ISLAMABAD: Some powerful stockbrokers are manipulating the book building mechanism amid weak regulatory oversight of the Securities and Exchange Commission of Pakistan (SECP) to make billions overnight at the cost of small investors. The regulatory failure of SECP was evident during the recent controversial book building of a meat company Al Shaheer Corporation Limited. The company offered 18.75 million shares via book building to institutional and high net worth individuals (HNWI) at the floor price of Rs43 per share. But to the shock of market experts, the company managed the strike price of Rs95 for the share of Rs10. Normally during the book building process an upper cap is imposed at 30% higher than the floor price but in Al Shaheer case, the upper cap was conspicuously removed to the benefit of the big shareholders of the company who happen to be closely associated with SECP. One of the major shareholders of the company is a former chairman of the SECP whose former close associates are holding key positions in the commission. Book building is used in developed jurisdictions as price discovery mechanism but in Pakistan it is manipulated to arrive at a high price so that sponsors and others can subsequently offload their share at higher price besides fetching high premium. In the past couple of issues manipulation was quite obvious and at least in one case enquiry was also conducted by SECP and heavy penalties were imposed on CFO of the company involved. But in case of A-lshaheer all limits have been crossed. The experts are questioning whether it is fair for the common investor to be charged a premium of 85 per share?Al Shaheer is expected to offer 6.25m shares through an initial public offering (IPO) to the general public in a couple of weeks. The experts are concerned that the small investor who might subscribe to the issue at Rs95 per share might face heavy losses. “Now poor common investor will fall prey to this scam and in a couple of month this share will be trading around Rs30 or even lower,” said an insider. The experts believe SECP either deliberately looked the other way to benefit a top broker and a former chairman or they are responsible for criminal negligence in this case.Sources near the former chairman, however, rubbished this charge saying there are no associates of former chairman on key positions currently and if there is any, no one favoured the former chairman in this regard. When contacted by The News an SECP spokesman said Al Shaheer was not the first book building without a cap. Before Al Shaheer, another book building was also conducted without a cap. Imposition of the cap was hindering price discovery - the core objective of the book building process. “Under the capping regime, almost all the issuers approached SECP for relaxation from the upper limit which was set 30% higher than the floor price. In some cases this went up to 70% of the floor price. Most of these issuers were of the view that the price band regime is an obstacle in the way of fair price discovery. In addition to above, cap was leading to operational issues at the time of allocation if shares were subscribed at the maximum price. The above change has been brought about after discussion with market stakeholders, stock exchanges and policy board of the Commission,” he said. He added that capping of price has been discontinued and the same will be followed for future issues.When asked whether it was a fact that for Al Shaheer, the “upper cap” was Rs59.50 but so called HNWI jacked up the price of Rs95 he said: “No, in Al Shaheer case there was no cap. The book building of Al Shaheer has been conducted under the concept of floor price where corporate, financial institutions and individuals with minimum bid of one million rupees participated in the book building. When asked whether it was true that that the recent IPO of Al Shaheer Corporation Ltd was not fair and that SECP had failed to perform its duties in this regard he said the SECP neither approves the price of any IPO nor does it approve the offering method. “The issuer has the option to offer its shares through the book building method or through fixed price method. In case of book building, the issuer sets the minimum price called the floor price. The investors who can participate in the bidding process are not the retail investors as they are either institutions or high-net-worth individuals with minimum bid value of one million rupees,” he said. From such class of investors it is expected that they have the ability to do proper due diligence of the offered shares before making investment decision. The floor price given by the issuer is normally an indicative price below which the issuer does not accept the bids, he added. It is noteworthy to mention here that under the book building method, the price is decided by the market forces and not by the regulator. But the experts believe that SECP is misleading the public by saying that mechanism was not approved by regulator. It was duly approved. Although in book building price is determined by market it is the duty of regulator to ensure fair play. In this case it was determined by individuals and not by institutions. It is the duty of regulators to investigate why no upper cap was fixed and why no action has been taken by SECP. The SECP spokesman said the commission granted approval of prospectus of Al Shaheer Corporation Limited for issuance of 25 million ordinary shares, representing 27.31% of the total post-IPO paid up capital of the company, to the public. “The proposed issue was made through the book building process whereby 18,750,000 ordinary shares (75% of the total issue size) were offered to Institutional Investors and High Net worth Individual Investors (HNWIIs) at a floor price of PKR 43/- per share whereas the balance 25% of total issue size i.e., 6,250,000 ordinary shares will be offered to the general public at a strike price determined through the book building process,” he said adding that SECP does not approve the floor price which is set by the issuer. “In the instant case, the offer method selected by the issuer was book building and the floor price was also decided by the issuer. Since the offer is by way of book building therefore the strike price is determined by the market forces i.e. investors” he added. The regulatory failure of SECP was evident during the recent controversial book building of Al Shaheer Corporation Limited. It is interesting to note that SECP policy board finalised the book building rules on June 29 (yesterday) in the policy board meeting while SECP spokesperson last week claimed that Al Shaheer book building has been already approved by SECP. Furthermore, Al Shaheer Corp was given approval to float 13mn shares initially by KSE but at the last moment it allowed the company to float 25mn shares. In addition, the maximum price was fixed at 55.90 but with the change of float it was also removed and as a result strike price came out at 95. Akd & Next Capital was the book runner and lead manager of the issue.
