Introduction to the guide

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1 Listing Guide

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3 Introduction to the guide Purpose of the guide Companies across the globe face local, regional and global challenges in their respective competitive business environments. In order to remain competitive, businesses, private and public, need to stay at the forefront of the growth frontier through the implementation of sound business plans. A critical factor associated with the implementation of growth agenda is the access to capital. The stock markets are one of the largest sources for businesses and entrepreneurs to access capital, be it in the form of debt or equity. To support such businesses in the Kingdom of Saudi Arabia, Saudi Stock Exchange (Tadawul) has prepared this Listing Guide to present the benefits of going public and listing on Tadawul. This Guide helps address some of the frequently asked questions about going public, the listing requirements and other concerns faced by companies consider going public. The Guide also outlines the key steps required by businesses to become a listed company and the key regulatory obligations to be followed in the Kingdom as stipulated by the Capital Market Authority (CMA) and Tadawul. We trust you will find this publication useful and wish you every success, both in bringing your company to the market and as a publicly traded company. As the largest stock exchange in the region, we look forward to welcoming you to be among the prestigious group of listed companies in Saudi Arabia. 1 Listing Guide

4 Table of contents 1 1. Introducing Tadawul Incorporation of Tadawul 6 Tadawul s vision and mission statement 8 Key objectives 9 Past five years key statistics relating to Tadawul s activities Going Public 14 What is an IPO? 16 Why list? 16 Advantages 17 Key challenges 18 Why list on Tadawul? 19 CMA Listing Rules Requirements Executing Your Plan To Go Public 22 Company s decision to go public 25 Appoint advisors 28 Preparation phase 30 Submit IPO application 34 CMA review and decision 35 Book building 36 Subscription period 36 4 Listing 36 Post-listing phase 37 Indicative listing related costs 37 Tadawul fees Responsibilities After A Company Goes Public 40 5 Effective corporate governance 42 Obligations and disclosures 45 Public and investor relations Role Of The Capital Market Authority (CMA) 48 6 Introduction to CMA 50 Functions and responsibilities 50 Duties and authorities 50 Market conduct regulations (Trading rules) 51 Listing of foreign companies in Saudi Arabia/cross listing Tadawul Services 58 7 Tadawul s services 60 Trading services 60 Depository services 61 Listing services FAQ s And Glossary Listing Guide

5 4 Introducing Tadawul 5 Listing Guide

6 Timeline Introducing Tadawul Incorporation of Tadawul Tadawul traces its history back to the mid-1930s when the Arabian Automobile Company was established as the first joint stock company in Saudi Arabia. Regular expansion of economic markets and the introduction of localownership of part of foreign banks led to the emergence of large corporations in 1970s. SAMA was the government body charged with regulating and monitoring market activities until CMA was established on 1424H/2003G. CMA is the sole regulator and supervisor of the capital market. It issues the required rules and regulations to protect investors and ensure fairness and efficiency in the market. \ \ Qualified foreign investors allowed to invest in listed shares Launch of Tadawulty services World federation of exchange membership Launch of e-trading for sukuks and bonds Introducing the new tradable rights framework Launch of ETF trading Electronic voting Launch of new identity Applying sector index On 1428H/2007G, the Council of Ministers approved the establishment of Saudi Stock Exchange Company (Tadawul).This was in accordance with Article 20 of the Capital Market Law. Tadawul is the largest stock exchange in the Middle East region, with the largest initial public offerings (IPOs), capital raised and market capitalization. Formation of Saudi Stock Exchange (Tadawul) Opened market for foreign investors through SWAP agreement 2003 Framework to establish stock exchange and Capital Market Authority Beginning of electronic settlement and clearance (T+0) Automated trading system launched Establishment of Saudi Share registration company Ministerial Committee formed to develop and regulate the market 6 7 Listing Guide

7 Tadawul s vision and mission statement Vision To be an integrated financial exchange that fosters the development of a diverse Saudi capital market and competes internationally Mission To offer sound, efficient and attractive capital market products and services that deliver superior value to our market participants and stakeholders Key objectives Tadawul s main objectives to guide its vision are as follows: Operating the market efficiently and delivering service excellence: Operate the market effectively and efficiently Ensure market integrity, quality and fairness Support investor education and awareness efforts Develop service excellence for customers (brokers, issuers, investors, vendors, etc.) Develop the Exchange s capabilities and competencies Developing a leading financial exchange by supporting competitive investment and financing channels: Support efficient capital raising for companies Provide innovative, diversified, and integrated financial markets, products, services and instruments Attract national and international market participants Integrate and leverage offerings across the value chain Facilitate provision of superior financial returns and shareholder value 8 9 Listing Guide 9

