Module 56 — Equity Capital Markets Deep Dive

IPO mechanics from CFO perspective: bookbuilding, greenshoe option, lock-up periods, and stabilization. Rights issues: TERP calculation and underwriting structures. Private placements: PIPE and accelerated bookbuilds. PSX listing process end-to-end.

Learning Objectives

Manage an IPO from CFO perspective — preparation, pricing, and aftermarket obligations
Calculate TERP and design a rights issue structure
Evaluate private placement alternatives to public markets
Understand PSX listing requirements and end-to-end listing process
Navigate post-IPO continuous disclosure obligations

1. IPO Mechanics — CFO Perspective

IPO Readiness Assessment

Before beginning an IPO process, the CFO must honestly assess 10 dimensions:

Dimension	IPO-Ready Standard
Audited financials	3 years of IFRS-compliant accounts, unqualified opinions
Financial controls	Documented, tested internal controls (COSO or equivalent)
Governance	Independent board members, audit committee, remuneration committee
FP&A quality	Monthly management accounts within 10 days of month-end
Legal structure	Clean ownership, no undisclosed related party issues
Tax compliance	FBR filings current, no material disputes without disclosure
ESG	Basic ESG disclosure capability
Management depth	Team beyond CEO/CFO to support investor scrutiny
Business quality	Stable or growing margins, clear value proposition
Market conditions	IPO window open: equity markets positive, sector in favor

IPO Preparation Timeline

Month 1–3:    Select advisors (investment bank, lawyers, auditors, PR)
              Begin IFRS restatement if needed
              Board and governance restructuring
              Conduct IPO readiness assessment

Month 4–6:    Long-form due diligence by bank
              Financial forecasting for prospectus
              Connected transactions review
              Draft prospectus — first drafts

Month 7–9:    SECP review process (Pakistan)
              Pilot analyst presentations
              Research publication preparation
              Roadshow logistics

Month 10–11:  Pre-deal investor education
              Institutional roadshow (global for cross-listed deals)
              Bookbuilding
              Pricing and allocation

Month 12:     Settlement and listing
              First day of trading
              Post-IPO lock-up period begins

CFO's Key Prospectus Responsibilities

The prospectus is a legal document. CFO bears personal responsibility for:

Accuracy of all financial statements and projections
Completeness of risk factors related to financial position
Working capital statement (typically: "The company has sufficient working capital for at least 12 months from the date of this prospectus")
Related party disclosure
Material litigation disclosure

CFO personal liability: Under Pakistan's Securities Act 2015, the CFO (as a director or senior officer) can be personally liable for misstatements in the prospectus. This is one of the highest-stakes documents the CFO will ever sign.

2. Bookbuilding Process

How Bookbuilding Works

The bookbuild is the process by which the underwriting bank collects demand from institutional investors before pricing the IPO.

Steps:

Launch roadshow — CFO presents company to institutional investors (fund managers, insurance companies, pension funds, family offices)
Investors submit indications of interest: price they will pay and number of shares
Bank maintains the "book" — aggregated demand at each price point
CFO and board, advised by bank, set final IPO price based on book coverage
Shares allocated to investors; settlement typically T+2

Key Bookbuilding Metrics

Book coverage: Total demand / shares on offer. A well-run IPO targets 5–10× coverage. Undersubscribed books (< 1×) are typically pulled (postponed) rather than priced at lower end.

Price revision: If book is 8× covered at the top of the range, the IPO is "well covered" — strong institutional demand. If 90% of demand is at the mid or low end of the price range, pricing may be at lower end.

Cornerstone investors: Anchor investors who commit to a fixed allocation pre-roadshow. They provide confidence to the book and receive allocation certainty in exchange for a lock-up (typically 6 months).

Pakistan Retail Tranche

PSX-listed IPOs in Pakistan have a mandatory retail investor tranche: typically 20–30% of total offer size allocated to Pakistani retail investors (individuals), distributed via lottery if oversubscribed.

3. Greenshoe Option (Over-Allotment Option)

How the Greenshoe Works

The greenshoe is a 30-day stabilization mechanism named after the Green Shoe Manufacturing Company (first company to use it, 1960).

Mechanics:

The IPO allocates 15% more shares than originally planned (the "over-allotment")
The stabilization agent (usually the bookrunner bank) has a 30-day option to buy shares from the issuer at the IPO price
Simultaneously, the bank short-sells the over-allotted shares into the market at the IPO price

Two scenarios after IPO:

Scenario A — Stock trades below IPO price:

The bank buys shares in the market (supporting the price) to cover its short position
Bank does NOT exercise the greenshoe option
Result: stabilization support for the stock price; bank makes money on the spread

Scenario B — Stock trades above IPO price:

Buying shares in market would cost more than the greenshoe exercise price
Bank exercises the greenshoe — buys shares from issuer at IPO price
Issuer receives additional proceeds (up to 15% more than planned)
Result: company gets additional capital; no aftermarket support needed (price is already up)

SECP Stabilization Framework

Pakistan SECP allows greenshoe/stabilization subject to disclosure in prospectus and SECP notification. The stabilization agent must maintain a stabilization account and report all transactions.

4. Rights Issues

When Companies Use Rights Issues

Rights issues are used to raise equity capital from existing shareholders:

Deleveraging: reducing debt-to-equity by paying down debt with equity proceeds
Growth funding: capex program too large to fund from internal cash
Regulatory capital: banks often issue rights to meet Basel III capital requirements
Distressed equity raise: company needs capital to avoid covenant breach

TERP Calculation

The Theoretical Ex-Rights Price (TERP) is the price at which the shares theoretically trade after the rights issue, incorporating the dilution from new shares at the subscription price.

