Market-driven share price valuation suggested for quality listing

Top merchant bankers and portfolio managers have urged the securities regulator to amend the IPO (initial public offering) valuation process to encourage listing of good companies.
Companies with strong fundamentals usually go public, using the book building method to set the value 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 to decide the maximum value of primary shares of a company.
The valuation method does not offer much scope for price variation, said Managing Director of ICB Capital Management Mazeda Khatun.
Prices remain almost fixed. "That's why good companies are reluctant to go public. We have urged the regulator to bring reforms to the valuation process," said Ms Khatun, also president of the Bangladesh Merchant Bankers Association (BMBA).
The proposal, among others, was put forth at a meeting on Wednesday between merchant bankers and top brasses of the Bangladesh Securities and Exchange Commission (BSEC).
The capital market has been witnessing a shrinking flow of quality listing, which is why the secondary market fails to draw investors and experiences volatility because of abnormal price hikes of junk stocks.
Previously, companies' offer prices were fixed based on the cut-off yield of the prices offered by eligible investors at the IPO bidding.
Stakeholders, including merchant bankers, have been demanding the reintroduction of this market-driven formula to attract good companies.
Presently, a company willing to go public is required to submit an IPO application within 120 days from the closure of its financial year.
Merchant bankers at the meeting said the timeframe of IPO application submission should be relaxed. They also said a period of maximum 90 days could be set for approval of an IPO proposal after the application submission.
Merchant bankers said the regulator should give more focus on future income growth plans taking into account the company's industry-based business forecasts and management efficiency instead of relying on historical data.
Individual investors should invest in the secondary market through portfolio managers to reduce investment risks. "We have talked about necessary measures for encouraging individual investors to enter the market through discretionary portfolio management," said Ms Khatun, managing director of ICB Capital.
Discretionary portfolio management is a way of investing, in which a client's buy and sell decisions are made by a portfolio manager.
At the meeting, merchant bankers and portfolio managers proposed a reduction in the trading cycle of listed securities in the secondary market to improve trade volumes.
As per the existing rules, T+2 trading cycle is applicable to securities of 'A', 'B', 'G' and 'N' categories while T+3 trading cycle is applicable to junk stocks.
BSEC Chairman Khondoker Rashed Maqsood told the meeting that the regulator would place the suggestions of merchant bankers before the task force formed to make recommendations for reforms to the market.

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