8 Past five years key statistics relating to Tadawul s activities As at the end of 2014, Tadawul had a total of 169 companies listed on the exchange. These companies are classified into 15 market sectors. The Tadawul All Share Index (TASI) comprises the companies listed on Tadawul and acts as a key analytical tool to track the stock market s performance. It is one of the key indicator to investors overall sentiment and performance of companies listed on the Exchange. Tadawul publishes various sector specific indices such as retail, cement, transport, petrochemical industries, insurance, etc. which can assist market participants in analyzing sector performance. Tadawul, also, provides a market for trading Sukuks, bonds and exchange traded funds (ETF s). The table below shows the number of listed companies by sector over the period 2010 to Sector Insurance Agriculture & Food Industries Building & Construction Petrochemical Industries Industrial Investment Cement Banks & Financial Services Retail Real Estate Development Multi-investment Telecommunication & Information Technology Transport Media & Publishing Hotel & Tourism Energy & Utilities TOTAL The table below highlights the annual amount of capital raised (SR 000) between 2010 and 2014 across various sectors Sector Insurance 380, ,000 60, ,500 Agriculture & Food Industries 413,100 1,328,400 Building & Construction 612, , , ,000 Petrochemical Industries Industrial Investment 757, ,000 Cement 650, ,500 1,796, , ,000 Banks & Financial Services 22,500,000 Retail 396, , , ,000 Real Estate Development 1,020,000 Multi- Investment 350,000 Telecommunication & Information Technology Transport Media & Publishing Hotel & Tourism 1,368, ,000 Enegy & Utilities TOTAL 3,832,600 1,727,000 5,326,000 1,962,000 25,229,000, Listing Guide

9 At the end of 2014, the market capitalization of all companies listed on Tadawul was SR 1,813 billion, and the value of shares traded was SR 2,146 billion. The chart below highlights the trend with respect to market and trading value over the past 5 years. 2,000 1,750 1,929 1,753 1,813 2,146 Market Cap Trading Value SR billion 1,500 1,250 1,325 1,271 1,400 1,370 1, Listing Guide

10 14 15 Listing Guide Going Public

11 Going Public Advantages of Listing What is an IPO? An Initial Public Offering (IPO) is the first offering of shares made by a company to the general public. It is one of the most crucial strategic decisions that can be made in the lifetime of a company. It offers the existing owners an opportunity to not only obtain access to a wider pool of capital and expand the investor base but also bring about key structural and operational changes in a company. For investors, an IPO is an opportunity to invest, become a part owner of the company and play an important role in the strategic decisions associated with its future growth. One of the most significant reasons to invest in an IPO is to earn return through dividends and the performance of the stock price which reflects the financial growth prospect of the company and the industry in which it operates. Why list? Going public is a significant transformational decision in a company s development that requires a series of planned, pervasive changes to the company, its owners and its culture to achieve long-term strategic objectives including business continuity, market leadership and shareholder wealth value maximization. Enhances visibility of the company Creates certainty about a company s going concern status Increases the investor base and diversifies risk Easier to value for potential mergers and acquisitions Improves credibility of a company in the market Advantages of listing Access to wider capital pool Helps in regional and global expansion Enhances liquidity for shareholders Encouraging employees commitment Easier to benchmark a company s market position in a sector Enhances visibility of the company A listing provides the benefit of showcasing the business strategy and performance through increased media coverage and availability of analysts reports. It helps in enhancing the corporate brand and attracts new investors, customers and suppliers without incurring extra spending. Potential investors get an opportunity to participate in the company s growth plans, its market positioning, financial performance, etc. Access to wider capital pool Going public enhances the options that are available to a company with respect to raising capital. Access to a wider pool of equity capital can help a company achieve its growth objectives along with providing flexible financing alternatives. Typically, a listed company is also in a position to raise debt capital at a lower rate of interest with longer maturity duration. Listing on a stock exchange adds confidence to investors. Creates certainty about a company s going concern status Establishment of a separate legal entity, which is listed, provides enhanced comfort around continuity of a company s operations in the longer-term. This is contrary to the risks involved in the case of a family business, where the second and third generations of the family may face challenges and becomes difficult to promise the same continuity of interest, management and performance as the first generation. Also, internal disputes are sometimes common within family businesses, which can hinder the performance of a family owned and managed enterprise. Helps in going global A public joint stock company works under the regulatory guidance of CMA, which requires the company to publish information on a regular and timely basis. Disclosure of a company s financial performance to investors is mandatory under various regulations, and assists in improving transparency, and eases access to broader options of growth for business including Mergers and Acquisitions (M&A), Joint Ventures (JV), and expansion into foreign countries. This could also help in attracting foreign investment into the company where it will increase investors base and diversifies risk. Increases investor base and diversifies risk Involvement of a large number of institutions and individuals investing in a listed entity helps diversify the risk involved and provides a company with more options to enter new markets. Enhances liquidity for shareholders Investment in a listed company is considered a more liquid form of investment due to the ease and ability of investors to buy and sell shares on the exchange, making such investments more attractive. Tadawul offers a significantly higher level of liquidity compared with other GCC countries. Easier to value for potential mergers and acquisitions One of the critical components in M&A activity is the valuation. Given that listed companies have a quoted price per share available on the exchange on a daily basis, it makes it easier for the companies to engage in M&A activities. Encourages employees commitment Many listed companies motivate their employees through long-term share incentive schemes (Employee Share Options Programs or ESOPs ) which can provide employees with the benefits of ownership. This is a feature that can help attract key talent to the company and encourage long-term employment and goal alignment between employee and company Listing Guide

