Initial Public Offering in Capital Market of Bangladesh
Going Public: Initial Public Offering in
Capital Market of Bangladesh
The capital market is the engine of growth for an economy, and performs a critical role in acting as an intermediary between savers and companies seeking additional financing for business expansion. Vibrant capital is likely to support a robust economy. While lending by commercial banks provides valuable initial support for corporate growth, a developed stock-market is an important pre-requisite for moving into a more mature growth phase with more sophisticated conglomerates
The Bangladesh capital market still has a long way to go. The recent measures taken by the transitional government have already begun to positively impact the markets. If more investor-friendly policy reforms were to be implemented, the capital market will undoubtedly play a critical role in leading Bangladesh towards being the next Asian tiger with growth comparable to India, Vietnam and the other most dynamic economies in the region.
Capital market provides an alternative channel for intermediation of savings. Capital market allows small savers to share the benefits of economic growth and higher corporate profits. Capital market is also attractive to the entrepreneurs because it does not entail fixed repayment obligations as in the case of bank loans.
Unfortunately, supply of shares does not increase keeping pace with demand for shares, which is a source of concern. The regulator’s recent measures will help stabilize the market in the short term, but not in the long term,
This Internship Report emphasizes to find out the Initial Public Offering Process, advantages and disadvantages, and impact of IPO in any company. This paper also discuss about the involvement and role of regulator, (Securities & Exchange Commission), stock exchanges , Dhaka Stock Exchange & Chittagong Stock Exchange, other facilitator , (Registrar of Joint Stock Companies & Firms, Board of Investment, Central Depository Bangladesh Limited) in the process.
The relevant rules and regulations which needs to comply before going for IPO has also been discussed. Pricing method for IPO, fixed price and book building method, prerequisite for book building and its process are mentioned in later chapters of this paper. One cannot do it alone! Going public is a monumental decision. The process involved not only is extremely demanding, but also requires specialized skills and experience. A dedicated team, consisting of members of the board, company management, and external advisers (e.g., issue manager, underwriters, lawyers, auditors) is a key element of a successful offering.
The major tasks of issue manager are overall look after and monitor the entire process. Experienced and adequate manpower enriched issue manager can make a huge difference in the whole process. The estimated cost structure and project timeline is also pointed out in this paper.
Objectives of the Internship Report
The main objective of the study is to get a definite idea about how a company can get finance through offering shares to general public. Though the title “Going Public: Initial Public Offering in Capital market of Bangladesh” very lengthy area, the specific objectives are as follows:
To know relevant rules & regulations;
· To give a clear idea regarding the process;
· To know the factors need to consider for a company before going to public;
· To identify hindrances and recommend for probable solutions;
· To have an insight about the advantages and disadvantages of IPO;
· To learn about timeline and cost framework for going public;
· To know about different pricing method;
· To know about the critical issues for going public;
· To analyze the performance of recent IPOs;
· To know about recent capital market developments and
· To know the governing and regulatory aspects of capital market of Bangladesh.
Scope of the Internship Report
The report will give us an insight about Initial Public offering in Bangladesh. The area of concentration of this Internship Report is confined in investigating different aspects of the initial public offering, the advantages and disadvantages of going public, pricing method for IPOs in capital market of Bangladesh, the public issue process and major content of prospectus, appointment of different professionals, time frame for the whole process and cost structure. The Internship Report also highlights about various rules & regulations related to IPO and present capital market scenario.
Methodology of the study
Analysis has been made on the basis of the objectives mentioned before in the context of “Going Public: Initial Public Offering in Capital market of Bangladesh”. The paper will be written on the basis of information collected from primary and secondary sources.
Experience gathered while working in Issue management department at IDLC Finance Limited.
Additional information will be obtained through interviewing the participants i.e. issuers, prospective issuers, regulators, officials from stock exchanges,
For the completion of the paper, secondary data will be collected. The main sources of secondary data will be:
Official Website of Bangladesh Bank, Securities & Exchange Commission, Central Depository Bangladesh limited.
Rules and regulations of SEC.
Information from published reports of SEC, DSE
Different Books, Journals, Periodicals, News Papers.
Limitations of the study
An analytical work requires enormous study and research when the subject is related to capital market development. This is time and effort consuming endeavor; despite my full time internee I have tried my level best to bring every aspects of the selected topic.
Despite my heartiest try I have found some information unavailable, which could enrich my report. I have also found that time and opportunities are some factors that created hindrance in completion of the paper.
This report aimed at providing a comprehensive picture of the whole situation, but some aspect without knowingly may have missed, I apologize in advance and request for advice and support so that the errors can be corrected on a timely basis and my knowledge level can be enriched.
Why Go Public? Pros & Cons
The Going Public Process
Taking a company public is an exciting and challenging process for the entrepreneur, the chief executive office, the chief financial officer—and for all the other stakeholders involved in the process. For some, going public may be the culmination of one long-term strategic goal and the beginning of a new life in the public spotlight. For others, it may be the achievement of a major business and financial reward.
