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OPINION

IPOs as deceiving tools

Shamsul Huq Zahid | April 26, 2019 00:00:00


Between 2010 and 2018, a total of 105 new issues, including 22 mutual funds, were listed on the country's main bourse, the Dhaka Stock Exchange (DSE).

What is worrying is that 45 of the general issues, listed during the period under review, are being traded below their offer price and 18 of the mutual funds below their face value. Seven issues got listed using the Book Building Method and four of them are now being quoted below their respective offer price.

But the erosion in market price of the new issues could not anyway dampen the unusual enthusiasm among a section of investors to subscribe new IPOs. The reason is these issues generally fetch successful subscribers a good amount of return in the initial months of their trading.

The price erosion starts in the case of those issues that either fail to declare dividend or declare highly unattractive amount of dividend at the end of their respective accounting year.

But that should not have happened. The IPOs of the new issues do usually portray a rosy picture about their financial performance. The rates of profit earning of these companies are found to be very attractive in the years preceding their listing.

Are then the financial statements that accompany the IPOs concocted?

It should be. Otherwise, financial performance of a company cannot be unsatisfactory overnight.

A dearth of good shares is very often cited as one of the reasons for the market becoming unattractive to investors. There is no denying that the number of issues listed on the bourses, on an average, in recent years, is not commensurate with the size of the country's economy. The private sector operators are found to be lukewarm about mobilising their long-term financing need from the capital market. There are certain reasons behind their lack of interest in the capital market.

The market does need a constant flow of new issues to meet the investors' appetite for fresh stocks. But the securities regulator is doing a disservice to the market through the induction of a large number of potential junk issues.

The Bangladesh Securities and Exchange Commission (BSEC) has updated its public issue rules to stop non-performing companies from entering the market. Yet non-performers are having their entry with ease.

The regulator concerned cannot shift the blame on to the auditors for preparing the financials that do hide the real picture. The BSEC does have its own people to go deep into the balance-sheets submitted by the companies seeking to float IPOs.

The regulator does also have the responsibility to make physical and on-the-spot examinations of the companies wanting to go public. Moreover, the BSEC is not a stranger to this kind of problem as a good number of companies in the mid 90s and later had cheated the investors by floating IPOs.

The regulators do generally make rules to set things right. Dishonest operators, be they companies or individuals, devise strategies to defy those and make their schemes successful. An efficient and alert regulator, however, does apply its sixth sense and, if needed, goes beyond the rules to stop schemers from doing any mischief. Unfortunately, the BSEC, as far as the financial performance of the new entrants in the market shows, has not been doing its job very seriously.

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