Asiatic Lab's IPO at record 60% discount for general investors

A tightening regime for the pricing of primary shares has now resulted in a record 60% discount from the reference price being offered to the general investors in the initial public offering (IPO) of Asiatic Laboratories Ltd.

Following the bidding process under the book building method, eligible institutional investors (EIIs) have bought one-fourth of the company's new shares which were set aside for them at the maximum allowable price of Tk50 apiece.

And their retail counterparts are offered an unprecedented entry edge as the drug maker is offering the remaining three-fourth new shares at Tk20 apiece to the general public, as dictated by the regulator during the IPO approval.

Technically, institutional investors have nothing to say as they themselves have bought their stake at the ceiling price during the book building bidding, the issuer company is okay with the discounted price for its three-fourth primary shares and the regulator is happy to see the retail investors getting such a big discount, said Mostaque Ahmed Sadeque, former president of the DSE Brokers Association (DBA) of Bangladesh.

"But I have never seen such a situation," said the veteran stockbroker.

Bangladesh Merchant Bankers Association (BMBA) President Sayadur Rahman said, institutional investors would remain in a disadvantageous position, compared to their individual counterparts as they bought Asiatic Laboratories primary shares at a 150% higher price.

In the secondary market, retail investors would sit on 150% profits when the stock would hit the cost price of institutions.

The regulator's increasing discretion

According to Public Issue Rules, EIIs bid and set a cut-off price — the price at which the institutional quota of 25% shares exhausts, and later the general public subscribe for the remaining 75% shares at a 10% discount.

The Bangladesh Securities and Exchange Commission (BSEC), applying its special power, is gradually increasing the discount for the public, which is being lauded by the retail investors, while critics are raising questions about the increasing approach of discretionary basis of approval rather than sticking to the rules.

There had been a very few events in the last decade where the BSEC pushed issuers to offer their shares a little cheaper. But nowadays, it seems to have become a trend of increasing discretion.

In 2020, the BSEC widened the discount for the public to 20% in the Walton Hi-Tech Industries IPO. The story was repeated in the JMI Hospital Requisite Manufacturing IPO a year ago.

Earlier this year in the Navana Pharma IPO, the discount was further widened to 30%.

In the Asiatic Laboratories IPO consent letter, the BSEC did set a 30% discount from the cut-off price, but the unprecedented book building price fixation at a maximum of Tk20 apiece effectively made the discount 60%.

BSEC said 30% discount from the cutoff price or Tk20, whichever is lower would be the price at which the general investors would buy Asiatic Laboratories primary shares.

BSEC Executive Director Rezaul Karim said the regulator is prioritising the protection of the majority of individual investors and it did not set wider discount or the ceiling at Tk20 apiece, instead approved what the issuer offered. 

Most importantly, the big discount for the public was announced much before the EIIs bid, he added. 

The irresponsible race of EIIs in bidding had previously raised the cut-off price in some book building IPOs and the 10% discount proved insufficient for the long term retail investors in terms of dividend yield and margin of safety, said market people.

On the other hand, many opined that the tightening IPO pricing formula and the regulator's overreliance on its own discretion is weakening the book building method itself.

Brokerage and investment banking industry is in continuous discussion with the BSEC for amending the rules that would offer a win-win situation to all.