Overpriced bidding puts small investors at risk of loss

Some rogue institutional investors are jeopardising the way prices are determined for stocks for their launch in the stock market, detrimentally affecting general investors.

Their modus operandi: placing inflated price bids in the book-building process.

This simple tampering disrupts the whole process designed to determine cut-off prices of initial public offerings properly.

The book-building method comes to play when a company wants to issue stocks at a price higher than the face value.

The process involves an underwriter, usually an investment bank, inviting institutional investors such as fund managers to submit bids for the number of shares they want along with the prices they are willing to pay for it.

The book is "built" by listing and evaluating the demand, and the average price is taken as the final price in the IPO.

Apart from the book building method, there is also a "fixed pricing" method where the price is set prior to investor participation. Here the face value is taken as the issue price.

If the bids are inflated, it unnecessarily raises the stock prices, forcing general investors to pour in more money than they would have otherwise to obtain the shares, explained stock investor Arifur Rahman, who has a decade's experience of the market.

This mishandling is usually brought about by the companies issuing the stocks in connivance with some rogue institutional investors, he said.

As to what was driving this practice, he said the companies were getting higher amounts of money in the listing process and having a "pricey" stock while the institutional investors could not care less.

Asset management companies are paid a fixed annual fee for managing mutual funds, which pool money from investors and channel those into securities such as stocks, bonds and other assets.

The asset managers get a management fee at the end of the year, irrespective of whether or not they were able to make a profit and distribute those among unitholders of the mutual funds.

The exorbitant investments from mutual funds ensuing from inflated prices are depriving unit holders, Rahman said.

Mutual funds are unable to log higher profits, so the unitholders are also being deprived of good dividends, said another merchant banker. Whoever places inflated prices in bids should be investigated, he said.

"This is manipulation," said one stockbroker, pointing out general investors were mainly the ones to end up suffering because they had to buy the stocks at a higher price.

Come to think of it, asset managers are not putting their own money on the line; it is that of investors, for which there is no sense of attachment to drive a proper analysis and valuation, said one merchant banker.

They are availing illegal benefits through underhand dealings with unscrupulous issuer companies seeking inflated prices in the bids, he said, adding, "Their bidding practice proves it."

The Bangladesh Securities and Exchange Commission (BSEC), which is the stock market regulator, should conduct investigations and punish errant market players, he said.

Otherwise, general stock investors will continue to incur losses and have their confidence in the market eroded, said the merchant banker.

The BSEC brought about the book building method in 2015 to keep in tune with international practices, but this has fallen victim to manipulation, he said.

Before its introduction, the BSEC used to itself determine the value, but that gave rise to a lot of criticisms, he said.

One recent instance of the blatant malpractice took place in the IPO price determination of Index Agro.

The stock had a face value of Tk 10 and many renowned asset managers with good performance records bid with offers ranging from Tk 15 to Tk 20.

However, 38 institutional investors bid more than Tk 70. Of them, 21 were of mutual funds. Some went as far as Tk 100.

The BSEC recently formed a two-member investigation committee to identify anomalies in the IPO bidding of Index Agro.

The regulator has long been irritated by such manipulation, for which it had issued a notification last year stipulating that bidders would have to purchase the stocks at the respective price they had placed in the bid.

General investors in Bangladesh are allowed to buy stocks at prices 10 per cent lower than the cut-off price.

Though the notification brought some institutional investors to their senses, there were others who never flinched, presumably because they were not bidding with their own money.

The Daily Star talked to several asset managers, but none wished to speak on the record. However, most said the price finding mechanism was being affected for the malpractices of a few.

So, instead of blaming all the asset managers, the regulator should identify and punish the rogue ones, they said.

Earlier, the stock market regulator had also asked to see the analysis based on which institutional investors bid high prices in book building processes for Walton Hi-tech Industries and Mir Akhter Hossain Company.

Institutional investors cannot come up with a bidding price out of the blue. The procedure involves forming a committee within their institution to analyse the past performance of the issuer company alongside its prospects.

The investors need to conduct the analysis and have a valuation committee who will work on settling on a price, according to a BSEC notification.

"We have already sought an explanation from some institutional investors for their high-priced bids," said Mohammad Rezaul Karim, BSEC spokesperson and executive director (current charge).

"If we find that they have not followed the proper procedure, then we will take action," he said.

"Already, many investors have become alert, and others will also come about when they will see that we are strict on this matter. Our market intelligence department is also working on it," he added.