Editor’s note: This is general educational information about how the offer price of a Nigerian public offering is arrived at and who is responsible for it. It is not investment advice and it does not comment on the pricing of any particular issue. The rules, definitions and statements below come from the official documents listed at the end.
Two questions decide what a Nigerian investor pays in a public offering. Was the price fixed before the offer opened, or discovered from institutional demand during it? And who, if anyone, checked the number? The Securities and Exchange Commission’s rules answer the first question by setting out a book building process in detail and leaving fixed pricing to the ordinary prospectus regime. The Exchange has answered the second in public, and the answer is not what many investors assume.
What the rules mean by book building
The Commission defines book building as a process of price and demand discovery by which an issuing house or book runner attempts to determine at what price a public offer should be made, based on demand from qualified institutional and high net worth investors. Those categories are enumerated rather than left open: banks, fund managers, pension fund administrators, insurance companies, investment and unit trusts, multilateral and bilateral institutions, registered or verifiable private equity and hedge funds, market makers, staff schemes, trustees and custodians, and stockbroking firms, with the Commission able to add others. A high net worth investor is defined as an individual with a net worth of at least 300 million Naira, excluding automobiles, homes and furniture.
The mechanics follow. The company must pass an ordinary resolution authorising the process and file it with the Commission. The option is available to all public companies. Registered issuing houses are appointed as book runners and named in the prospectus, and there shall be no more than one lead book runner primarily responsible for building the book. A red herring prospectus, containing everything except the price and the volume of securities, is filed with the Commission, after which the book runners may begin the roadshow. Once approved, it is circulated to qualified institutional and high net worth investors with an invitation letter which shall indicate the price range within which the securities are to be offered.
Orders are then recorded, aggregated daily and passed to the lead book runner. The rules require the book runners and the issuer to determine the price at which the securities shall be offered, based on the aggregation of orders received, not later than two weeks from the day the book opens. On determination of the issue price, coupon and number of securities, the prospectus is amended and filed with Form SEC 6 within 48 hours, and the Commission approves the updated document within 48 hours of complete filing. Two subscription accounts are opened, one for qualified institutional and high net worth investors and one for retail investors, and the book building proceeds are remitted to the issuer within 24 hours of allotment.
Allocation is bounded at both ends. For equities a portion of the offer may be reserved for retail investors, while for fixed income securities 100 percent shall be offered to qualified institutional and high net worth investors. In the event of over-subscription the issuer can only absorb not more than 15% of the value of the offer, and where the issuer opts for underwriting it shall be on a 100 percent standby basis.
The fixed price route
Where a price is not built from a book, it is simply stated in the offer document and filed. A registration statement for the offer of securities is filed by an issuing house and must conform with the Act and the Commission’s rules, no securities may be sold or offered before the Commission’s approval, and the time interval between the initial filing of documents and approval shall be not more than six weeks. Between filing and approval no report, recommendation or sale literature may be circulated, with the single exception that an issue requiring a price discovery process may file and circulate a preliminary prospectus, boldly written in red lettering.
The Commission’s investor education material sets the offer types side by side. An offer for subscription is a company issuing part of its authorised share capital to the public, with the proceeds going to the company. An offer for sale is the sale of existing shares by their owners, with the proceeds going to those owners rather than to the company. The same fixed price can therefore mean two entirely different things about where the money goes.
Who checks the number
The Exchange has stated its position on this directly. NGX Regulation Limited noted that commentators had raised concerns over the listing of some issuers’ equity securities at prices considered too high, and that investors expected its due diligence to have caught that. Its clarification is that an issuer seeking to list must indicate the proposed listing price in its application and submit a pricing memorandum detailing the methodologies and assumptions adopted by the issuer and its advisers in arriving at that price.
What the regulator does with that document is narrower than it sounds. In its own words, “NGX RegCo does not intervene in the proposed listing price, as obtains in some other jurisdictions.” It reviews the pricing memorandum to understand the basis of the listing price and to evaluate whether the methodologies and assumptions are based on generally accepted valuation principles. Responsibility for determining the price using a generally accepted methodology rests with the issuer and its advisers, and the listing requirements do not require the Exchange’s regulator to determine a fair price or to fix a listing price.
Analysis: discovery is bounded by who is asked
The book building rules are precise about process and almost silent about outcome, and the gap between the two is where the interesting reading is. The price range in the invitation letter is set before any order arrives, by the issuer and the book runner. Demand is then collected inside that range, from a list of participants the rules enumerate. Nothing in the rules requires the final price to fall anywhere in particular within the range, and nothing collects demand from outside the enumerated categories except through whatever retail portion the issuer chooses to reserve. Price discovery here means discovery of institutional appetite within a corridor the sell side drew.
The 15% absorption cap on over-subscription is the most concrete investor protection in the sequence, and it is worth stating what it does. Without it, strong demand could be converted into a larger issue at the same price, diluting existing holders and letting the issuer take the whole of the excess. Capping absorption at 15% of the value of the offer means an over-subscribed book mostly results in scaling back rather than in a larger issue. The two week limit from book opening to price determination bounds the period over which demand is collected.
Set against that, the fixed price route has one clear advantage and one clear cost. The advantage is that every investor sees the same number at the same time and no one is inside a book. The cost is that the number was set weeks earlier, before the offer opened, in a market that may have moved. The six week ceiling on the Commission’s review is what bounds that staleness.
The pricing clarification is the fact investors most often get wrong. Neither the Commission’s approval of a prospectus nor the Exchange’s admission of a security is a statement that the price is right. The Exchange’s regulator reviews the reasoning behind the number rather than the number itself. A reader assessing an offer should therefore treat the pricing memorandum’s methodology, the identity of the lead book runner, and whether the proceeds go to the company or to selling owners as the substantive questions, because, on these documents, neither the Commission nor the Exchange’s regulator determines the price.