12 Improves credibility of a company in the market Transparency and availability of information relating to a listed company in the market provides confidence to various stakeholders associated with the company. They can evaluate their investments, and make a buy or sell decision with ease. A well performing company always takes advantage of this to ensure that it generates a stronger brand and credibility in the market. Easier to benchmark a company s market position in a sector It is easier to compare a listed company to its peers due to the availability of information. For instance, a petrochemical company can be compared to other listed entities in the same industry as well as with the Petrochemical sector index to establish its relative performance. Key challenges of listing While there are a number of benefits of being a publicly listed company, there are also challenges, especially with respect to legal and disclosure requirements and on-going regulatory costs. Transparency/disclosure and greater responsibility CMA has outlined the disclosure requirements to be followed by companies listed on Tadawul. These requirements enhance the responsibility of a public company towards CMA, Tadawul and investors. Whilst transparency and disclosure can be the strengths, they can also act as a major challenge for a public company as they lose aspects of confidentiality, especially in cases where the company s peers are not listed. In such cases, there can be an apparent concern around having more information in the public domain over the competitors. Regulatory rules also add another layer of necessary compliance for a listed company. Cost and time lag Listing a company has its associated costs; these include expenses incurred on legal, financial, accounting, external consultants/advisors and compliance matters. These additional expenses need to be carefully evaluated and compared with the benefits of an IPO, when deciding to go for listing. An IPO can often take a long time to complete due to the work associated with preparing a company to go public. (Also refer to indicative listing related costs outlined on p39 of this guide). Longer decision making process Why list on Tadawul? Tadawul provides a platform for companies to attract various investors through access to the exchanges large liquidity pool and broad investor base complimented by its state of the art trading infrastructure which connects investors, traders and brokers. Saudi Arabia being the largest economy within the region adds to the strategic significance of Tadawul and enhances its attractiveness further. Tadawul also has a best in class primary market team which is solely focused on ensuring that businesses maximize value by being listed on the Exchange. primary market team Best in class State of the art trading infrasructure Why Tadawul Access to the biggest economy in the region Transparency/Disclosure and greater responsibility Challenges of listing Longer decision making process As compared to private companies where strategic decisions are typically taken by the owner or a small group of decision makers, major strategic decisions require board of director and sometimes shareholder approval as they have an impact on the performance of the company. Accordingly, the decision making process for a public company takes longer as the company is required to follow set governance rules and regulations around board of director and shareholder meetings. Long-term investor relations support post - IPO Cost and time lag Listing Guide

13 Why list on Tadawul? Tadawul provides a platform for companies to attract various investors through access to the exchanges large liquidity pool and broad investor base complimented by its state of the art trading infrastructure which connects investors, traders and brokers. Saudi Arabia being the largest economy within the region adds to the strategic significance of Tadawul and enhances its attractiveness further. Tadawul also has a best in class primary markets team which is solely focused on ensuring that businesses maximize value by being listed on the Exchange. CMA Listing Rules Requirements CMA has issued Listing Rules and regulations that need to be followed and complied with by companies seeking to list on Tadawul. The Listing Rules provide key requirements that an issuer needs to follow pre and post the listing process, after the issuer s board has approved the listing of the securities of the company. 1. Appointment of Advisors: CMA requires the issuer to appoint an independent Financial Advisor who is licensed by the CMA to advise the company on various CMA related rules and regulations. There are specific requirements that the Financial Advisor needs to fulfill with respect to the listing process, which are outlined in the Listing Rules. An independent Legal Advisor licensed to practice in Saudi Arabia must also be appointed 2. Conditions for registration and admission to listing: The key conditions that need to be met in order to be listed on Tadawul are; a. The company must be a Saudi Joint Stock Company except where the provisions of article 14 (cross listing) of these rules apply b. Have carried out a main activity for at least 3 years with substantially the same management c. Have at least 200 public shareholders d. Have 3 years audited financial statements and the latest interim financial statements produced since the date of the last annual report and the most recent audited financial statements e. An appropriately experienced management team f. The company must not have carried out certain financial restructuring within the last 1 year g. It must have sufficient working capital for the next 1 year h. The aggregate value of shares listed must be at least SR100 Million 3. Listing and registration: The actual process of listing requires the issuer to ensure that the offered securities are fully underwritten by an underwriter authorized by CMA. Further, the issuer, in consultation with its Financial Advisor, needs to submit documentation such as an application for registration, prospectus, etc. in accordance with the Listing Rules. Acceptance of the listing is subject to CMA s approval of the issuer s compliance with the Capital Market Law and CMA s Regulations. 4. Compliance with listing rules: An issuer must comply with the Listing Rules and provide information and explanations to CMA as and when required. The Financial Advisor appointed by the issuer can assist in providing all the required information along with clarifications. It is important to note that CMA may take appropriate actions in the interest of investors. 5. Continuous obligations: Listed companies are required to comply with CMA s listing and other applicable rules and regulations on an on-going basis to ensure continuity of their status as a listed company. Some of the key obligations include requirements relating to disclosure of material developments and financial information in accordance with the prescribed time lines, announcements, publications, duties of the board of directors, notification relating to securities, payments of fees, etc. The Listing Rules also cover provisions relating to capital injection and reduction. Some of the aspects discussed above are aimed at providing a general overview of key requirements and do not cover the detailed requirements that an issuer would have to follow with respect to the listing process. For more details, please refer to the Listing Rules issued by CMA which are available at i. Following the offering, at least 30% of the shares must be owned by the public Listing Guide

