In a bid to check manipulation, the securities regulator is going to bar institutional investors from bidding beyond 20% higher or lower than the fair value of primary shares.
The Bangladesh Securities and Exchange Commission (BSEC) has moved to reform the book building process following several instances of irresponsible bids by institutional investors.
The commission has noticed unbelievably big 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 companies willing to go public.
As a result, their actual cut-off price is not determined, and the recent issues bear testimony to that.
Recently, stock market experts have pushed for upgrading the bidding process in the interest of investors.
According to sources, the BSEC would introduce the fair value method for benchmarking the price of primary shares in the book building process.
In this system, institutional investors initially set the reference price and general investors follow that to subscribe for new shares, which include premium over face value.
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.
On the other hand, to calculate the expected rate of earnings, bidders have to 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.
Sources also said companies must exclude fictitious assets, bad debts, preference shareholders' claims, and proposed dividends while calculating their net asset value.
Whatever the fair value comes out, no bid can be 20% higher or lower than it.
The commission has already imposed restrictions on institutional investors who bade 100% higher than the cut-off prices in the last five initial public offerings in the book building method, said Dr Shaikh Shamsuddin Ahmed, a commissioner of the BSEC.
"We are working to make the book building process more successful, fair, and transparent," he added.
Market insiders said general investors do not get proper valuations in IPOs in the book building method due to overstated biddings.
Besides, general investors are being deprived of the actual valuation of the primary shares, they added.
There are allegations that institutional investors manipulate bidding prices in connivance with issuers.
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 comprising at least two members having 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.
During its analysis, the committee has to take into account all aspects, including financial, technical, managerial, commercial, economic, and ownership issues.
Besides, it has to use international securities valuation techniques to make decisions on objective and professional judgments.
The cut-off price of Walton Hi-Tech Industries shares had been set at Tk315 each through the electronic bidding, but the prices of the highest and the lowest bidders were Tk765 and Tk12 respectively.
In addition, the cut-off price of Mir Akhter Hossain's shares were determined at Tk60 each, but the highest and the lowest bidders were Tk98 and Tk14 respectively.