CSE: Small investors burn their fingers

by FS

“Will someone at the Securities and Exchange Commission of Sri Lanka (SEC) please explain the connection, difference or the similarity between Private Placement, Initial Public Offering (IPO) and Insider Trading with respect to the IPOs endorsed by the SEC recently?”

(June 19, Colombo, Sri Lanka Guardian)  This is not a plea from the newspaper but the contents of a letter we received from a reader who like many small investors has got walloped by the plethora of IPOs with private placements and different pricing for both. We would add to that: Sell-downs stock held by directors in private companies)

The Expolanka Holdings IPO is a good example. Criticised over the substantial difference in price; Sell down – Rs 6 per share; IPO – Rs 14 per share; some of those who bought into the sell-down stock said they were looking at the company from a long-term perspective and not planning to sell their stock when it opened for trading in the Colombo Stock Exchange (CSE). Company officials said they had also been assured by these shareholders that their stock won’t be sold as the market opens.

Unfortunately all these promises have been broken and the small investor - with no opportunity to take part in sell downs or private placements which are generally for institutions and high networth investors – bought into this stock at Rs 14 only to find that the price, after trading in the market has slumped to around Rs 12. Now who would sell it at Rs 12 to Rs 14? Certainly not those who paid Rs 14 for the stock but would be some of those ‘privileged’ investors of the sell down who made a killing from their purchase price of Rs 6. The sell down had 317 million shares while the IPO had just about half that quantity (172 million)!

Like many investors of the sell down who were unhappy with the criticism in the media about the pricing of the Expolanka IPO – in that it was unfair pricing -, Krishan Balendra, President –John Keells Capital also commented on the issue assuring that JKH will not sell its holding in Expolanka in the short term. JKH is one of the investors in the sell-down and also the financial advisor of the IPO. JKH must have kept to its promise but what about the others?

Now Balendra who follows in the footsteps of his illustrious father, Ken, who took John Keells Holdings to phenomenal heights as chairman of this conglomerate and as Chairman of the CSE, is in a unique position to bring some order into the market in conjuction with the Securities & Exchange Commission (SEC).

There have been many issues in the market, particularly the lack of disclosures and the shortfall in the regulatory mechanism in tackling some of these issues. For example this week some brokers brought to our notice transactions by a top investor cum whiz-kid in the ad industry.

According to Rule 36 of the Company Take-overs and Mergers Code 1995, as amended in 2003, “Any person, or persons acting in concert with such person, who acquire or hold ten per centum or more of the shares or voting rights of a company, shall report their holdings to such company, the Commission and the Stock Exchange within two market days of such acquisition.” This investor bought stakes of over 10% each in Panasian Power and People’s Merchant Bank which is perfectly in order but the transactions were much earlier and still no official disclosure (within two market days as required by law), has been made.

The market lost badly during the early part of the week and the week before but recovered on Friday. Small investors have been burning their fingers in the recent flurry of IPOs, particularly where there are private placements/sell downs at different prices, and this week lost badly in the Expolanka trades.

The SEC has stepped in to curb unfair advantage of the market through amendments to the provision permitting private placements/sell downs. Based on its own assessment and complaints, it brought in rules which bars investors of private placements to sell their stock once an IPO is launched, for a period of 12 months from the date from which the stock is purchased.

However some companies like Expolanka were exempt as their private share sales was a few weeks before the rule came into force. Thus such investors are within their legitimate right to sell their stock. However isn’t it unfair, unethical or unjust to others (who have access to stock only through an IPO - in this case a difference of Rs 12 between the private placement price and the IPO price)?

There is a serious need to look at the rules pertaining to private placements and sell downs particularly to ensure fairplay in the market. Disclosure provisions also need to be tightened up to ensure investors follow the rules and are rapped on the knuckles if they don’t do so. Justice must be swift.

The letter, referred to earlier, talks about Insider Trading. On one hand, private placement or sell down investors are privy to information that this stock would soon be listed through an IPO which in a listed company is information that the market should be aware of. On the flip-side however, being a private company, the rules of the CSE on insider trading does not apply.

However what about fairplay, justice and governance in a wider context? Without waiting for issues to surface and crises to happen, the regulator along with the CSE has to be ‘on the ball’, be pro-active and initiate action to pre-empt such events rather than wait for them to happen. With a new team at the CSE led by its youngest ever chairman (Krishan), one hopes the stockmarket would be a place where investors are assured not only of a good return but justice and fairplay.