Dhaka Stock Exchange (DSE) is drafting rules on the proposed book-building system, a modern method for distribution of initial public offerings (IPOs) practiced by all developed stock markets in the world.
"We are in final stage on drafting of the rules, which will be placed before the Securities and Exchange Commission (SEC) for final approval," one DSE source told the FE Friday.
The book-building system is a method of selling equities when an investment firm seeks bids for a new issue at indicative prices. When the book is complete it offers prices and sells the lot in a single day.
Underwriters buy all the shares to be floated by public limited companies through competitive bidding procedure under the proposed system. Later the underwriters choose some brokers to put up those shares for selling to retail investors.
The issuers get their share prices from the underwriters who will be the highest bidder in the bidding process.
The source said different aspects of the system in the context of Bangladesh market is being examined ahead of fine-tuning of the draft rules.
Another market source said a joint team comprising of senior executives of DSE, Chittagong Stock Exchange (CSE) and Central Depository Bangladesh Ltd (CDBL) will visit Indian stock markets to see the book-building system.
Commenting on the progress of the book-building system, one SEC source said the stock market regulatory body will proceed only after getting the draft rules from the DSE and CSE.
The SEC has already fixed certain initial criteria for the prospective issuers and the stock brokers to become eligible for participation in the proposed book-building system.
Under the initial criteria, credit rating of the new issues will be compulsory. The size of an Initial Public Offering (IPO) should be minimum Tk 50 million.
The latest annual financial statement of an IPO should also be audited by a firm having foreign affiliation in addition to the statutory auditor.
The prospective issuers must comply with the Corporate Governance Guidelines of the SEC to become eligible for entry into the new system.
Senior executives of SEC, DSE, CSE and CDBL in a meeting held at CSE in late 2005 fixed the initial criteria.
The meeting also decided that stock brokers under the proposed system on floatation of IPO must be a corporate entity with a minimum paid-up capital worth Tk 10 million.
The net worth will be at least 25 per cent of the broker's paid up capital, but not less than Tk five million.
"Brokers will face any punishment for involving in foul play in stock business with the investors and will be barred from participation in the trading for minimum six months," the joint meeting also decided.
Under the book-building method, the issuer in association with a merchant banker indicates either a floor price or a price-band, with a lower limit (floor) and an upper limit (ceiling). The final price, however, is determined based on the demands received from investors.
The spread between the floor and the capitalisation of price band usually will not be more than 20 per cent.
When the issuer company goes for the road show, it gets the first hand views of the investors about the issue which plays an important role in deciding the floor price or price band in the book building system.
The merchant banker, who acts as a book runner, collects the bids (above floor price) through syndicate members. On the close of the book-building period, the book runner and the company determine the final price and allocation of securities on proportionate basis.
"Introduction of the book-building system is now needed very urgently as the stock market is getting no significant benefit under the existing disclosure-based IPO distribution system as most of the shareholders who get allotment of primary shares dispose of the same immediately on the first trading day of the issues," said DSE senior vice president Ahmad Rashid.
He said the stock market cannot be developed under the existing system where millions of small traders eagerly wait only to apply in the primary shares of new issues.