How Morgan Stanley sold Safaricom IPO shares to foreigners on the cheap

The report by the Controller and Auditor General also says that the book-building process conducted by Morgan Stanley did not achieve its objective of bringing in investors with a long-term approach to investing, who would have been expected to stabilise the Safaricom share price.

Indeed, the prospectus specifically indicated that Morgan Stanley was to “build a book of demand consisting of a mix of investors who are likely to be long-term holders of the securities.”

But the investigation has revealed that the foreign investors who were allotted shares by Morgan Stanley were speculators and short-term investors.

The report adds that it is the speculative behaviour of these investors that has caused the fall in the price of the share — leading to the disappointment and depressed demand that has become a permanent characteristic in the after-trading of the Safaricom share.

It says that the information provided to the investigation by the Nairobi Stock Exchange on trading patterns of foreign investors between January and May 2008 shows that before the Safaricom IPO, foreign investors were net buyers of stocks on the local bourse.

But in June and July 2008, immediately after the listing of the Safaricom shares, the situation changed.

Analysing the trends, the investigation found that between January and May last year, foreign purchases were 66.7 per cent against sales of 33 per cent on total foreign trading, with an average purchase value of Sh1 billion ($13 million) against average sales of Sh500 million ($6.5 million) per month over the same period.

The report says that, going by the trends between January and May, and taking into consideration the total foreign trading in June and July, it follows that trading in the Safaricom share accounted for purchases of approximately Sh1.7 billion ($22 million) in June and Sh2.2 billion ($28.5 million) in July.

This is against sales of Sh6.2 billion ($80.5 million) in June and Sh3.2 billion ($41.5 million) in July.

The Controller and Auditor General has also questioned the manner in which the contract to place shares for foreign investors was awarded, charging that it was single-sourced.

Initially, Morgan Stanley came on the scene as a transaction adviser in partnership with local investment bank Dyer & Blair.

This group won the bid after quoting a paltry Sh100 ($1.30) for the job.

The report says that on July 5, 2007, Dyer & Blair wrote to the Treasury seeking to introduce an amendment to the contract to include a provision saying that a separate agreement would be entered into for international placement.

“The section introduced by Dyer & Blair was exploited to give Morgan Stanley the exclusive right to be the authorised international selling agent, the sole global co-ordinator, and sole book runner for international placement,” says the report.

Signed on May 6, 2007, the contract provided for commissions of 1.5 per cent of the value of the shares placed by Morgan Stanley.