PRESENTED BY: MOHAMMAD DANIYAL KHAN SHUMAILA ZEHRI YASRA YAFEEZ YAMNA SHUMAS

Public issue of common shares is essentially carried out in two ways: Fixed price method, and Book-building method

Book-building is a process of price discovery used in public offers. The issuer sets a base price and a band within which the investor is allowed to bid for shares. Example: base price Rs 80 Range Rs 80 - Rs 100

When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range

Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price.

A company planning an IPO appoints a merchant bank as a book runner. Then the company issues a prospectus that does not mention the price, but provides other details related to the issue size, the companys operating area and business, the promoters and future plans among other disclosures. A particular time frame is also fixed as the bidding period. Then the book runner builds an order book that collates bids from various investors. Potential investors are allowed to revise their bids at any time during the bidding period

The Cut Off Price

The price at which the shares are allotted is known as cut off price. The entire process begins with the selection of the lead manager, an investment banker whose job is to bring the issue to the public.

Once the offer period is over, the lead manager and issuing company fix the price at which the shares are sold to the investors. If the issue price is less than the cap price, the investors who bid at the cap price will get a refund and those who bid at the floor price will end up paying the additional money.

The cut-off price is arrived at by the method of Dutch auction. In a Dutch auction the price of an item is lowered, until it gets its first bid and then the item is sold at that price. Let's say a company wants to issue one million shares The floor price for one share is Rs 48 and the band is between Rs 48 and Rs 55.

At Rs 55, on the basis of the bids received, the investors are ready to buy 200,000 shares. So the cut-off price cannot be set at Rs 55 as only 200,000 shares will be sold. So as a next step, the price is lowered to Rs 54. At Rs 54, investors are ready to buy 400,000 shares. So if the cut-off price is set at Rs 54, 600,000 shares will be sold. This still leaves 400,000 shares to be sold

The price is now lowered to Rs 53. At Rs53, investors are ready to buy 400,000 shares. Now if the cut-off price is set at Rs 53, all one million shares will be sold.
Investors who had applied for shares at Rs 55 and Rs 54 will also be issued shares at Rs 53. The extra money paid by these investors while applying will be returned to them.

Green Shoe option allows underwriters to sell additional shares in a registered securities offering at the offering price, if demand for the securities exceeds the original amount offered. The green shoe can vary in size and be up to 15% of the original number of shares offered.

Since the demand is greater than supply the prices tend to rise way beyond what the fundamentals of the stock would justify. So in order to stabilize the post-issue price of the stock, the issuer has to issue more shares in case of oversubscription.

The Securities and Exchange Commission of Pakistan (SECP) had approved Book Building Process as part of the Listing Regulations of the Karachi Stock Exchange, which is in line with international best practices and standards. (2008) Fatima fertilizer (Jan 2010) Ghani Gases Limitd (1st) TPL direct insurance (June 2011) PPL (March 2012)

GDRs through book building

MCB 150m UBL6 50m OGDC 800m

Book Building Process

o Book building process is a common practice used for marketing a public offer of equity shares of a company. However, book building is a transparent and flexible price discovery method of initial public offerings(IPOs) in which price of securities is fixed by the issuer company along with the Book Running Lead Manager (BRLM) on the basis of feedback received from investors as well as market intermediaries during a certain period.
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The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids. The Issuer also appoints syndicate members with whom orders are to be placed by the investors. The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction. The book normally remains open for a Period of 5 days.

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Bids have to be entered within the specified price band. Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels. The book runners and the Issuer decide the final price at which the securities shall be issued. Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share. Allocation of securities is made to the successful bidders. The rest get refund orders.
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There are three kinds of investors in a bookbuilding issue. The retail individual investor (RII), the noninstitutional investor (NII) and the Qualified Institutional Buyers (QIBs). RII is an investor who applies for stocks for a value of not more than Rs 100,000. Any bid exceeding this amount is considered in the NII category.
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Each of these categories is allocated a certain percentage of the total issue. The total allotment to the RII category has to be at least 35% of the total issue. RIIs also have an option of applying at the cut-off price. This option is not available to other classes of investors. NIIs are to be given at least 15% of the total issue.

