All about private placement of shares
Tuesday, 23 September 2008
Imtiyaz Hossain
THE Grameen Phone may, according to a news report published in the FE on September 19 last, have to halve the size of its earlier proposed Initial Public Offering (IPO) due to the latest directive of the National Board of Revenue (NBR) on pre-IPO placement. You can't have the cake and eat it too as the old adage goes, I welcome the decision of our National Board of Revenue (NBR). The origin of most securities and anti-competition laws has been in the USA. Many of our laws are derived directly from the US laws.
The US capital market has a straightforward approach for raising capital. Issuer may either undertake the route of private placement or if it is larger and an established company in need of large volume of capital, it may directly issue an initial public offering (IPO). The two strategies are not mixed together as in our market. The IPO is used for obtaining large amounts of capital and ensuring direct listing in an appropriate regional or national stock exchange. The shares, privately placed under the US-SEC exemptions, may remain unlisted securities. There is a provision in Bangladesh laws which allow brokers to trade in non-listed securities. These may be traded privately or in an over-the-counter (OTC) market until such time there is a statutory increase in the number of share holders when they may get automatically listed in any regional stock exchange.
The primary securities market has always ebbed and flowed during the past decade. During some years, IPOs have shown tremendous public response and in other years there has been little interest resulting in the offers being covered by the underwriters. The public response has never seen a natural growth often interrupted by sudden spurt and at other times becoming totally flat. A lot depends on the public confidence in new issues. That confidence is a result of good business performance of the companies through dividends and corporate behaviour. Thus, issuers are never really sure about their success in getting favourable response. The issue mangers are not of much help because to them the job is to complete the floatation and forget matters.
For many of them a successful strategy is to make an IPO as small as possible. This is done by marketing shares privately before handing them to selected investors. The investors are induced by the attractive pattern of small size of offering and belief that on listing the new shares would trade at a premium and would result in a windfall profit. Many share issues have been programmed with such intent.
The procedure of making public offering has changed a lot, arbitrarily during the past decade. Under the Companies Act, 1913, the promoters had to go door to door selling shares. After the stock market crash of 1929 in the US, some control were established by the British Raj and none could raise funds from the public, in the Indian sub-continent without the consent of the Ministry of Finance. In 1947, this matter came under the purview of the Controller of Capital Issues within the operational jurisdiction of the relevant (Continuance) Act. Prior to 1993, the practice of public offering was straightforward. The companies seeking public funds applied to the Controller of Capital Issues, the Ministry of Finance in prescribed forms and undertook to arrange all steps such as prospectus, underwriting, banking arrangements and listing. In 1960s when the stock market was booming, the directors of companies used their preemptive rights to allot shares to friends and friends. The action of the stock exchanges eventually put a stop to any preferential allotments.
All this changed after the SEC was established in 1993. Two existing laws, Securities and Exchange Ordinance, 1969 and the Control of Capital Issues (Continuance) Act, 1947 were embodied in the new law with the authority vested in the SEC. The S and E Ordinance of 1969 is derived from the US law. The law was over simplified. This unfortunately did not take into account the cultural aspect of the Pakistani and Bangladeshi market, and the ways things were done in the capital market.
Private placement was practically unknown in Bangladesh before 1993- 94. With the entry of the non-resident international investors, private placements became popular. An estimated amount of $ 290 million changed hands directly between the companies and offshore funds by way of arranged placements of pre-IPO and right issues usually at substantial premium during 1994-96. In the process, a time bomb was built. This worked under the influence of supply-side dynamics leading to an irrational rise in the price of shares in 1996, not denying the reinforcement infused by the total absence of any regulation on the streets.
From the above, it appears that while our securities market has many regulations, it does not have a standard in respect of private placement of shares. After all, it has taken the Bangladesh Bank to stop the banks and National Board of Revenue (NBR) to stop unfair pre-IPO placements. Moreover, today the members of the public have spoken by the way of their confidence in the IPOs. There is absolutely no longer any need to allow any shares to be privately placed.
It has been observed in past that the shares are only given to the insiders, their spouse, their progeny, their relatives and their friends. Despite all their efforts to give the public the short end, the companies need the public who is happy to accept their pittance. Foolishly the public buys and sells, making the demand and supply. And when the company insiders eventually want to get out, it is the public, which gives them the exit. So why should any company be allowed to continue to damn the public in the public domain? If the companies want to place shares privately let them do so and continue to trade as an unlisted privately traded stock. Or otherwise they should have the courage to face the market.
Least we should not forget what is happening to the major international capital markets. The credit crunch started by the sub prime mortgage loans has affected major world class institutions. Great investment bank Lehman Brothers has gone bankrupt. Merrill Lynch, J P Morgan, Goldman Sachs etc., and many commercial banks e.g. Citi Bank, Wachovia etc. had to be rescued. The largest bail-out of AIG group and Freddie Mac and Fenny Mae should tell us to be cautious. These unsettled loans and the credit crunch are being called "toxic investments" by the US Secretary of Treasury. We have a better name for them, we call them defaulters. Perhaps, we should take heed and learn to walk before we want to run. After all small is often beautiful. Let our stock market digest what we can eat and no more.