TERP = (Existing shares × Pre-rights price + New shares × Subscription price)
        ÷ (Existing shares + New shares)

Worked Example:
Existing shares: 100M at PKR 50/share = PKR 5,000M market cap
New shares: 25M at PKR 40/share (20% discount to market) = PKR 1,000M proceeds

TERP = (100M × 50 + 25M × 40) / (100M + 25M)
     = (5,000 + 1,000) / 125
     = PKR 48.00

Nil-paid rights value = TERP − Subscription price = 48 − 40 = PKR 8 per right

Subscription Price Discount

Rights issues are typically offered at a discount to market price to incentivize take-up:

Typical discount: 20–40% to theoretical ex-rights price
Larger discount: easier to place with underwriters; more dilutive to shareholders who don't subscribe
Pakistan practice: SECP requires disclosure of subscription price in rights issue circular

Underwriting

The company typically appoints an underwriter (usually the lead bank) to guarantee the capital raise. The underwriter commits to buy any shares not taken up by existing shareholders.

Underwriting economics:

Underwriting fee: typically 1.5–3% of total capital raised
Sub-underwriting: the lead underwriter distributes risk to institutional sub-underwriters

Nil-Paid Rights Trading

Between announcement and close of the rights offer, existing shareholders can:

Take up their rights: Pay the subscription price, receive new shares
Sell their rights (nil-paid rights) in the market: receive the nil-paid rights value (TERP − subscription price) as cash
Do nothing: Rights lapse; shareholder is diluted

5. Private Placements

Accelerated Bookbuild (ABB)

An ABB is a rapid (typically overnight) placement of shares with institutional investors:

Used for secondary offerings (existing shareholders selling) or primary capital raises
Launch after market close, price and allocate by market open next morning
No prospectus required in most jurisdictions (using existing listing documents)
Discount to market: typically 3–8% to compensate investors for speed and lack of information
CFO involvement: Approve the price, the allocation, and manage post-announcement disclosure

PIPE — Private Investment in Public Equity

A negotiated placement with one or few institutional investors:

Negotiated price (discount to market), no public bookbuild
Often includes warrants, registration rights, information rights, anti-dilution provisions
Common in FinTech/growth equity raises
Pakistan: Preferential allotment under Companies Act 2017, Section 83 — EGM approval, SECP notification, price must not be below par value

Private Placement for Pre-IPO Companies

Pre-IPO companies raise equity via private placements without public listing:

Angel/seed round: informal, no regulatory framework
VC rounds (Series A, B, C): SAFE or convertible note or priced round
Pre-IPO placement to anchor institutional investors: builds investor base before listing
SECP exemptions: Companies Act 2017 allows private offerings to sophisticated investors

6. PSX Listing Requirements

Main Board Eligibility (Pakistan Stock Exchange)

Requirement	Standard
Minimum paid-up capital	PKR 200 million (post-IPO)
Profitable track record	Profitability in at least 2 of last 3 years
Minimum free float	At least 25% of post-IPO capital offered to public
Audited accounts	3 years of audited financials (ICAP-registered auditor)
Corporate governance	Comply with SECP Listed Companies Code of Corporate Governance

Growth Enterprise Market (GEM)

For smaller companies:

Minimum paid-up capital: PKR 25 million
Less stringent profitability requirement
Suitable for tech startups, smaller companies seeking public capital

PSX Listing Process — Typical Timeline

Week 1–2:    Initial eligibility review with PSX
             Appoint lead manager (regulated by SECP)
Week 3–8:    Due diligence, prospectus drafting
             SECP review of draft prospectus
Week 9–12:   SECP approval of prospectus
             Roadshow to institutional investors
Week 13–14:  Retail subscription period (typically 3–5 days)
Week 15:     Allotment, SECP filing, listing on PSX

Post-Listing Obligations

Once listed on PSX, ongoing obligations include:

Quarterly financial results: Within 30 days of quarter end (PSX Regulations)
Annual results: Within 4 months of financial year end
Material information disclosure: Immediate notification of any price-sensitive information
AGM: Within 6 months of financial year end
Dividend announcements: Board announcement and notification to PSX
SECP filings: Form A (annual return), Form B (balance sheet confirmation)

Self-Assessment

BIQAI Group plans a rights issue to raise PKR 2 billion. Current share count: 400 million shares. Current market price: PKR 75 per share. The subscription price will be set at a 25% discount to TERP. Calculate: (a) the subscription price, (b) the number of new shares to be issued, (c) the TERP, (d) the nil-paid rights value, and (e) total underwriting fees at 2%.
BIQAI Group has a cornerstone investor committed to 30% of the IPO at PKR 60 per share, with a 6-month lock-up. The IPO total size is PKR 5 billion. On day 15 post-IPO, the stock has risen to PKR 72 per share. The greenshoe agent has been buying shares in the market to cover the short. Should the greenshoe option be exercised? Who benefits and how?
As CFO, you receive a call from a Gulf family office offering a PIPE at a 10% discount to the 30-day VWAP (PKR 68/share vs current PKR 75) for a PKR 500M investment. The PIPE comes with a demand registration right (forcing you to list their shares within 12 months) and anti-dilution ratchet. Analyze the pros and cons and your recommendation to the board.