The Capital Market Authority (CMA) explained that the issuance of instructions that organizes book building process and allocation method in IPOs, which will take effect as of the third of Rabi’ II of 1438 H. corresponding to the first of January 2017, aims to promote the share pricing mechanism and improve the allocation criteria. This emanates from CMA's continues quest to develop the Saudi financial market and strengthen the protection of investors as well as improve the regulatory environment, in its attempt to achieve CMA's strategy. It is worth mentioning that the process of book building is currently applied, and organizing instructions were issued for that purpose, which took into account the best global practices when developing such instructions.
The instructions include a number of organizing restrictions for IPOs and share issuers to subscribing individuals. Among such instructions is that the whole amount of the offering must be covered by participating institutions, provided that public funds cover a specified percentage of the full IPO. This percentage varies based on the size of the public fund assets. Also, the price for IPO subscribing individuals must not exceed the highest price at which the whole offering was covered by participating institutions meeting the percentage set for public fund coverage. The allocation percentage for subscribing individuals should be specified in the prospectus.
Among the aspects stipulated by the issued instructions regarding the price range, the price extent (the difference between the lowest price and the highest price) must be at a percentage not exceeding (20%) of the minimum price. The participating institutions are entitled to submit requests at prices outside the price range up to a maximum not exceeding (20%) of the lowest and highest prices. After the approval of the underwriter and issuer, the financial adviser may change the price range only once.
For the subscription price and allocation of shares to participating institutions involved in book building, the instructions stated that the subscription price should be according to the price mentioned in the application form, provided that the offered shares are allocated sequentially starting from the highest price then the lower, and so forth.
The instruction allowed eligible foreign financial institutions to participate in book building. The instructions are available on CMA's website: www.cma.org.sa
Further, the instructions of book building and the allocation of shares in IPOs come within CMA's endeavors to promote its objectives of strengthening institutional investment in the market by encouraging individual investors to invest through public funds; by raising the allocation ratio for institutional investors of all denominations in IPOs. CMA recognizes the many desired benefits of the existence of this category of investors for the development of the financial market, which is one of the functions of CMA stipulated by the Capital Market Law. Markets holding a large segment of institutional investors are characterized with low level of volatility and high level of efficiency. The larger institutional investors owning strategic ratios of shares in listed companies supports governance practices in such companies and increases transparency, and this is difficult to achieve in light of dominant individual investors.
