1. APRIL 2013 Pakistan IPO Summit - 2013 Overview of Underwriting & Pre-IPO Placements By : Muhammad Farid Alam, FCA Chief Executive Officer – AKD Securities Limited

2. 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 3

3. Underwritings 3

4. Underwritings Meaning of Underwriting Underwriting means – To assume financial responsibility for; guarantee against failure OR To agree to buy the stock not subscribedat a fixed time and price 3

5. Underwritings Need for Underwriting “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

6. Underwritings Who can Underwrite? 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?

7. Underwritings Responsibilities of an Underwriter 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

8. Underwritings Traditional Underwriting vs Book Building Underwriting 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.

9. Underwritings Insights of Underwriting in Pakistan • 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

10. Underwritings Insights of Underwriting in Pakistan • Traditional Role • Underwriter = Underwriter (non-fund based) • New Role • [ • Underwriter = Equity Investor • (non-fund based & fund based)

11. Underwritings Insights of Underwriting in Pakistan • 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

12. Book Building

13. Book Building What is 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

14. Book Building Mechanism of 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”

15. Book Building Types of Bids • 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

16. Book Building Illustration 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.

17. Book Building What is 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

18. Book Building Traditional Offering vs Book Building

19. Pre-IPO Placements

20. Pre-IPO Placements Meaning of 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

21. Pre-IPO Placements Who are Pre-IPO Investors • 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.

22. Pre-IPO Placements Rationale • 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

23. Pre-IPO Placements Rationale • 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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