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News Analysis
A mixture that may taste sour
Shamsul Huq Zahid

          The Bangladesh Bank (BB) has, according to a newspaper report, formed a committee, headed by one of its executive directors, to formulate policy guidelines on a subject that may sound unique to many.
The central bank wants the entrepreneurs seeking bank loans for establishing new industrial units or expanding the existing ones to mobilise a part of the funds from the capital market.
The job of the committee that includes members from the Metropolitan Chamber of Commerce and Industry (MCCI), Dhaka, the Bankers Association of Bangladesh (BAB), the Bangladesh Association of Leasing Companies (BALB) and the Securities and Exchange Commission (SEC) will be, among others, to recommend the ratio of shares against the bank loans an entrepreneur would have to offer in the share market.
The central bank people have a feeling that such a measure would help increase the flow of new issues in the share market and ensure transparency and accountability on the part of the companies. Besides, it would create scopes for the entrepreneurs to mobilise funds from a source other than banks.
The move by the central bank is likely to create a mixed reaction among the investors in the country's share market. They might be happy that more and more companies would be coming to the market and, at the same time, worried that influx of a large number of issues might create a negative impact on the market. Such a fear is not without a basis. Only a couple of months back, when the SEC allowed a good number of companies to float initial public offerings (IPOs) in quick succession, the prices of most shares in the secondary market plummeted because of substantial withdrawal of funds by investors.
The banking system, according to recent estimates, annually disburses industrial credits worth Tk 20 billion. If the entrepreneurs are asked to raise 10 per cent of that amount from the share market, will there be enough investors in the share market to absorb the same?
Moreover, the scrutiny done by the SEC, the capital market watchdog, for allowing any company to float IPO, is different from that done by banks while sanctioning loans. The creditworthiness of a particular company does not necessarily make it eligible for raising funds through public subscription of its primary shares.
The lapses in loan sanctioning procedure in the country's banking sector are well known. Though the situation has improved of late, many banks are still finding it difficult to address the problem of non-performing loans (NPLs), a substantial part of which went to the industrial sector. Political influence in the case of the nationalised commercial banks (NCBs) and directors' prerogatives in private banks do still play a part in sanctioning loans, may it be for trading purposes or for setting up new industries. So, any blanket formula to force the borrowers to go public might put the investors in the share market at risk. It is expected that the official who is representing the SEC would apprise the central bank committee of the necessary rules relating to the floatation of an IPO.
It will not be, however, out of place to mention here about the failure of the SEC in conducting proper scrutiny of the companies seeking to float IPOs. Investors have lost billions of taka in shares of a good number of companies which should not have been allowed by the SEC to float IPOs. In the middle part of the nineties, it was almost a free-for-all situation. Getting an IPO approved by the SEC was one of the easiest jobs for companies. None from the SEC at that time even cared to make an on-the-spot visit to verify the existence of the company.
The callousness, deliberate or otherwise, of a section of SEC officials has done an extensive damage to the country's stock markets and the poor investors are still licking their wounds. But in spite of the tragic episode of the '90s, the lesson has not been, apparently, learnt by the capital market watchdog. It has approved in recent years IPOs of many companies having poor track records.
Besides, the notion that a listed company operates in a transparent manner and it is accountable to its shareholders does not hold water anymore. A large number of listed companies give a damn to the rules and regulations of the SEC and wishes of their shareholders with total impunity.
Any conditional sanctioning of industrial term-loan might also discourage many potential investors who might not be ready to go through the hassles of IPO flotation and other procedures that a listed company has to comply with subsequently.
So, the prevailing circumstances demand extreme caution on the part of the central bank committee entrusted with the responsibility of preparing the guidelines on raising funds from capital market by the entrepreneurs seeking industrial loans. The move has the potential of creating a lot of confusion. However, the committee might recommend incentives, in terms of reduced rate of interest on loans, if any borrower goes for mobilising fund from the share market. That could be made optional.


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