Mend book-building method to prevent price fixing

Some stakeholders, including Dhaka bourse, seek changes in the book-building method in trading to avert any doctoring during determining the cut-off prices of stocks.
The Dhaka Stock Exchange (DSE) has already submitted a proposal to Bangladesh Securities and Exchange Commission (DSE) for modification of the process of cut-off price determination by way of increasing the number of participants.
Four years after the suspension of the method in 2010, the securities' regulator brought amendment in the book-building method in December 2015 by increasing the number of disclosures and due-diligence requirements for issuing companies and issue managers.
According to the revised book-building method, the cut-off price will be determined at the nearest integer of the lowest bid price at which the total securities offered to eligible investors would be exhausted.
One eligible investor (EI) is allowed to quote for up to 10 per cent of the total amount offered to the EIs.
In its proposal, the DSE said the cut-off price should be the weighted average bid price of at least total top (based on bid price) 50 bidders or two-thirds of total bidders participating in the bidding of a particular issue, whichever is lower.
The DSE also proposed a reduction in the existing 10 per cent securities allowed for an EI to bid for an issue.
Asked about the move, chairman of the premier bourse Prof Dr. Abul Hashem said their board thinks that there is a control in determining the cut-off prices.
"That's why we have proposed to increase the number of participants in the bidding of an issue under the book-building method," Prof Hashem said.
Chittagong Stock Exchange (CSE) echoed the DSE proposal, although the CSE is yet to submit any formal proposal for making changes to the book-building method.
Asked, CSE managing director M. Saifur Rahman Mazumder said they had received some observations regarding the cut-off price from their stakeholders.
"Following the observations of our stakeholders, it seems to us that there is logic behind submitting proposal by the Dhaka bourse," Mazumder said, adding that the process of determining the cut-off price should be modified.
According to revised book-building method, after completion of the bidding period, the cut-off price will be determined at the nearest integer of the lowest bid price at which the total securities offered to eligible investors would be exhausted.
Managing director of IDLC Investments Md. Moniruzzaman said the scope of revising price even after the bidding is a weakness of the book-building method.
"Due to this privilege, investors will have the incentive to bid at lower prices. Fair value should be discovered so that entrepreneurs also feel motivated to get listed," Mr Moniruzzaman said.
He also said the regulator should not be too stringent to 10 per cent of securities allowed to bid by a single EI, as that will hamper big-sized IPOs.
"Slaps of amount should be set for a single EI considering the size of IPOs," Moniruzzaman added.
When asked, a BSEC commissioner said the regulator internally discussed the issue several times but is yet to sit officially to bring any change in the book-building method.
"The book-building method was something new for our capital market. It takes time to find out weaknesses, if any, of newly formulated rules," the commissioner said, adding that they may sit to discuss the observations raised by the stakeholders.
In the revised book-building method, the securities' regulator also restricted the distribution of private-placement shares on a large scale, which was seen as one of the major reasons for the 2010-11 stock-market debacle.
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