Questions are being raised by the industry, particularly small investors in Colombo’s stockmarket, on private placements (PP) and ‘sell-down’ of shares done before an Initial Public Offering (IPO) at prices way below the IPO price by firms who aspire to go public, over its morality and fair dealing in this exercise.
Private placement or private investment capital is money invested in a company usually from private investors in the form of stocks and sometimes bonds. Here new shares are issued to raise cash, while a sell down such as what Expolanka and Free Lanka Capital Holdings (FLCH) did recently, is where directors sell some of their existing shares to raise cash. All this happens generally before the stock is listed.
The Securities and Exchange Commission (SEC) in late February amended the rule of the 1-year lock-in period for trading in shares which are purchased through a PP after that particular firm goes public in an IPO. The earlier SEC rule said that anyone who participates in a PP after March 1 of this year cannot trade their shares for one year in the company after its IPO, but this date was brought forward to February 7, which is the date that the SEC had arrived at this decision. This move by the regulator to stop private equity investors from trading for a year is to prevent speculative investors from subscribing to private placements with the intension of cashing out during the post IPO trading.
An SEC source said that this prevents High Networth Investors (HNWI) from cashing in on their gains as soon as the company starts trading after the IPO. He said these HNWI are promised a ‘sizeable’ return to them (double or at times triple the return) after a company is listed.
But many investors argue that the regulators should look at ‘sell downs’ as well which give an unfair edge to the big ‘guys’ who invest in them. “There definitely is a loophole in the law as in recent times sell-downs have become increasingly popular.
The SEC should extend this rule to sell-downs as well because big corporates participating in them are bound to make a killing on the IPO opening day,” an investor told the Business Times.
He complained that this is the case with the Expolanka IPO announced on Tuesday. The sell-down price is Rs 6, while the IPO is priced at Rs 14, which is 113% difference. “The FLCH’s sell-down price was Rs 4.70 and the IPO was priced at Rs 5, which is comparatively small.
??? The FLCH escaped the lock-in rule as PP was before the rule was enforced. ????
With Expolanka, this issue has escalated as its price difference is massive by any standard,” the investor explained. He said that the magnitude and the scale of the price difference are causing great concern. He said that the risk here is that those who got shares in the sell-down can even dump a few million at around Rs 7 or Rs 8 and destroy the share price so that they can easily collect more and more at that same price.
Stockbrokers say that investors are now focusing on the sell-down and the IPO price of Expolanka and not whether it’s a good share. “This may be a decent share to invest but what many are concentrating is this price disparity. Attention has deviated from the merits of this firm to the price discrepancy,” a stockbroker said.
Merit based regulation
According to the SEC the 1-year lock-in-period for PP was brought in as it appeared to them that many were misusing the PP. “SEC attention has been drawn to this and the concerns of the related parties,” the SEC source said. However, he pointed out that the sell-down price at Rs 6 was disclosed by Expolanka and that SEC is only carrying out disclosure based regulation. “The moment all these rules come, not many firms will want to list,” he said.
But investors say that the reasons to extend the rules to sell-downs are the same. “It’s the same thing. The HNWIs participating in the PP are also promised a sizeable return on the opening day of the IPO and this will bring the market down. This is why these rules need to be extended," another small investor pointed out. He said many small investors aren’t aware of what a sell-down is. Some still think it’s a PP. When the SEC and entire industry is promoting IPOs while encouraging people to participate in them, it’s a duty to make the investors aware of the similarities in a PP and a sell down, he added.