The debate surrounding the decision to reserve shares for international investors in the Safaricom IPO rages on, with critics now saying that the 10 per cent premium paid by foreign applicants on Safaricom shares may have been a raw deal for Kenyan tax payers.

The reservation of 3.5 billion shares for foreigners, equivalent to 35 per cent of the 10 billion shares on sale at the initial public offering (IPO), has proved to be a controversial issue.

The debate was re-ignited after news emerged that foreign applicants had put in a premium of only 10 per cent above the IPO price of Sh5, yet the IPO offer price was discounted by Government by up to 14 per cent of the mobile company's fair book value at the time of the issue.

Investment Secretary Esther Koimett said at the launch of the IPO that the Sh5 per share IPO price reflected a 14 per cent discount on Safaricom's valuation of Sh200 billion at the time of the offer.

Foreign investors' IPO price of Sh5.50, which was arrived at through a book building process, falls short of what could have been the fair non-discounted offer price of about Sh5.70 per share.

While announcing the international applicants' IPO price of Sh5.50, the investment secretary hailed it as one of the highest premiums ever realised through the international book building process. "This represents a 10 per cent premium on the domestic pool's offering price, an unprecedented structure and premium level when compared to past transactions around the world," said a statement released through the IPO's publicists.

Those opposed to a special reservation of shares for foreigners argue that Safaricom is a public company that was formed using tax payers' money, and locals should therefore get the first priority to own the company while foreigners should only buy into the company in the secondary market.

They also argue that the foreigners should have at least matched the 14 per cent IPO discount to justify the reservation of shares at the expense of locals.

"The market is questioning the 10 per cent premium which even falls short of the IPO discount rate," said an investment banker who did not want to be named.

The Government has a 60 per cent shareholding in Safaricom, while UK company Vodafone owns 40 per cent of the mobile phone company that was carved out of fixed lines operator Telkom Kenya.

Issues were also raised with regard to the secrecy of the book building process, which was controlled by a sole book runner, Morgan Stanley Investment Bank. The daily bids filed by international applicants were only available to Morgan Stanley and Treasury, through what was referred to as a "blind" auction.

Critics question the transparency and justification for conducting a "blind auction" when disposing public assets. Business Daily's efforts to get the daily bidding details from Morgan Stanley during the book running period were unsuccessful as all e-mails sent to the international investment bank went un-answered.

Juicy offer

Transaction advisors to the issue have also confirmed that the IPO, now in its applications verification and share allotment stage, has been oversubscribed by close to four times, meaning that retail applicants are only likely to get between 25 to 30 per cent of their applications.

Involvement of foreign investors in the Safaricom IPO has proved to be both a controversial and emotive issue, with a section of politicians alleging that the significant allocation for foreign applicants was meant to facilitate the purchase of shares by locals masquerading as international applicants.

Finance minister Amos Kimunya and NSE chairman Jimnah Mbaru whose firm, Dyer and Blair, also acted as the lead transaction advisor for the IPO have maintained that the involvement of foreign investors would open up the country's capital markets to international investors.

"If you want foreign investors to participate in the local capital markets you invite them to sample the juicy offer, so that in future they also look out for less attractive offers in the market," said Mr Mbaru at a recent luncheon hosted by the Nairobi Central Business District Association.