Why CMA Don’t Resort to Determine Share-Price Range? or Adopt Independent Financial Advisor Option? 

With investors anticipating a large tally of initial offerings, in the Year 2022 and the following, and after the IPOs the market have experienced, during the current Year 2021 and the controversy surrounding the prices of those offerings, as some see them too higher than the fair value of the shares and others believe the opposite, i.e. lower than the fair pricing, especially at the level of individuals category, why the Capital Market Authority (CMA), as the regulator, shall not release report on the basis of which a share is evaluated before the subscription?

Or, in case that the profession of the independent financial advisor is legalized? It shall be that the advisor to evaluate the fair price proposal and announce it.

Until 2008, shares prices were determined in initial offerings through consultations between the underwriter and the issuing company, before the Capital Market Authority approve the book building method, which is the most applicable method, in pricing and selling shares, in initial offerings, across global financial markets.

The order building mechanism depends on the financial advisor of a company, being offered for public subscription, inviting institutional investors to participate, in the subscription, according to a specific price range for the offering.

And the way of building the order book, although it is among the best ways that regulators may encourage, to increase the volume of institutional investors’ participation, in the market, such as companies and investment funds, it is not considered optimal for individuals, especially since the method or approaches used in evaluating shares are not disclosed by those institutions, or even the price set by the financial advisor for the offering, by setting the price range, and therefore there is no opportunity for research companies to provide other evaluations of the stock, before the offering, on the basis of which it appears the fairness of the evaluation offered by the institutions or the financial advisor, and accordingly matters are clearer for investors.

Usually, before the initial offering, the company works with an underwriter, which is often an investment bank, for a specified fees, agrees to pledge to buy all shares, at a specified price, and then sells them.

The underwriter usually works with a financial advisor to determine the share offering price, and this is done after evaluating the assets, liabilities, and future of the company, and it also determine the quantity of shares to be offered to the public, at that set price.

The set price shall be logical and consistent with the company’s historical performance, considering the current and future market situation, based on studies prepared by an independent authority.

The CMA shall specify in the Authorized Persons’ Regulations, the principles that licensed financial advisors must adhere to, when carrying out such assessments.

Although it is obvious that the financial advisors will be keen to ensure that the prices are fair to preserve their professional reputation.

However, despite all this, the details of these evaluations shall not be announced, neither in the prospectus nor in a separate statement, but it shall remain only with the issuer company, the underwriter and the financial advisor, and eventually, based on it, the offer price shall be determined.

CMA have shown interest in individuals, recently, after allowing their stake in the Saudi Tadawul Group to be raised from 10% to 30% of the total offered shares.

The group seeks through this change in the offering structure to provide adequate opportunity for all categories of investors, in the Saudi financial market, Eng. Khaled Al-Hussan, CEO of Tadawul Group company confirmed.

Continuous increase in the turnout of individual investors to participate in the initial public offerings, in the Kingdom this year, is an incentive for the group to diversify its shareholders base, after the listing, he pointed out.

The total number of individuals investing in the stock market has reached 5.75 million, by the end of the Q3 of 2021, recording the highest level ever.

Only 84.96 thousand new investors have entered the market in the third quarter of this year, while 31.6 thousand entered it in the second quarter, while 43,34 thousand new investors have already entered the market, in the first quarter.

Accordingly, the Capital Market Authority may consider releasing the way the shares shall be evaluated before the subscription, or adopting the profession of an independent financial advisor, in the market, as a well-established profession, in place, across the markets of developed countries, such as the United States of America, and even some Arab markets, such as the Egyptian.

They are in charge of the practice of evaluating companies, to meet special requests, at predetermined prices.

In the markets where the profession, is in place, it is forbidden for an independent financial advisor to obtain financial compensation for his job, in the form of a percentage of a deal, so that his evaluation shall not be subject to interference out of desires and interests.

The opinion of the independent financial advisor is indicative and is not binding on any party, especially the investment bank, that is advising the offering, although the independent financial advisor can meet with the manager of the offering to settle on the final evaluation, and it is normal for the opinion of the independent financial advisor to be published within the prospectus or in a separate statement, however, that shall take place in a sufficient time before the subscription, as is the case in the markets that adopt the profession.

However, all these are naturally to increase the cost of offering to the issuing companies, in addition to increasing the supervisory role of the authority.

Therefore, it is necessary to mull these aspects, as they are widely considered to allow legalization of the profession of independent financial advisor, by the regulator, in order that the state of equilibrium will be, in place, and prevail