14 22 Executing Your Plan To Go Public 23 Listing Guide

15 Executing Your Plan To Go Public Executing your plan to go public A company that intends to go public should follow the process detailed opposite for listing on the Saudi Stock Exchange (Tadawul). Tadawul Primary Markets Team (guiding companies through the process) Once it has decided to go public, a company should have a business plan, and a targeted timeframe for listing Ensure overall readiness, Conduct due diligence, prepare valuation, prospectus and application forms CMA reviews the application and assesses the adequacy of discoursers in the prospectus and if acceptable, announces its approval through Tadawul and CMA s website Subscription period, IPO proceeds received, share holder allocation and refunds, provide Tadawul with shareholder file Company decision Appoint Advisors Preparation phase Submit IPO Application CMA review and decision IPO book building Subscription period List on Tadawul Appointment of Financial and Legal and other Advisors Filing of an application to CMA along with all relevant documents Marketing to institutional investors, allocation between retail and institutional determined After completing the information and documentations required by Tadawul s and CMA s, an announcement will be made in Tadawul and CMA s websites, and secondary trading will begin First step: Company s decision to go public An IPO in itself is not an isolated event but a series of steps in an important transformation journey of companies. Each step acts as a milestone for the success of the process and thus the transformation of a private company, to a large public compan, to a large institutionalized public company. To launch a successful IPO, one of the more critical steps is to prepare and plan. Planning includes understanding the importance of the IPO for the prescribed objective. Whilst the execution process of an IPO event itself generally lasts for 6 to 12 months at least, the overall timeframe for realizing substantial value from an IPO begins at least 1-2 years before the actual listing and continues well beyond that. Some of the more important steps during this journey are listed on this page. The key to a successful IPO (value obtained and time taken) is to start implementing as many of these steps as possible well before the start of the implementation of the IPO process. Ensure all key shareholders/family members understand and accept the changes that will come about as a result of transforming the business to a public company Confirm the strategy of the business is there a clear vision? Ensure the company has a compelling equity story i.e. strong historical track record and clear, positive growth outlook Fill necessary management team gaps benchmarking the company to ensure competitiveness Carry out required restructuring (capital, holding company etc) and implement required governance changes to comply with CMA guidelines Ensure the company has a strong finance function that can meet strict reporting guidelines and support the IPO and ongoing budgeting and forecasting requirements Prepare business plan, financial projections and understand potential IPO pricing issues, size of offer, use of proceeds Consider carrying out independent pre IPO readiness assessment Act like a public company even before becoming one Listing Guide

