SEC chief urges top firms to use Book Building method for floating shares
Sunday, 8 November 2009
FE Report
The newly introduced Book Building method will encourage entrepreneurs to list their companies with stock exchanges as it ensures fair pricings of initial public offerings, head of the securities regulator said Saturday.
Book Building is a process through which companies determine the values of their IPOs based on the bidding prices from the institutional investors.
An underwriter "builds a book" by accepting orders from fund managers indicating the number of shares they desire and the price they are willing to pay.
A set of regulations on the method, widely practiced in developed and developing countries, was approved by the Securities and Exchange Commission (SEC) in March 2009.
"The Book Building method will encourage many entrepreneurs to list their firms," said Ziaul Haque Khondker, chairman of the SEC, in the city.
"It will help remove the fear that the existing IPO pricing method does not ensure fair prices for the successful entrepreneurs," he said, while speaking at a seminar on Book Building Method for Price Discovery.
"It is the retail investors who benefit from the prevailing pricing system more than the sponsors and owners of successful companies," he said urging big companies to raise capital from the bourses.
Listing of the big and profitable companies will also bridge the gap between demand and supply, the SEC
chief said.
Dhaka Stock Exchange President Md Rakibur Rahman also called upon the owners of big companies to follow Grameenphone's example in floating shares.
"The market is now capable of absorbing big issues as it has managed well the biggest ever IPO of Tk 4.86 billion by the country's top mobile operator Grameenphone," he said.
"The market lacks quality shares," he said, also urging the government to offload quality shares so that the people can participate in large public infrastructure development projects.
Explaining the Book Building mechanism, SEC executive director Abdul Hannan Zoarder said it is the process by which a price will be determined by institutional investors on the basis of an indicative price offered by the issuer company.
He said the method, which was started in USA and Canada in the 1980s, has now been widely practiced in most of the developed and developing countries, including India.
Using the method, the issuer company will first ask for share prices from the institutional investors by organising road shows, projection meeting and seminar on the company.
Then the company in association with its issue manager will fix an indicative price, which will have to be based on offering prices by at least five institutions in three categories, and send it to the securities regulator and stock exchanges.
Based on the indicative price, the institutions will bid for shares.
However, the bidders could not quote 20 percent more or less from the indicative price. Then a weighted average price will be fixed based on the higher and lower prices and shares will be allotted for institutions at the weighted average price.
The lowest will be considered as cut-off price for public offerings or general investors.
The institutions will not be allowed to sell shares in the first 15 trading days under the book building's lock-in system.
However, there are some preconditions that a company will have to fulfill for floating shares under the book building method, according to the SEC regulation.
A company will have at least a Tk 300 million paid up capital, it will have to be in commercial operation for the past five years and made net profit for the last three years to be eligible for fixing share prices through book building.
The company will also have to show it has no accumulated loss at the time of application and holds regular annual general meetings.
The IPO size will have to be a minimum 10 percent of the company's paid-up capital.
The newly introduced Book Building method will encourage entrepreneurs to list their companies with stock exchanges as it ensures fair pricings of initial public offerings, head of the securities regulator said Saturday.
Book Building is a process through which companies determine the values of their IPOs based on the bidding prices from the institutional investors.
An underwriter "builds a book" by accepting orders from fund managers indicating the number of shares they desire and the price they are willing to pay.
A set of regulations on the method, widely practiced in developed and developing countries, was approved by the Securities and Exchange Commission (SEC) in March 2009.
"The Book Building method will encourage many entrepreneurs to list their firms," said Ziaul Haque Khondker, chairman of the SEC, in the city.
"It will help remove the fear that the existing IPO pricing method does not ensure fair prices for the successful entrepreneurs," he said, while speaking at a seminar on Book Building Method for Price Discovery.
"It is the retail investors who benefit from the prevailing pricing system more than the sponsors and owners of successful companies," he said urging big companies to raise capital from the bourses.
Listing of the big and profitable companies will also bridge the gap between demand and supply, the SEC
chief said.
Dhaka Stock Exchange President Md Rakibur Rahman also called upon the owners of big companies to follow Grameenphone's example in floating shares.
"The market is now capable of absorbing big issues as it has managed well the biggest ever IPO of Tk 4.86 billion by the country's top mobile operator Grameenphone," he said.
"The market lacks quality shares," he said, also urging the government to offload quality shares so that the people can participate in large public infrastructure development projects.
Explaining the Book Building mechanism, SEC executive director Abdul Hannan Zoarder said it is the process by which a price will be determined by institutional investors on the basis of an indicative price offered by the issuer company.
He said the method, which was started in USA and Canada in the 1980s, has now been widely practiced in most of the developed and developing countries, including India.
Using the method, the issuer company will first ask for share prices from the institutional investors by organising road shows, projection meeting and seminar on the company.
Then the company in association with its issue manager will fix an indicative price, which will have to be based on offering prices by at least five institutions in three categories, and send it to the securities regulator and stock exchanges.
Based on the indicative price, the institutions will bid for shares.
However, the bidders could not quote 20 percent more or less from the indicative price. Then a weighted average price will be fixed based on the higher and lower prices and shares will be allotted for institutions at the weighted average price.
The lowest will be considered as cut-off price for public offerings or general investors.
The institutions will not be allowed to sell shares in the first 15 trading days under the book building's lock-in system.
However, there are some preconditions that a company will have to fulfill for floating shares under the book building method, according to the SEC regulation.
A company will have at least a Tk 300 million paid up capital, it will have to be in commercial operation for the past five years and made net profit for the last three years to be eligible for fixing share prices through book building.
The company will also have to show it has no accumulated loss at the time of application and holds regular annual general meetings.
The IPO size will have to be a minimum 10 percent of the company's paid-up capital.