Being public brings prestige and visibility with all the players in the market—customers, suppliers, employers, and the financial community. Like any other initiative that brings high long-term rewards, the going public process is not without its challenges: complex accounting rules and reporting requirements, pressures on time and resources, and managing new stakeholders—the board, shareholders, and, possibly, new management.
IPO is a perpetual source of finance. Unlike debt, equity does not contain any definite maturity, interest, and amortization requirement. Therefore, equity capital greatly increases the cash flow status of the company relieving it from periodic payment obligation. In the era of free economy and democracy, stock market provided an effective linkage between large pool of investors and entrepreneurs. Investors on their freewill want to take risk and invest directly with the project and like to posses share of ownership and profit.
Why go public?
Decision to go public should follow from the companies longer-term strategic objectives—
Seeking opportunities for growth,
Value creation, or
An exit strategy
Growing companies constantly search for new capital. Going public is one way to obtain that capital, but it takes time and money—and a lot of both! Typically, this decision is the culmination of a longer term strategic plan for the company.
One may be an entrepreneur who started a business around a good idea. A successful strategic formula has created shareholder value and now the company is ready for the next step. Reaching where the company is today may have stretched the internal operational and external borrowing capacity. The company may seek access to the public equity markets for additional investors.
One may have founded a successful business and want to crystallize the value on which built the company. Or, one may be an investor in the private equity sector, looking for an exit strategy or to receive a return on investment.
Benefits of Listing
Listed non?financial companies enjoy significant tax benefit. The usual tax rate of the listed non-financial companies is 27.5% as opposed to 37.5% of the non-listed companies. Additionally, 10% tax rebate is allowed if at least 20% dividend is distributed. Therefore, the effective tax rate of the listed companies comes to 24.75%.
Better Corporate Governance
As listed companies have to follow stringent corporate governance policies and accounting standards, greater transparency of the organization is ensured. Greater transparency, in turn, helps to increase the value of the company.
Brand Value Creation
Listing with bourses, enhances brand equity of a company. Publicly listed companies enjoy greater acceptability in both corporate and social levels. As the price and corporate news is published in newspapers and other publications, the company is exposed to a vast number of people. Moreover, listed companies are followed by a number of analysts, financiers, investors, and journalists.
Marketability of Shares & Value Determination
Listing provides easy exit to the shareholders through providing marketability. The sponsors, who actually create value through undertaking enterprising efforts, get the opportunity to sell off a portion or all of their holdings at appropriate value and reinvest the proceeds in other ventures.
Attract Foreign Investment
Being a listed company, can help attract foreign investment in the firm, opening up opportunities for business expansion and modernization.
Self Esteem & Social Recognition
Usually listed companies become financially healthy and organically diversified. Managing large diversified company gives the management a sense of achievement of self esteem. Moreover, the employees get greater recognition in the society. The increased recognition and esteem leads to higher motivational level and output.
Further Capital Raising Option
Listing also opens other source of financing like issuance of rights, bonds, debentures or secondary issuance of shares (repeat public offer). As the market is viewed as the cheap fount of finance, it is prudent to raise capital from the market.
Reduced Reliance on Debt Finance
Borrowing and their prescheduled compulsory debt servicing could be avoided if company is listed.
Increased scrutiny and accountability
As a public company, companies lose privacy in matters related to your company’s business operations, competition, executive officers’ compensation, material contracts, and customers. Extensive public disclosure rules require details in public offerings and continuous disclosure documents, such as the memorandum & Articles of Association. As a public company, the information must provide to the public is also available to the competitor. Some of this information may be sensitive (e.g., operating results for the company or geographic segments, compensation of senior officers). The company is also under constant pressure to meet market expectations and explain the decisions made and actions undertaken to your shareholders and different players in the market.
Increased demands on time and resources
Going public creates extensive new reporting requirements, including preparing and filing annual and quarterly financial statements, and CEO/CFO certifications on disclosure controls and procedures as well as internal control over financial reporting. These requirements demand a significant commitment of time and resources by senior management and other personnel. A company may also need to make changes to existing accounting and reporting systems in order to meet these reporting requirements.
Reduced flexibility in decision making
Corporate decision making for major activities, which may have been informal and flexible, will now require approval of the board of directors or shareholders. Obtaining director or shareholder approval can be a lengthy process. For example, if a extraordinary general meeting must be convened, appropriate advance notice must be provided to all shareholders and proxy-filing requirements must be satisfied. Management team must consider the public shareholders’ rights in any major decisions. An experienced board, with outside directors, can be an invaluable ally in meeting expectations.
Loss of control
An IPO dilutes the ownership of the company. At the IPO stage, the owners can make certain that they maintain control after the completion of the IPO by ensuring they continue to hold the majority of the voting shares. Future public financings or issuing shares for acquisitions will dilute their ownership percentage, and create the possibility that the original owners will lose future control.
