The Bangladesh Securities and Exchange Commission (BSEC) has imposed an upper limit on the bidding process of institutional investors in the book building system, in order to check manipulation in the bidding process.
Institutional investors can now bid only up to 20% higher or 1.2 times the fair value of primary shares, and there will be no lower limit for bidding.
The securities regulator has issued a directive in this regard.
As per the directive, the simple average of net asset value and the value obtained by the earnings yield method would be the fair value of the offered shares.
To find out the value in the yield method, bidders have to divide a company's expected rate of earnings by its actual rate of earnings and then multiply the outcome by paid-up value.
The normal rate of earnings will have to be at least 10% of the paid-up value.
Meanwhile, to calculate the expected rate of earnings, bidders must divide the five-year average of profit after taxes by the paid-up share capital – including share premium – and then multiply the figure by 100.
While calculating their net asset value, companies must exclude: fictitious assets, bad debts, preference shareholders' claims, and proposed dividends.
Then whatever the fair value is, no bid can exceed the upper limit of 1.2 times.
BSEC Executive Director and Spokesperson Mohammad Rezaul Karim said bidders will not bid exceeding 1.2 times the fair value, which will be determined by the average of net assets method and yield method.
For example, if the net assets method value is Tk20 and yield method value is Tk30, then its fair value will be the average value of Tk25.
The BSEC has noticed large gaps between prices offered by the highest and the lowest bidders in the book building system.
There are allegations that many institutional investors do not follow the regulations while evaluating the shares of the companies that are willing to go public.
As a result, the actual cut-off price of the shares of those companies is not determined.
Usually, every institutional investor takes part in biddings after analysing the: financial statements, business policy, future growth, management governance, and overall condition of issues.
As per the rules, institutional investors have to form a bidding recommendation committee consisting of at least two members who have relevant: knowledge, skills, qualifications, and experiences.
After a detailed analysis of the value and prospects of the securities, the committee must recommend investors to participate in the electronic bidding. It will also mention the bidding quantity and price.