Book-building system in stock market yet to take shape

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FE Report
The introduction of book-building system in the country's primary stock market is yet to take shape due to lack of efforts of both the stock exchanges and the Securities and Exchange Commission (SEC).
The book-building system is a modern method of selling equities normally used when an investment firm seeks bids for new issues at indicative prices. When the book is complete, it make offers 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 through whom those shares are sold to retail investors.
Market operators said the committee on introduction of book-building system in the last 18 months held several meetings but failed to make any headway.
Another meeting is scheduled on November 5, sources concerned said.
A joint team comprising senior executives of two bourses, SEC and Central Depository Bangladesh Ltd (CDBL) visited India in the middle of last year to see the practice prevailing there in respect of book-building system.
"Apart from policy support, we also need logistic infrastructure to introduce the modern IPO system," a DSE source said.
Considering the time-consuming process to have such an infrastructure in place, the DSE had opted for introducing the system straight away.
"But SEC opposed our move saying it should be introduced after all the necessary ground works have been completed," a DSE source hinted.
He said the debut trading of Dhaka Electric Supply Company Ltd (DESCO) and Power Grid in the stock exchanges in 2006 helped the market gather some experience on the book-building system.
"We learned something new on price-fixation of an IPO and also the sentiment of enthusiastic buyers on the transaction procedures of DESCO and Power Grid shares," the DSE source added.
Moreover the ensuing direct listing of Meghna Oil and Jamuna Oil will also help to gain knowledge on the book-building system.
The issuers in the book-building system get their share prices from the underwriters who would quote the highest in the bidding process.
The SEC has already fixed certain initial criteria for the prospective issuers and the 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 IPO should be minimum Tk 50 million.
The 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 the stock brokers, under the proposed system on floatation of IPO, must be a corporate entity with a minimum paid-up capital of 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 punishment for having any involvement 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 will not be more than 20 per cent.
When the issuer company goes for the road show, it receives the first hand opinion of the investors about the issues 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 (floor price) through syndicate members. On the close of the book-building period, the book runner and the company determines the final price and allocation of securities on proportionate basis.