16 One of the key areas on which investors place significant emphasis is on the past and expected future financial performance of the company. The quality of the company s equity story is one of the most important determinants the quality of the company s equity story is one of the most important determinants of whether or not a company should consider an IPO, together with the readiness of the shareholders to accept the changes an IPO will bring about. Once a company decides to go public and the decision is approved by the board, it needs to prepare an action plan including the steps necessary for appointing a financial advisor. This is followed by the identification of key company employees to be involved in the IPO process, which generally includes a director, Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Chief Information Officer (CIO). Keeping options open Most companies are now following a multi-track approach which involves an IPO and evaluating alternatives in parallel which act as a backup plan. A multi-track approach means a combination of the following approaches: 1. Considering a sale in the M&A market: This option requires a detailed evaluation of the suitability and viability of a merger or an acquisition as an alternative to an IPO. A company needs to evaluate whether a merger or acquisition would be more beneficial to its strategic options than an IPO. 2. Private placement, a pre-ipo step: This can be done either for the purpose of raising funds for growth and expansion instead of carrying out an IPO or bringing in one or more external shareholders to assist with and add value to a future IPO. It often involves commitment to a future IPO to provide some form of exit option for the new shareholder in return for that company providing capital and management and/or technical expertise. 3. Joint ventures and strategic alliances: This option could provide the company with greater operational efficiencies and access to knowledge, with minimal cost. Joint ventures can be helpful in entering new and strategic markets and geographies, giving an opportunity to expand the business, access new technology, and reduce costs and risk. Some of the other key considerations that need to be assessed at this stage include: a. A comprehensive business plan and a detailed timeline: The company is required to showcase its operational, financial, and strategic initiatives along with its business strategy to be implemented in the near future. The business plan brings together these elements and acts as a key document that outlines the plan going forward. A critical component of the business plan is the detailed implementation timeline relating to any strategic initiatives. b. Potential growth of market size and an equity growth story: The company should be in a position to articulate and sell the potential growth story to its investors through facts and figures and a demonstrable track record. An independent assessment of the market will eventually be required to support market disclosures in the prospectus. c. Benchmarking with peer group and demonstrating competitiveness: The company should start to benchmark its relative market position through competitive benchmarking amongst its peer group. d. Acting like a public company before the IPO: A company is required to demonstrate its strength in terms of financial performance and integrity and transparency in business to generate confidence among potential investors. Companies should start to act like a public company well before actually becoming one in order to embed these disciplines internally and provide confidence to regulators and potential investors. As this stage, undertaking an IPO readiness assessment can be a useful exercise to identify the key areas that the company needs to focus on, in order to better prepare itself for an IPO. Such an independent readiness assessment can be invaluable to the owners in providing a clear picture of what the company needs to work on before applying to go public. The reason that many IPOs are delayed or cancelled is due to the fact that the company is just not ready at the time of starting the application process. These unpleasant surprises could be easily avoided by having an independent readiness assessment carried out Listing Guide

17 Second step: Appoint advisors Appointment of the advisory team A company considering listing is required to appoint a team of advisors that deals with the IPO regulatory bodies such as CMA and Tadawul on behalf of the company. Below is a list of advisors along with their roles who manage the process of listing, and provide guidance to the company at different stages. Lead Manager Manages the IPO process Manages the retail subscription Financial Advisor Ensures compliance with CMA rules Communicates with CMA and investors Provides advice to the company Manages the institutional book building process Legal Advisor Undertakes the legal due diligence Provides advice on all legal matters Ensures legal sections of the prospectus are in accordance with the Listing Rules Advisors Underwriter Underwrites the issue and sometimes involves other underwriters Financial Due Diligence Advisor Undertakes the financial due diligence Public Relations/ Media Advisor Manages media campaigns and road shows Works on brand enhancement Professional and licensed external advisory team It is critical that the company sells its IPO story to the investors and follows all the laws and regulations regarding the listing process. Experienced advisors play an important role in assisting a company present its IPO story in the most appropriate manner. The advisory group typically comprises the following advisors: Lead Manager: Provides overall management of the IPO process and works closely with all other advisors in the process. Financial Advisor: CMA provides licenses to professional advisors for providing IPO related services to applicants. They provide guidance to fulfill regulatory requirements by acting as a representative of the company as well as managing the other advisors. Legal Advisor: The legal advisor assists with any necessary restructuring of the company, reviews material contracts and agreements, advises on shareholder rights, articles and by-laws and together with the financial advisor advises the company of the requirements of the Capital Market Law and Listing Rules. The Legal Advisor also plays a very big role in the review of the prospectus. Underwriter: The CMA requires any offer of securities including IPOs to be fully underwritten by an authorized underwriter. Financial Due Diligence Advisor: A key component of the prospectus preparation is the analysis of financial information, which is typically covered as part of the financial due diligence process. Public Relations/Media Advisor: Building effective public relations, starting with bringing information to the knowledge of prospective investors and addressing their concerns is key to a successful IPO. The Public Relations Advisor conducts road shows, media campaigns, etc., using all available channels of communication with the prospective investors in accordance with the applicable Capital Market regulations Listing Guide

