When everyone wins, there must be problem

DENWAY Investment and the $240 billion of hopeful investors' money its issue last week attracted continue to be the subject of controversy.

The subscription of 658 times the number of shares available to the public left many individual securities and banking figures gasping.

This phenomenon prompted the Government to get involved. Two separate investigations are under way.

The real problem is defining the problem. To use an analogy taken from the world of animal wildlife, it is said elephants are somewhat difficult creatures to describe to an individual who has never seen one before, but you definitely know one when you see one.

There is a consensus that the huge subscription levels caused by Sino-Hongkong stock exchange listings are ridiculous, but no one can define why. This is because theoretically everyone wins.

The underwriters win because the stocks are off their books; the brokers win because there is heavy commission-generating trading in these issues; and the banks probably love the circumstance as the lending that goes on to back applications is huge and highly lucrative.

Of course those lucky investors who get shares are happy because they see the value of their shares double or treble in the first few days of trading.

Arguably, the losers are institutional investors, who in normal circumstances should be the strong hands in a new listing, underpinning the issue.

They can find themselves squeezed out of the process and are forced to go into the market after listing to buy the stocks at higher price-earnings ratios, thus making new listing stock less attractive.

The other loser is the company, which has been theoretically robbed of the opportunity to raise hundreds of millions of dollars more in the market.

Yet the imperative for many of the controlling shareholders in this type of new listing is to get the issue away with a rip-roaring success, leaving little chance of a flop, which would dominate investor memories of the stock for quite a number of years.

Politically, Beijing, if it is consulted at all, is also very keen to see these types of issue get clean away with lots of enthusiasm attached.

To use another analogy, this is like describing a perpetual motion machine to someone. Even better, it looks like the financial market's answer to the discovery of cold fusion, which was purported to be a way of providing an infinite supplying of energy from common cold sea water.

There has to be a rub somewhere. Precisely where is what the Government is going to try to find out.

But for the Hongkong Government to interfere in the pricing or tamper with the listing mechanism would be inappropriate.

Peregrine Capital, the sponsor behind Denway, is now for its part actively exploring a change of issue method combining B share and C share (mainland enterprise stock authorised for distribution in Hongkong) issues via a sale by tender offer.

This is a tried and tested issue method in the West, but one that is not commonly used in equity issues.

It will still allow market forces to keep working, but it will help institutional investors stay in the ring and help merchant bankers price these types of issue more accurately by tender. - GARETH HEWETT