Oct 2011

AKD Securities Limited

Pakistan IPO Summit

Overview of Underwriting & Pre-IPO Placements

Presentation by : Muhammad Farid Alam FCA 1 CEO, AKD Securities Limited

AKD Securities Limited

Table of Contents
Underwriting
Meaning Need Underwriters Responsibilities Insights Selected Underwriting transactions Insight Mechanism Illustration Benefits of Book Building Book Building vs Traditional Offering

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Book Building

Pre-IPO Placement
Meaning Who are Pre-IPO Investors Rationale for Pre-IPO Placement

AKD Securities Limited

What is Underwriting?

Meaning of Underwriting
Underwriting means

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To assume financial responsibility for; guarantee against failure

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

Need for Underwriting

AKD Securities Limited

Underwriting is an independent assessment on valuation Regulatory stance Premium Issue - 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 5
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Responsibilities of an Underwriter
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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
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buyback/repurchase agreement from the Underwriters 6

Traditional Vs Book building Underwriting

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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.

Underwriting - Insights
AKD Securities Limited

Over the years soliciting underwriting has become difficult due to: - declining interest owing to poor performance of the secondary markets - stretched valuation expectation by the issuer 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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Underwriting - Insights
AKD Securities Limited

Traditional Role
Underwriter = Underwriter (non fund based)

New Role
[

Underwriter = Equity Investor (fund based)

Underwriting - Insights
AKD Securities Limited

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
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Selected Underwriting Transaction

AKD Securities Limited

S.No Company Name

Listing Year

Deal Type

Underwriting Amount (PKR mm)

1 2 3 4 5 6 7 8 9 10 11

1 2 3 4

IPOs & OFS Engro Foods Limited International Steels Limited Amtex Limited First Credit & Investment Bank Limited Dawood Equities Limited Arif Habib Bank Limited Sitara Peroxide Limited Flying Cement Company Limited Hira Textile Mills Limited The Bank of Khyber PICIC Growth Fund Total Book-Building TPL Direct Insurance Limited International Steels Limited Amtex Limited Ghani Gases Limited Total

2011 2011 2010 2008 2008 2007 2007 2007 2007 2006 2006

Offer for Sale Offer for Sale Initial Public Offering Initial Public Offering Initial Public Offering Offer for Sale Initial Public Offering Offer for Sale Initial Public Offering Initial Public Offering Initial Public Offering

100.00 128.00 50.00 40.00 43.75 42.00 30.00 126.00 8.33 100.00 286.53 954.61 100.00 435.00 555.10 84.00 1,174.10
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2011 2011 2010 2010

Initial Public Offering Offer for Sale Initial Public Offering Offer for Sale

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AKD Securities Limited

What is Book Building?

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Book Building - Insight

AKD Securities Limited

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 13 13

Book Building - Mechanism

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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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Book Building - Mechanism

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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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Book Building - Illustration

Bidder Price (PkR per share) Quantity (shares in Millions) Cummulative Category of Order Number of Shares

AKD Securities Limited

Date

Institution - A Institution - E Institution - B Foreign Institution - A HNWI - A Institution - C HNWI - B Institution - D HNWI - C Institution - C Institution - B HNWI - A Institution - C

15.00 14.50 13.75 13.00 12.25 11.25 11.05 X X 10.50 10.25 10.10 10.05
Strike Price determined through Dutch Auction Method

5.00 6.00 4.00 3.00 1.00 11.00 20.00 1.00 1.00 3.00 4.00 2.75 6.00

5.00 11.00 9.00 12.00 13.00 24.00 44.00 45.00 46.00 49.00 49.00 51.75 57.75

Limit Price Limit Price Limit Price Limit Price Step Order Step Order Limit Price Strike Order Strike Order Step Order Limit Price Step Order Step Order

Day 1 Day 3 Day 2 Day 2 Day 3 Day 1 Day 2 Day 2 Day 3 Day 1 Day 2 Day 3 Day 1

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

Example:
No. of shares being offered Floor price Bidding period

44mn PkR10 per share 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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Benefits of Book Building

AKD Securities Limited

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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Book Building VS Traditional Offering

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Features Pricing

Traditional Offering Price at which securities are offered/alloted are known in advance

Book Building process 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
The Issuer has no discretion over the quality of investors as the shares are issued to the general public Includes certain fixed costs to be borne by the Issuer that push the overall cost of the transaction at a higher side

Demand for the securities offered can be known everyday as the Book is built
The issuer can decide to allocate shares to any investors falling within the cutoff price range The cost of the transaction is significantly reduced as the public portion is smaller and hence fixed costs are reduced
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Investors

Cost of the Transaction

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AKD Securities Limited

What is Pre-IPO Placement?

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Meaning of Pre-IPO Placement

AKD Securities Limited

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?

AKD Securities Limited

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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Selected Pre-IPO Investors

S.No Transaction Name Listing Year

AKD Securities Limited

Pre IPO Investors

Engro Foods Limited - Offer for Sale

2011

2 3

International Steels Limited - Offer for Sale Nishat Power Limited

2011 2009

National Bank of Pakistan American Funds Insurance Series Acacia Institutional Partners LP - USA Acacia Conservation Funds LP - USA JL Falcon Global Fund International Finance Corporation Sumitomo Corporation AKD Golden Arrow Stock Fund AKD Opportunity Fund Adamjee Insurance Limited - Gratuity Fund

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Rationale of Pre-IPO Placement

AKD Securities Limited

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 CONTROLHOLDLONG TERM 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
PATIENCETEMPERAMENT

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Rationale of Pre-IPO Placement

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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 Diff between Pre-IPO Investor & Private Equity Investor Pre-IPO Investor invest in a Company that is going for listing whereas it is not necessarily the case with Private Equity Investor

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AKD Securities Limited

Thank You

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