Being a public company is costly. Costs are incurred during the planning stage and for the initial offering. Issue management fee, underwriters’ commissions are negotiated based on the size of the offering. Other costs vary, depending on the structure and complexity of each offering. Subsequently operating as a public company will incur further costs.
Assess the impact on the company & making decision
Compliance with regulatory requirements demands a level of commitment of time and resources across the business segments of a public company. In essence, the company is selling a part of it to the investing public through IPO. The price receives for the company will be determined by track record, the company’s future potential, and the market into which selling is going on.
The public invests funds in search of growth and a return consistent with or better than other investment opportunities. This expectation puts pressure on the company and management team to continue building shareholder value through profitable growth, even after it has gone public. While management may not know most of the new investors in the company, they have significant responsibilities and accountability to them.
After your company goes public, investors and securities regulators will expect to have extensive timely and relevant information about the company and its prospects. Be prepared for this scrutiny. For this reason, determine whether the company is able to deal with this additional stress on its governance, value chain, and infrastructure.
Before deciding to go public, assessment of the impact this change will have on the company. Determination of whether the company is ready to make the necessary commitment before, during, and after the IPO process is highly needed.
Given all the information available and assessments made to date, the following questions need to be answered and then make the decision.
Does going public fit into the company’s strategic objectives?
Are the company and management team committed to this process?
Does the company have the resources to execute the plan, bring the process to completion, and continue as a public company?
The Regulator, Stock Exchanges & Facilitators
Overview of Capital Market of Bangladesh
Bangladesh capital market is one of the smallest in Asia but the third largest in the south Asia region. It also consists of a dedicated regulator, the Securities and Exchange Commission (SEC), since, it implements rules and regulations, monitors their implications to operate and develop the capital market. It has two full-fledged automated stock exchanges namely – Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). There are service provider such as Registrar of Joint Stock Companies & Firms (RJSC), Central Depository Bangladesh Limited (CDBL) and Board of Investment (BOI).
Current market capitalization of about USD 43.6 billion which has grown 10 folds in the last ten years.
Fueled by consistent economic growth of about 6% in the last 6 years, the capital market has been growing fast in the recent years.
Despite recent growth, market capitalization as % of GDP is one of the lowest among comparable economies and the neighboring countries.
Average daily turnover of DSE increased from USD 3 million in 2001 to USD 86 million in 2009. From January 2010 to date, average daily turnover is USD 227 million. In October 2010, daily average turnover was USD 339 million.
Currently there are 2 stock exchanges, 37 merchant banks, 11 Asset Management Companies, 238 brokers on DSE, 131 brokers on CSE and 246 listed companies in Bangladesh.
The Regulator: Securities & Exchange Commission
The Securities and Exchange Commission was established on 8th June, 1993 under the Securities and Exchange Commission Act, 1993. The Chairman and Members of the Commission are appointed by the government and have overall responsibility to administer securities legislation. The Commission is a statutory body and attached to the Ministry of Finance.
Mission of the SEC is to:
Protect the interests of securities investors.
Develop and maintain fair, transparent and efficient securities markets.
Ensure proper issuance of securities and compliance with securities laws.
The Commission’s main functions:
Regulating the business of the Stock Exchanges or any other securities market.
Registering and regulating the business of stock-brokers, sub-brokers, share transfer agents, merchant bankers and managers of issues, trustee of trust deeds, registrar of an issue, underwriters, portfolio managers, investment advisers and other intermediaries in the securities market
Registering, monitoring and regulating of collective investment scheme including all forms of mutual funds and regulating all authorized self regulatory organizations in the securities market.
Prohibiting fraudulent and unfair trade practices relating to securities trading in any securities market.
Promoting investors’ education and providing training for intermediaries of the securities market.
Prohibiting insider trading in securities.
Regulating the substantial acquisition of shares and take-over of companies.
Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of securities, the Stock Exchanges and intermediaries and any self regulatory organization in the securities market.
Conducting research and publishing information.
The Stock Exchanges: DSE & CSE
Dhaka Stock Exchange (DSE):
Dhaka stock exchange (DES), the first bourse of the country was established in 1954. It is regulated by its own regulations and run by its own Board comprising of nine elected councilors and three councilors nominated by the government.
The Major Functions of DSE:
Provide listing rules to give assurance that the issuance of a company’s securities has conformed to legal requirements.
Provide disclosure rules (The Financial Express, 1999).
Publication of monthly journal, showing performance of the market as well as listed companies.
Provide floor for transaction (Capital Market Development, 1994).
Ensure adequate volume of trade leading to liquidity.
Provide reasonable level of fairness in deal making and trading.
Registering, monitoring security prices.
Provide adequate instruments and technical aids for prompt and smooth trading.
Chittagong Stock Exchange (CSE):
Bangladesh government approved Chittagong Stock Exchange as a second Bourse of the country on February 12, 1995, in order to accelerate industrial growth for overall benefit of the economy.