18 Third step: Preparation phase As mentioned earlier, the key to a successful IPO is for the company to plan early and start to structure itself and act like a public company well before its actual IPO. By the end of this phase, all IPO readiness requirements need to have been completed. Ensure strong senior management team Quality of management remains one of the most important non-financial factors considered by institutional investors in making a decision to subscribe to an IPO. Appoint a board with independent members Improve internal control measures 1. Appoint a board with independent members: The company s shareholders should consider appointing independant directors who are experienced in handling IPOs as board members. This group should have good exposure across the business and bring that experience to the IPO process. 2. Improve internal control measures: Internal controls are defined as a process, affected by the organization structure, work and authority flows, people and management information systems, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: a) Effectiveness and efficiency of operations; b) Reliability of financial reporting; and c) Compliance with laws and regulations. Establish a qualified audit committee Establish and implement an acceptable executive compensation structure Implement board meetings and reporting process The dynamic nature of reporting requires adequate and appropriate control mechanisms to be in place. Therefore, it is necessary to ensure the existence of comprehensive internal control policies. 3. Establish a qualified audit committee: The audit committee of the board reviews and provides insights into the annual and quarterly performance of the company and meets regularly and independently with the company s external auditors. 4. Establish and implement an acceptable executive compensation structure: Remuneration packages should be balanced, in line with the profitability of the company and sufficient to reward high performing executives. The executive compensation structure should align the long-term senior management s objectives with the company s business plan. 5. Implement board meetings and reporting process: Certain decisions should be taken only by the board in meetings held in accordance with established protocol. All decisions of the board should be documented and reported in accordance with company and CMA regulations. Board committees may be formed which will require their own appropriate meeting, documentation and reporting protocols. As part of the IPO preparation phase the issuer / company will need to conduct a number of activities alongside the preparation of the prospectus. These are summarized below: Due diligence of historical financial information (typically completed by accountants) Legal due diligence Preparation of detailed financial model (income statement, balance sheet and cashflow with supporting assumptions) Preparation of the valuation of the company based on various valuation techniques as required by the CMA (discounted cashflow, comparable company multiples, Tadawul Price Earning Multiples) Based on valuation, shareholders set preliminary IPO price range Preparation of working capital model (and associated working capital report by accountants) Finalization of legal structure Other due diligence (e.g. environmental, actuarial, etc.) if applicable Preparation of appropriate supporting schedules for extraction of comfort in respect of the prospectus Implementation of appropriate financial reporting controls prior to the IPO / listing (or alternatively the obligation to implement proposed controls with an implementation timetable in place, post IPO) Confirmation of management s incentive plans Listing Guide

19 Valuation considerations The valuation of the company and the related price at which the shares are offered to the investors is a critical aspect of the IPO preparation phase. Following is a brief description of different valuation methods that are typically adopted to value a business: Discounted Cash Flow Method -The DCF method, which is an income based approach, is underpinned by the premise that the value of a business is based on the future cashflows that it will generate. This method involves estimating the future free cash flows on a year by year basis. It applies an appropriate discount rate on the projected free cash flow, which takes into account key business and operating risks of a business. It also takes into consideration the company s capital structure Comparable company method The comparable company method, which is a market approach based method, values a business based on the trading prices of shares of companies engaged in similar lines of business and operating in the same industry sector as the company being valued. It entails identifying a suitable/relevant market multiple and applying these multiples to the company s financial parameters. Some of the commonly used market multiples are: Price to Earnings (P/E) Enterprise Value to EBITDA (EV/EBITDA) Price to Sales (P/S) Price to Book value (P/BV) Net Asset Value Method The net asset value method is generally utilized when the value of an entity is closely related to the value of its underlying assets. The value for a business calculated under this method is based on the aggregate value of its net assets i.e. assets less liabilities as of the valuation date. Prospectus preparation The prospectus plays a vital role in the issuance of company shares. It is an official document published by the company that contains all the key information about the company s business, management, financial performance, risks, future plan of action etc. A prospectus also includes information relating to the securities to be traded and related terms and conditions. This information enables an investor to make an informed investment decision for that security. Listed below are details of some of the other mandatory information which must be covered in a prospectus: Summary of the offer including total capital and number of shares Targeted type of investors Contact details of all the key personnel involved in the IPO Timetable showing key dates and the subscription procedure Industry information for the sector in which the company operates Organizational structure Key financial information and management discussion and analysis Dividend policy Plans for application of funds from the offer Key risk factors Various declarations Legal information Documents available for inspection External auditor s report for the three financial years immediately preceding the date of publishing the prospectus. For a full list of the required contents of the prospectus, refer to annex 4 of the Listing Rules. Timing the market offering The company should ensure from the initial stages that the timing of the IPO is appropriate to achieve the desired valuation. To achieve this goal, a company needs to plan well ahead and accordingly should seek to: 1. Manage the pressure appropriately: by recruiting a highly qualified and experienced management team who can support taking the company public. Typically, a company would have to gather inputs from external advisors, including investment banks, authorized persons and auditors/financial advisers. 2. Seek the window of opportunity: The company should assess the market and investor receptiveness to a new security issuance in this particular industry. Also, the company needs to provide adequate time to implement any organizational and other readiness changes required pre-ipo Listing Guide

