Friday, March 12, 2010
Raigam Wayamba Salterns Limited – Initial Public Offering
the salterns of Puttlam salt with the new wind mills to be opened shortly
I went to the launch of the IPO shares of the above last evening at the Taj Samudra which was attended by the press and potential investor advisers and was packed. The event befitted a Rs2Billion launch as opposed to a Rs 200M launch which it was. This presents a huge problem.
As an advisor to potential investors to this offering what is it that I can say? If any of the past IPO’s is anything to go by as a marker, the share issue is going to be oversubscribed by a factor of 10. This assumption is based on a lot of money available, not earning much, chasing too few shares. This will present an allocation problem, as the small retail investor will not apply for future IPOs if he is not given at least 5,000 shares. If he cannot make Rs5000 he would not bother taking the risk in applying for 5,000 shares by investing Rs12,500. If every one applying for up to 10,000 shares is given at least 5,000 then all the shares would be allotted with none for the institutional investors.
If that is the case, institutional investors will not apply in future, especially if the money raised is cashed and returned 4weeks later. No one will want to keep money tied up for so long. The company therefore should have made a commitment to only cash the checks once the allocation is made and the balance amount immediately remitted back to the applicant.
Due to this quandary one of two things is likely to occur. Advisers may tell retail clients (generally small clients) not to bother to apply tying up their money for a small chance of getting a few shares, which means that even if the shares open at a Rs1 premium, there is very little money that can be made. Institutional clients who value the time value of money are unlikely to invest if they are unable to get a reasonable allocation, and the advisers will also be in a fix as to how to advise their clients, because the client may be able to make more money just trading in the market without applying for these shares.
It is therefore an exercise of a very delicate nature to determine how this issue will be viewed and therefore subscribed. The very goose that lays the golden egg may be persuaded not to invest as the likelihood of getting an allocation is small given the perceived interest for the IPO at the event. It will be disastrous for the company if this is the case, as the IPO would have succeeded if they wanted to raise Rs1B.
The moral of the story is the IPO should befit its hype and in this instant the hype befitted a Rs1B offering and not Rs200M. They could have raised the Rs200M by merely placing the shares amongst 10 institutions instead, saving Rs16M in fees.