Chittagong Stock Exchange was incorporated as public limited company on April 1, 1995. Since then, it has accomplished some innovative functions. On June 30, 1997, CSE started automated trading system on Wide Area Network. On June 02, 1998, it started screen based trading replacing the floor based cry out system. On January 16, 2000 CSE established South Asian Federation of Exchanges. Chittagong stock exchange is a self regulatory organization.
Roles of Chittagong Stock Exchange:
The major role of Chittagong stock exchange is to create an effective, efficient and transparent market of international standard to save and invest in Bangladesh in order to facilitate the competent entrepreneurs to raise capital.
Seek explanation from the listed company(s) on any reasonable ground.
De-list any company for some specific reasons.
Extend time schedule for AGM/ EGM.
Observe AGM/ EGM time schedule.
It can take any legal action against the listed companies for violation of listing regulations or for not fulfilling the continuous listing requirements.
Facilitators: RJSC, CDBL, BOI
Registrar of Joint Stock Companies & Firms (RJSC)
This office, under the ministry of commerce, administers the registration of companies as specified in the companies Act. A Company files its memorandum and articles of association with the Registrar, who after assuring himself that all requirements have been met, issues a certificate of in-corporation. Every company with issued share capital must keep a list, update at least annually, showing its members and the number of shares held. Presumably the Registrar inspects the information filed with him.
Central Depository Bangladesh Limited (CDBL)
Our Central Depository System (CDS), called the Central Depository Bangladesh Limited (CDBL), is also a monopoly. After the turmoil in the stock market in Bangladesh in the early 1990s the need for automation of the bourses and the presence of a CDS was realized.
A depository is like a bank for shares instead of money. Instead of holding shares in the form of certificates, investors have accounts in the depository and are able to move securities and settle stock exchange transactions by an electronic update of their accounts.
CDBL provides services to the Bangladesh Capital Market, covering Settlement of trades on the Dhaka and Chittagong Stock Exchanges as well as Settlement of OTC transaction of Treasury Bills and Government Bonds issued by the Bangladesh Bank.
CDBL, a joint venture company set up by banks, stock exchanges, Asian Development Bank and other institutions, operates the CDS in Bangladesh. Converting physical certificates into electronic form eliminates the risks of damage, loss, forgery and duplication of share certificates. The instantaneous delivery through electronic book entry results in immediate transfer of ownership, which used to take over a month. CDBL has also reduced the costs of the investing while increasing process efficiency.
Central Depository Bangladesh Limited (CDBL) was incorporated on 20 August 2000. It was sponsored by the Nationalized Commercial Banks (NCBs), Investment Corporation of Bangladesh (ICB), Private Commercial Banks (PCBs), Foreign Banks, Merchant Banks, Publicly Listed Companies, Insurance Companies and Dhaka & Chittagong Stock Exchanges with the collaboration of the Asian Development Bank (ADB).
CDBL’s core services cover the efficient delivery, settlement and transfer of securities through computerized book entry system i.e. recording and maintaining securities accounts and registering transfer of securities; changing the ownership without any physical movement or endorsement of certificates and execution of transfer instruments. CDBL has proved to be a convenient and reliable means to settle securities transaction. The investor has been freed from the hassles of physical handling of certificates, errors in paper work and the risks associated with damaged, lost and forged certificates.
Board of Investment (BOI)
Established under Investment Board Act 1989, the Board of Investment (BOI) is the principal private investment promotion and facilitation agency of Bangladesh. The act mandated BOI for providing diversified promotional and facilitating services with a view to accelerating industrial development of the country. In addition, the government also entrusted BOI with some more functions in its service list in the recent past. Combining all, BOI’s present functions can be categorized as follows:
Compliance of Relevant Rules & Regulations
Relevant Rules to Comply
In Bangladesh the issuer companies need to comply several rules and regulation applicable from case to case basis. But in short the following rules and regulation must be covered while making a public offering. These are as follows: Securities and Exchange Ordinance, 1969; Securities and Exchange Rules, 1987; Securities and Exchange Commission Act, 1993; Securities and Exchange Commission (Issue of Capital) Rules, 2001; Securities and Exchange Commission (Public Issue) Rules, 2006; Companies Act, 1994; Income Tax Ordinance, 1984; Income Tax Rules, 1984; Bangladesh Accounting Standards & Bangladesh Financial Reporting Standards
For going public or raise capital Securities and Exchange Commission (Issue of Capital) Rules, 2001 and Securities and Exchange Commission (Public Issue) Rules, 2006 are the key rules. Issue of Capital rule is mainly for issuance of shares for non listed companies. At present there is a slab for issue of capital. Private limited companies need to follow this if the paid up capital increases more than Tk. Ten Crore. In case of Public limited Company (Non Listed) this rule is applicable if the paid up capital increases more than Tk. One Crore. Public Issue rule is the bible for going public in Bangladesh. This rule provides detailed guidelines about the IPO. SEC is the only authority to provide consent for raising capital from public through Initial Public Offering. SEC provides consent as well as a disclaimer in the following form:
“CONSENT OF THE SECURITIES AND EXCHANGE COMMISSION HAS BEEN OBTAINED TO THE ISSUE/OFFER OF THESE SECURITIES UNDER THE SECURITIES AND EXCHANGE ORDINANCE, 1969, AND THE SECURITIES AND EXCHANGE COMMISSION (PUBLIC ISSUE) RULES, 2006. IT MUST BE DISTINCTLY UNDERSTOOD THAT IN GIVING THIS CONSENT THE COMMISSION DOES NOT TAKE ANY RESPONSIBILITY FOR THE FINANCIAL SOUNDNESS OF THE ISSUER COMPANY, ANY OF ITS PROJECTS OR THE ISSUE PRICE OF ITS SECURITIES OR FOR THE CORRECTNESS OF ANY OF THE STATEMENTS MADE OR OPINION EXPRESSED WITH REGARD TO THEM. SUCH RESPONSIBILITY LAYS WITH THE ISSUER, ITS DIRECTORS, CHIEF EXECUTIVE OFFICER/CHIEF FINANCIAL OFFICER, ISSUE MANAGER, UNDERWRITER AND/OR AUDITOR.”
