Need for UnderwritingUnderwritings


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 Underwriter’s 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?


Responsibilities of an UnderwriterUnderwritings

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 rule‐4 of the Balloters, Transfer Agents,

and Underwriters Rules, 2001

Undertaking on Non‐Judicial Stamp Paper regarding no buy‐

back / re‐purchase agreement from the Underwriters


Traditional Underwriting vs Book Building UnderwritingUnderwritings

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.


Insights of Underwriting in PakistanUnderwritings

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


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 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


Book Building


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


Mechanism of Book BuildingBook 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”


Types of BidsBook 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


IllustrationBook Building

Institution - A 15.00 5.00 5.00 Limit Price Day 1Institution - E 14.50 6.00 11.00 Limit Price Day 3Institution - 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 1HNWI - B 11.05 20.00 44.00 Limit Price Day 2

Institution - D X 1.00 45.00 Strike Order Day 2HNWI - C X 1.00 46.00 Strike Order Day 3

Institution - C 10.50 3.00 49.00 Step Order Day 1Institution - B 10.25 4.00 49.00 Limit Price Day 2

HNWI - A 10.10 2.75 51.75 Step Order Day 3Institution - C 10.05 6.00 57.75 Step Order Day 1

Total Shares SubscribedStrike Price determined through Dutch Auction Method

Bid has been revised and placed at PkR13.75 per share

Cummulative Number of Shares

DateCategory of OrderBidderPrice (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.


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


Traditional Offering vs Book BuildingBook 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

DemandDemand 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


Pre-IPO Placements


Meaning of Pre-IPO PlacementsPre-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


Who are Pre-IPO InvestorsPre-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.

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


RationalePre-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


RationalePre-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


THANK YOU!