August 13, 2020 | Investopaper
Securities Board of Nepal (SEBON) has implemented ‘Book Building’ method in Nepal. Through Book Building Method, a company wishing to issue shares at a premium over the face value of Rs 100 will be able to issue a Initial Public Offering (IPO) at more than Rs 100. Experts say that the new system can attract companies showing good performance to the capital market. Now, the companies in Nepal can sell shares at above Rs 100 after the SEBON issued Book Building Directive 2077.
As per the new provision, when determining the selling price limit of securities, the upper limit should be maintained by adding 20 percent to the average intent price received from institutional investors and the lower limit should be maintained by reducing 20 percent from the average intended price obtained by institutional investors.
After fixing the sale price of the securities, the company should obtain permission from the board. Similarly, the issue manager must invite bids from eligible institutional investors within one month of approval from the board. Bidding must be done through an automated electronic system.
If the issued securities remains not fully sold to the institutional investors, the company should cancel the issuance process. It should also return the applied amount within seven days with interest . Provision have been made to review the price limit of the securities once the issued securities are not sold.
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Requirements/Process For Issuing IPO At Premium
In order to issue IPO at a premium, the company has to meet the standard guidelines set by the Securities Board. Some of the requirements include:
–Company should operate at a profit for the last 3 years.
–Approval from the AGM of the company to issue IPO through ‘Book Building’
–Per Share Net-worth should be 150 percent of the per share capital.
–The company should have average or above average ratings from the agencies.
In this process, the institutional investors will fill in the shares through the bidding process. The ‘cut-off’ price will be calculated on the basis of the bidding process by the institutional investors. The concerned company will then issue an IPO to the public at the same price as the cut-off price.
Institutional investors who apply for a higher price after deducting the cut-off price will get all the shares. After that, those who pay at the cut-off price will get the shares, while those who pay at the lower price will get the shares in a proportional manner.
First of all, in order to issue an IPO, the details of the organization for book building should be prepared. For this, there is a provision in the draft to discuss with the organization and issue public information. The authorized entity decides the value of the shares of the company that will bring in the IPO by conducting an expert study. And then the bidding for the shares starts. The higher the price at which they agree, the higher the price of the IPO.
What Is Book Building?
Book Building is an alternative method of public offering. In this method, the issue manager or book runner creates, collects and records the demand for securities from the investors to determine the true value of the securities.The issue manager or the underwriter determines the price of the public issue based on the demand from various potential investors.
Book is a collection of demand and price received from potential investors. This remains confidential between the issue manager or the underwriter. Developed capital markets in the world have used the book building method for a long time. The issue manager creates an archive of potential investors, such as financial institutions, institutional investors, high net worth individuals, etc., and their demand for the shares and the price they are willing to pay.
In this system, the sales manager or guarantor invites bids from various potential investors during the period of public offering. Investors submit their bids within the price range set by the issuing company. They submit the bids based on the financial statements, credentials, performance appraisals, etc. of the issuing company. If the company’s base indicators are good, the demand is high and if it is bad, the demand is low. After a certain period of time, the issue manager or underwriter closes the book. This process determines the final price for the IPO issuance and also the demand for the securities.
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