Firms’ multitasking in IPOs leads to conflict of interest

Experts and the country's premier bourse see a conflict of interest, as some particular firms play more than one role in the whole process of initial public offering (IPO) of a company.

Experts and officials at the Dhaka Stock Exchange (DSE) said some particular firms worked simultaneously as issue managers, underwriters and pre-IPO shareholders for same companies in IPO floatation leading to a conflict of interest.

According to the DSE officials, a conflict of interest arises, when an issuer company pays the loan of a bank by raising capital through IPO and when the bank's subsidiary is appointed the company's issue manager.  

They said provisions should be incorporated in securities rules so that an entity could not be engaged simultaneously as an issue manager, underwriter and pre-IPO shareholder of a single company.

"We will send our opinion in this connection to the securities regulator," said a senior DSE official.

According to data available from the DSE, two state-owned merchant banks and two private merchant banks are working as issue managers and underwriters by holding pre-IPO shares of same companies.

Besides, 16 private merchant banks and another one state-owned merchant bank are working as issue managers and underwriters for same companies which are in the process of going public.

Officials at the Bangladesh Securities and Exchange Commission (BSEC) said the DSE might submit its opinion on the conflict of interest to the securities regulator.

The premier bourse has prepared a list of companies which are working as issue managers, underwriters and pre-IPO shareholders for same issuer companies willing to go public.

"We have written to some companies which are simultaneously working as issue managers, underwriters and pre-IPO shareholders for the same issuer companies. But they have told us there is no legal bar to playing more than one role for a company willing to go public," said a DSE official.

He said an issue manager suggests a price for a company in the IPO, though it earlier purchased pre-IPO shares at a different price.

"Secondly, the issue manager issues a due diligence certificate favouring a company's IPO approval by the securities regulator. There is no third party to look into the issue manager's certificate," said a DSE official.

According to them, in some cases an issue manager plays three roles for a single issue in consideration of fees.

Mr Faruq Ahmad Siddiqi, former chairman of the BSEC, said it would be better if a pre-IPO shareholder was not allowed to work as an issue manager for a company.

"I think a restriction should be imposed barring a pre-IPO shareholder from working as an issue manager for the same company," Mr Siddiqi said.

When asked, BSEC executive director and spokesperson Mohammad Saifur Rahman said the limitations and inconsistencies in securities rules were being removed day by day.

"It can create a conflict of interest, if a pre-IPO shareholder is appointed the issue manager. The DSE should submit its opinion regarding the conflict of interest to the regulator for its consideration," Mr Rahman told the FE.

IDLC Investments Managing Director Md Moniruzzaman said an issue manager was holding a stake in a company as part of generating general investors' confidence in the prospect of that particular company.

"The issue managers uphold their commitment to those companies by holding stake in those. Any sister concern of a company, which wants to go public, should not be allowed to work as an issue manager for the sake of ensuring due diligence," Mr Moniruzzaman told the FE.

He referred to the common practice in other countries, saying that an issue manager sells a company's shares by receiving the company's whole stake.

In this connection the senior DSE official said the underwriters in those countries purchase the whole volume of shares of a company on dissemination of all kinds of information.