Pre-IPO placement of shares
Thursday, 22 April 2010
What was earlier hinted at rather vaguely turned out later into a full-blown allegation. Some people here and there in the stock market had been murmuring about some people making their fortunes using the pre-initial public offering (IPO) placement of shares. Soon it became a cause for wider resentment. But the capital market regulator, the Securities and Exchange Commission (SEC), did not consider it worthy of attention. It has, however, decided now to step in and address the issue, at least, in a truncated form. The SEC, according to an FE report, last week fixed who would get how much of the mutual fund shares under the pre-placement rules. Earlier, there was no quota for individuals or institutions, listed or unlisted, in the pre-placement shares. One SEC member, speaking to the FE, admitted that in the absence of any ceiling for distribution of pre-placement shares, the mutual fund sponsors used to pick their own men and pocketed the profits when the issues hit the market.
Under the ceilings fixed by the SEC, an individual will now be allowed to buy a maximum of pre-placement shares worth Tk. 1.0 million, a listed company Tk 10 million and an unlisted one Tk. 5.0 million. The decision is likely to provoke lots of questions. But the first and foremost question that must be agitating the minds of investors is: why did the securities regulator at all keep the provision of private placement that could be abused easily by unscrupulous sponsors of mutual funds or any other company? Allegations about abuse of the provision had been there in the market many months back. But the SEC did not then take the issue seriously. In the meanwhile, several mutual funds have hit the market and many reportedly made windfall gains through pre-IPO placement shares.
In recent years, no issue has gone under-subscribed. Rather, the subscription in the case of every issue, mutual funds or otherwise, has been several times, even 40 times in some cases, of what was offered to the general investors. Even in the event of under-subscription, the underwriters are bound to buy the un-subscribed part of the shares. So, there is theoretically nothing to lose on the part of companies offering all the shares to general investors through initial public offerings (IPOs). The bourses have been requesting the government to offload the shares of its profitable enterprises to help augment supplies of scrips for meeting the high demand of general investors. But these self-regulatory bodies have, interestingly enough, never asked the regulator or the government to look into the allegations about pre-IPO placement of shares.
Pre-placement of shares may, however, be required under the given circumstances in the country's capital market, in the cases of very large issues, such as the Grameenphone, and issues carrying high premium. Except for such cases, the SEC should have no reason to allow pre-placement of shares for any IPOs. It should rather consider the abolition of this facility for most of the IPOs. Investors would like to see an effective regulatory framework being put in place sooner rather than later to ensure fair and transparent transactions in the capital market in a timely manner. In this context, some of the capital market-related regulations need to be revised and updated. The capital market watchdog should embark on this task without any further delay. The positive ratings given to Bangladesh recently by Moody's and Standard and Poor's might soon be attracting a few foreign portfolio investors. So, the SEC does need to organise itself better to handle such investments.
Under the ceilings fixed by the SEC, an individual will now be allowed to buy a maximum of pre-placement shares worth Tk. 1.0 million, a listed company Tk 10 million and an unlisted one Tk. 5.0 million. The decision is likely to provoke lots of questions. But the first and foremost question that must be agitating the minds of investors is: why did the securities regulator at all keep the provision of private placement that could be abused easily by unscrupulous sponsors of mutual funds or any other company? Allegations about abuse of the provision had been there in the market many months back. But the SEC did not then take the issue seriously. In the meanwhile, several mutual funds have hit the market and many reportedly made windfall gains through pre-IPO placement shares.
In recent years, no issue has gone under-subscribed. Rather, the subscription in the case of every issue, mutual funds or otherwise, has been several times, even 40 times in some cases, of what was offered to the general investors. Even in the event of under-subscription, the underwriters are bound to buy the un-subscribed part of the shares. So, there is theoretically nothing to lose on the part of companies offering all the shares to general investors through initial public offerings (IPOs). The bourses have been requesting the government to offload the shares of its profitable enterprises to help augment supplies of scrips for meeting the high demand of general investors. But these self-regulatory bodies have, interestingly enough, never asked the regulator or the government to look into the allegations about pre-IPO placement of shares.
Pre-placement of shares may, however, be required under the given circumstances in the country's capital market, in the cases of very large issues, such as the Grameenphone, and issues carrying high premium. Except for such cases, the SEC should have no reason to allow pre-placement of shares for any IPOs. It should rather consider the abolition of this facility for most of the IPOs. Investors would like to see an effective regulatory framework being put in place sooner rather than later to ensure fair and transparent transactions in the capital market in a timely manner. In this context, some of the capital market-related regulations need to be revised and updated. The capital market watchdog should embark on this task without any further delay. The positive ratings given to Bangladesh recently by Moody's and Standard and Poor's might soon be attracting a few foreign portfolio investors. So, the SEC does need to organise itself better to handle such investments.