When a company decides to offer its shares to the public, the share price does not appear out of nowhere.

Before the share reaches the trading screen, the company goes through a process designed to answer the most important question:

How much do investors believe this share is worth?

This is where bookbuilding comes in.

The Capital Market Authority is currently seeking public comments on a proposal to improve initial offering practices. The proposal focuses on making orders submitted during this stage more closely aligned with investors’ actual liquidity, while also strengthening the underwriter’s accountability and the issuer’s future disclosures.

But why do these details matter in the first place?

What Is Bookbuilding?

Before the final offering price is determined, the parties responsible for the offering contact institutional investors to gauge demand for the shares at different price levels.

One investor may say they are willing to buy a certain quantity at a specific price, while another may submit a larger or smaller order.

These orders are collected in an order book, and the financial adviser and issuer use this information to help determine the final price.

Under the current regulatory framework, the offering price is determined by supply and demand, while taking into account the rules governing the process.

Put simply, the order book serves as an early market test before trading begins.

What Happens If the Orders Are Unrealistic?

Suppose an offering is worth one billion riyals, but institutions submit orders worth 20 billion riyals.

Demand may appear exceptionally strong.

But what if some of these orders are far larger than the liquidity the investor actually has, or were submitted on the assumption that the investor would receive only a small percentage of the requested amount?

In that case, the order book may become less capable of reflecting genuine demand.

This matters because apparent demand may affect the assessment of the offering’s strength and the appropriate price.

That is why the proposed changes focus on verifying that participation orders are linked to the cash or cash equivalents available to the investor, and that investors are bound to settle them by the specified deadlines.

The idea is not to reduce demand, but to make the recorded figure closer to the investor’s actual purchasing capacity.

Why Does This Matter for Price Discovery?

In financial markets, a good price is not necessarily a high or low one.

Rather, it is a price that comes as close as possible to the balance between what the seller is willing to accept and what the investor is willing to pay.

If the information entering the pricing process is more reliable, it becomes easier to discover that price.

But if the order book contains orders that do not reflect a genuine intention or ability to buy, the picture it presents of the market may become less accurate.

This is where the importance of what is known as price discovery becomes clear.

Why Does an Investor Need to Know the Future?

Another proposal would require the issuer to disclose forward-looking financial performance expectations and indicators for a period of at least one year.

The reason is that investors do not buy a company based solely on its past results.

The value of a share depends largely on expectations for the company’s future revenue, profits, and cash flows.

Providing forward-looking information based on reasonable foundations may therefore give investors better tools for building their valuations, rather than relying solely on general expectations or impressions.

However, this information also requires professional care, which is why the proposal places greater responsibility on the financial adviser for the quality of disclosures.

What Role Does the Underwriter Play?

The underwriter is the party that bears a significant portion of the risk associated with the success of the offering.

Under the new proposals, its obligation to purchase all remaining shares would become effective from the start of the bookbuilding process.

This reinforces the concept of aligning interests.

The more responsibility the party managing the offering bears for the outcomes of pricing and underwriting decisions, the stronger its incentive to ensure the quality of the process and the recorded demand.

From a “Covered Subscription” to a “Trusted Offering”

We often hear that an offering was oversubscribed dozens of times.

But the large figure alone does not tell us everything.

What matters most is:

Is the demand genuine?
Can the investor pay?
Is the information used for pricing sufficient?
And do the participating parties bear clear responsibility for their decisions?

That is why improving offering practices is not simply about increasing the number of offerings, but about improving the quality of the way prices are discovered and capital is allocated.

A successful offering is not one that gathers the largest number of orders on paper, but one that reaches a price reflecting genuine demand, clearer information, and greater confidence among all parties.