Authority of SEC by Securities & Exchange Ordinance, 1969
Section 2CC. Power to impose Conditions
Notwithstanding anything contained in the Companies Act, 1994 (Act XVIII of 1994) or any other law for the time being in force, or in any contract or any Memorandum or Articles of Association of any company, any consent or recognition accorded under section 2A, section 2B or section 2C, whether before or after the commencement of this section, shall be subject to such conditions, if any, as the Commission may, from time to time, think fit to impose.
Section 2CC inserted vide the Securities and Exchange (Amendment) Act, 1997 (Act VI of 1997).
Section20A. Power of Commission to issue directions in certain cases
Where the Commission is satisfied that in the interest of investors or securities market or for the development of securities market it is necessary so to do, it may, by order in writing, issue such directions as it deems fit to any Stock Exchange, stock broker, stock dealer, issuer or investor or any other person associated with the capital market.
Section 20A inserted by the Securities and Exchange (Amendment) Act, 2000.
Section33. Power to make rules
The Commission may, by notification in the official Gazette, make rules for carrying out the purposes of this Ordinance:
Provided that before the publication of the notification in the official Gazette, the proposed rules shall be published in at least one Bangla and one English widely circulated daily newspapers of the country inviting opinion, advice or objection thereon of all persons concerned:
Provided further that, at least two weeks time shall be allowed for submission of such opinion, advice or objection.
Recent Amendments in Issue of Capital & Public issue Rules
IPO size as per SEC notification dated November 14, 2010
As per guideline, Minimum Paid up Capital (existing + proposed IPO) should be
Minimum paid up capital (existing + proposed) requirement for initial public offering (IPO) shall be Tk. 30 (Taka thirty) crore;
Minimum size of IPO shall be Tk. 12 (Taka twelve) crore but that shall not be less than 10% (ten percent) of the total paid up capital (existing + proposed);
As per SEC Notification dated September 6, 2010
Following rules shall be applicable for issue of capital:
In case of issuance of further security, other than rights or bonus shares, to any person other than the existing shareholders, as the case may be, offer for such issue shall be through Offer/ Information Document containing, among others, determination of the offer price and the justification of premium (if any) in accordance with the provisions of the Securities and Exchange Commission (Public Issue) Rules, 2006.
Such Offer/Information Document shall be prepared, processed and filed with the Commission through a merchant banker for prior consent of the Commission following due diligence as per the provisions of the Securities and Exchange Commission (Public Issue) Rules, 2006.
As per SEC notification dated May 5, 2010
A company must apply to SEC for making an issue of capital through public offering
Within one year from the date of its paid up capital exceeds taka fifty crore, or from the date of publication of the notification in the official gazette, whichever comes later, if it has already been in commercial operation for three years or more; or
Within three years of commencement of its commercial operation, if it has not yet commenced its commercial operation.
Pricing Method of IPO: Fixed Price & Book Building
Pricing of Shares in Initial Public Offering
Bangladesh capital market has been witnessing a robust growth since 2007. Today we are poised for the transformation of the market from a frontier market to an emerging market.
However, the rapidly growing market has created some problems as well. The most serious problem is demand and supply mismatch. Supply of scrip could not keep pace with the growing demand. This often resulted in pushing the price up beyond a reasonable limit and the market had propensity to become risky for inexperienced investors.
