CMA seeks to overhaul book building process

The Capital Markets Authority plans to lure more investors to the stock exchange with plans to overhaul the process for listing in a move that will ensure they get the best value for shares bought.

CMA will amend clauses to be used by transaction advisors which wish to use the book building process— a procedure of generating, capturing, and recording investor demand for shares to a select group of investors during an initial public offering (IPO) or a bond issue in order to establish optimum demand and prices for shares to ensure the success of an offer.

The market regulator —through an advert—signalled its intentions to overhaul the book building process with the hope of ensuring that investors and issuance of shares get a fair value on their investment.

“The Authority is hereby proposing to put in place an appropriate regulatory framework to guide future book building processes to ensure adequate transparency of such processes in the interest of promoting a more vibrant capital market,” Stella Kilonzo, the chief executive of CMA, said in an interview.

“This process of establishing the level of demand at different potential prices allows an issuer to avoid under or over pricing an offer by identifying the highest price at which the most desirable range of investors will be able to participate to the fullest extent in the offer.”

The CMA’s move to regulate book building comes in the wake of a government report that issued a stinging criticism in the manner the process was used during the Safaricom IPO, arguing that the government did not get value on its investment.

The Government sold a 25 per cent stake in the mobile telephony firm in the first half of 2008.

The report by the Controller and Auditor General found that underbidding by foreign investors cost the government Sh1 billion, arguing the price discovered by the book runners, Morgan Stanley who were in the consortium led by Dyer & Blair, of Sh5.50 a share was undervalued.

“Book building enables issuers to know where the optimum pricing is and therefore realise value,” said Eric Musau, an analyst with Renaissance Capital Investment Bank, adding that the pricing mismatch has in part contributed to the volatility in share prices soon after their listing.

Earlier attempt to use the method during the KenGen IPO faltered under intense opposition from the broking fraternity and CMA on arguments that it would have locked out the small investors from the offer.

CMA’s quest to rewrite the book building rules comes as the government prepares to sell part of its shareholding in about 26 State-owned firms in an effort to support its expanding national budget.

The sale of East Africa Portland Cement, KenGen, National Bank of Kenya and Kenya Wines Agencies Limited (Kwal) are set to happen this year with the government having picked transaction advisers for some of the offers.

Other firms planned for sale are national fuel distributor Kenya Pipeline Company (KPC), milk processor, New Kenya Cooperative Creameries (New KCC), Kenya Meat Commission (KMC) and a stake of the Kenya Ports Authority (KPA).

State hotels such Karbarnet, Golf and Sunset hotels, Mt Elgon Lodge, Kenya Safari Lodge, and the hotels under Kenya Tourism Development Corporation (KTDC)—International Hotels, Kenya Hotels, Mountain Lodge — are also on the list.