The SECP has been energetic in its pursuit of ways to put its capital markets more on a par with international standards. This year it has regularly put out draft rules on various issues, seeking market feedback before bringing out new regulations.
One such draft paper at the moment concerns bookbuilding for ECM transactions, and it has caught the attention of banks and brokers in Pakistan, say sources close to the situation.
The rules under consideration include narrowing down which companies are eligible to sell shares through the bookbuilding process. The draft proposes that public sector unlisted companies, stakeholders in public sector unlisted companies, and the government of Pakistan (for shares it holds in listed entities) will be the only parties eligible to tap investors in this way.
This means that privately owned listed companies that want to raise fresh capital, or shareholders of such businesses looking to sell stakes, cannot use the bookbuilding mechanism — something that has given rise to concerns among some bankers.
“Companies can raise money through a fixed priced deal, but what the new rules will effectively mean is that price discovery is not allowed,” said a Pakistan-based investment banker. “So far we don’t have any valid answers about why the SECP wants to do this, but we have raised our concerns with the committee.”
A group of investment bankers, brokers and other stakeholders is understood to have met with members of the SECP roughly 10 days ago to discuss these guidelines.
A second topic under the microscope was another part of the process of deciding pricing. At the moment, issuers have to establish both a floor price and an upper price limit when executing a deal, with the final price typically determined based on where the majority of demand comes in.
Now, bankers want the price ceiling to be scrapped completely and have asked the Pakistan regulator to allow more flexibility.
“What happens is that when investors see a cap on pricing, they think that the SECP values the stock at that level,” said a corporate finance head at a Pakistani firm. “So they all bid at that level. The last four or five issues that happened were all subscribed at the cap. Sometimes it is okay but sometimes it is overpriced, or underpriced, so tackling this is a good move.”
Way forward
It certainly has its hands full bringing the country’s capital markets to order. Another problem the authority is tackling is the involvement of bookrunners and lead managers in fundraisings. As it stands these firms are allowed to put in bids for shares in transactions they are running — albeit within a certain limit. But while it helps getting some momentum into deals, it can also increase the risk of insider trading.
The SECP plans to crack down on that. The draft rules state that all parties associated with the bookrunning institutions are now barred from dealing in the shares. While this will help bring more transparency, not all people are thrilled with the change.
“The SECP thinks that we have access to privileged information in these deals,” said a third Pakistan-based investment banker. “But from my perspective, everything we know is public knowledge because we have to disclose everything in filings. From the future prospects of a company to whether pricing is a premium, all of it is disclosed.
“So while I understand where the SECP is going with this idea, it has noted down our observations.”
Other measures under consideration include restricting the bid amount by an investor to Prp10m ($98,439.73) or 2.5% of the bookbuilding portion, whichever is higher. The Pakistan commission is tentatively expected to come out with the final rules by the end of the month.