Saturday July 14, 2012
Getting retail investors into the market
A Question of Business
By P. GUNASEGARAM
A COUPLE of Thursday's news reports were interesting one said that the response for the initial public offer (IPO) of Khazanah Nasional-owned IHH Healthcare was great with the share price for the IPO set at RM2.80.
At the same time, there was another report saying that there are moves afoot to allow retail investors to invest directly in the bond market, a move when implemented will prove a great boon to them because they can simply bypass intermediaries to invest in that other investment besides shares bonds.
What's the connection between the two? It is this. While authorities are busy trying to attract retail investors into the bond market, retail investors are being almost completely shut off from the IPO market, which would discourage their participation in the overall share market as well.
To be fair, that is not the case just for IHH but has become a trend for IPOs of late with retail investors being systematically discriminated against by favouring institutions through a book-building process and obtaining cornerstone investors who agree to take large stakes with the proviso that they have a moratorium on selling for six months.
By the way, that 6-month moratorium may stop the share price tanking now, as Facebook shares did earlier, but what's to stop it tanking six months later, if it deserves to tank that is?
Thus, while retail investors are scrambling for a mere 1%-2% of the shares on offer, as much as 62% of offer shares are going to cornerstone investors and another large slice to institutions. And this small percentage given to retail investors attracts a huge over-subscription rate.
Furthermore, while institutions and cornerstone investors have access to information through direct briefings from company management and exclusive reports from research houses who have considerable access to company management, retail investors don't even have the benefit of a profit forecast in the IPO prospectus.
And finally, these IPOs, especially those which are higher quality, are given out to a large number of foreign institutions, begging the question of why this should be so when foreign participation in the market itself is just about 15%, according to some accounts.
In effect, the crowding out of retail investors out of IPOs and the asymmetric information by which they are discriminated against represents a major market unfairness that regulators should take note of and seek to rectify as soon as possible.
That this may be accepted practice in other markets should be no excuse. In the name of free markets and allowing market players free rein, a multitude of sins are often committed as is now well known.
Often in the name of free markets and independent action, market participants forget conveniently or otherwise that they owe an equal duty to all investors and everyone should be given an equal chance for a bite at the cherry. Anything else is clear discrimination.
Our own market regulators must have the independence of thought and the guts to act according to our own needs and aspirations and to ensure an orderly market, which is fair to all participants big or small, no matter what the practice elsewhere.
If a company wants to have an IPO and become a listed company, then everyone should have an equal chance at getting the shares at a particular price. The process is simple get in all commitments, whether retail or institutional, and allocate the shares through a ballot.
All companies should be required to have a profit forecast for three years if they are going for an IPO. Now, they “guide” others to the profit forecasts instead via briefings, a process which may well border on giving inside information to selected investors.
If as some contend, that US laws are likely to hold directors and companies too onerously responsible for forecasts, simply make sure the forecasts are reasonable and properly made. That way there will be no legal liability because everything was done above board and correctly. Or simply don't market in the US there is enough money elsewhere, often within Malaysia itself.
More importantly, such a move will require that the company clearly state its profit forecast and the basis for it in the prospectus, ensuring that everyone has equal access to the same information.
The company can be permitted to make one more open briefing to analysts, fund managers and the press, which briefing should be streamed live on the Internet to anyone interested and put on the company's website for anyone to access together with all presentation materials. And that's it after that until the IPO so that no one has informational advantage. How much fairer a process that will be!
With the existing situation, retail investors are virtually shut off from IPO investments in Malaysia, even though we have boasted of the second largest (Felda Global Ventures) and the third largest (IHH) in the world after Facebook.
That's sad. Retail investors once accounted for the lion's share of trading on Bursa Malaysia. Now it ranges from a still significant around a quarter to a third, no wonder because retail investors don't get a decent bite of the best shares.
But they have a lot of money as shown by their savings rate and the consumer demand, which is currently propping up the local economy but the systematic discrimination against them has contributed to the decline of their share of trading on the local bourse.
As one academic, G Sivalingam put it in an article in Singapore's Business Times earlier this year: “Individual investors are averse to active trading in the market given that they are risk-averse and also loss-averse. They are loss-averse in the sense that they may trade quickly to realise a gain but they will keep the equity or asset if it makes a loss, hoping that over time they can sell it for a profit and realise a gain.
“Bursa Malaysia then may have difficulty in increasing retail participation in the market because by and large individuals are risk-averse, loss-averse, are not “over-confident” and may be reluctant investors because of asymmetric information and a long history of insider trading and lax regulatory control and discipline of Bursa Malaysia.”
It's time market regulators realised this and levelled the playing field. Besides, encouraging informed retail participation can give more life and liquidity to the market because retail investors collectively have more funds they are prepared to put into the market than most institutions.
The man on the street can play a big role in the healthy development of markets if he is given a fair chance to do so instead of the odds being stacked high against him.
Independent consultant and writer P Gunasegaram says we must have the courage to go against the herd when we need to.