Dec 31, 2010 (LBO) - Sri Lankan investors who make big applications for shares with bank guarantees instead of cash in public issues are helping them appear overvalued to the untrained eye and can be risky for banks, analysts said.
Recent initial public offers on the Colombo bourse have seen massive over-subscriptions, with many big investors using bank guarantees to apply for shares.
"As little as five or ten percent collateral was used by some investors for bank guarantees when applying for IPO shares," a stock market analyst said.
Some big investors are reported to have applied for the entire issue using bank guarantees, with the bank liable in the unlikely event all shares applied for are given.
"Using only five percent collateral for grantees can be quite irregular and can also be rather risky in terms of conventional banking," the analyst said.
Stock brokers and analysts said the massive IPO over subscriptions helped by bank guarantee, gives the share an overall artificial hype, making its stock an 'in-demand' commodity, encouraging buying by retail and new investors.
However, officials in the market regulator, Securities and Exchange Commission said the oversubscriptions are merely the effects of supply and demand and that there is no regulation needed at this point.
"However, what happens is that when trading of the stock begins officially the big players sell early making a profit while the smaller investor holds on to his stock and by the time he decides to sell usually the stock price has dropped," an analyst said.
"Lots of small investors can be discouraged because of this scenario and can also get driven away from trading," he said.
The banking regulator, the Central Bank, sees the share transaction as too small to pose any systemic risk.
Central bank's deputy governor, Dharma Dheerasinghe says the regulator is not worried about bank guarantees for IPO applications as they are not massive transactions and that its bank supervision division is aware of what is going on.
"Earlier these investors were using cheques to do these transactions but because of cheque floats there were some complications and now bank guarantees are used instead."
Dheerasinghe said there is room for higher credit to the private sector from commercial banks and that the central bank wants to encourage investors to participate more actively in daily market trading.
Some 378 big players on the Colombo bourse applied for large quantities of shares in the recent Singer Finance (Lanka) IPO which was over-subscribed by a record 135 times, mostly using bank guarantees.
The Singer Finance IPO offered 26.7 million shares at 15 each.
Traders who applied for all the IPO shares by using the bank guarantee would have had to pay close to 500,000 rupees to the bank for the facility and get about 100,000 shares in return.
Brokers say that other recent IPOs have also been massively oversubscribed, again mostly with bank guarantees.
The Odel IPO in July was oversubscribed by 63 times with a record 22,686 applications received from the public with a cumulative value of over 15.9 billion rupees.
Some banks are reported to have earned about 30 million rupees from the Singer Finance IPO by issuing bank guarantees, analysts said.
source - www.lbo.lk
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