KATHMANDU: Today (Wednesday) marks a milestone in Nepal’s financial landscape as shares are now being sold through the innovative book building process for the first time.

Sarbottam Cement initiated the issuance of shares using the book building method earlier this week, allocating 2.4 million shares specifically for qualified institutional investors, which accounts for 40 percent of the total 6 million shares slated for issuance.

These shares are being offered to institutional investors at rates ranging between Rs 401 to Rs 601. Institutional investors will engage in bidding for these shares.

The ‘cut-off price’ is established when the maximum price in bidding is reached, determining the price at which the shares can be acquired.

The bidding for this sale will remain open until November 26th.

In this process, institutional investors commit to purchasing the shares they’ve bid for. Prior to this phase, institutional investors had already bid on the company’s shares through the book building process to assess the company’s valuation.

Initially quoted at Rs 501 to Rs 751.50, the price range has now settled between Rs 401 to Rs 601 based on discussions.

Following this, the next phase involves issuing shares to the general public at a price 10 percent lower than the cut-off price determined by qualified institutional investors. 3.6 million shares will be made available to the general public in this phase.

Global IME Capital is managing the sale for Sarbottam Cement. The company had applied to the Nepal Securities Board in June 2022 to launch an IPO using the book building process.

This offering had faced contention due to conflicts arising from the board chairman and others purchasing the company’s shares conflicting with their prior interests, leading to a prolonged share issuance process.

Currently, over 135 organizations have received approval as qualified institutional investors from the Securities Board. These include various entities such as listed corporate bodies, investment fund managers, merchant bankers, and others with a minimum net worth of 100 million rupees.

ICRA Nepal has assigned a BBB rating to Sarbottam Cement, a company engaged in cement and clinker production. Initially set up for an annual production of 400,000 metric tons, the company now produces around 10 million tons per year.

As the flagship investment of the Saurav Group, the company operates in Nawarparasi, manufacturing OPC and PPC cement under the Sarbottam brand, distributed through 1300 dealers.

Recent upgrades in power supply have positively impacted the company’s energy costs. However, the company’s profit for the financial year 2022/23 decreased from 46.76 million to 20.75 million, with sales income decreasing from 7.88 billion to 5.38 billion.

The earnings per share for the financial year 2022/23 stand at 5 rupees 13 paisa, with a net worth per share of 185 rupees 19 paisa.

The difference between book building and premium pricing:

Companies traditionally issue shares either at face value or at a premium. Shares issued at face value have a fixed price per share, typically at Rs.100, though some may have face values ranging from 10 to 50 rupees or more.

On the other hand, shares issued at a premium are priced based on various valuation methods such as the capitalized earnings of the last three years, discounted cash flow, or other internationally accepted appraisal methods. However, regardless of the calculated average price, the company cannot issue shares exceeding twice the value of the total assets per share according to the latest audited financial statements.

Book building, unlike premium pricing, doesn’t impose such a limit. This process allows shares to be sold at prices exceeding twice the value of the total assets.

In the book building process, the issuing company specifies the minimum shares, target price, and valuation method to qualified institutional investors registered with the Securities Board. At least ten qualified institutional investors are needed to purchase the allotted shares, and based on their feedback, the company determines the base price. These investors can purchase the allotted shares at a minimum of 20 percent of the base price.

Subsequently, negotiations with these organizations determine the final price at which the shares will be allocated. The shares are then distributed starting from the highest bidder’s price, which becomes the final price (cut-off price).

Eligible institutional investors obtain shares at the final price, while those bidding below that price do not receive any allocation.

This process enables the company to offer shares to the general public at a price 10 percent lower than the final price achieved through negotiations, fostering broader public participation in the stock offering. For instance, if the final closing price is set at 800 rupees, the IPO price for the general public would be 720 rupees.