Market-based IPO valuation need of the hour: CFA Society

The CFA (Chartered Financial Analyst) Society Bangladesh demanded amendments to the IPO valuation method and promotion of institutional investments to improve the depth of the capital market.
At a programme at the Economic Reporters' Forum (EFR) on Sunday, the association of financial experts said the capital market still was at its 'nascent' stage, compared to other regional nations, due to easy means of bank financing and the existing dire strait of the mutual fund industry.
The funds raised through investment vehicles of the market are insignificant relative to the banking sector. For example, The City Bank solely disbursed loans worth Tk 41.3 billion in FY23 while the aggregate amount of funds raised from the equity market was Tk 1.1 billion in the year.
In the last nine years, the amount of funds raised from the capital market reached Tk 54 billion while bank financing amounted to Tk 10.08 trillion during the same period.
When deciding the price of primary shares, the securities regulator currently considers a company's net asset value, prices of similar stocks, and the average EPS (earnings per share) in the preceding five years.
Previously, companies' offer prices were fixed based on the cut-off yield of the prices offered by eligible investors at the IPO bidding. The CFA Society seeks the reintroduction of this market-driven formula to attract good companies.
It holds the existing IPO (initial public offering) valuation under the book building method responsible for companies' reluctance to raise funds from the secondary market.
The failure of the mutual fund industry to act as a market stabilisation force is another big reason behind the prolonged stagnant situation of the market.
Popularizing the mutual fund industry is a must to promote institutional investments, the CFA Society said.
The other recommendations included ensuring timely corporate disclosures, reviewing margin rules and practices, widening of the scope to express expert opinions, establishment of vibrant bond and commodity markets, and reforms to restore trust in corporate governance.
The event chaired by CFA Society President Asif Khan also brought forth policy recommendations for the country's economy and the banking sector.
Policy recommendations for banking sector
Financial experts from the association said the central bank should be given full autonomy to act decisively on monetary policy, ensuring its separation from the fiscal authority and the Ministry of Finance.
The appointment of the governor should be done by the cabinet division.
To enhance governance in the banking sector, the experts suggested that the number of sponsor-directors in banks should be reduced to 15 from 20, increasing the number of independent directors to at least 5, and that representatives of depositors should be there in the banks' boards.
The family representation on the board should be limited too -- maximum one director from one family.
Corporate governance policies and regulations should be reviewed for banks and finance companies to align them with BCBS (Basel Committee on Banking Supervision) standards and WB-IMF recommendations.
The CFA Society said banks should comply with IFRS (International Financial Reporting Standards), regulatory disclosures, and IFAC (International Federation of Accountants) codes.
It has put emphasis on better NPL (non-performing loan) management by reviewing loan classification, provisioning and rescheduling policies of banks and financial institutions.
To expedite court cases, additional courts may be established along with empowering the central bank with judiciary authority. Out of court settlements through alternative dispute resolution (ADR) and arbitration should be encouraged.
The CFA Society stressed the need for amending the Bankruptcy Act, 1997 and Artha Rin Adalat Ain, 2003.
To bring down NPLs, the credit management and approver team of the banks should be independent and separated from the business operations, it said.
A high-powered independent and completely autonomous audit team should be formed at each bank with a mandate to perform periodic and surprise audits, said members of the association.
Moreover, they said, the state-owned commercial banks should be operated with a fully commercial mindset.
A regulatory reporting structure should be developed for determining the actual classified and defaulted loan situation and for disclosing capital adequacy ratio of banks.
The banks should be categorized based on their financial health.
To manage and resolve bad loans within a time-bound framework, an asset management company (AMC) can be established.
The AMC should be formed on a PPP (private public partnership) basis with the firms having international experience in dealing with toxic assets.
The list of defaulters should also be published for transparency and they should be prohibited from accessing all state services, said the CFA society.
The secretary of CFA Society Bangladesh, Kazi Monirul Islam and two directors -- Mahtab Osmani and Md. Moniruzzaman, among others, spoke at the event.

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