New IPO pricing method frustrates entrepreneurs

Infographic: TBS

The new method to determine the allowable price of primary shares in the initial public offering (IPO) under the book-building method is frustrating for entrepreneurs who expect a fair price for their companies' shares.

The Bangladesh Securities and Exchange Commission (BSEC) introduced the new conservative valuation method for book-building IPOs in February 2021 to prevent overpricing of primary shares that had been hurting investors after debuts.

An August 2020 study, earlier reported by The Business Standard, revealed that less than half of the 91 IPOs in the 2010s gave an above-average return to their primary shareholders, while primary investors lost money in 20 IPOs and 27 saved their backs with some meagre positive return.

Md Moniruzzaman, managing director of IDLC Investments, said the regulatory move to enforce the conservative price building method makes sense in terms of guarding against poor IPOs – both in terms of financial performance or credibility of their numbers – being overpriced.

But, the too stringent stance now made the way to bring good companies to the stock market tough and a large number of good companies are reluctant to go public for less money in IPOs, while the investment bankers, the bourses, and the regulator are working hard to bring reputed companies to the market to make it a barometer of the economy, added Moniruzzaman, also the vice-president of the Bangladesh Merchant Bankers Association (BMBA).

The pipeline for good IPOs is drying out mostly because of the low price being offered, while the number of book-building IPOs in the last 14 months came down to three, from the previous decade's annual average of 4.3.

An analysis of the 10 book-building IPOs under the previous method suggests that companies are being offered 20%-70% less price for their primary shares.

Omera Petroleum, the second-largest player in Bangladesh's expanding LPG market, got a Tk8 premium on top of the face value of Tk10 per share in 2012 from foreign investors. In 2018, they paid Tk15 in premium for the energy company's right shares.

The previous method of book-building valuation was offering a decent price. But the new method offers a price even lower than what the foreign investors paid several years ago.

"It (the allowable cut-off price) is not the price a good company deserves and our sponsors and pre-IPO foreign investors are very frustrated," Mohammad Asaduzzaman, company secretary of Omera Petroleum, told The Business Standard.

At a Dhaka Stock Exchange programme with the major non-listed corporates of the country, entrepreneurs urged for less policing of good firms and easing the restrictive measures.

BMBA President Md Sayadur Rahman said, "Facing the issues, we, the stakeholders, discussed it with the regulators and they asked for proposals. We hope the issues will be solved in the coming days." 

"We need to attract reputed and successful large companies in the market," he added.

Two analysts at a merchant bank said, even the conservative method is generous for the companies that cook their books targeting IPOs, while it is choking the honest well-performing companies.

There lacks a coat that fits all and the fair pricing of IPOs would depend on the professionalism of institutional investors and the prudence of the regulator, they suggested. 

"BSEC is open to granting exemptions to the deserving companies, for example, reputed multinationals, local large firms generating huge turnover and consistent profits," said Rezaul Karim, an executive director and the spokesperson for the BSEC. 

According to the Public Issue Rules, companies that want no premium over face value for their primary shares go public under fixed-price IPOs, while premium seeking firms need to go through the book-building method where institutional investors bid to set the reference price for the public, technically called the cut-off price.

Since errant bidding had long been resulting in IPO overpricing, the regulator gradually imposed mechanisms to make the bidders accountable by asking for their bid justification papers initially and later imposing the stricter valuation method.

Bidders now can go as high as up to an average of a company's net asset value, and its historic and expected earnings, which significantly reduced the cut-off price from the previous method of open auctions that used to allow analysts discretion.