Retail investors to get burnt by overvalued Legacy Footwear after rollout of new shares

Retail investors, who jumped on Legacy Footwear after the April announcement that new shares would be issued, got it all wrong.
Though the disclosure said shares would be distributed among "existing shareholders", it was clear by the time that general investors would not be getting them as the company was not in a position to seek regulatory approval for issuing rights shares.
Meanwhile, the demand for the stock escalated on the Dhaka Stock Exchange driving the price up 250 per cent to Tk 136.50 between April 11 and August 6 only to burn the retail investors in the end.
Prudent institutional investors jettisoned their stakes, taking advantage of the overvalued stock. The DSE data shows the overall stake of institutions declined to 12.33 per cent from 20.98 per cent in just one month to August 31.
On the other hand, the stake of general investors rose from 49.02 per cent to 57.67 per cent during the time.
Now, the 30 million new shares disbursed to 17 beneficiaries, including three sponsor directors, through private placement would dilute the earnings per share.
Bearing the impact would be agonising for general investors as the stock is likely to experience further corrections on the DSE. It closed at Tk 113.50 on Tuesday making it to the top of the losers' chart.
Legacy Footwear issued shares to raise Tk 300 million. The regulator gave permission for the share issuance through private placement so the company could repay interest of bank loans and boost exports.
The company's paid-up capital will go up to Tk 430.80 million from Tk 130.08 million.
The recipients of new shares include companies, such as Sea Pearl Beach Resort & Spa and MK Footwear.
According to the officials of the Bangladesh Securities and Exchange Commission (BSEC), the company failed to issue rights shares because it could not meet regulatory conditions.
Firstly, the company had to be profit making ahead of the disbursement of rights shares. Instead, it reported a loss of Tk 11.20 million for FY22.
Secondly, the net asset value went below the face value to Tk 9.83 per share for the period.
The managing director of Midway Securities, Md. Ashequr Rahman said the regulator allowed the company to raise capital through private placement in a special circumstance, but one-year lock-in period for the new shares, other than the holdings of sponsor directors, would help shareholders take out hefty profits from the market.
"The one-year time is not sufficient to turn around a company's business, and those shareholders may offload their holdings after one year without thinking about the company's viability," he added.
The shareholders got the shares at a price of Tk 10 each with a massive discount when compared to the present market value of the stock. They would make profit even if the stock suffers a sharp correction by next year.
On the other hand, any kind of significant correction will bleed general investors.
The lock-in period is three years for sponsor directors and the shareholders who would have 5 per cent or more of the outstanding shares after the disbursement of new shares.
According to the DSE, the stock started to climb up ahead of the regulatory consent for share issuance through private placement. The company posted the news on April 11.
At the time when the company sought the regulator's nod, the stock was below Tk 50 on the bourse.
"The regulator allowed the company to raise capital to help fulfill the regulatory requirement and facilitate operations," said Mohammad Rezaul Karim, BSEC executive director and spokesperson.
Mr. Rahman said general investors were responsible for their investments in the stock.
Meanwhile, the Dhaka Stock Exchange (DSE) on Tuesday asked the company as to why shares had been issued only to the existing sponsors and/or directors.
In the query, the DSE also wanted to know why the company did not submit any price sensitive information (PSI) regarding the purpose of raising capital as ordered in the consent letter of the BSEC.
DSE acting managing director M. Shaifur Rahman Mazumdar said the consent letter issued by the regulator showed that shares would be issued among "existing shareholders".
"It might be a clerical mistake," he said.
The company secretary of Legacy Footwear could not be reached for comments despite repeated attempts by phone.

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