ISA Wants Reforms to Prevent Oversubscription

The Israel Securities Authority is considering reforming the underwriting system to prevent huge oversubscriptions of stock issues, such as the incredible NIS 1.6 trillion in demand recorded for Solbar Industries' IPO last week.

Though legislation to govern underwriting was submitted in May 2002, the Knesset Finance Committee has still not approved it. In the meantime, therefore, the ISA is considering changing the regulations that it itself set to allow institutional investors to order up to 90 percent of an offering, instead of the current limit of 50 percent. The ISA might also allow underwriters to determine the division of securities at the institutional phase, as the bill suggests.

The institutional phase is crucial to creating massive oversubscription. In Solbar's case, for instance, demand at the institutional phase was large enough for the company to settle for minimum interest on its bonds, which meant that the public auction, held a week later, was not about price, but about amount. Investors therefore placed highly inflated orders, knowing that they would receive only a fraction of the amount.

The ISA is also trying to expedite legislation of the bill, which would adapt Israel's underwriting practices to those used in the U.S. The bill would give underwriters discretion to allocate stock to institutional investors, relieving institutional bidders of the fear of getting only a fraction of an order. The law would also grant underwriters greater freedom to stabilize prices for a limited period of time after the offering.