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Tuesday, 12 August 2014 00:00 - - {{hitsCtrl.values.hits}}
Capital markets regulator the SEC yesterday acted swiftly to punish new kid on the block Adam Investments Ltd. (AINV) for violating rules and discreetly selling a 31% stake in PC Pharma Plc (PCP) for an unethical gain.
The Securities and Exchange Commission directed the Colombo Stock Exchange (CSE) to cancel the sale of the 31% stake or 31.46 million shares in PCP by AINV at prices ranging from Rs. 2.10 per share to Rs. 2.90 per share. The sale by AINV was whilst a mandatory offer at Rs. 1.70 per share by the company for minority shareholders of PCP was in force. It was to expire on 21 August 2014.
The SEC’s swift action was because AINV had violated the SEC Takeovers and Mergers Code, of which Section 28 (3) specifically states that an offeror cannot sell shares of an entity on which it is making a mandatory offer without prior approval from the CSE.
The sale which some viewed as akin to ‘dumping’ took place on Thursday, exactly two weeks before the expiry of the mandatory offer. On that day 46.825 million PCP shares changed hands via 653 trades for Rs. 107.3 million. The brisk activity prompted the PCP share price hit an intra-day high of Rs. 3 (whilst mandatory offer price was Rs. 1.70) before closing at Rs. 2.30, down by 50 cents from Wednesday’s close.
The market at large didn’t know who the seller was. SEC was of the view that had the market known the seller was in fact the party which made the mandatory offer, then there wouldn't have been any buyers. Analysts said this information (the offeror selling) could be interpreted as “price sensitive” and if so there wasn't disclosure and such discreet selling could also tantamount to price manipulation.
In July and June AINV bought the stake at prices ranging from Rs. 1.20 and Rs. 1.90 per share from the former main shareholder British American Technologies and other investors. The sale by AINV had been at profit, though thanks to SEC action, the unlawful gain wouldn't materialise.
Analysts welcomed the swift action by the SEC since a failure would have led to a serious erosion of investor confidence. The CSE on its part also suspended the trading of PCP and AINV on Friday pending clarifications from the two firms.
“We found the transaction improper and a violation of the rules, hence we acted fast after a proper investigation. This was to ensure investor confidence,” SEC Chairman Dr. Nalaka Godahewa told the Daily FT. “The company may have had reasons to sell. That is a different matter. But how they did violated the rules,” the SEC Chief added.
AINV had apologised to the SEC over its action and had been told to make its case over the difficulty in concluding the mandatory offer or persisting with its original investment separately to the SEC.
The SEC’s swiftness was critical because any cancellation if there were to be had to be done by or before T+2, which fell yesterday.
Any form of reversal of a transaction in markets is usually frowned upon by foreign investors. However, SEC Officer-in-Charge and Deputy Director General Dhammika Perera responded saying, “Protection of investor interest is paramount. What took place was against the law apart from being unethical and we had to take necessary action.”
PCP as well as its original parent PCHH have been under heavy criticism for mismanagement apart from being embroiled in litigation. CSE on Friday also suspended trading of PCHH over Chairman S.H.M. Rishan’s disclosure about the sale of a subsidiary and claim by AINV which is a major shareholder of PCHH that the subsidiary was still a part of the assets.
In a filing to the CSE on 30 July, AINV said the company filed a petition before the Commercial High Court on 25 July seeking certain interim orders which inter alia had the effect of protecting the assets of PCP from misappropriation and preventing the management of company funds.
PCP and current directors of the company who are respondents of the petition were represented in Court and objected to the grant of such interim relief.
However, pending the Court inquiring into the matter, the PCP Chairman has given an undertaking to Court to the effect that the assets will be safeguarded until the next court date. In view of this undertaking AINV lawyers did not seek further interim relief at that juncture and Court accordingly granted a future date to the Respondents to file their objection in writing.
In the first nine months of FY14, PC Pharma made a Rs. 102 million loss and had retained loss of Rs. 71.5 million. It is likely that when full year results are out, PCP will be having a negative net worth.
