Wednesday, October 19, 2005














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New system for IPO floatation
SEC needs to think twice before the plunge
Shamsul Huq Zahid

          In the world of stock market, there is, possibly, nothing without a dual meaning or dual face.
A move that appears to be investor- and market-friendly in the outset, actually, is intended to meet evil designs of someone or some particular group of people. The proposal to introduce a new method for the floatation of the initial public offerings (IPOs) by reputed and strong local and foreign companies is, according to many small investors and stockbrokers, one such move. The proposal is reportedly under active consideration of the regulatory watchdog of the capital market -- the Securities and Exchange Commission (SEC).
"Criminal minds do never run short of ideas to achieve their evil objectives. The move to introduce a separate guideline for floating primary shares by reputed local and foreign companies is a glaring example. The idea surely has originated not from the SEC but from the outside with certain ulterior motives," said an angry stockbroker in Dhaka Stock Exchange (DSE) who does not want to be identified.
The reaction of the investors and stockbrokers appears to be somewhat valid.
According to the report published in the FE Monday last, the SEC is now examining the 'nitty-gritty' of a rule called, 'book building', in IPO floatation by business enterprises. Under the rule, underwriters will buy all shares to be floated by a company in the stock market through competitive bidding. Underwriters would then sell the shares to general investors through seller groups or brokers.
According to interviews carried out by the FE reporter concerned, some SEC and Dhaka Stock Exchange (DSE) officials are in favour of putting the system in place to encourage companies with strong fundamentals to come to the stock market. One SEC official said through competitive bidding, the share issuing companies would get an opportunity to raise their paidup capital significantly.

News Analysis

But the question is: what is the necessity of going for such a system when the existing IPO rules offer the same opportunity through the fixation of premium on the face value of shares?
For instance, the renowned multinational, the Berger Paints (Bangladesh) Ltd. has only very recently offered its shares to general investors with a premium of Tk. 100 on the face value (Tk. 10) of its shares. The SEC, it is believed, has thoroughly examined the Berger's business track records and all financial statements before granting such premium. The Square Pharmaceuticals, one of the leading local drug manufacturing companies, back in 1995 was allowed 800 per cent premium on the face value of its share. There are some other companies whose primary shares were sold at premium values.
Under the book building system, underwriters too will have to do a lot of arithmetic before going for actual bidding. However, in the case of an underhand dealing, such homework may not be necessary. In such cases, the ultimate losers will be the general investors.
Another important issue has the potential to be overlooked by the people concerned. The so-called book building system would offer the opportunity to the sponsor directors to gain control over as many shares as they like, if necessary, through depressed bidding. The directors would not have to take the trouble of opening fake Beneficiary Owners (BO) accounts.
It is up to the SEC to look at the issue dispassionately. The first and foremost consideration of the SEC should be the interests of the small and genuine investors. It should not entertain any activity that has the potential of becoming controversial.
Often examples of stock markets of neighbouring India and Pakistan are cited. Such a comparison is not fair since the size of the markets in these countries is huge. These markets are more mature and have enough strength to withstand shocks.
The companies with strong fundamentals, local or foreign, in most cases do not go public for raising capital from the market. They are more lured or attracted by the fiscal incentives -- such as corporate tax -- that are offered to listed companies.
The SEC with a view to attracting such companies to the capital market can hold discussions with their top officials on their preferred fiscal concessions to the listed companies. The regulator can recommend possible incentives to the government for consideration. This might do the trick.
There are hundreds and one ways to improve the climate of the country's stock market if all the stakeholders are really ready to put in their sincere efforts. But that is unlikely to happen. For, everyone is interested in building his/her own individual fortune through legal or illegal means. However, there are exceptions. But they are few in number.


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