Today, there are over two million BO account holders operating in primary and secondary markets. Trading is no more confined to Dhaka and Chittagong. It has extended to many other places. All these positive developments have put pressure on the limited good shares. Therefore, in the interest of stability of the market, the most demanding task is to bring more companies under listing to satisfy the growing appetite of the investors. This has not been happening as fast as it should. More than a third of the present market capitalization is from the banking sector as the banks are obliged to be listed due to regulatory compulsion. This is nearly complete and there is not much prospect of new supply of shares from this sector. The other prospective area is offloading at least a portion of government-held shares in different companies through the stock market. This has also slowed down and in last more than a year; the government did not offload any share through the stock market. Besides, government-owned companies, eligible for listing, are limited and are likely to dry up in the near future. This brings us to the third option, which should be the most important targeted option – and that is the private sector.
Private sector entrepreneurs are largely reliant on the banking system for funding. There is not much enthusiasm for exploring the possibility of funding their business enterprises from the capital market despite the fact that cost of fund from the capital market is generally more favorable. There is also no liability for repayment of the fund or payment of interest at a fixed interval. In spite of these advantages, not many entrepreneurs are coming forward to the capital market which needs to be studied in greater details.
But some factors for this reluctance may not be far to seek. To start with, many of our entrepreneurs are not familiar with capital market. They are familiar with the banking system. Most of the time, banks have surplus liquidity and entrepreneurs generally have access to a large number of entrepreneurs who would prefer to keep ownership and management of their business within the family. That may be an important reason for avoiding capital market. There could be another group who want to avoid transparency. Listing with stock market involves more regulatory control. There are requirements for regular financial disclosures which are scrutinized by the regulators and a large number of market intermediaries and investors. Listed companies are also required to comply with securities laws and hold transparent AGMs regularly. These may not be pleasant suggestion to some entrepreneurs. Again, some business houses may have hesitation on corporate governance issue. Listed companies are required to abide by corporate governance guidelines of the SEC. This is not acceptable to some entrepreneurs – especially to first generation businessmen. There is a substantial corporate tax relief for listed companies. Even this generous tax concession has not been successful to allure companies to come to the stock market.
Generally, established and profitable companies complain that IPO pricing policy does not attract good companies. It’s true that in some cases, trading price on the very first day of trading was few times higher than the issue price. It’s argued that because of this conservative IPO pricing policy, main benefit goes to the traders and not to the companies. The wide difference between market price and issue price is cited as an example of unfair IPO pricing policy that discourages companies with good fundamentals to come to the capital market. Although stock price in a heated market may not always be a reflection of fair price, there could be some truth in this argument. To address this problem, SEC moved towards book building as an alternative method of IPO pricing. After a long deliberation, rules regarding book building method were notified in March, 2009.
Fixed Price Method
If ordinary shares are being offered, the factors to be considered in determining the offering price shall be set forth in the prospectus.
If the issue price of the ordinary share is higher than the par value thereof, justification of the premium should be stated with reference to-
Net asset value per share at historical or current costs;
Earning-based-value per share calculated on the basis of weighted average of net profit after tax for immediately preceding five years or such shorter period during which the issuer was in commercial operation;
Projected earnings per share for the next three accounting year as per the issuers own assessment duly certified by the auditor of the issuer;
Average market price per share of similar stock for the last one year immediately prior to the offer for common stocks or if issuance is the repeat public offering, market price per share of common stock of the issuer for the aforesaid period; and
All other factors with justification which have been taken into account by the issuer for fixing the premium
Prerequisites of an issuer eligible for book building method
An issuer may determine issue price of its security being offered following book building method (i.e. price discovery process) subject to compliance with the following, namely:-
Must have at least Tk. 30 crore net-worth;
Shall offer at least 10% shares of paid up capital (including intended offer) or Tk. 30 crore at face value, whichever is higher;
Shall be in commercial operation for at least immediate last three years;
Shall have profit in two years out of the immediate last three completed financial year;
Shall have no accumulated loss at the time of application;
Shall be regular in holding annual general meeting;
Shall audit at least its latest financial statements by a firm of chartered accountants from the panel of auditors of the Commission;
Shall appoint separate person as issue manager and registrar to the issue for managing the offer; and
Shall comply with all requirements of Public Issue Rules in preparing prospectus.
Process of book building method
Book Building is a process used by companies raising capital through Public Offerings to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from institutional investors at various prices, which are within the price band approved by the Securities and Exchange Commission. The process is directed towards only eligible institutional investors. The bidding is handled through a uniform and integrated automated system of the stock exchanges, or any other organization as decided by the Commission, especially developed for book building method. The offer price for initial public offering is cut-off price, the lowest price offered by the bidders at which the total issue is exhausted.
Prior to the introduction of book building system, IPO price was determined only under fixed price method. Under this method, when issue price of the ordinary share is higher than the face value premium is required to be justified with reference to certain parameter. These reference points were net asset value per share, earning based value per share, projected earnings per share for the next three years, average market price per share of similar stock and other factors taken into account by the issuer. Clearly, this system is not rigid and there is sufficient scope for the determination of market-based IPO price. However, a company intending to issue IPO is required to obtain prior approval of the SEC.
