Income & Risk in Underwriting Business

+ Based on the auction results, the underwriter will summarize and report the number of shares sold to the CPH enterprise.

+ CPH enterprises register to print certificates according to the form of the Ministry of Finance.

+ After receiving the certificate, the underwriting organization will distribute the certificate based on the list of investors who have confirmed their purchase and completed payment.

- Issue book

+ Based on the auction results, the underwriter will summarize and report the number of shares sold to the CPH enterprise.

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+ The equitized enterprise appoints a transfer agent (usually the Securities Trading Center) to carry out the distribution of certificates. The appointed transfer agent will, based on the details of the share purchase and the payment status of each investor, issue shares to investors by book-entry method and prepare a list of shareholders to report to the equitized enterprise.

Phase 4: Completion of the Offering

Step 1: Close the books and end the underwriting period

Depending on the laws of each country, a certain number of days after the competent state agency announces the effective registration dossier for issuance, the securities sale will be closed. At the time of closing, the underwriter is responsible for paying the securities sale proceeds to the issuer (even if the distribution has not been completed).

Before the closing date, the member underwriters will notify the main underwriter of the information needed to prepare the certificates of the sold securities (including the name of the registered person and the name of the person designated as the representative). After collecting the information, the main underwriter will forward the information to the issuing company to prepare the certificates for printing. Once prepared, the certificates will be sent to the issuer's transfer agent. The transfer agent will fill in the necessary information to complete the certificates, then sign and send the certificates to the registrar. The company registers the certificates

The transfer agent, who is often also the transfer agent, signs the certificates and records the registration number and number of securities listed on each certificate.

Payment is made at the cut-off date, concurrent with the transfer of the certificates. However, the certificates do not have to be delivered at the actual cut-off date. Two days before the cut-off date, representatives of the underwriters will inspect the certificates at the transfer agent's office to ensure that the securities are properly prepared. When the underwriter pays the issuer, the certificates are delivered to the lead underwriter at the transfer agent's office.

Step 2, stabilize and regulate the market

To prevent the market price of securities from falling below the public offering price before the issuance is completed, the underwriter may take measures to stabilize and regulate the market. This is usually announced to potential investors in advance in the prospectus.

- Stabilize the market by purchasing securities into the underwriting syndicate's account. The main underwriter will buy securities on the market at the expected price (POP price) to prevent investors from buying at a lower price. However, by implementing this solution, the underwriter will have to buy shares at a higher price than the market price accepted before the issuance ends and must hold those securities. This is a purchase order to push the stock price up, so it is often clearly announced during trading and on the electronic board.

- Additional issuance: To ensure the issuance of all securities, the main underwriter may decide to issue additional securities (offer a larger amount than the announced issuance) with the aim of selling all securities even in cases where investors do not buy all the ordered securities. Performing additional issuance creates higher purchasing power after the end of the offering. Therefore, it can support the securities price for the issuing organization when the issuance ends. The terms of additional issuance are specified in the underwriting contract.

Step 3, dissolve the group and report the results of the offering to the State Securities Commission.

The underwriters are responsible for payment at the closing date according to the number of securities allocated to the main underwriter. The amount that the underwriters must pay is the amount of securities sold according to the commitment minus the underwriting commission. The main underwriter will continue to pay the securities sold to the issuer. After completing the payment to the issuer and the underwriting commission to the syndicate members, the operation of the underwriting syndicate ends. The related parties will complete the remaining work such as:

- Liquidate all related contracts such as underwriting contracts, audit consulting contracts, etc.

- Complete payment in the guarantee group, payment to the issuing agents

onion.

- Report the results of the securities offering to the State Securities Commission as follows:

Sample in Appendix No. 06 attached to Circular No. 60/2004/TT-BTC and sent with a confirmation document from the bank where the blocked account is opened regarding the amount of money collected in the issuance.

- Register capital with competent authorities.

4.1.8 Income & risk in underwriting business

4.1.8.1 Income from underwriting operations

Highlights:

+ The issuance guarantee fee that the issuing organization must pay the underwriting organization is appropriate to the form of guarantee that the underwriting organization undertakes.

+ Depending on the agreement between the two parties (recorded in the preliminary guarantee contract or memorandum of understanding), the issuing organization may pay for the underwriting organization some costs such as legal consulting fees, document printing fees (provisional prospectus...) and presentation costs.

Submerged part:

+ Right to be selected as the underwriter for subsequent offerings.

+ Provide financial consulting services to issuers

+ Appoint people to participate in the board of directors of the issuing organization

+ Enjoy the warrants of the issuing organization

* Factors determining the income of underwriting organizations

- Form of issuance guarantee

+ With a guaranteed underwriting, the main income of the underwriter is the difference between the price at which the underwriter buys the securities from the issuer (and existing shareholders, if it is a joint offering) and the price at which they sell them to the public (Public Offering Price - POP). This fee is divided separately for each role and actual work as follows:

Underwriting syndicate manager fee. This is the management fee that the lead underwriter receives, usually accounting for 10-20% of the total underwriting fee.

Fees paid to members participating in the underwriting syndicate. This amount accounts for 20-30% of the total underwriting fee.

Selling group member fee. This is paid to the securities brokerage companies that contract to sell the securities of the issue directly to investors. This fee accounts for the remaining 50% of the total underwriting fee. If the underwriting group members sell themselves, they will receive this fee.

+ With the best effort underwriting form, the underwriter is not entitled to the difference between the purchase price and the selling price as mentioned above, because they do not commit to buying the issued securities but are only the stock sales agent. Therefore, the underwriter is only paid a brokerage commission by the issuing organization as a percentage of the value of the shares they sell.