20 Fourth step: Submit IPO application A company planning to list its shares submits an application to CMA, along with various other documents as specified in the CMA Listing Rules. Below, are some of the documents that are submitted (hard copy and electronic) at the time of filing the application for listing: IPO application letter signed by an authorized officer of the company as per Annex 1 of the Listing Rules Letter of appointment for the Financial and Legal Advisor List containing names and civil registry numbers of directors, senior executives and their relatives Draft prospectus in Arabic All underwriting commitment letters Issuer s certificate of commercial registration and articles of association Annual report and audited annual financial statements of the issuer Latest interim financial statements Report by an external auditor certifying the adequacy of working capital for the 12 months following the date of publication of the prospectus Legal and financial due diligence reports Subscription form Declarations as per Annex 2 outlined in the Listing Rules The list provided above is not exhaustive, but illustrative in nature. For a detailed list of documents required, please refer to Article 19 of the CMA Listing Rules. For more information related to Prospectus filing and its approval by CMA, visit Fifth step: CMA review and decision Once a prospectus is prepared by the company and its advisors, it is submitted to the CMA for its review and decision. Subject to submission of complete application, CMA reviews the prospectus and reaches a decision within 45 business days of its submission. The typical process is as follows: Review Application & Prospectus Review Application and Prospectus CMA reviews the submitted application, ensures it complies with the Listing Rule, and informs the company s financial advisor about the missing requirements. CMA also reviews the submitted prospectus and assesses the adequacy of its disclosures. If there are any discrepancies noted or amendments needed in the submitted prospectus, the CMA notifies the company s financial advisor. Decision Decision Announce Decision on Website Once the application is completed and all necessary disclosures have been properly reflected in the prospectus, the application will be presented to CMA s board of directors for the decision. Announce Decision on Website Decision will be noted electronically through the websites of CMA and Tadawul Listing Guide

21 Sixth step: Book building This period covers the time after the CMA has approved the company s IPO application but before the commencement of the subscription phase where the shares are offered to the retail investors. Pre-marketing requirements The company needs to prepare detailed investor presentations together with the draft prospectus and other company media information prior to the road show of presentations to the selected institutional investors. The investor presentations are conducted by the management team. Additionally institutional investors would have access to key documents; including prospectus and valuation model, contained in a data room. Building a pipeline of potential investors is also an important component of the pre-marketing exercise with the underwriting team. Companies also should be prepared to directly reach out to potential investors through ongoing dialogue, conference attendance and marketing visits. Understanding the audience The management preparing for the road show should build a rapport with the target investor audience. It is important to communicate a high level of excitement and passion during road shows as this helps create a PR buzz around the opportunity to invest in the company s IPO. Extensive marketing Marketing should be conducted through effective road show presentations, the focus of which is communicating the IPO story, the company s strategy and future growth plans all of which support the valuation price range. These road shows comprise extensive meetings and discussions with prospective investors that help gather ideas about their investment criteria. Typically, institutional investors rely more on information gathered through these presentations than by visiting the company. Price and allocation determination Based on the levels of demand from institutional investors for the various ranges of share prices, together with the CMA s requirement for demand coverage, the offer price and preliminary allocation between retail and institutional investors will be determined. At this point, the company s financial advisor advises the CMA of institutional subscriptions and confirms allocations to the institutions. There will be clawback provisions agreed with the CMA such that high demand from retail investors during the IPO could result in a prorate lower allocation to institutional investors. Seventh step: Subscription period At this stage the price at which the companies shares will be offered to the public has been confirmed through the institutional book building process. Therefore prospectus can be finalized by inserting the offer price. Copies are lodged with the CMA, published on their website, and printed for distribution to receiving banks where they will be available for inspection by interested retail investors. The subscription period runs for a set number of days stipulated by the CMA. IPO proceeds are received, share allocations and refunds for over subscriptions are made by the receiving banks. A final shareholder file is then sent to Tadawul along with the application for listing and request for a ticker symbol. Eighth step: Listing Tadawul allots shares to the shareholders as per the shareholders file and the start of trading of the company s shares in the secondary market commences. Post-listing phase After a company becomes public and its shares are listed, priced and allocated to investors, the post-listing phase of activities begins. These activities are equally as important as the pre-ipo preparations. A listed company is required to: Keep investors interest alive After the successful listing of a company, the company needs to retain and increase its value. Therefore, it is essential for the company to develop a proactive investor relations strategy with the objective of maintaining the stock s attractiveness. This includes reaching out to current and potential investors with information about the company s business, management, market position, plans, etc. Typically, this is done through a variety of press conferences, conference calls and investor presentations. The investor relations team of a listed company also must try to attract the coverage of equity research analysts who play an instrumental role in presenting the facts in the best possible way to the investor community. Keep its promises Another key factor that the management of a listed company need to be mindful of is to ensure that any promises made during the IPO process are delivered. This includes appropriate usage of the IPO funds, meeting growth plans, achieving operational efficiencies, enhancing shareholder value and an improvement in share price. The investor community keeps a close track of the usage of IPO funds. They prefer the money to be used for accelerating the company s growth by developing new products and services, entering into new geographic markets, expansion of operations, acquisition of other companies, investment in latest technology, cost reduction programs, etc. The management must also try to keep its operational and financial targets realistic because meeting or exceeding these targets adds to investor confidence and helps in the long term outlook of the company. Indicative listing related costs There is no fixed cost related to listing of shares as the listing costs associated with the share offerings vary from company to company. In general, the cost is based on various factors that include: Readiness of the company Size and complexity of company s operations Quality and availability of company management team to support the IPO process Amount of pre-ipo restructuring required Experience of the Financial Advisor, especially in leading IPOs in the company s sector Amount invested in promotional campaigns Profile of advisors appointed The table opposite highlights the total subscription cost as a percentage of the total offer value for companies that listed during the period 2010 to There is some element of fixed costs in the total cost of subscription so as a percentage of the offered value, larger IPOs tend to have a lower cost to value ratio Listing Guide