The Commission approves a proposal when it is satisfied on all points including the proposed price of the IPO. Therefore, ultimately IPO price depends on discretionary authority of the Commission. This may not be an acceptable position to an issuer. Besides, in view of rather blurred criteria, judgment of the Commission could be questionable. To be on the safe side, the Commission may also prefer to take a conservative position. In view of these constraints, a market-based method was being considered by the Commission for some time and book building method was the outcome of such deliberation.
Although rules were amended in March, 2009 making provision for the book building method, the Exchanges took some time to make necessary arrangements including updating software for the purpose. This is now in place and price discovery through institutional bidding process took place in case of a company recently. Hopefully this new system of modern market-based pricing policy will attract well-established companies to the capital market.
In order to be eligible under the book building method, the issuer company must have a minimum net worth of Taka 300 million and be in commercial operation for at least three years. The issuer is also required to offer at least 10% shares of paid-up capital or Taka 300 million at face value, whichever is higher. The process will be completed in three stages.
First step of the process is the determination of indicative price. The issuer is required to invite offer for indicative price. Institutional investors approved by the Commission are eligible to participate in the process. The determination of indicative price involves the following institutional investors registered with or approved by SEC in this regard
Merchant Bankers accept the issue manager of the proposed issue
Foreign institutional investors
Recognized pension funds and provident funds
Banks and NBFIs under regulatory control of Bangladesh Bank
Insurance Companies regulated under Insurance Act, 1938
Institutional venture capital and institutional investors
Any other artificial juridical person permitted by the SEC for this purpose
Price so established shall be the basis for formal price building with an upward and downward band of 20%. Issuer in association with eligible investors shall quote indicative price to the Commission for its consent.
The second step starts with eligible institutional investors taking part in book bidding within the price band. The bidding period will be three to five days and no bidder shall be allowed to bid for more than 10% of the total security offered for sale.
The allotment to institutional investors will be made on the basis of the weighted average price of the bids that would clear the total number of securities set aside for them.
The third step is the allotment process to general investors and starts with the opening of subscription to them. IPO price for the general investors shall be fixed at the cut-off price of institutional bidding. General investors will include Mutual Funds and NRBs also.
Depending on size of the issue, quota for institutional investors will vary from 20% to 50%. As usual, quota for Mutual Funds and NRBs will remain at 10% each. Public portion of the issue will therefore vary from 30% to 60%. Notable features of the method are that IPO price discovery is being made on the basis of market mechanism without intervention by the SEC. The price discovery process is restricted to participation of the institutional investors only. This is likely to ensure mature and responsible bidding on the basis of proper assessment by the professionals. The system also ensures that under no circumstances a general investor pays more than an institutional investor. There is also provision for lock-in of fifteen trading days from the first trading day on the security issued to institutional investors. Presumably, this has been done to ensure that institutional investors do not sell shares in bulk disturbing the market before the price stabilizes. However, since a company is required to have a minimum net worth of Taka 300 million to qualify under the system, smaller companies will not have access to the book building method.
It is expected that by ensuring market-based price of the public offer the new policy will encourage bigger and performing companies to come to the capital market. Proper IPO price is likely to open up an alternative source of cheaper funding. Besides, with the growth of economy the banks may not be in a position to offer long-term credit in the future. At that point of time the capital market is likely to grow very fast. The hesitant entrepreneurs may also come to realize that their business cannot grow beyond a point unless they come out of family management and ownership concept and opt for corporate governance by the professionals.
IPOs under Book Building Method
Book Building method is also mandatory for offloading shares through Direct Listing as per Dhaka Stock Exchange (Direct Listing) Regulations, 2006. A notification in this regard has been made on July 7, 2009. Another notification has been made on January 5, 2010 allowing only fully government owned companies to go for direct listing. As on date five companies use book building method for floating shares, these are as follow:
Ocean Containers Limited
RAK Ceramics (Bangladesh) Limited
Khulna Power Company Limited
MI Cement Factory Limited
MJL Bangladesh Limited
Ocean Containers Limited and Khulna Power Company Limited went into public through direct listing, RAK Ceramics (Bangladesh) Limited was the first company which floated shares under book building method for IPO. The bidding procedure of MI Cement Factory Limited and MJL Bangladesh Limited has been completed. These two are yet to start trading in the stock exchanges.
|Issuer||Issue Manager||Type||No. of shares offloaded||Offer Price||Indicative Price||Start of Trading|
|Ocean Containers Limited||ICB Capital Management Limited||Direct Listing||11,900,000||121.40||145.68||March 4, 2010|
|RAK Ceramics (Bangladesh) Limited||IDLC Finance Limited;
BRAC EPL Investments Limited
|Initial Public Offering||34,510,000||40||48||July 13, 2010|
|Khulna Power Company Limited||AAA Consultants & Financial Advisers Limited||Direct Listing||52,148,250||162||194.4||April 18, 2010|
|MJL Bangladesh Limited||Prime Finance & Investment Limited||Initial Public Offering||40,000,000||127||152.4||*|
|MI Cement Factory Limited||Alliance Financial Services Limited||Initial Public Offering||30,000,000||93||111.6||*|
Institutional bidding has been completed, IPO subscription period has been declared on January 2011.
