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

International Investment banker Morgan Stanley, which presided over the Safaricom IPO, has been heavily criticised in a new government investigation into the manner in which it allocated shares to foreign investors in East Africa’s largest share flotation.

The investigation, conducted by the Office of the Controller and Auditor General, says the government may have lost up to Sh1 billion ($13 million) because of the subjective and opaque methods that Morgan Stanley employed when placing Safaricom IPO shares to the foreign investors.

Under the arrangement, Morgan Stanely was appointed the sole book runner, giving it the exclusive right to sell some two billion Safaricom IPO shares to a selected group of foreign investors according to the formula of its choice — under a method referred to in market jargon as book-building.

In the end, Morgan Stanley came up with an IPO price of Sh5.50 (7.1 US cents) per share for the foreign investors pool.

But the investigation has now discovered that Morgan Stanley actually rejected higher offers for Safaricom IPO shares.

According to the report, a total of 94 investors applied for the shares.

Out of these, 28 offered to pay a price of Sh6 (7.7 US cents) and above — representing an oversubscription of 32 per cent and an effective demand of 2.6 billion shares.

The investigation found that the 28 bidders who offered to buy the shares at Sh6 were capable of taking the entire international pool at an oversubscription of 81.66 per cent.

Says the report, “Due to Morgan Stanley’s use of subjective allotment criteria, the government lost Sh1 billion in the international placement offer at Sh5.50 instead of Sh6.”

The Controller and Auditor General argues that this situation would have been prevented if the book-builder had brought the oversubscription level downwards, accepted the Ksh6 offer as the book-building price for the international pool, and factored in an oversubscription level of 32.5 per cent.

It adds: “Since Morgan Stanley have not given reasons as to why they offered the share price at Sh5.50 instead of Sh6, the loss of Sh1 billion should be recovered from them”.

The investigation found that out of the two billion shares, 814,300,000 were sold to bidders whose accounts are managed by Morgan Stanley.

“This was in pursuit of its own interest of earning management fees in the increased portfolios,” adds the report.

The report recommends that the identity and existence of the firms under the Morgan Stanley nominee accounts be confirmed, as they did not open CDS accounts in their name.

“The basis of allotment to these firms needs to be explained, as some of them did not bear tiering comments in the book,” it adds.