+ With the form of minimum-maximum guarantee: the underwriting organization will receive the difference between the purchase price and the sale price with the minimum number of shares they commit to. In addition, with the number of shares they sell, they will

receive a brokerage commission as a percentage of the value of the shares they sell.

+ Issue size: In general, the larger the issue size, the lower the fee as a percentage of the issue value.

+ Risk level of the issuance: The higher the risk level of the issuance, the higher the fee to compensate the underwriter.

4.1.8.2 Risks in underwriting operations

The nature of the underwriting business is to create a mechanism to transfer and accept risks from the issuing organization to the underwriting organization. In other words, through the underwriting contract, the issuing organization purchases insurance for the success of the issuance.

With the form of underwriting under a firm commitment, the underwriting transaction can also be seen as a put option transaction with the exercise price being the amount of capital the issuing organization receives and the option execution fee being the discount (or the difference between the purchase price from the issuing organization and the POP price) that the underwriting organization receives.

Like other financial intermediaries, underwriting organizations always face capital risks, interest rate risks, liquidity risks, etc. However, while performing underwriting operations, underwriting organizations are also affected by the following two main risk groups:

- Price risk

Price risk or underwriting risk is the risk that an underwriter faces when the price of the securities they underwrite tends to decrease immediately after being issued.

Obviously, with the form of guaranteed issuance according to a certain commitment, the underwriting organization will suffer the most damage, because the loss or profit of the underwriting organization is calculated as follows:

Loss/profit = Committed CP purchase price x (Public sale price – purchase price)

There are many reasons for underwriting risks: external reasons such as a falling stock market, changes in investment trends, or inaccurate stock analysis and valuation leading to an underwriting price higher than the actual value of the stock.

Therefore, to reduce underwriting risks, especially for large-scale capital issuances, underwriting organizations often do not stand up to underwrite alone but often join together to form an underwriting consortium as a form of risk dispersion.

Legal risk

Legal risk is the risk that the underwriting organization suffers direct or indirect financial losses caused by disputes and litigation with partners during the transaction process.

Legal risks can be caused by poor contract drafting or by conducting transactions that do not comply with the law. During the underwriting process, the underwriter must simultaneously serve two groups of issuers with different goals: the issuer wants to issue shares at the highest price while investors want to buy shares at a low price (in the risk-return relationship).

If the underwriting organization does not comply with legal regulations and does not balance the interests of these two customer groups, they will easily encounter legal risks and lose potential customers in the future.

4.2 Some other operations

4.2.1 Margin lending

This is a common practice in developed stock markets. In emerging markets, however, it is restricted and only special financial institutions are allowed to provide loans.

Margin lending is a form of credit provided by a securities company to its customers to buy securities and use those securities as collateral for the loan. The customer only needs to deposit a portion, the remaining amount will be advanced by the securities company for payment. When the payment is due,

The customer must repay the full difference along with interest to the securities company. In case the customer cannot repay the debt, the company has the right to own the purchased securities.

The risk that a brokerage firm faces is that the collateral securities may decline to the point where their value is less than the value of the margin loan. Therefore, when granting margin loans, brokerage firms must have their own principles for ensuring capital recovery and avoiding excessive concentration in a particular client or type of securities.

4.2.2 Short selling

If you predict that the market trend in the near future is an upward trend, so the prices of some securities will increase, to make money in the stock market, you will find a way to buy those securities and when the prices of those securities increase, you will find the right time to sell them to make a profit. On the contrary, if you predict that the market trend in the near future is a downward trend and some securities will decrease in price. If you are holding those securities, you may find a way to sell them. On the contrary, if you do not hold these securities, you will not buy these securities. However, in addition to that usual choice, the stock markets of many countries also allow you to participate in short selling securities to expand business opportunities.

Short selling is selling securities that you do not actually own at the time of sale. By borrowing securities from securities companies to sell and then buying those securities to pay them back, you will make a profit if when you buy back those securities the price decreases as you expected.

Short selling, or selling something you do not actually own, may seem illegal, but there are many examples of short selling being widely accepted in normal business relationships. Similarly, short selling securities is the sale of securities that are not currently owned with a contract to deliver them back at a future date. If the securities are bought back at a lower price, the seller makes a profit. However, if the cost of buying back

increase, seller will lose

In fact, short selling stocks fits into the rational stock selection approach. If an investor, based on fundamental analysis of a company, believes that the stock is overvalued and the stock price is bound to fall, then considering shorting the stock is a reasonable strategy.

4.2.3 Payment Loan

It is a form of credit provided by a securities company to customers to buy securities and use those securities as collateral for the loan. Customers only need to deposit a portion, the remaining amount will be advanced by the securities company for payment. At the agreed deadline, the customer must repay the full difference along with interest to the securities company. In case the customer cannot repay the debt, the company has the right to own those securities.

The risk that may occur to the securities company is that the collateral securities may decline in value to the point where their value is lower than the value of the margin loan. Therefore, when granting margin loans, the securities company must have its own principles of ensuring capital recovery and avoiding excessive concentration on a certain customer or a certain type of securities.

4.2.4 Securities Pledged Lending

Securities companies can lend securities based on customers' requests. When customers need to borrow money based on collateral such as securities in their accounts. They will request to borrow capital by pledging listed securities deposited at the securities company. First, they are the loan procedures (loan request, short-term credit contract and securities pledge contract).

The securities company will freeze the pledged securities and carry out the procedures for the mortgage loan. After the loan application is approved, the securities company will notify the Securities Depository Center about the case of pledging securities to borrow money so that the center can carry out the procedures to transfer the securities to the mortgage account. If

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