SECP revamps public offering regime including introduction of centralized e-IPO system

Observer Report

Islamabad

In order to promote quality listings, the Securities Exchange Commission of Pakistan (SECP), has notified a comprehensive regulatory framework for initial public offering (IPO). IPO means the first time allocation of newly issued stocks or shares, to the public.
The main objective of the notified regulatory framework is to promote ease of doing business and streamline the entire public offering process for debt and equity securities to bring efficiency to it.
On the one hand, the Public Offering Regulations have been reduced to two, i.e. Public Offering Regulations, 2017 and Public Offering (Regulated Securities Activities Licensing) Regulations, 2017. It is worth mentioning here that there were seven rules/ regulations/ guidelines relating to public offering and six different rules/regulations/ guidelines were initially circulated for public consultation. Without objective consolidation of the framework, the same would have resulted in ten different rules/ regulations/guidelines governing public offering process.
On the other hand, under the guidance of the SECP, Central Depository Company (CDC) with the active support of banking system has introduced the concept of Centralized E-IPO system (CES) to allow the retail investors to make application for subscription of shares electronically either through internet, mobile phones or ATMs etc. without going to banks and waiting in long queues.
These, two measures, i.e. revamped framework and E-IPO, will not only make the whole IPO process more efficient but will also help increase investor base and facilitate the investors in the remote areas.
As far as the public offering framework is concerned, it has been divided into three parts, i.e. process for public offering, methods of public offering and functions and responsibilities of various intermediaries involved in the process, i.e. consultants to the issue, underwriters, book runners etc.
Previously, the Consultant to the Issue was not a regulated activity, however, considering the significance of their role in the public offering process, it has been notified as a regulated activity.
Being experts of the capital markets, core reliance has placed upon consultant to the issue by requiring them to carry out detailed due diligence of any proposed IPO in order to promote quality listing and protect the interest of the public. The consultant to the issue shall ensure that all requisite disclosures have been made in the prospectus. Further, a requirement of separate valuation section has been introduced in the prospectus, where the consultant to the issue shall provide justifications in support of the offer price set by the issuer taking into account various factors such as the track record of the issuer, management expertise, inherent risks, past financial performance, financial projections, etc.
In the new public offering regulatory framework, an issuer would not be eligible to make a public offer, if the issuer or its directors, sponsors or substantial shareholders have overdue/ defaults appearing in their credit information bureau reports or have been declared defaulter by PSX
The conflict of interest has been reduced through appointment of independent intermediaries such as consultant to the issue, underwriter, book runner etc.
The entire process for public offering has been simplified especially in terms of time and cost involved, to make it easier for the corporates to raise the funds through Capital markets. In terms of the new regime, any company going for IPO has to appoint an independent consultant to the issue who after detailed examination shall submit an application for listing of securities along with draft prospectus to PSX. The PSX shall place the draft prospectus on its website for a period of at least seven working days for seeking public comments. The comments received, if any, on the draft prospectus shall be suitably incorporated and addressed by the consultant to the issue to the satisfaction of PSX. Earlier there was no such requirement of seeking public comments on the draft prospectus.
Thereafter, the Listing Committee of PSX, comprising of external members being experts from various sectors, professionals with business background and members of its management, shall examine the proposed issue from various aspects, including its suitability for the public. Once listing committee of PSX grants its approval, the consultant to the issue shall submit application to the Commission for its approval.
Contrary to the previous regime, flexibility has been introduced with regard to the book building process by allowing 100% book building with no retail offer. However, such companies shall be traded only among the sophisticated investors on a separate board other than main ready board. Furthermore, the issuer has also been allowed determination of strike price through 100% book building and the bidders would be initially allotted 75% shares. The public subscription will be held for the remaining 25% shares and in case of undersubscription of retail portion, the same will be allotted to successful bidders on pro rata basis. This flexibility will not only eliminate the underwriting cost of the public offering but would also ensure efficiency.
With the objective of encouraging maximum participation by foreign investors in the book building process, the book runner may waive margin requirement for foreign institutional investors, subject to confirmation from their custodian banks that an amount equivalent to the bid money is available and will be paid directly to the book runner on confirmation of allocation of shares.
To reduce the cost of publication of abridged prospectus in the newspaper, contents of abridged prospectus has been rationalized without compromising on the quality of disclosures. In order to promote debt market, the SECP processing fees, in case of issuance of debt securities has been reduced by 50%.
In order to make availability of funds raised through IPO to the issuer at the earliest, time to conclude IPO process including issuance and allotment of securities has been reduced from 30 days to 10 days.
Apart from the above conducive regulatory framework, a centralized e-IPO system has been introduced by the CDC with the active support of banking system, through which application for subscription of securities can be made electronically. Investors having a valid CNIC, bank account with any scheduled bank and CDC account can electronically register themselves “24/7 throughout the year” on www.cdceipo.com. Only registered investors can make application for the subscription of securities through any of the banking channels (ATM, net banking, mobile App and over the counter) using e-IPO facility.
In addition to the above reforms, i.e. conducive regulatory framework and e-IPO, the Commission has also improve its decision making process in respect of listing applications. The Commission has constituted an in-house cross-functional committee, comprising of head of different functions, to examine listing applications in details and furnish recommendations to the Commission for its consideration. This practice has been implemented to promote quality listings and improve decision-making process in respect of listing applications.
Moreover, to encourage IPOs, the Commission has also drastically reduced its approval time and as a matter of fact, last five approvals of prospectus, including one for issuance of listed sukuk were approved by the Commission in a record time of less than five working days after receipt of applications.
As a result of newly notified regulatory framework, the Underwriter Rules, 2015, Book Building Regulations, 2015, Guidelines for Issuance of Prospectus, 2002, and Guidelines for Issuance of Term Finance Certificates to the General Public, 2002, stand repealed. Further, the portion of Commercial Paper Regulations, 2013, Sukuk Regulations 2015 and Companies (Issue of Capital) Rules, 1996 dealing with public offering have been shifted to the new public offering regulations and these frameworks shall no more be applicable on public offering of securities.
The revamped public offering framework, i.e. Public Offering Regulations, 2017 and Public Offering (Regulated Securities Activities Licensing) Regulations, 2017 are effective from May 2, 2017

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