Business Daily (Nairobi)
20 April 2008
editorial
Nairobi — In what has become the latest twist in Safaricom's long journey to becoming a public company, the Capital Markets Authority (CMA) last Friday wrote to investment banks making an important clarification on the rules guiding the sale of shares in the primary market.
The letter, written by CMA's acting chief executive Stella Kilonzo, tackles the very critical matter of the sale of shares in the Qualified Institutional Investors' (QII) segment of the market.
It basically prohibits investment banks from buying shares in their own names for the benefit of their clients in the ongoing Safaricom IPO unless they are licensed to run collective investment schemes (CISs).
In the Kenyan capital markets, the QII segment is a recent phenomenon that was mainly borne out of the share allocation crisis that transaction managers faced in the heavily oversubscribed KenGen IPO of May 2006.
Failure to segment the market during the KenGen sale saw the big investors - many of them fund managers with billions of investor funds in their vaults - get an equal number of shares with the retail investors.
This allocation criteria was particularly seen to be inappropriate as it exposed the listed company's share price to a heavy fluctuation driven by the speculative tendencies of the retail investors.
The QII segment of the market is ordinarily made up of licensed collective investment schemes, investment banks, retirement benefit schemes, and life insurance companies, whose presence as shareholders in any listed firm is thought to be critical to the stability of the share price.
During IPOs, players in this segment of the market are not only shielded from competition from retail investors but also have the privilege of not being required to pay upfront for the shares they have applied for and only write cheques for shares that are allocated to them.
Though clearly aimed at tackling a problem in the market, creation of this new category of investors has not been without its pitfalls.
This newspaper was among the many observers who questioned the inclusion of investment banks in this club of investors given their role in the market as mediators for share purchase by retail investors.
Even more important was the fact that inclusion of investment banks in this category of investors was done without any safeguards against possible use of this window by insiders to buy shares for themselves and their associates unencumbered by ongoings in the retail segment of the market.
On the face of it, this appears to be what the CMA chief executive was aiming at in her letter. Yet a close look at the letter raises a number of queries.
Take for example the order that only investment banks with CMA approved collective investment vehicles can buy the shares as QIIs.
The list provided by the regulator in response to an inquiry by one of the players offers an interesting reading.
It lists a number of investment banks as having CMA approved unit trusts without any indication as to when they were licensed or whether this line of business, if licensed, is operational or just exists on paper.
Then there is the unresolved matter of how the CMA will ensure that those who qualify even under these additional rules, will only buy shares they need for their CIV line of business and will not abuse this window to serve personal interests of owners or use investor funds from other lines of their business to buy shares.
Most important is the question as to why the regulator saw it fit to make such an important clarification this late into the Safaricom sale - knowing very well the problems it is likely to create for many investment banks who are holding billions of shillings from high net worth investors hoping to buy shares on their behalf using the QII window.
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