Is not allowing direct listing by SEC justified?

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Khaled Hyder
The Securities and Exchange Commission (SEC) issued on December 02, 2009 unexpectedly a directive to both Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) not to allow companies other than state-owned enterprises (SoEs) to be listed under the direct listing regulations, 2006. By this directive, the SEC reversed the decision of its consultative committee that was reached only on November 10, 2009. As usual, it did not give any reasons for its decision. However, an anonymous high official of the SEC stated to the media, as published in the Financial Express on December 03, 2009, that "this is the finance ministry's decision. We just conveyed the message to the bourses..."
In doing so, the SEC however has forgotten that it is an independent body, not just a post box of the ministry of finance; and it is a body to promote and protect capital market, not to inhibit growth of capital market. Its decision also goes against the interests of the market economy in general and the private sector in particular; because direct listing by the private sector was barred, not that of the public sector.
As is known, direct listing allows a public company first to list its shares in stock exchange(s); and then, offers its owners' shares for sale to investors; whereas initial public offering (IPO) facilitates a public company first to offers its shares for sale to investors; and then, list its shares in stock exchange(s). Direct listing involves "Offer for Sale" of existing shares by the owners; and IPO involves "Offer" of new shares by a company.
Amongst, the aforesaid methods, direct listing has three distinct benefits. First, in the case of direct listing, the company's shares get the best price as the shares are directly offered for sale to investors in stock exchange(s). In the case of book building IPO, the prices of shares are discovered by institutional investors fraught with the danger of not getting fair price; and manipulation. In the case of normal IPO, prices of shares are limited by rules, leading to lower price. Secondly, in the case of direct listing, the owners sell their shares to investors in stock exchange(s); and the moneys from such sale are received by them. Thus, the owners can invest the moneys in the company itself; or in one or more new projects. This will speed up industrialisation; and growth. Finally, because of the foregoing, direct listing can bring successful and profitable companies to the stock exchange(s). This will improve supply of good shares; and stabilise capital market so necessary presently.
Thus, capital market experts, as reported in The Financial Express on December 12, 2009, advocated for direct listing.
However, the opponents of direct listing usually cite three points against direct listing. Firstly, they point out that there is no direct listing in any other country of the world. This is not true statement. Many countries of the world including the USA, the UK, Pakistan and Sri Lanka have similar listing, differently called. Even, Bangladesh had direct listing before 2006, i.e., before issuance of direct listing regulations, 2006. Square Textile Mills Limited was listed in 2002 under similar direct listing method. After 1975, some companies were listed without IPO, e.g., Bangladesh Services Limited (Sheraton Hotel) was listed in 1984 without any IPO whatsoever.
Secondly, the opponents of direct listing say that owners get the moneys from direct listing, adding that they are taking away such moneys. Such statement has no basis whatsoever. On the other hand, research indicates that in all four cases of direct listing of private sector companies (Square Textile Mills Ltd, ACI Formulations Ltd, Shinepukur Ceramics Ltd and Navana CNG Ltd), the owners reinvested the money in the respective company or in new projects; and in repayment of debts, resulting in higher sales, net profit, EPS, dividend and prices of shares; and contributing to GDP.
Thirdly, the opponents of direct listing further say that direct listing is a creation of "immediate past Caretaker Government". This is also not a correct statement. Direct listing was first done in 2002; and then, in 2008 and 2009. Direct Listing Regulations were issued in 2006 when there was an elected government.
Because of the foregoing, there are no valid reasons to oppose direct listing.
In issuing the aforesaid directive to Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE), the SEC has not stated whether the direct listing of a container port already approved by CSE and two other cases being considered by DSE and CSE would be within or outside the purview of this directive. Neither the SEC nor the Ministry of Finance has thought what would happen to the cases that are being pursued by the private sector companies for months, if not year(s).
Accordingly, there is a strong case for continuation of direct listing with a view to furthering industrialisation and growth; and stabilising capital market. The earlier SEC and the Ministry of Finance understand thus, the better will be for the capital market and the country.