22 The table below shows the total offer value for companies that listed during the period 2010 to 2014 Year/issuer 2010 Total value of offered shares (SAR 000) Total cost of subscription (SAR 000) Cost to value % Herfy Foods 413,100 13, % AlSorayai Group 243,000 17, % Shaker 514,500 22, % Al-Khodari 612,000 25, % 2011 Aslak 331,500 17, % Extra 396,000 16, % 2012 Takween 234,000 21, % AlTayyar 1,368,000 50, % Saudi Airlines Catering Company 1,328,400 33, % Dallah Health 539,600 20, % 2013 Care 364,500 14, % Bawan 540,000 26, % 2014 Farm Superstore 270,000 13, % Al Hokair Group 825,000 26, % Al Hammadi 630,000 20, % NCB 22,500,000 25, % EIC 729,000 20, % Tadawul fees Tadawul charges annual listing fees based on the paid up capital of the company which covers costs associated with providing the share registry related services. The table outlines the various fee brackets. Annual registry fee (SR) Capital (million) Cost Up to , , , , ,000 +2,000 5, ,000 +5,000 10, , , , Listing Guide

23 40 Responsibilities Of A Publically Listed Company 41 Listing Guide

24 Responsibilities of a publically listed company Corporate Governance booklet which summarizes the Effective Corporate Governance As the MENA region integrates more into the global economy, the importance of effective corporate governance becomes more significant than ever as it helps to improve competitiveness, transparency, domestic and foreign investor attractiveness and social accountability. The CMA regulations define corporate governance as a mechanism to control and direct all the company s activities to protect the rights of the shareholders and other stakeholders (such as employees, customers and suppliers). The governance framework constitutes a coherent set of procedures and organizational arrangements that govern the relationship between the shareholders, board of directors and executive management that are aimed at achieving the company s long-term strategic objectives. Corporate Governance Regulations also specify the rules and standards governing the companies management listed in the exchange. The regulation constitutes as guiding principles in applying some of its articles but must disclose the provisions that have been implemented and the provisions that have not been implemented. To view the mandatory articles in the regulation, check Regulations.aspx The CMA Corporate Governance Framework In order to ensure compliance with the best corporate governance practices, CMA has set out a clear corporate governance framwork covering 3 main areas: The rights of shareholders covering general rights, meeting,voting and distribution rights Disclosure and transparence setting out policies and procedures for information disclosure and disclosure in board reports Board structure and responsibilities setting out the basic functions of the board, its responsibilities and composition, and the role and responsibility of other committees such as the audit and remuneration committee. Good corporate governance ensure fairness in the work environment and transparency and the accountability of those responsible for their actions. The following chart shows number of points about the importance of corporate governance. Secures rights of shareholders Ensures effective internal controls Advantages Of Corporate Governance Encourages investment Improves transparency and disclosures Imposes accountability and improves performance The above-mentioned aspects relating to establishing and maintaining an effective corporate governance framework are an important on-going responsibility of a listed company. For the capital market authority to ensure better practices, it offers presentations for newly listed companies to introduce corporate governance and disclosure requirements explaining all the related aspects. The Authority also continuously issues awareness booklets designed to raise investment awareness. Number of booklets were issued related to corporate governance: importance of governance and covers, for example, but not limited to: the core functions of Board of Directors, the classification of its members and its key functions, it also provides simplified explanation about board committees. A Guide for the Shareholder in General Assemblies of Listed Companies in the Saudi Capital Market which aims to activate the role of shareholders in the General Assemblies and to increase their awareness of the principles of corporate governance for listed companies and other related requirements. How to read the listed company board Directors report which demonstrates the importance of Board of Directors report, where it s considered to be one of the important sources of data and information needed by investors. Guidelines for Corporate Governance regulation which aims to clarify the requirements of the Corporate Governance Regulations. In Capital Market Authority (CMA) there is a specialized unit (Corporate governance practices unit) under the corporate governance department which supports and stimulates companies to apply the best practices in corporate governance and to contact the unit on this matter: cgd@cma.org.sa Listing Guide