Move to stop private placement trickery

Company fattening attempts targeting manipulative initial public offering (IPO) schemes is set to be discouraged as the securities regulator has taken initiatives for some long sought-after reforms.

If the reform plan is implemented, companies cannot sell any shares for two years before filing for IPO, according to regulatory drafts.

Moreover, no company can apply for stock listing if its existing capital accumulated through private placements exceeds 15% of the amount it plans to raise from the public during the listing. Currently, there is no such restriction. 

Non-listed companies now need no regulatory approval to increase their capital by issuing shares privately.

In contrast to public offers, the placements let a company issue securities to any investors privately, usually facing fewer regulations.

When asked, Bangladesh Securities and Exchange Commission (BSEC) Commissioner Professor Shaikh Shamsuddin Ahmed told The Business Standard, "Many things are on the table, but we are yet to finalise all those officially."

"We are now working on making the offers foolproof to investors," he said. 

The regulator is also streamlining the process so that a company can raise its deserving capital from the market faster.

Authentic and responsible capital growth history will be needed

There had been some stock market listings over the last decade, where some companies allegedly fabricated their sizes just before applying for IPOs so that they could get a better response from public investors.

The capital fattening has two common aspects – increasing capital in the immediate past years before filing for market listing, and the increased capital usually comes from the pre-IPO placement shareholders who count on an unsustainable stock price hike after debut for a profitable exit.

It often appears to be a pump and dump scheme that begins before listing and ends after listing, instead of the ideal way to provide a non-listed company with necessary capital and hold the investment for long.

However, if the draft is finalised, the BSEC will not accept IPO applications if a company is found to have sold any shares to investors over the preceding two years, which would discourage the said scammers along with pushing the incumbent companies to be responsible for diluting its asset and earnings.

Most importantly, limiting private placements is believed to discourage the primary market manipulators. 

It cannot be a healthy behaviour that investors pour any amount into a company only because it is going into the stock market, said a BSEC official working on the reforms.

Dr Shaikh Shamsuddin Ahmed, however, did not confirm that the allowable limit of pre-IPO private placements will be 15% categorically. But he supported the idea to limit it.

10% equity sharing with investors will be a must

The BSEC is also planning to ensure the floating of minimum shares among investors by incumbent companies so that scarcity does not create any artificial demand for the stocks in everyday trading.

Following Walton's listing experience, where less than 1% of the company shares are held by public investors and the extremely low float creates an extreme scarcity in the market, the BSEC is set to say a company must share at least 10% of its equity with investors.

Currently, in fixed-price IPOs, where a company offers its primary shares at a face value, it must offer at least 10% of its post-IPO shares or Tk30 crore, whichever is higher.

On the other hand, in book-building IPOs where institutional investors set the primary shares' prices through bidding, companies must offer primary shares worth at least Tk75 crore. But the existing Public Issue Rules, modified several times, do not guarantee the floating of minimum shares in book-building IPOs.

The minimum floating threshold may be increased up to 30%, depending on how much capital a company is planning to raise through book-building IPOs.

Fast processing

According to the draft, the BSEC will introduce post-facto approval of how a company has built its present value in terms of capital and other important things, before it files for IPO.

The post-facto approval had been there until the early 2000s and reintroduction of those will speed up the IPO process and also fix some deficiencies in IPO documents at the first glance, said Md Sayadur Rahman, the president of Bangladesh Merchant Bankers Association (BMBA).

The leader of local investment bankers welcomes the regulatory moves for the long-pending reforms for a vibrant market for primary shares, which builds the foundation of a healthy secondary market.

The BSEC is now seriously looking to shorten the period of the IPO approval process, which has been a serious concern among issuers. In many cases, companies had to look for alternative sources of project funding only because of delay in the IPO process.

"We are working to significantly reduce the time between a company applying for IPO and its shares get traded in the bourses," said BSEC Commissioner Dr Shamsuddin.   

The commission also said it will accord two consents at a time – one for bidding and the second one for the public offer– when a company applies for IPOs in the book-building method.

BMBA President Sayadur Rahman said, "We are really hopeful that the IPO processing time will be shortened, which is very important to attract successful companies into the stock market.

He also praised the recent announcement by the BSEC to discourage IPO hunters.

IPO hunting discouraged 

At the end of last year, the BSEC said there would be no lottery against oversubscription in IPOs, there would instead be pro-rata allocation of primary shares, meaning that subscribers would get shares in proportion to how much they collectively oversubscribed in an IPO.

The BSEC also said without having at least Tk20,000, no investor would be allowed to subscribe for primary shares.

Primary shares are company shares, which they issue during listing on the stock market. 

"The market needs real investors' subscription in IPOs as IPO hunters' role is not anything constructive," said the BMBA president.

More than four lakh of the 25.57 lakh investment accounts, technically called beneficiary owner (BO) accounts, were found to be owned by IPO hunters who participate in IPO lottery and dump these all as early as possible if they avail any shares in the lottery. 

As they do not mean to hold the shares for long, it fuels an irrational investors' response to IPOs.

IPOs have been a long-discussed issue in the capital market of Bangladesh as even too many restrictions and a long approval process failed to protect investors' interest ultimately.

Half of the IPOs in the last decade failed to beat popular fixed income alternatives in terms of generating annual returns for primary shareholders, while too many of those ended up with investors' losses.