New IPO price discovery methods conservative, say listed firms

The Bangladesh Association of Publicly Listed Companies (BAPLC) has said the new methods to discover primary share prices in book building are conservative and might discourage the listing of good companies.

In a letter to the Bangladesh Securities and Exchange Commission (BSEC) chairman in mid-February, the association requested him to formulate a more market-based approach for pricing primary shares when companies seek premium over face value.

BAPLC also requested the BSEC not to execute the 1 February 2021 directive issued by the latter. The directive included a code of conduct for eligible institutional investors (EIIs) regarding the price they can quote in bidding under the initial public offering (IPO) of the book building method.

In Bangladesh, when a company wants prices higher than the face value of its primary shares, it has to apply for the book building IPO, where EIIs set the reference price and the masses follow that at a 10% discount.

Code of conduct for EIIs and listed companies' opinions

The Bangladesh IPO market has long been blamed for irresponsible bidding and collaborative attempts to inflate primary share prices. Also, a trend was observed that many companies artificially inflated their pre-IPO financial figures for better prices, which ultimately did not sustain.

Several examples of insane bidding, where the quoted prices by different EIIs varied widely, surprised observers.   

In this context, the BSEC on 1 February this year came up with a directive that allowed EIIs to follow only three methods to determine their bid price.

The methods are net asset value method, earnings yield method, and fair value method. The third one is a blend of the first two.

BAPLC in its letter said the strict valuation methods that the BSEC had allowed are conservative for discovering a company's share prices as there is no provision for securities valuation methods generally accepted worldwide.

The popular methods include absolute valuation methods, such as dividend discount model and discounted cash flow model, and relative valuation methods that compare price to earnings ratio, price to asset ratio, and enterprise value to earnings before interest, taxes, depreciation, and amortisation (EBITDA).

Moreover, the valuation methods advised by the BSEC do not take into consideration many important factors like the issuer company's brand value, management strength, and industry situation.

Earnings yield and asset-based pricing methods have never been considered perfect for highly capitalised entities, especially in the first eight to ten years of their operation, argued BAPLC.  

The association also said the methods approved by the BSEC only looked at historical earnings while companies' earning potential was ignored.

Companies with strong fundamentals, including multinational ones, will not be interested in getting listed with local bourses using the conservative price discovery methods.

BAPLC strongly believes that EIIs have the necessary skills and acumen to determine prices of the offered securities in case the relevant information is transparently and accurately shared by the company and its issue manager.

In case of reckless or manipulative behaviour by EIIs, the regulator can come up with pre-emptive or punitive measures instead of keeping the pricing method too tight for all, opined the listed companies.

The BSEC received the BAPLC letter and a meeting has been scheduled to discuss the points, said BSEC Commissioner Professor Shaikh Shamsuddin Ahmed.

"After observing some irregularities in bidding, the BSEC came up with the code of conduct and there is always room for positive changes, if situation and time demand so," he told The Business Standard.