Business Daily (Nairobi)
Washington Gikunju
20 April 2008
Nairobi — Thousands of rich investors who entrust brokers to secretly place orders for them in order to increase their chances of getting a higher allocation of shares during initial public offerings (IPOs), risk missing out on the Safaricom privatization.
This is after the securities regulator on Friday threatened to close this loophole that allowed stockbrokers to reward their rich clients with more shares than an ordinary Kenyan investor would get in an IPO that is characterised by huge demand such as Safaricom.
The only banks that will be exempt to exploit this loophole are those that are licensed to act as fund managers for collective investment schemes (CIS), which in Kenya are known as unit trusts.
However, the decision by the Capital Markets Authority (CMA) to enforce a rule that prohibits investment banks from buying shares in their own name for onward reallocation to their clients in a manner the stockbroker deems fit drew a lot of criticism at the weekend due to its timing.
It also raised issues of favouritism and conflicts of interest among the stockbrokers acting as lead transaction advisors (Dyer & Blair) and their competitors in the fight for Sh750 million that is up for grabs in the form of brokerage commissions from the Safaricom IPO.
Mr Jimnah Mbaru, who is owner and joint chief executive of Dyer & Blair, is also the chairman of Nairobi Stock Exchange.
In a new twist that comes just 72 hours to the closure of the IPO, acting CMA chief executive Stella Kilonzo sent out a letter warning investment banks that they will not be allowed to buy shares in their names unless they operate unit trusts. The letter has sent shockwaves to about eight investment banks that are said to be holding on to applications worth billions of shillings for their high net worth clients, who now risk missing out on the IPO allocations.
Among the lucky investment banks that also have licences to operate unit trusts and are therefore exempt from this rule include lead IPO transaction advisor Dyer and Blair, African Alliance, Suntra, Standard and CFC.
Suntra Investment Bank, Dyer and Blair and Standard investment banks all acquired their CIS licences from the CMA early this year, though only Suntra has formally launched its fund.
This means that the letter is specifically addressed to Renaissance, ApexAfrica, Kestrel Capital, Faida, NIC Capital, Drummond, Sterling and Afrika Investment Bank, who happen to be some of the more visible investment banks, but who do not have CIS licences.
However, the regulator's decision to create an entry barrier in the IPO with the unit trust rule has raised questions of favouritism over the inclusion of stockbrokers, who in spite of having received a CIS licence, have yet to launch their unit trusts.
Mr Jimnah Mbaru
According to Kenya's securities regulations for unit trusts, among the duties of a fund manager of a collective investment scheme is "publishing daily the price of shares in at least two daily newspapers of national circulation, published in the English language.
Provided that where a collective investment scheme is not dealing on a daily basis, there shall be at least one publication a month of the prices of shares in at least two daily newspapers of national circulation, at least three days before the dealing day, specifying therein the date of the dealing day.
There is no evidence that a number of players who will qualify under this provision have been complied with the above regulations.
Imposition of the CIS rule will block rivals from competing for higher share allocations as well as ability to borrow capital to fund their clients' transactions and eventually, diminish the amount of fees earned.
Ms Kilonzo warns in the letter that though investment banks are qualified institutional investors (QIIs), capital market regulations do not allow them to borrow money in excess of 40 per cent of their shareholders' funds. This means that they cannot buy shares worth more than 40 per cent of their capitalization in their own name.
Capitalization of local investment banks stand at between Sh30 million and Sh300 million - with the exception of Dyer & Blair, which reportedly has a capital base of Sh1 billion.
Wtih this level of capitalisation, Dyer & Blair can take a debt load of Sh400 million to buy shares
Investment banks in Kenya have been classified as Qualified Institutional Investors (QIIs) in recent initial public offerings (IPOs) - a move that has enabled them to buy loads of shares in their own names for re-allocation to their retail clients.
"Regulation 40 of the capital markets licensing requirements 2007 specifies the authorized functions of investment banks, which does not include acting as a fund manager, save as a fund manager for a registered collective investment scheme (CIS)," states Ms Kilonzo in the letter.
This rule exempts five investment banks that in addition to investment banking licences also run CMA approved 'collective investment schemes.'
Ms Kilonzo warns that all allocations of Safaricom shares to investment banks shall be examined to identify those that will buy shares in their name, but for the benefit of their clients.
"Upon allotment of the shares by Safaricom, the authority will examine the allocations to investment banks specifically to confirm compliance with capital market regulations...the level of capitalization shall be determined based on the audited accounts of investment banks as at December 31, 2007," says the letter.
Most investment bank managers affected by this rule argue that the letter is the handiwork of their competitors and is specifically targeted at destabilizing them just hours before closure of the offer.
Those who spoke to the Business Daily questioned why this law has never been enforced in past IPOs and most importantly why this letter was not sent to them at the beginning of the IPO.
Ms Kilonzo's circular seems to be a clarification issued as a follow up to a letter written by Dyer & Blair through its joint chief executive, Mr Mohammed Hassan, requesting for a list of the approved CIS, investment banks, fund managers and authorized depositories, who all fall under the category of QIIs in the IPO.
Ms Kilonzo sent the list to Mr Hassan on March 25, according to correspondence between the two seen by the Business Daily.
The list includes Dyer & Blair and Standard Investment Bank among operators of unit trusts, though their daily quotes do not appear in Kenya's national newspapers like other funds.
With over 1.7 million retail investors reported to have applied for Safaricom shares, a conservative estimate of 2,000 shares per applicant amounts to a total of 3.4 billion shares. This means that the retail pool reservation of 3.3 billion shares may be already oversubscribed. This appears to have shifted the battlefront to the QII pool, with a share reservation of 2.7 billion.
The Government is selling 10 billion shares (25 per cent) of its stake in Safaricom, through an IPO that has been billed as the region's biggest ever.
Thirty five per cent of the 10 billion shares on offer have been reserved for international investors, while 6.5 billion shares (65 per cent) have been reserved for local investors.
Out of the local investors' pool, 3.3 billion shares have been set aside for retail investors, 2.7 billion for QIIs while 260 million shares and 130 million shares have been set aside for Safaricom employees and authorized Safaricom dealers respectively.
If CMA enforces this rule, the affected investment banks argue that their only alternative would be to forward their clients' applications through the domestic retail pool, exposing them to possible massive refunds in the event that the pool is oversubscribed.
What is all this fuss about QII's?
Investment banks in Kenya have been classified as Qualified Institutional Investors (QIIs) in past initial public offerings (IPOs).
This classification has enabled them to buy loads of shares in their own names for onward allocation to their retail clients.
According to the Safaricom IPO prospectus, QIIs are identified as licensed collective investment schemes, investment banks, retirement benefit schemes, and life insurance companies.
The classification of applications for different investors has become hugely significant in recent IPOs as they determine the success of an investor getting a good chunk of shares applied for based on reservations for the respective categories.
Segmentation of applicaions for the various categories of applicants was necessitated by the outcome of the 2006 KenGen IPO that left institutional investors furious after they were allocated an equal number of shares with retail investors despite having applied for millions of shares.
Investor categorization has lately gained clout owing to the high demand for shares by small investors in IPOs that are coming to the market as part of government's privatisation programme. This has diminished the pool of shares available to big investors, forcing investment banks to cushion their high net worth clients from being forced to take back huge chunks of their money in refunds.
Other application categories in the ongoing IPO in addition to the QIIs include the international applicants, retail applicants, Safaricom employees and authorized Safaricom dealers.
Be the first to Write a Comment!
Copyright © 2008 Business Daily. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
