Deception through IPOs

An irony is that the financial information that the initial public offerings (IPOs) carry always present an 'attractive' picture about the companies but the stock market faces a severe shortage of companies with strong fundamentals, in terms of performance and attractive dividend payments. There obviously exists a gap between the information given in the financials by a section of companies seeking to float IPOs and their actual state of financial health.

The unwary investors soon get into deep water as far as dividend payments are concerned. In fact, the investors, in a number of cases, get misguided by the financials that are allegedly doctored with the help of a section of audit firms. That should not have been the case, for prior to offering primary shares for public subscription, all information furnished by a company are supposed to be scrutinised at various stages by relevant organisations, including the securities' regulator. Yet the general investors suffer as they do not have any other option but to keep faith in such scrutiny.

There is a set procedure that a company willing to go public has to follow. If the companies concerned followed the same, particularly in financial matters, honestly and rigorously, there should be no reason for the investors to be worried about possible deception. There are also safeguards against moves by companies to deceive investors. But such measures, in many cases, do not work as the relevant agencies do, in many cases, fail to carry out their responsibilities, deliberately or otherwise.

The head of the Bangladesh Securities and Exchange Commission (BSEC) has asked the merchant banks at a function in Dhaka recently to be cautious while dealing with the IPOs so that companies cannot go public using 'doctored' financials. There is no denying that the financial performance of a sizeable number of the companies listed on the bourses has been dismal belying the projections they had made in their IPOs. Some of these companies have even been delisted and got their place in the over-the-counter (OTC) market. Some unscrupulous companies had also chosen the bull markets to sneak into the market, for frenzied investors devoured everything that came in their way during that time. The regulatory laxity had also helped these companies to rob the unsuspecting investors.

The BSEC, following the 2010 market collapse, strengthened its process of scrutiny of IPOs. But one cannot yet be assured of the entry of the companies with dubious record having been fully stopped. Moreover, a section of investors are found to be more interested in IPO subscription than investing in the listed stocks since the former fetches quick bucks. But what has been hurting the market is the lack of interest among multinationals and a good number of local companies having strong fundamentals to go public for a variety of reasons.

The most important reason, possibly, is that the companies with good financial track records find the incentives are not worth the regulatory and public scrutiny they would be facing following their listing on the bourses. The Finance Minister on a number of occasions in the recent past have asked the companies to mobilise funds from the stock market to meet their long-term need, instead of taking bank loans. Yet not many companies are coming to the market as they find securing bank loans is easier than mobilising funds through IPOs. However, though in small numbers, companies would continue to seek listing and the relevant parties should ensure a proper scrutiny, particularly in the matters of their financial performance.