PSE seeks to adjust LSI allocation in IPOs

By Keren Concepcion G. Valmonte,  Reporter

THE Philippine Stock Exchange (PSE) is considering adjusting the allocation of shares for local small investors (LSIs) in initial public offerings (IPO), as well as mandating LSI allotments in follow-on offerings (FOO).

In a consultation paper uploaded on the PSE website, the bourse operator said it is proposing to tweak the percentage of the allocation to LSIs in IPOs to not less than 5% but not more than 10% of the entire offer, depending on the size of the offering.

Under Article 3, Part F of the PSE’s Consolidated Listing and Disclosure Rules, companies going public are currently required to have an LSI allocation of 10%.

“However, the Exchange has noted that in IPOs conducted over the last two years, the total LSI take-up, in terms of value, was only 14.45% of the 10% LSI allocation,” the PSE said.

It noted that in the case of big IPOs, “a large portion of the LSI shares may end up being unsubscribed and taken up by the underwriter.”

“Aside from the financial impact on the underwriter, such a situation may also have an adverse effect on the stock because the disposition by the underwriter of a large number of offer shares post-IPO may cause the stock price to decline,” the PSE said.

“On the other hand, retention by the underwriter of a big block of IPO shares may negatively impact the liquidity of the stock.”

However, the PSE will be keeping its “clawback mechanism” rule. This allows companies to increase the shares allocated for small investors by 5% if the initial LSI offer is oversubscribed by five times or more.

“Relaxing the requirement could help the local small investors receive a more equitable distribution and bigger chance to participate in IPOs and FOOs,” Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in a Viber message on Tuesday.

Mr. Limlingan said amending the rule will also “give more flexibility to the underwriters in distributing the shares depending [on] where the demand is stronger.”

Also, the PSE wants to make LSI allocation mandatory in follow-on offerings, with not less than 5% but not more than 10% of the total offer shares allotted for small investors.

“To ensure equitable distribution of shares and ensure LSI participation, the Exchange proposes to make LSI allocation mandatory in both IPOs and follow-on offerings,” it said.

Meanwhile, the PSE is also proposing a lock-up rule, which would apply to companies conducting follow-on offerings and to firms listing by way of introduction or through backdoor listings.

“The objective of the lock-up rule is to prevent stockholders availing of shares at a subscription price lower than that offered to IPO investors from immediately flipping their shares in order to take advantage of the discount, to the detriment of the IPO investors,” the PSE said.

The PSE also hopes to protect those investing in FOO shares.

“Lock-up periods would be able to send signals to shareholders entering that they believe in the longer-term prospects of the company,” Mr. Limlingan said.

Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort said the proposed rules are an effort to further protect “the interest of retail investors.”

“[This is] to encourage greater participation of the investing public through additional safeguards or checks-and-balance versus undue advantage or potential abuses by other investor groups, whether or not intended or deliberate at times,” Mr. Ricafort said in a separate Viber message.