Business Times

Of private placements and share pricing

The expansion of the Colombo Stock Exchange (CSE) in the post-war period has at times seen frenzied-type trading and brought its share of pitfalls in the last few months. Given the bizarre nature of trades that have taken place in a few instances reaching dizzy heights and forcing, at times, the intervention of the Securities & Exchange Commission (SEC), the market is never far from either a crash or a crisis driving investors and regulators round the bend.

The SEC has been stepping up the ante bringing in new rules and strengthening old ones in the face of criticism that this is becoming an over-regulated market. On the flip side, others say that there still isn’t enough safeguards from sly operators (including some directors) who manipulate the market, bringing it down or jacking it up to suit their choice.

Regulators all over the world face this criticism which is not, often, fair. The same, one could argue, applies to the latest issue that has been dogging the market for the past two weeks – the Expolanka public offer due to open on May 12.

Criticism is being leveled at the company and its advisors over the pricing of the issue (Rs 14 per share) at more than twice the price of a private placement of old shares (Rs 6) generally called a ‘sell-down’ just five months back (December).

In the first place why on earth should an investor buy new stock that is more than double the price of what it was just a few months back when it is more likely that the Rs 6 per share-stock could get unloaded in the market on the opening day itself, at a premium (say Rs 8 or Rs 10 per share). The ‘chosen’ few by the company stand to make a killing if they sell and pre-IPO who knows what they would do? For example this private stock of 300 million shares is already trading in the ‘grey’ or unofficial market in some cases at over Rs 20 per share!

Questions are also being raised about a conflict of interest by John Keells Holdings (JKH), the lead manager and financial advisors to the issue who also purchased a large stock in the private placement, which it says was at the request of Expolanka. They too get a head start though the company says it won’t sell and is there for the long haul, not to make a quick buck. (Our story on the previous pages explains the positions of Expolanka and JKH).

The lines however in the drama that has unfolded are blurred and confusion reigns in the market. It’s not as easy as black and white because the fact remains that the company has followed SEC rules ‘to the letter’ in so far as having a ‘sell-down” and providing full disclosure in the prospectus with a ‘small’ problem however.

Among the shares sold earlier, there are 130 million shares that have been sold to a category called ‘others’. While the rest of the new shareholders have been named in the prospectus, this category of shareholders remains a secret or will it? These shareholders should have also been disclosed, given the issues confronting in this IPO.

The recent Free Lanka Capital IPO also had a private placement earlier priced at Rs 4.70 while the IPO price was Rs 5 – not much of a premium and little to grumble about though small retailers are complaining that the share has not taken off and affects profit-taking.

The Expolanka issue however has this huge premium with the IPO being priced at more than double its ‘sell-down’ price and then the questions start flowing. This week listed stock HNB announced a private placement pricing a share at not less that Rs 235 per share while the stock was trading at Rs 227 on Friday. No one can grumble over this pricing because it is higher than the market rate.

One of the issues in the new Companies Act is now emerging – replacement of the par value with free pricing. Earlier every share was priced at what was called the par value whereas now it is open sesame and free pricing.

While the company and its promoters have acted ‘within’ the law in pricing the new stock, the issue of moral grounds, ethics and fair-play is at the centre of the debate.

Sri Lankan Corporates have in recent years taken a moral high ground and wax eloquence over social responsibility, ethics, governance and fall over each to be the ‘goody-goody’ in society. Annual reports are filled with these pronouncements in the name of helping society, etc. Seminars are held extolling the virtues of good governance and how directors should ‘behave’. But is this really practised on the ground?

On moral grounds, the directors of the company have taken a hit which has as a result caused a lot of confusion and confounded, particularly the retail investors. However here’s a piece of advice for retail investors: Retailers who follow the herd mentality should not be ‘fools to rush in where angels fear to tread’.

If in the pre-war period it was the foreigners who dominated the market, in recent years retailers have taken over and look for a fast buck and quick profits. They know little about fundamentals, don’t study the fundamentals of a company, its track record and are unable to make an informed choice on investments. Some of them are even unaware of what a ‘sell-down’ is.

Their tactic is follow the herd, buy small lots and moan and groan when a new stock doesn’t gain on opening day trades. There is simply no calculated risk in this kind of investment. Retailers need to slow down and at least invest 50 % of their stock for long term gains like other matured investors and institutional buyers. Maybe they should look for investments in mutual funds to be safe.

Expolanka is a good company and has done extremely well. However the company should have been a little more circumspect in the decision-making on the pricing.

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