Little perks for good firms going public

Over the last year, the stock market regularly maintained a uniform rule for price discovery of companies willing to issue shares with premium prices instead of the fixed price method.

Under the system that was put in place following allegations of malpractice in price development, share prices of a company coming to the stock market are derived based on a simple average of its asset value and yield analysis.

Prices can be predicted under the current method as a bidder cannot bid 1.2 times the value, which may deprive a financially sound and prospective company of getting fair value of its shares, according to market operators.

The issue came to the surface after a bidding of JMI Hospital Requisite Manufacturing ended in only 5.44 seconds with most bidders offering Tk 25 for its shares at the same time.

Market operators said as the Bangladesh Securities and Exchange Commission (BSEC) is trying to attract good companies to the stock market to increase the supply of quality scripts, the current rule of price discovery through the book building method may not be attractive enough to lure them in.

Last month, the Dhaka Stock Exchange (DSE) held a meeting with big business houses to encourage them to get listed.

"But the existing pricing process will discourage big and renowned companies from entering the stock market," said Md Moniruzzaman, vice-president of the Bangladesh Merchant Bankers Association.

Merchant bankers do the main task for bringing a company to the stock market but the companies will not get lucrative prices under the system.

Financial reports of many companies do not reflect the true earnings of their preceding five years of operation for various ongoing socio-economic factors, he said.

In the new system, a company's valuation is done on the basis of financial variables of the recent five years.

Besides, companies will continue to shy away from the market due to the uniform valuation method for bidding.

In addition, first come, first serve basis is not also justifiable and therefore, pro rata system should be introduced within the process.

Moniruzzaman recommended going back to the previous book on the building process, where the bidding method would be open and competitive.

"It should be a competitive process and if anyones buys it at a higher price, they will pay the price," he said.

"The BSEC should check whether there is any manipulation in the debut trading of an initial public offering (IPO) shares. If it can be checked, then the high price bidding would be stopped added Moniruzzaman, also managing director of IDLC Investments.

Richard D Rozario, president of the DSE Brokers Association of Bangladesh echoed the same, saying the new process would not be favourable for listing well performing conglomerates.

"They deserve good prices so the system should allow eligible investors to bid following many other valuation processes," he said.

If anyone bids an excessive price, then they should be punished, he said.

However, the whole process should not become a victim to the actions of a few bad eggs.

"The new book building process is almost like a fixed method as the bidding price of all would be almost similar," Rozario added.

Most eligible investors bid for shares of JMI Hospital at Tk 25 due to the almost same valuation method, according to data from the DSE.

In the last bidding, the process ended within a few seconds too. Now, there is an easy solution that is giving shares to all bidders.

The bidding time was three days but those who bid within only 5.44 seconds of the start said they won the bid, the data shows.

Answering a question, Rozario said the stock market regulator did it for good intentions of blocking higher price bidding.

In the new book building method, the BSEC alots the price based on a simple average of a company's asset value and yield analysis.

"The bidder shall not bid exceeding 1.2 times of the value," he said.

Every system has a positive and negative side and the BSEC definitely made the change for good intentions, said Arif Khan, vice chairman of Shanta Asset Management.

The regulator always wants to ensure a reasonable price of a stock in its IPO.

"Now, it can be reviewed after taking the views of the market stakeholders," Khan said.

"Actually, the rules are for the betterment of people so they can examine it further to see the best fit for the stock market," added Khan, who is also a former commissioner of the BSEC.

In 2020 and 2021, six companies got listed through the book building method with a premium of Tk 608 crore. The companies are Walton, Mir Akhter Hossain and Energypac Power Generation, Lub-rref Bangladesh, Index Agro Industries, and Baraka Patenga Power.

BSEC had fixed the valuation method to prevent overvaluation in the book building system to discover the IPO price.

However, since two methods are prescribed, everyone is bidding in the upper limit to get shares, said Mir Ariful Islam, CEO of Sandhani Asset Management

As a result , in case of a small issue, the allotted share was exhausted in five to six seconds, he added.

To solve this problem, Islam reccomends that the BSEC consider more valuation methods and other alternative share distribution/allotment systems.

"All the indicators of a company are considered in new methods so I don't see any problem to find a good price," said BSEC spokesperson Mohammad Rezaul Karim.

The BSEC fixed the method as some of the companies got excessively higher prices in bidding, which ultimately did not sustain.

So, general investors who bought the shares in the IPO were impacted, he said.

If any multinational company say that any other option may be a better fit for them to come to the stock market, then the BSEC may consider alternatives.

"Likewise, if any stakeholder brings some other valuation process which is good to discover justifiable prices, then the commission can examine it," Karim added.