CSE to change preferential IPO share allotments

Heavy retailer investor displeasure over recent allotments in initial public offerings (IPOs) saw the Colombo Stock Exchange ( CSE) revisiting the preferential allotment rules for these listings, officials said.

“We are looking into this area; the changes will have to go through a stakeholder consultative process, Rajeeva Bandaranaike, CEO CSE told the Business Times.

Viraj Dayaratna, Chairman Securities and Exchange ( SEC) said the SEC recommended redrafting the rules for preferential allotments to the CSE. "Right now the interpretation for preferentially share allotments is broad. Redrafting of these rules will see more specifications in allotting shares to be included in the prospectus," he told the Business Times.

The IPO of Capital Alliance Ltd which was oversubscribed on its official opening day on November 25 took some dissension from retailers saying the allotments were not fair. Subsequently, almost all public listings were taken to task by investors, forcing the regulator and the market operator to take action as the retailers did not get their expected allotments. It exacerbated after Hela Clothing IPO’s 50 per cent allotment to preferred investors. Retailers who applied upto Rs. 200,000 were only allocated a maximum of 3,800 shares, down sharply from previous IPOs, to cater to increased preferential allotment to 'selected investors'. Hela had 17,765 retail applicants.

Questions were raised on IPOs having preferential allotments to selected investors with retailers saying they felt cheated that their allotments have been overlooked in place of larger shareholders and high net-worth individuals.

Now the CSE has mandatory allocations giving retailers 40 per cent of the shares and 10 per cent is allocated to unit trusts in IPO that have raised less than Rs. 3 billion. For the rest of the investors, there aren't any rules on the allotment.

The most recent Hela Clothing IPO was called an Initial Private Offer by highly displeased retail investors who pointed out that half of the issue was allotted on a preferential basis to unnamed 'eligible' investors with no lock- in period. One investor pointed out that this is like a private placement within a public issue. “Why are the companies going public if they want to give - now as much as 50 per cent - in preferential allotments to those who the rest of the investors are unaware of ?” He categorically pointed out that while this is not illegal, it is immoral and unethical. He further stated that retail investors are taken for a ride. “Are the regulator and the market operator here to look after fat cats only?” he asked saying that once the public issue starts trading in the secondary market the so- called high net- worth traders will sell out and the small- time retailers are left in the lurch.

What investment bankers point out is that before issuing the IPO a company must have some cornerstone investors which gives them certainty when the public issue opens.

But angry investors were asking pertinent questions such as name the investors? “The names and volumes of the high net-worth individuals are not disclosed by the companies. “The CSE is a disclosure- based market. Companies should declare those who got the preferential allotment,” one investor said.

"This practice of non-transparent selective IPO allotment has to end," one investor said on Twitter noting that lock- in should be imposed on those who get the bigger chunks so that they cannot sell as soon as the issue opens leaving the retailers ‘holding the baby’.