THE Grameen Phone may, according to a news report published in the FE on September 19 last, have to halve the size of its earlier proposed Initial Public Offering (IPO) due to the latest directive of the National Board of Revenue (NBR) on pre-IPO placement. You can't have the cake and eat it too as the old adage goes, I welcome the decision of our National Board of Revenue (NBR). The origin of most securities and anti-competition laws has been in the USA. Many of our laws are derived directly from the US laws.
The US capital market has a straightforward approach for raising capital. Issuer may either undertake the route of private placement or if it is larger and an established company in need of large volume of capital, it may directly issue an initial public offering (IPO). The two strategies are not mixed together as in our market. The IPO is used for obtaining large amounts of capital and ensuring direct listing in an appropriate regional or national stock exchange. The shares, privately placed under the US-SEC exemptions, may remain unlisted securities. There is a provision in Bangladesh laws which allow brokers to trade in non-listed securities. These may be traded privately or in an over-the-counter (OTC) market until such time there is a statutory increase in the number of share holders when they may get automatically listed in any regional stock exchange.
The primary securities market has always ebbed and flowed during the past decade. During some years, IPOs have shown tremendous public response and in other years there has been little interest resulting in the offers being covered by the underwriters. The public response has never seen a natural growth often interrupted by sudden spurt and at other times becoming totally flat. A lot depends on the public confidence in new issues. That confidence is a result of good business performance of the companies through dividends and corporate behaviour. Thus, issuers are never really sure about their success in getting favourable response. The issue mangers are not of much help because to them the job is to complete the floatation and forget matters.
For many of them a successful strategy is to make an IPO as small as possible. This is done by marketing shares privately before handing them to selected investors. The investors are induced by the attractive pattern of small size of offering and belief that on listing the new shares would trade at a premium and would result in a windfall profit. Many share issues have been programmed with such intent.
The procedure of making public offering has changed a lot, arbitrarily during the past decade. Under the Companies Act, 1913, the promoters had to go door to door selling shares. After the stock market crash of 1929 in the US, some control were established by the British Raj and none could raise funds from the public, in the Indian sub-continent without the consent of the Ministry of Finance. In 1947, this matter came under the purview of the Controller of Capital Issues within the operational jurisdiction of the relevant (Continuance) Act. Prior to 1993, the practice of public offering was straightforward. The companies seeking public funds applied to the Controller of Capital Issues, the Ministry of Finance in prescribed forms and undertook to arrange all steps such as prospectus, underwriting, banking arrangements and listing. In 1960s when the stock market was booming, the directors of companies used their preemptive rights to allot shares to friends and friends. The action of the stock exchanges eventually put a stop to any preferential allotments.
All this changed after the SEC was established in 1993. Two existing laws, Securities and Exchange Ordinance, 1969 and the Control of Capital Issues (Continuance) Act, 1947 were embodied in the new law with the authority vested in the SEC. The S and E Ordinance of 1969 is derived from the US law. The law was over simplified. This unfortunately did not take into account the cultural aspect of the Pakistani and Bangladeshi market, and the ways things were done in the capital market.
Private placement was practically unknown in Bangladesh before 1993- 94. With the entry of the non-resident international investors, private placements became popular. An estimated amount of $ 290 million changed hands directly between the companies and offshore funds by way of arranged placements of pre-IPO and right issues usually at substantial premium during 1994-96. In the process, a time bomb was built. This worked under the influence of supply-side dynamics leading to an irrational rise in the price of shares in 1996, not denying the reinforcement infused by the total absence of any regulation on the streets.
From the above, it appears that while our securities market has many regulations, it does not have a standard in respect of private placement of shares. After all, it has taken the Bangladesh Bank to stop the banks and National Board of Revenue (NBR) to stop unfair pre-IPO placements. Moreover, today the members of the public have spoken by the way of their confidence in the IPOs. There is absolutely no longer any need to allow any shares to be privately placed.
It has been observed in past that the shares are only given to the insiders, their spouse, their progeny, their relatives and their friends. Despite all their efforts to give the public the short end, the companies need the public who is happy to accept their pittance. Foolishly the public buys and sells, making the demand and supply. And when the company insiders eventually want to get out, it is the public, which gives them the exit. So why should any company be allowed to continue to damn the public in the public domain? If the companies want to place shares privately let them do so and continue to trade as an unlisted privately traded stock. Or otherwise they should have the courage to face the market.
Least we should not forget what is happening to the major international capital markets. The credit crunch started by the sub prime mortgage loans has affected major world class institutions. Great investment bank Lehman Brothers has gone bankrupt. Merrill Lynch, J P Morgan, Goldman Sachs etc., and many commercial banks e.g. Citi Bank, Wachovia etc. had to be rescued. The largest bail-out of AIG group and Freddie Mac and Fenny Mae should tell us to be cautious. These unsettled loans and the credit crunch are being called "toxic investments" by the US Secretary of Treasury. We have a better name for them, we call them defaulters. Perhaps, we should take heed and learn to walk before we want to run. After all small is often beautiful. Let our stock market digest what we can eat and no more.