‘Strictly private’

The capital markets regulator the Securities and Exchange Commission (SEC) yesterday stepped in to discipline this time around the private placements business by slapping a new rule that will require investors participating in such issues to lock themselves for one year.

In a brief directive the SEC said that “if shares of any public company are allotted to any person within a period of one year prior to its listing on the Colombo Stock Exchange (CSE), the entire shares allotted during a period of one year prior to its listing shall be locked-in for a period of one year from the date of allotment of such shares.

This directive will be applicable for the companies who will be listed on the CSE on or after 1 April 2011.”
This move had been approved by the SEC Commissioners at their last meeting held on 31 January.

Analysts said that the move by the SEC is following some recent private placements almost becoming a public issue similar to IPOs with a large number of investors being allotted shares.

Traditionally private placements are “strictly private” and in the past such issues involved only strategic investors with a medium to long-term view. “With some recent private placements encompassing as much as 800 investors, the SEC has got very concerned; hence the new rule,” analysts added.

Market sources explained that some speculative investors clamour for private placements to cash in during the post-IPO public trading and exit at a premium. The rationale behind SEC’s move appears to be that in such an event ordinary public investors are at a disadvantage as the process prior to the IPO had been unfair.

However other analysts tend to disagree. “It is a free market which a fair degree of understanding on the risks and reward. The SEC shouldn’t micro manage too much but focus on broader oversight and regulatory role,” they added.

Sources in investment banking industry said that usually private placements come with a shareholder agreement that specifies subscribers have to lock themselves for one or three years. “For the straight forward private placement industry and private equity investors the SEC move will not have a major negative impact,” they added.

Daily FT learns that at least in one recent private placement the SEC requested the top three investors to go for a voluntary lock-in.

Some of the recent successful private placements included the biggest ever worth Rs. 4.9 billion by Vallibel One Ltd, Rs. 1.9 billion by Expolanka Holdings, and Rs. 387.5  million by Union Bank, Rs. 1.5 billion by Browns Investments whilst there were also others last year such as Softlogic Holdings and Central Hospital.

As per the new rule entire shares allotted during period of one year prior to its listing on CSE on or after 1 April will be locked-in for a period of one year from the date of allotment of such shares. For example if shares were allotted on 1 February 2011 in a private placement and the Company is listed on CSE on 1 April, the lock in period is until 30 January, 2012 or if allotted on 30 May, 2010, the lock in period is until 30 April, 2011

Sources familiar with the SEC Act said that according to Section 28A of the SEC ACT, public companies in which shares are allotted to any person within a period of one year prior to listing do not qualify to list shares unless special approval is granted by the SEC for such listing. They said that the objective of Section 28A of the SEC Act was to avoid promoters from getting undue advantage over other investors by allocating shares initially (before the application is made for listing) at a lower price and selling the same at a higher price soon after the listing.

“The SEC’s concern appears to be the risk if one or few promoters exiting from the company soon after listing and a possible shift in the strategic direction of the company concerned threatening its stability” they opined.

It was also argued that some of these strategic investors appear by name in the IPO Prospectus which in turn gives credence to the investment case of such an IPO. However such investor confidence may be short lived if a promoters or strategic investors were to exit with a profit motive soon after the IPO. “The new rule will ensure there are no so called strategic but fly-by-night investors,” these sources emphasised.

Those supportive of the SEC’s new stand also said that the rule is enforced in several other international markets such as Singapore, Malaysia and India where promoters are locked in for a specific time period ranging from six months to one year as well as a phased out exit.

source - www.ft.lk