How IPOs destroy investors' wealth

An Initial Public Offering (IPO) is the process of adding new companies to the capital market and raising capital for their business. IPOs may seem attractive to investors because they offer the potential for rapid growth and the opportunity to invest in new companies. In reality, however, they have often led to financial losses rather than wealth creation.
After the political changes in mid-2024, the interim government identified flaws in IPO-related policies and began reforming them. As a result, no new IPOs have been approved to date.
Under the previous system, the more money an investor invested in an IPO, the more shares they could buy. Companies often attracted investors by exaggerating the potential of new businesses, rapid growth, and high profits. Ordinary investors relied heavily on such promotions and prospectuses when making investment decisions.
In reality, sellers often have more accurate information than buyers, a phenomenon known in economics as the "lemon problem." Many shares were sold at relatively high prices, lured by prospectuses and advertising, while entrepreneurs or related parties exited after taking profits from the market. Consequently, ordinary investors suffered losses when buying shares at inflated prices.
In the initial stage after listing, rumors about a company's profitability often artificially increase demand for its shares in the secondary market. Since IPO shares are limited, they are sold at high prices all at once to capitalise on demand. Later, when new buyers no longer appear, share prices drop sharply, resulting in losses for investors.
The Bangladesh government has recently reintroduced the lottery system for IPOs-a timely and welcome initiative. Under this system, only investors whose names are drawn in the lottery can purchase a fixed number of shares. Even if flashy advertisements are made, investors cannot buy extra shares.
This approach protects investors from significant losses due to misleading propaganda and limits the influence of owners and syndicates. It also increases opportunities for small investors to obtain shares. Moreover, effective IPO policies and exemplary action against those spreading false information can help restore investor confidence in the IPO market.

Md. Shahjalal Hossain Sifat
Department of Accounting & Finance
North South University
shahjalal.sifat@northsouth.edu