CMA’s new IPO guidelines eye more level playing field

RIYADH — The Saudi Capital Market Authority’s (CMA) instructions of book building process and allocation method in Initial Public Offerings (IPO) provide more clarity on the bidding process by public funds and aims for a more level playing field for the managers, Al Rajhi Capital said.
At present, funds are guided by the relevant Investment Fund Regulations’ (IFR) provisions which did not cover detailed bidding limits as provided in the new guidelines. Enhancement of aggregate bidding limit from 10% to 25% of the total offering value will be beneficial for managers with larger equity fund AUMs as they were limited by the 10% cap earlier given the low offering sizes.
Similarly, there was not much clarity on bids that can be placed by individual funds earlier as IFR dealt with mainly investment limits. As per new guidelines, individual public funds are not allowed to bid more than 10% of the total offering value, and exceed 20% of its net asset value (NAV) to the issuer and 10% of the funds’ NAV in the offered shares. Only funds that follow a customized sub-category benchmark within the broader market are allowed to bid an amount that exceeds 10% of its net asset value (up to the issuer’s weight in the respective benchmarks, but seems capped by the 20% issuer limit) in the offered shares. This will ensure that specific theme based funds such as IPO funds can bid for a higher amount compared to broader market funds subject to meeting other guidelines. On the one hand, the relaxed price range will give an advantage for IPO funds to bid aggressively based on prices but, the bid size restrictions will lower the risk of aggressive bidding by managers by reducing exposure to a single issuer.
Public funds’ bid sizes will be also limited by the number of unit holders. As per the new guidelines, the bid amount by any public fund shall not exceed SR1 million per unit holder. This is likely to benefit public funds with larger investor base and encourage APs to broaden their investor base, while could be a constraint for APs with a smaller investor base.
The book building participants will be allowed to bid on prices outside the price range (not exceeding 20% of the minimum price) proposed by the financial advisor up to 20% of the minimum or maximum prices in the specified range. Previously participants could only bid within the price range. The book building period has also been extended to fourteen calendar days as compared to up-to seven days previously. Moreover, financial advisor can present details about the issuer to authorized persons (AP) with advising license in order for them to publish research reports on the issues prior to or during the bookbuilding period. We believe that the longer book building period and provision to present to other APs to publish research reports will enhance the price discovery process, as investors will get more time to evaluate the issuers, which was constrained earlier by the short book building period.
Moreover, as per the new guidelines, QFIs will be allowed to participate in the book building process. This should encourage participation of foreign investors in IPOs, wherever permitted. Interestingly, the guidelines have not mentioned about the participation of GCC entities as QFI rules exclude GCC citizens. Overall, we believe that this will encourage existing foreign institutions to take the QFI route rather than continuing via Swaps and more incentive for foreign institutional participation given the planned IPO of Aramco.
The allocation of shares for public funds and other participating entities will be done sequentially, based on bidding price. This means that until the allocation reaches the specified allocation limit for funds or other entities, the bidder with the highest bid price will be allotted the entire bid amount until the offer is fully allocated. In case of bidders with the same bid price, allocation will be done on a pro rata basis. As participants are allowed to bid outside the price range, the allocation mechanism will ensure higher allocations for bidders who are willing to offer higher prices.
The new guidelines also allow the financial advisor to change the price range once (subject to obtaining consent of underwriters and issuer) during the book building process if the offered shares are covered at a higher price (within the 20% limit allowed from the higher price of the initial price range) or if the offering is not fully covered. The new price range cannot exceed 20% the maximum bid price allowed and participants will not allowed to bid outside the price range in this case.
Al Rajhi Capital presented a hypothetical case to explain the price ranges further. If the minimum offer price for an issue is set at SR 100 per share, the initial price range will be SR100-120 per share. At the book building stage, the participants can bid from SR80 to 144 per share (20% allowed from both the minimum and maximum prices of the range) depending on their evaluation of the issuer. If the entire offer is covered at the highest price of the range (SR120 in this case) or at a higher price within the bidding range, or if the issue was not covered fully, the financial advisor of the issue has the option to change the price range up to a maximum of 20% from the maximum allowed bid price, which is SR144 per share in this case. Hence, the maximum price in the new price range can go up to SR 172.8 per share, indicating a price which is more than double (116%) compared to the lowest allowed bid price (SAR 80 in this case). However, participants will not be allowed to bid above the price limit (SR172.8 in this case), during the extension period, which should not exceed 5 days from the initial period.
The guidelines have not set any limit in case the price range has to be revised downwards if the issue is not covered fully during the initial period.