Revisiting the book-building process

Published June 29, 2015
The regulator needs to check whether institutions and HNWI profit at the cost of small investors.—Reuters/File
The regulator needs to check whether institutions and HNWI profit at the cost of small investors.—Reuters/File

THE local equity market reawakened to new listings last year, raising Rs72.2bn through 10 initial public offerings. This compared favourably with just three new issues worth a tiny Rs4bn in 2013.

With institutions, high net worth individuals (HNWI) and even common investors sitting on piles of cash, there is a healthy appetite for fresh issues. And corporates with good earnings records, superb management and growth-oriented products stand a fair chance of receiving full subscription to their share offerings.

The realisation that the soaring equity market can greatly enrich them owing to their large holdings has dawned upon corporate sponsors. So far this year, around seven companies have mobilised capital from the equity market. They include Systems Ltd, Sindh Modaraba, Synthetic Products Enterprises Ltd, Mughal Iron and Steel Industries Ltd, Ghani Global Glass, Dolman City REIT and the Al Shaheer Corporation Ltd.

But for all that, there are only around 300,000 stockholders in the country. And most small investors grumble that they are the last to gain when the going is good and the first to lose when the market takes a tumble.

Small investors and market observers therefore observe that only institutions and HNWIs — defined as those with over Rs1m in investable funds — are the major beneficiaries of the upsurge in stock prices.

In this regard, the book-building system is just another measure that keeps common investors from benefiting from the stock market in a real way. Previously used to sell government holdings in state-owned enterprises in foreign markets, the system has seeped into local offerings as well.


The regulator needs to check whether institutions and HNWI profit at the cost of small investors, who are generally offered a quarter of the new shares after 75pc of them have been picked up by the big players during the book-building process


Critics argue that unless a transparent mechanism is evolved, it is possible to manipulate the ‘strike price’ worked out for the three-quarters of shares that are initially offered to institutions and HNWIs.

Former Wall Street investment banker Mir Mohammad Alikhan affirms that 90pc of the people do not understand that book-building is another way of manipulating the price of a stock in the developed markets. He underlines the point that it should be a ‘firm commitment offer’.

“Book-building is easy to manipulate, particularly in markets like Pakistan where you can have friends and family bid for the stock, thus making the average price higher before the opening.”


The book-building system keeps common investors from benefiting from the stock market. Previously used to sell govt holdings in state-owned firms in foreign markets, the system has seeped into local offerings as well


For that reason alone, book-building is looked down on Wall Street, and firm commitments are made in most cases. So even in developed markets where you cannot have a fake account, the regulators do not take a chance, Alikhan observed.

The Securities and Exchange Commission of Pakistan can conveniently distance itself from the dispute of whether the book-building system is fair or foul for small investors by fishing out a copy of the ‘Draft book-building regulations 2015,’ which was released in January through an SRO.

But the regulators need to do more. The onus lies on them to put the concerns of individual investors at rest by answering fair questions like: why was the ‘upper cap’ on the strike price removed; why should a bidder be allowed to take his bid off the table after making an offer at a phenomenally high price; does the strike price help the price discovery of a share and can institutions and HNWI profit at the cost of small investors, who are generally offered a quarter of the shares after 75pc of them have been picked up by the big players during the book-building process?

From the look of things, 2015 could be another year of record listings at the stock market. Some big IPOs said to be in the pipeline include those of Amreli Steel and Agha Steel.

Most market participants are hoping for a splendid market performance for the fourth year running. The Morgan Stanley Capital International’s (MSCI) announcement that it would include Pakistan in its 2016 annual market classification review for potential reclassification to emerging markets brought cheer to the local market last month.

Unhappy with the imposition of the infamous floor in stock prices that had blocked investors’ exit during the financial crisis of 2008, the MSCI Pakistan Index was eased out of the Emerging Markets Index and reclassified as a component of the Frontier Markets Index in May 2009.

Analysts expect the potential return to the emerging market territory as good news, as it would bring the country back onto the radar screens of bigger and more resourceful foreign funds, potentially resulting in heavy foreign portfolio inflows.

Yet, all of this demands that the controversial and irritating issues at the market, such as the book-building process, are amicable resolved.

Published in Dawn, Economic & Business, June 29th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

Defining extremism
Updated 18 Mar, 2024

Defining extremism

Redefining extremism may well be the first step to clamping down on advocacy for Palestine.
Climate in focus
18 Mar, 2024

Climate in focus

IN a welcome order by the Supreme Court, the new government has been tasked with providing a report on actions taken...
Growing rabies concern
18 Mar, 2024

Growing rabies concern

DOG-BITE is an old problem in Pakistan. Amid a surfeit of public health challenges, rabies now seems poised to ...
Provincial share
Updated 17 Mar, 2024

Provincial share

PPP has aptly advised Centre to worry about improving its tax collection rather than eying provinces’ share of tax revenues.
X-communication
17 Mar, 2024

X-communication

IT has now been a month since Pakistani authorities decided that the country must be cut off from one of the...
Stateless humanity
17 Mar, 2024

Stateless humanity

THE endless hostility between India and Pakistan has reduced prisoners to mere statistics. Although the two ...