Merchant banks demand a review of the existing public issue rules before much-needed changes to attract good-performing businesses to the capital market.
The Bangladesh Merchant Bankers Association (BMBA) has already prepared a set of proposals aimed at overcoming barriers to the development of the capital market.
Merchant bankers, whose core function is to bring initial public offerings (IPOs), are critical of the book-building method to determine the price of IPO shares.
Book building is a process through which an issuer attempts to determine the price to offer for its security based on demand from institutional investors.
Presently, companies that offer primary shares at premium prices follow the book building method to raise capital from the public.
The process is not fair, according to entrepreneurs. "It is discouraging for reputable companies," said Mohammad Obaydur Rahman, second vice president of the BMBA.
Eligible institutional investors bid to set a cut-off price. However, the price will not be allowed to cross 150 per cent of the indicative price to be fixed in a blend of five valuation methods based on assets, earnings, peer average, projected earnings, and return on net worth.
After the latest changes in the public issue rules in 2021, no well-performing companies felt encouraged to go public, said Mr Rahman, adding that the strict IPO rules had already weakened the stock market.
The stock exchanges should be empowered to approve IPOs on a limited scale alongside direct listings, said Mr Rahman, also a director of AAA Finance & Investment, one of the leading merchant banks.
The association had placed several proposals, pressing home to make IPO rules effective, but to no avail, he said.
The capital market has failed to become a source of long-term financing, which is why its size compared to GDP has not grown over the last decade.
Commercial banks in the country collect funds from short-term financing sources and use the money for long term project finance, creating an imbalance in the financial system.
In a situation like this, merchant bankers have sought the widening of the scope of listing, allowing state-run, large conglomerates for direct listing; roadshows following consent for IPOs, and at least 50 per cent share allocation to eligible investors, up from current 25 per cent.
"Addressing IPO applications in the shortest possible time will encourage companies to list. The maximum time should be 90 days."
Authorities, such as the National Board of Revenue, Registered Joint Stock Companies, audit firms, credit rating companies, and IDRA, should operate digitally so that the documents issued to companies can be verified by the securities regulator or stock exchanges easily.
Changes sought for private placements
Currently, non-listed companies are exempted from seeking permission from the securities commission while raising capital through the issuance of equity securities, as per a notification gazette in August 2019.
The BMBA said this exemption should be removed because it leads to unregulated capital collection.
"Specific conditions could be imposed on companies, dictating who can invest, and how much can be invested," said the BMBA in its proposals.
Presently, there is no restriction on private placements, which is taken advantage of by many companies.
Direct listing of large conglomerates
At present, only state-owned firms are allowed to list on the bourses through direct listing.
The BMBA suggests extending this opportunity to private entities, including reputed and large conglomerates, as well as multinational companies (MNCs).
It says such an opportunity would encourage non-listed MNCs with strong fundamentals to get listed.
Roadshows after approval of IPO
Merchant bankers proposed that roadshows should be conducted by an issuer company after regulatory approval of its IPO instead of the other way around, which is the case right now.
The BMBA refers to practices in neighbouring India while making the suggestion.
In India, roadshows are conducted after the IPO approval by the Securities and Exchange Board of India.
Raising IPO share allocation to eligible investors
The BMBA proposed increasing the share allocation for eligible investors to at least 50 per cent under the fixed price or book-building method from the existing 25 per cent.
It says the lower allocation is a hindrance to the listing of large companies.
Under the fixed price and book-building methods, the share distribution quota is 20 per cent for eligible investors, 5 per cent for mutual funds, 5 per cent for non-resident Bangladeshis (NRB), and 70 per cent for the general public.
The BMBA says the quotas should be revised to give 50 per cent shares to eligible investors, including mutual funds and collective investment schemes, 5 per cent to NRBs, and 45 per cent to the general public.
Merchant bankers say the large quota for the general public increases the risk of IPO cancellation. The number of eligible general public applicants decreases for the inability to meet the minimum investment criteria, leading to under-subscription of IPOs.
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