Flow of IPOs in a dull market

Though the stock market has never looked up barring occasional flare-ups since its collapse at the close of 2010, the demand for primary shares has never ebbed. But investors still make long queues before the bank counters to deposit subscription money for initial public offerings (IPOs) because of the fact that primary shares have regularly been fetching handsome profits on their debut trading. This trend has created an interest among a section of low and medium cap companies to offer their primary shares, of course, with premium.

A total of 17 companies have gone public through the Dhaka Stock Exchange (DSE) this year (2014) and mopped up funds worth about Tk. 10 billion. All the relevant IPOs were over-subscribed, in most cases, several times. The unusual interest among the sponsors of low-cap companies to float IPOs and also among the 'investors' in buying primary shares in an otherwise dull and drab market has, obviously, given rise to a few questions the answers to which are not readily available. The quality of a number of IPOs has come under scrutiny in recent times. The securities regulator, the Bangladesh Securities and Exchange Commission (BSEC), have suspended the IPOs of a number of companies and fined a couple of companies for incorporating fabricated information in their financials.

But such action was apparently not enough. The propensity to use doctored financials to help tag premium with face value of shares and mop up more than justified amount has, allegedly, become strong of late. A good number of low-cap companies with poor fundamentals were reportedly able to hoodwink the regulator and cheat the investors. This unfair practice, in fact, has been contributing to further delay in the recovery of the market and restoration of confidence among the investors. The relevant audit firms and issue managers can hardly escape their responsibility in this particular area.

Audit firms are supposed to maintain a high level of professional ethics while preparing financials of any firm, listed or otherwise. Unfortunately, allegations have been galore about some audit firms for deliberately extending cooperation to unscrupulous sponsors of companies wanting to cheat the general shareholders. This has forced the government to make a move for putting in place a regulatory council for the audit firms. The government's latest initiative has prompted the Institute of Chartered Accountants, Bangladesh (ICAB) to take actions against its errant members. The latter has already taken punitive actions against some of its members for professional misconduct.

The issue managers, on their part, do need to handle the job of primary issue floatation with due diligence. Prior to their submission to the securities regulator for approval, the managers should ensure that no attempt has been made in the IPOs to hide anything from the investors. The BSEC now applies its probing eyes in the matter of new issues more than before. But there are reasons to suspect some weaknesses on its part as far as the scrutiny of IPO proposals is concerned. Otherwise, it would not have been possible for the companies to manage undue premium while floating their IPOs. More importantly, the regulator needs to be proactive in removing barriers to large companies with strong fundamentals being listed. The entry of large-cap companies in primary market has become a rare incident.