And the QIBs are to be issued not more than 50% of the total issue. Allotment to RIIs and NIIs is made through a proportionate allotment system. The allotment to the QIBs is at the discretion of the BRLM.

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Qualified Institutional Buyers (QIBs) those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. Qualified Institutional Buyer shall mean: a) Public financial institution as defined in section 4A of the Companies Act, 1956; b) Scheduled commercial banks; c) Mutual Funds; d) Foreign institutional investor registered.
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e) Multilateral and bilateral development financial institutions; f) Venture Capital funds. g) Foreign Venture Capital investors. h) State Industrial Development Corporations. i) Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).

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FIXED PRICE
PRICE
PRICE AT WHICH SECURITIES ARE OFFERED / WOULD BE ALLOTED IS MADE KNOWN IN ADVANCE TO THE INVESTORS DEMAND IS KNOWN ONLY AFTER THE CLOSURE OF THE ISSUE 100% ADVANCE PAYMENT HAS TO BE MADE BY THE INVESTORS AT THE TIME OF SUBSCRIPTION

BOOK BUILDING
THE ISSUER SETS A BASE PRICE AND A BAND WITHIN WHICH THE INVESTOR IS ALLOWED TO BID FOR SHARES BOOK IS BUILT BY BOOK RUNNER LEAD MANAGER (BRLM) TO KNOW THE EVERYDAY DEMAND

DEMAND

PAYMENT

PAYMENT IS DONE AFTER ALLOCATION

50% OF THE RESERVATION RESERVATIONS IS FOR THE SMALL INVESTORS AND 50% FOR THE OTHERS

60% IS RESERVED FOR QIB AND THERES A DISCRETIONARY ALLOTMENT THAT DRIVES THE LARGER ISSUERS TO GO FOR THE BOOK BUILDING PROCESS

FIXED PRICE
INVESTORS THE ISSUER HAS NO DISCRETION OVER THE INVESTORS AS SHARES ARE ISSUED TO THE GENERAL PUBLIC 37 DAYS AFER THE CLOSURE OF THE ISSUE WITHIN 30 DAYS AFTER THE CLOSURE OF THE ISSUE

BOOK BUILDING
THE ISSUER CAN DECIDE TO ALLOCATE SHARES TO ANY INVESTOR FALLING WITHIN THE CUT OFF PRICE RANGE 3 WEEKS AFTER THE CLOSURE OF THE ISSUE LEAD MANAGER IMMEDIATELY ALLOCATES AFTER THE PRICING IS DONE

LISTING OF SHARES ON THE STOCK EXCHANGE ALLOTMENT OF SHARES

VALUE OF THE SHARES

NOT MAXIMUM SINCE PRICE IS SET BEFORE THE MARKETING PERIOD

MAXIMUM SINCE PRICE IS SET WITH ACCORDANCE TO THE DEMAND

The price of an instrument is set in much more realistic fashion. The primary aim of book building process is to fix the highest market price for shares and securities. As investors have a voice in the pricing of the issue, they have a greater certainty of being allotted what they demand. The issue price is determined by the market. As there is a distant possibility of the market price of share falling lower than issue price, investor is less likely to suffer from erosion of his investment on listing. 21

Well organized capital raising with enhanced issue procedures, which leads to a reduction in (a) issue costs (b) paper work and (c) lead times. Flexibility to increase/decrease price and/or size of offering the issues is possible. There is transparency of allocations to investors. Instant allotment and listing of placement portion of securities.

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Book building is suitable only for mega issues. The issuer firm must be fundamentally strong and well known to the investors. The book building system functions very well in matured market conditions. So, the investors are knowledgeable of the various parameters influencing the market price of the securities. But, such conditions are generally not seen in practice.

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