Financial Times

Allegations fly amid rush for LIOC shares
The hugely successful initial public offer by Lanka Indian Oil Corp (LIOC) got embroiled in controversy last week with some investors alleging the company had not allotted shares strictly in accordance with the prospectus.

But LIOC dismissed the allegations saying it had made the allotment according to the prospectus and that the criticism was based on misinformation by disgruntled applicants who did not get all the shares they asked for.

The unprecedented response by investors to the IPO also created a temporary shortage of funds in the inter-bank money market as some Rs 30 billion in applications was locked up in Citibank, the bankers to the issue.

The Sunday Times FT learns that stock market regulators had received complaints that LIOC had not allotted shares strictly in accordance with the prospectus and that they plan to re-examine the prospectus to see whether there had been any ambiguities relating to share allotments.

LIOC managing director M. Nageswaran said the company had stuck by the prospectus which gave first priority to employees, second to dealers, and third to retail investors. LIOC announced that according to the priority allotment, its employees were granted their full applications up to a limit of 2,000 shares while dealers were also allotted in full up to a cap of 25,000 shares.

"We have been extremely fair in the allotment," Nageswaran said. "We have completely satisfied retail investors - 16,000 retail investors who asked for up to 1,000 shares being given in full the shares they applied for, out of a total of 34,000 applicants. This shows that we are pro-poor, pro-small investor." He said the complaints over the allotment were overblown with "certain people purposely misleading investors by saying priority means full allotment. Priority allotment does not mean full allotment."

The IPO is the island's biggest so far and will make Lanka IOC the fourth-biggest stock on the Colombo bourse when it starts trading later this month. The shares were sought after as investors expect LIOC to make good profits with the petroleum fuel pricing formula guaranteeing a profit margin and the company enjoying a 10-year tax holiday and duty free imports of capital goods.

Deva Ellepola of HNB Stockbrokers and former head of the stock brokers association said the unprecedented success of the IPO was a "huge vote of confidence in the capital markets." He said it showed there was "a good appetite for a good issue, even though we say we're a small market."

But he warned that corporate governance must be monitored closely and the rights of minority shareholders looked after. "Otherwise there could be a loss of confidence in the stock market." Ellepola said the manner in which LIOC had allocated shares to foreigners was not clear with no clear definition of how they had been categorised into large scale and others.

He said local corporate investors had expected a better allocation but acknowledged that LIOC would have had a tough time in making the allotment and keeping everyone satisfied given the unprecedented response to the IPO.

Colombo Stock Exchange director general Hiran Mendis said the CSE got only five telephone calls and two letters complaining about the allotment out of the thousands of people who applied for the IPO. It was obligatory for the company to stick by the prospectus.

"If any investors feels the allotment has been unfair he or she should take it up with firm. The CSE does not approve the allotment," Mendis said. Meanwhile, money market dealers said the success of the IPO had created a shortage of money which drove inter-bank rates to 10 percent from the usual 8-8.5 percent.

Some Rs 30 billion went to Citibank because of the LIOC subscription. "It's not that there's no money. Money is there but it's concentrated in one bank," said a bank dealer. "Everybody is trying to borrow from Citibank but they can't give everything they have as they can lend only up to their exposure limits."

He expects the shortage to ease this week when the refunds come. Nageswaran dismissed criticism LIOC had shown preference to foreign investors, pointing out that out of the total share issue of 133 million shares, 100 million shares have been given to Sri Lankan investors and only the balance 33 million to foreign investors.

This was done keeping in mind the country's need for foreign exchange. "Twenty-one new foreign investors have come in. If they do not get shares then they will not come again," Nageswaran said. Foreign funds were selected based on a lot of parameters such as their investment pattern and also on the advice of LIOC's investment advisors, Nageswaran said.

The issue for 133.3 million shares (a 25 percent stake), attracted Rs. 3.6 billion, priced at Rs. 27 a share. LIOC expects to use the funds to expand its retail fuel outlets, renovate the Trincomalee oil tank farm and build a lubricant plant.

The LIOC announcement said retail investors who applied for up to 10,000 shares would be allotted 1,000 shares plus 20 percent. Investors who applied for less than 10,000 shares each, and who are categorised as retail, have been allotted almost 35 percent of the total issue.

However, domestic funds, banks and other domestic institutions and individuals have been allotted less than 20 percent of the total issue while foreign investors have been given 25 percent. Big foreign investors have been given 22.75 percent of the amount they applied for with a cap of two million shares and others 10 percent of the shares applied for with a cap of 200,000 shares each.

Domestic funds, unit trusts and banks have been given 10 percent of the amount applied for with a cap of two million shares each and other domestic funds and individuals 10 percent of the amount applied for up to a maximum of 200,000 shares each.

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