Hamid Fabrics, a textile company, mobilised Tk 1.05 billion by going public in 2015. The securities regulator allowed the company to offer primary shares each at Tk 35 inclusive of Tk 25 premium. The healthy financial reports of the company, apparently, convinced the regulator to approve the initial primary offering (IPO) prayer, that too with premium.
In the year preceding the floatation of the IPO, the company earned a pre-tax profit of more than Tk 270 million. But at the end of 2015, the same plummeted to Tk 135 million. The company in its IPO prospectus had said the fund mobilised through the IPO would be spent on bank loan repayments and business expansion within a period of one year.
The financial results of the company should have been rosier in 2015 than those in 2014 following repayment of substantial volume of bank loans and business expansion. The loan repayments must have saved a substantial amount that is usually spent on servicing the bank debts. The expansion of business was also supposed to add to the profits of the company. But in the case of Hamid Fabrics, investors have witnessed the opposite results.
However, such abnormal financial outcome is nothing unique. Identical results did happen to many other companies in the past. The rosy pictures presented about the financial health in the prospectuses of a good number of listed companies later proved to be not real ones. The attractive rate of profits shown in the prospectuses started declining soon after their listing and many even went into the red. Some of them were delisted and their shares are now being traded on the OTC market.
The period preceding the collapse of the stock market in 1996 saw the entry of quite a good number of such companies. It was the time when frenzied investors devoured whatever came in their way. None, not even the securities regulator, bothered to go for proper scrutiny of the prospectuses of companies willing to go public. That was the time when the investors got cheated most by a section of unscrupulous sponsors of so-called companies.
Following the 1996 share scam, the Securities and Exchange Commission tried to improve its own as well as market performance. Yet the entry of companies showing doctored financials has been going on with the help a section of dishonest audit firms.
The issues of proper assessment of financial reports and physical verification in relation to the companies willing to go public, it seems, have never been addressed properly. If necessary, the Bangladesh Securities and Exchange Commission (BSEC) can seek help from the National Board of Revenue in this respect.
The physical verification prior to the approval of IPOs is also an important issue that the regulator can hardly ignore. Some companies that existed only on paper managed to float shares through IPOs in the mid-90s and ate up innocent investors' substantial amount of money. On detection later, nothing has happened to the persons involved in such criminal acts.
It is also important to monitor the utilisation of funds mobilised through the floatation of primary shares by companies. Diversion of funds has been a very common practice. However, such monitoring should not be only in name. The BSEC should check details of the fund use. It should not remain satisfied with documents submitted by the companies. There should be proper verification of the documents also.
Moreover, why should be a company, which has shown itself as high-profit earning one, allowed to mobilise funds from the public for repaying bank loans? Such companies should first repay loans from profits and then come to market to raise fund for expansion programme.
True, mobilisation of funds for 'green field' companies remains a problem. Investors will not be willing to put in their money in stocks of a company that is yet to start its operation. In such a situation, sponsors tend to borrow money from banks for their projects and later repay the same with funds raised through the listing of their companies. But if the sponsors take recourse to irregularities while mopping up fund through the stock market, it hurts the investors in the short-term and leaves a very damaging effect on the market for a long time.
The new public issue rules enforced recently have, however, tried to streamline some of the deficiencies and flaws in the flotation of IPOs. Any company willing to offer its shares to public at premium would have to do it through book-building system. This is a right measure since during the road-show the IPOs come under close scrutiny of a set of informed investors such as banks, non-banking financial institutions and asset management companies that operate mutual funds. Such scrutiny needs to be ensured in the case of IPOs carrying no premium.
However, rules, no matter how stringent they are, have no effect unless the same are enforced with due diligence. Stock market is a place where manipulators and others with evil intentions are always on the prowl. Only an alert and efficient regulator can protect the investors from them. Hopefully, the BSEC would prove itself to be one such regulator as early as possible.
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