August 13: Securities Board of Nepal (SEBON) has implemented book building method for the issuance of Initial Public Offering (IPO).
SEBON has brought into use the Book-Building Guidelines, 2077 for the application of the book building method for the issuance of IPO under its Securities Registration and Issuance Regulations.
Bhisma Raj Dungana, the chairman of SEBON, said that the general investors will get a minimum of 50 units of shares under this method.
He also clarified that this method would not be mandatory for all companies. He informed New Business Age that issuing of the IPO under this method would require the company to provide the general investors with a discount of 10 per cent on the cut-off price.
The board has also prepared some guidelines about the book-building method before implementing it. The guidelines state that that the companies issuing their IPO through this method need to prepare a preliminary assessment that states the estimated value as well as the method of valuation of their IPO, in consultation with their issue manager.
The company will further have to take advices from a minimum of 10 qualified institutional investors about the minimum number of shares they want to purchase, their expected price of shares, and the basis for the valuation.
The company issuing the IPO through the book-building method will then have to set a price of the IPO by analyzing the institutional investors’ expected price of the shares. They will then have to set a price ceiling and a price floor at 20 per cent above and below the price of the share respectively.
The IPO will then have to be issued to qualified institutional investors registered with SEBON, through bidding after the price of the share along with its upper and lower limits approved.
Similarly, a capable institutional investor will not be permitted to bid for more than 20 per cent of the issued IPO. They will also have to either deposit the full amount of the auctioned price to the specified bank, present a Good-For-Payment cheque or have the full amount blocked in their bank account.
The automated electronic auction system operated by Nepal Stock Exchange (NEPSE) will have to be used for the book-building method. The companies can ask the board for a sealed-bid auction until the automated electronic auction system is introduced by NEPSE.
The company will have to determine the cut-off price once all of the issued shares are sold to the institutional investors, and will have to distribute the shares to all of the applicants whose bid was above the cut-off price.
In case the number of shares is insufficient to meet the demanded quantity of applicants, whose bid was above the cut-off price, the shares will have to be distributed proportionally. The board has also arranged for the account to be cleared as required or for the unused amount to be returned to the applicants within three working days with its accrued interest in case of a proportional distribution of the shares.
The board believes that the use of book-building method for issuing IPO will make the price of shares more transparent and competitive. The board aims to get the companies of the real sector to enter the capital market and believes that such companies will feel encouraged to enter the capital market after the implementation of the book-building method.
The board is also confident that this method will enable the companies issuing their IPO to get a high price for their shares and the institutional investors to increase their ownership in the issuing company, which will help in increasing the corporate governance.