Investors swindled thru' share conversion

Unscrupulous beneficiaries used preference shares as a tactic to fleece people in the stockmarket, cashing in on the weakness of existing rules, found the government probe body on the recent stockmarket crash.
They swindled investors converting preference shares into ordinary ones on the share market, said the committee in its report.
Preference share is a special equity security -- generally considered a hybrid instrument -- has properties of both equities and a debt instrument. It usually carries no voting rights, but may carry a dividend, and may have priority over common stock in payment of dividends and in the event of liquidation.
A rush to issue preference shares by listed companies was seen in 2009 and 2010. Eight companies raised Tk 1,182.98 crore by issuing convertible preference shares last year, the report said.
They include Beximco Pharma, Summit Power, Aftab Automobiles and People's Leasing and Financial Services Ltd. These companies raised Tk 410 crore, Tk 300 crore, Tk 180 crore and Tk 120 crore from the capital market by selling convertible preference shares.
"In the markets of other countries, it is observed that preference shares are issued when the market goes through a bearish trend or floatation of IPO is not supportive. Sometimes, a new company or an old one floats preference shares to create confidence among investors in the company. But in Bangladesh, the issuer companies resorted to manipulation to raise money from people, not to create confidence among investors in their companies," the report said.
"Although the companies were not qualified to issue right share or premium share, some of them raised money from the market by preference shares. All these were possible for the weakness in the guidelines of the Securities and Exchange Commission."
The features of convertible preference shares are not uniform as the SEC has no specific guideline on issuance of preference shares. There have been allegations that the companies took approval from the SEC to their own benefit in absence of a guideline.
Company directors took away money by converting preference shares into ordinary shares. There are also allegations of shoddy conversion and illegal placement trading of preference shares, mostly during their maturity period. Conversion of preference shares with short maturity period is not seen in other countries in the world, the report said.
In most cases, debenture with maturity period of several years and preference shares with a condition for conversion are floated in the capital market, and the holders of debenture or preference shares get interests or profits at a certain rate.
But in Bangladesh's capital market, most preference shares are issued for only 2-3 months. Summit Power and People's Leasing and Financial Services Ltd raised money by issuing preference shares only for a month, the report said.
A commission of 25-45 percent has been given during conversion of preference shares into ordinary ones. But the comparative conversion rate has been fixed in such a way that the issuer company gets a higher premium. For instance, 10 preference shares are convertible to three ordinary shares after the maturity period. It means the conversion ratio is 10:3.
One or two companies set the conversion rate and a premium price directly to avoid the complex process. For example, Summit Power fixed the conversion price of each preference share at Tk 118.27 against a face value of Tk 10, the report said.