IPO of Borak Real Estate rejected on suspicion of inflated earnings

The stock market watchdog has recently rejected an IPO proposal of Borak Real Estate amid a dried-up IPO flow, owing to concerns that earnings might have been inflated to influence the price of primary shares.
The real estate developer was undergoing the listing process to gather Tk 4,000 million by issuing primary shares to the market.
In November, the Bangladesh Securities and Exchange Commission (BSEC) issued a letter notifying the issuer and the issue manager of the IPO cancellation. It also provided an elaborate explanation as to why it rejected the proposal.
What was worrisome to the regulator was the company's abrupt fair value gain of Tk 7,000 million, shown in its financial statement of FY23, which caused an additional income of Tk 6,525 million on top of its operating profit in the year.
The main operation of Borak Real Estate involves acquiring land to develop and construct commercial and residential buildings to sell or earn rentals.
Without the revaluation, its net asset value (NAV) would have been only Tk 85.20 per share and EPS Tk 4.62 in FY23. The revaluation drove the NAV to Tk 148.54 per share and EPS to Tk 65.25 in FY23.
The abnormal jump in profit and asset value drew the attention of the security regulator.
The price of primary shares of Borak Real Estate was supposed to be decided through the book building method, in which market players determine IPO share price, as opposed to the fixed price method. So, the BSEC would have little control over the pricing of IPO shares.
The BSEC suspected that the revaluation of the company's assets was done to influence the IPO price determination process.
"This timing raises concerns and significant doubt about the company's motives, as it [asset revaluation] appears strategically aligned and time framed ahead of the company's application to the commission for a capital market listing," reads the letter of the securities commission.
"While the fair value gain was reported in alignment with accounting standards, its effects on NAPVS, retained earnings, and EPS pose potential risks to investor decision making and could create a distorted view of the company's financial health," it adds.
BSEC identifies some other matters of concern. Mohd. Noor Ali, who is managing director of Borak Real Estate, is also managing director of Unique Hotel and Resorts, a listed company.
According to the company law, holding the post of managing director at two different companies is forbidden.
Borak Real Estate made a plan to open a Banani branch of Hotel Sheraton on the 21st to 28th floor of Banani DNCC Unique Complex but is yet to get permission from the civil aviation authority for the extension of the building.
The company also failed to get approval of a 20-storey Borak Zahir Tower from Rajdhani Unnayan Kartripakkha (public agency responsible for urban development in Dhaka). It has permission to build up to the 13th floor.
A proposed 7-star hotel does not have any feasibility assessment done by the Bangladesh University of Engineering and Technology.
All these cast doubts over the company's future revenue income.
Moreover, most of the company's assets were found to be mortgaged with banks and financial institutions, which made the company a risky business to invest in.

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