Scarcity of primary shares is the root of all problems in the initial public offering (IPO) market in Bangladesh. To tackle the problems, the market needs to at least quadruple the supply of primary shares – as much as 50 IPOs annually in coming years, says Md Sayadur Rahman, president of the Bangladesh Merchant Bankers Association (BMBA).
In an interview with The Business Standard he said, "We should focus on fixing structural issues from a market perspective. The rest of the problems are bound to be resolved if we can create an environment where investors tend to reject poor offers and attempts at manipulation."
He thinks there will not be any undeserving oversubscription and overpricing of primary shares if investors are allowed to choose from a wide range of alternatives.
Scarcity and the primary market craze
Earlier, there used to be a number of individual or institutional investors in the pre-IPO placement market who spent a 50 to 60 percent higher price to grab primary shares in the hope of abnormal gains within three to four years.
Such a tendency helped create an excessive demand for primary shares in the market.
Why such a craze?
Sayadur, who led the investment bankers' association twice, believes that almost guaranteed profits, and in most cases, unusual profits at debut have made primary shares so popular.
Primary shares are considered to be almost zero risk investments with the possibility of doubling, tripling, or even getting a ten-fold gain in investment in some cases.
"It is almost obvious in our capital market that if you own some primary shares, the secondary market will not frustrate you after your debut," said Sayadur.
"We see oversubscribed IPOs of many companies -- 30 to 40 times higher than the issue size of the IPOs. It is not because investors are counting on the impressive fundamentals, it is rather their rush to secure one lot amid scarcity," he added.
Scarcity pushes prices higher. There will be no gold rush in the primary market if IPO flow is sufficiently increased.
"If a company is not attractive enough in terms of business potential and earnings, investors will not entertain it. You will not then need any circuit breaker or additional lock-in period," he said.
"It is not the market's responsibility to welcome each of the public offers. Let the issuers, their managers and underwriters work for it," the investment banker said.
The tomorrow's market
Sayadur thinks there is need for a system where banks will enquire about the debts and equity ratio of borrowers before disbursing loans. "That will help both the banking sector and the capital market," he added.
"Bangladesh Bank, the finance ministry and the National Board of Revenue can jointly come up to change the existing system," he added. Enhancing tax benefits for listed companies will ultimately prove a win-win step, which will encourage more firms to come to the capital market, the BMBA president believes.
"We also have been suggesting a VAT incentive for listed companies. It will inspire listing of hundreds of good performing businesses, provided the authorities concerned provide a transparent and strict tax regimen for all," he said.
"Besides, the capital market should cordially welcome good entrepreneurs," said Sayadur.
He suggests that a company should not be forced to pay dividends just after getting listed in the stock market.
About low quality of IPOs
The capital market welcomed around one hundred new companies over the last decade. Most of them are considered to be 'low quality' issues that made it into the stock market through irregularities and manipulative efforts.
Sayadur Rahman disagrees with the term 'low quality IPOs' as he believes in a mechanism where paying the proper price should be the answer.
"You all can reject an IPO offer at face value if you think it is worthless. That will happen only if there is an increased supply. That will also help to establish a better price discovery mechanism. A good company may enjoy a way higher debut, and an undeserving one may be rejected by investors during subscription and after debut," he said.
Soft loans sought as market support
Changes in some policies of Bangladesh Bank had reduced the investment strength of banks and non-banking financial entities after 2010. They are the key institutional investors here.
Non-performing loans and money market volatility weakened them further, and an increasing portfolio loss also hurt their confidence.
The central bank came up with an offer to lend low cost funds for six months only. But that did not attract banks because they are not interested in taking a risk with borrowed money, and they are not confident about a positive return from the market within a short time.
"We see gross headlines that banks have room to invest in stocks. But I want to say that not all banks have a set up for capital market investment," the investment banker said.
Stock market intermediaries have already been marginalised because of the market condition.
June 30, 2019 data, compiled by the BSEC, revealed negative equity totaling around TK15 thousand crore. "Now the amount has at least doubled after the sharp fall since then," Sayadur said.
"That is why we, some top market intermediaries, teamed-up to seek a market support fund from the government, and the government is positive about it," he continued.
"I am frustrated to hear some wise veterans saying that we will embezzle the fund and we should not be allowed to avail the loans. I repeat that it is a loan that must be paid back with agreed interest," said Sayadur.
"We did not want it as grants. We have the skill and enthusiasm to help the market revive," he said.
"JP Morgan and his market professionals helped Wall Street avert a collapse in 1907. The US government and regulators were open to support them," he said.
In India last year, the government very promptly came up with a reduction in corporate tax to keep the market confidence untouched, he added.
"We are also looking for some policy support that will increase the capacity of institutional investors and boost market confidence," he said.
"Besides, we need foreign portfolio investments back as those are tagged to a wider class of investors' confidence on the market," said Sayadur.
"However, the government is working on comprehensive measures to support and develop the capital market, and we are hopeful about the future," he added.