After the Bangladesh stockmarket debacle in 1996, the market recovered gradually and had been growing steadily until 2008. In view lower rates of interest on bank deposits, tax-free income benefit, overseas remittance, fair rate of return on investments and lack of sufficient avenues for investment by individuals, investors were encouraged recently to invest more in the stockmarket. The market became reasonably stable until 2008. In 2010, the share price index started rising and it became abnormally high in late 2010 creating an alarming situation and a concern among the experts. From the first week of December, there was repeated falls in the stock prices and in the process, many investors incurred huge losses and market is yet to be stable. Ultimately, highest level of the government had to intervene to turn the situation to a tolerable level from the disaster. Among other issues, the government also formed an investigation committee to detect the market manipulation, if any.
Now the questions are why it happened, how it happened, who are responsible and how to bring the manipulators, if any, into books and protect such untoward happening in future for steady growth of the capital market. As already indicated, the government has already formed an investigation committee with specific terms of reference and we are looking forward to the findings of the committee. So, I will refrain myself from commenting in this regard.
Among other issues, it was observed that in recent times, initial public offerings (IPOs) were priced at a very higher level specially under book building method. With the high price of any IPO, investors try to come to a conclusion that price of existing shares in the same sector is undervalued and this perception may mislead them to buy at higher price. That is how market price of shares increased apart from manipulations, if any. In other words, when the price of an IPO is approved by the Securities and Exchange Commission (SEC), then a clear message is going to the market that the SEC has accorded approval after the required due diligence and scrutiny. So people specially the small investors can rely upon such valuation and judicious decision. For any reason, if the price is fixed at a higher side, among other things, it has apparently two direct impacts: a) investors are exposed to high risks of losing capital as well as insignificant rate of return on their investment, and b) price of shares in the same sector attracts higher price for no apparent reasons.
It is a common knowledge that both quantitative and qualitative fundamentals are considered for buying shares in the stockmarket. Future potentials are of course very important for valuing business and shares but this should not be the major criterion in valuing shares on IPO ignoring other fundamentals. Besides, in an uncertain market scenario like ours, this kind of approach should not be considered as major criteria. Further, in our country, it is unfortunate that many of the sponsors of listed companies could not discharge their obligations properly towards small investors and in few cases, investors have been cheated and SEC's actions were not enough to change this culture to a remarkable level. In such a situation, pricing of IPO obviously deserve special attention of the SEC for a stable, growth oriented and healthy capital market.
Revaluation of fixed assets and restating net assets value (NAV) has become a common phenomenon in recent time to attract the high price for IPOs. In the absence of realisation of gain, in no way, it helps to increase and growth of business. This is merely a satisfaction of the owners to satisfy themselves as to the tangible value of the business and to impress upon the new comers (investors) indicating the NAV.
It has been noticed that before going for IPO, the auditors are changed. Change of auditors is not unusual and not always bad. The intention behind the change is important. If the change is aimed at ensuring quality, it is fine. Otherwise, the reason for change of auditors should strictly be reviewed including pre-change period financial performance of the company and qualifications (observations) made by previous auditors.
Book building method is apparently a sophisticated and widely used concept but unfortunately, this method is being misused with some motive. It needs adequate efforts by regulatory agencies to customise it for implementation in Bangladesh context.
It must be taken into consideration that demand-supply gap is already in existence and there is huge demand of good shares in the capital market in Bangladesh. There are a number of companies outside the capital market having strong fundamentals and very good track records. Care should be taken to ensure entry of these good and potential shares into the market. At the same time, restrictions should be imposed and risky shares should be less privileged for IPO so that small shareholders do not lose money eventually. The SEC seating on the driver's chair should ensure this before they place it to general public for subscription. Experts also feel that there are rules and regulations but the question is whether these are applied and enforced properly and judiciously.
We appreciate that price of shares in the secondary market is difficult to control as it depends on demand and supply, rumours and unusual expectations of the investors. But SEC as the regulatory agency for capital market has a greater role to play in taking active regulatory steps and preventing manipulation of inflated IPO share price before it goes to public.
In addition, SEC has no doubt a great role to analyse the nature of recent IPOs -- how it was priced, how valuation of shares was done, whether the management has been able to achieve the business results as projected and whether the issuers have been using the money raised for the intended purposes as declared. Similarly, pending applications for IPOs also deserve such scrutiny so that it cannot be approved at higher price without the solid grounds and fundamentals. Finally, without leaving it to the market, considering the peculiarities of Bangladesh capital market and level of knowledge of new and small investors, SEC may also like to formulate a policy guideline and take regulatory steps for introducing a “blended price” of IPO at the bidding stage under book building method considering current business performance and earnings per share, realistic business forecast and also NAV focusing less on future forecast.
The writer is a chartered accountant and a partner of Hoda Vasi Chowdhury & Co.