Calls for transparency get louder over IPO share allocations

• Hela Apparel allocates nearly 50% of IPO shares to undisclosed eligible investors
• Practice isn't confined to only Hela Apparel but nearly every IPO that preceded it
• Market participants call for disclosure of such shareholders and mandatory lock-in period post IPO
• Corporate governance activists call for amendments to existing rules or formation of new rules, if current rules insufficient

As a large amount of the initial public offering (IPO) shares of companies get often allocated to so-called undisclosed eligible investors, market participants are calling for the disclosure of such shareholders in a bid to bring in transparency to the whole IPO process.

In addition, the corporate governance activists are calling for a mandatory lock-in period for such investors, to protect the interest of the minority shareholders post an IPO.

The matter particularly became a main talking point after the Colombo Stock Exchange (CSE) saw an influx of companies seeking listings, raising over record Rs.12 billion in capital, while the share allocations to these so-called selected investors increasingly became a gray area.

The matter gained renewed interest and cause for concerns among market participants when Hela Apparel Holdings Limited yesterday disclosed its IPO share allocation, of which an outsize 49.687 percent of the total number of IPO shares was preferentially allotted “to certain eligible investors (e.g. foreign/local institutional investors, family offices and other high-net-worth individuals) identified by the board.

In comparison, the mom-and-pop investors coming under the retail individual category were allocated just 15.5 percent of the offered shares, while another 10 percent and 7.5 percent of the offered shares were allocated to unit trust investors and group investors and directors, respectively.

Hela Apparel raised Rs.4.0 billion, offering a 20.5 percent stake or 267.1 million shares of the company, at Rs.15 a share.

While the allocation in anyway does not contravene or violate either the IPO prospectus or CSE Listing Rules, where the issuer has the right to determine the allocation of IPO shares in consultation with the CSE prior to the IPO, what has continuously perturbed market participants was the non-disclosure of the identities of the so-called selected or eligible investors, who typically get preference over other categories of investors.

It is widely common for companies opting to go public to have strategic or cornerstone investors, who agree to buy or subscribe to a minimum amount of shares in advance of the formal roadshow to court investors.

However, according to market participants, what makes the current arrangement shady is the absence of any disclosure or disclosure requirement by the CSE.

Further, it also appears that Sri Lanka’s capital market also lacks the legal provision to mandate a minimum lock-in period for the shares held by the eligible investors.

The absence of which could put the interest of the minority shareholders at significant peril in the event of these selected/eligible investors deciding to dilute their positions soon after the IPO shares hit the market.

Hence, strong lobbying is being directed towards the CSE as well as the Securities and Exchange Commission (SEC) to amend the Listing Rules, if not bring new rules to close these apparent loopholes in the IPO process and to provide adequate regulatory oversight.