At present four IPO application is pending foe approval of book building. The companies are as follow:
Lanka Bangla Securities Limited
STS Holdings Limited (Apollo Hospitals Dhaka)
Unique Hotels & Resorts Limited (The Westin Dhaka)
Alliance Holding Limited
Two more companies have arranged the Road Show for Book Building. The application will be submitted to SEC after acquiring indicative price from the eligible institutional investors. The companies are as follows
Navana Real Estate Limited
Keya Cotton Mills Limited
Involvement of Related Entities in IPO
Assembling the team: internal and external members
One cannot do it alone! Going public is a monumental decision. The process involved not only is extremely demanding, but also requires specialized skills and experience.
A talented team, consisting of members of the board, company management, and external advisers (e.g., issue manager, underwriters, lawyers, auditors) is a key element of a successful offering. This chapter examines the roles of the following team members:
Chief executive officer
Chief financial officer
Board of directors
Bankers to the issue
Post Issue manager/Registrar to the Issue
Lawyers & Legal Counsel
Credit Rating Agency
Revaluation specialists and appraisers
Chief Executive Officer
The CEO is the team leader. Although the CEO will likely delegate significant portions of the project to the management group and external advisers, he or she should remain in the driver’s seat. The actual role can vary based on the circumstances, but the CEO typically
Drives the strategic decision to go public
Evaluates the company’s readiness
Works with the underwriters to assess market acceptance
Recruits the team
Monitors progress, including achievement of key milestones
Participates in key decisions throughout the process
Is actively involved in the marketing of the company to the investment community
Ensures that the company is in a position to follow through with the offering and
Make an effective transition into a public company.
Performing this role will be demanding, exhausting, and exhilarating. The CEO must be prepared to be flexible in responding to market changes as the offering is developed and priced. The CEO should also have the vision and the ability to be prepared to step back periodically, as the deal evolves, and ensure that going public continues to make sense from a business perspective.
Chief financial officer
Over time, the role of the CFO has become more prominent in the eyes of the regulators. For the most part, CFOs are under more intense scrutiny and have greater responsibilities than ever before, shoulder to shoulder with the CEO. The CFO should be strategic, skilled in building relationships, with a drive to focus on risks across the company to ensure that they are being measured and managed. The CFO serves as a bridge between the business units, management, board, and shareholders.
During the IPO process, the CFO will assume a key role in executing the process. Typically, the CFO
Serves as the key representative of the company in matters relating to the financial information content of the prospectus, and as a liaison between the external advisers, regulatory authorities, and underwriters
Assists the CEO in project managing the IPO process from setting and monitoring timelines, to marketing and closing the transaction.
The CFO has overall responsibility for the financial reporting process that includes both internal and external reporting. Internal reporting involves reporting to the CEO and the board on budgets, forecasts, and other areas as needed. External reporting includes preparing and filing the annual and interim financial statements, the Memorandum & Articles of Association, annual reports, management circulars, and subsequent prospectus offerings.
As part of his or her external reporting, the CFO is required to make regulatory certifications on such areas as the effectiveness of internal control.
Additionally, the CFO holds responsibility for financing decisions, including managing the debt-to-equity leverage, managing the cash flow, including preparing forecasts and budgets, and arranging for appropriate financing through issuance of debt, equity, or other securities.
An important aspect of the going-public process involves preparing for future relations with the investing public and the new shareholders. Company Secretary is the person involved in this regard. In general company’s compliance officer for IPO is the company secretary.
The share registrar also maintains an accurate list of shareholders for the prompt distribution of dividends, as well as notices of shareholders’ meetings, annual reports, and other corporate communications that are important to maintaining the company’s corporate image in the investment marketplace.
Board of directors
The board of directors participates as part of the company’s team. It will conduct its own due diligence through the process. The board can be an invaluable source of experience, advice, and counsel throughout the process—especially if a director has previously participated in taking a company public.
The company’s executives play a central role in taking the company public and in its ongoing success as a public company.
During the planning phase, management is typically involved in
Implementing changes to prepare the company to be public
Helping to select professional advisers as the company goes public, negotiating the advisers’ fees, and ensuring delivery of service
Helping to manage the prospectus process, closing, sale of the securities, and after market activities.
The management team works with the issue manager, underwriters, auditors, and lawyers to schedule the offering process, prepare materials related to the offering (e.g., the prospectus, marketing materials), respond to regulators’ comments, and finalize documents related to the offering.
After the public offering, the management team is involved in investor relations activities and regulatory filings that are part of life as a public company. In short, significant demands will be made on management’s time before, during, and after the public offering. Management must be prepared for these responsibilities and be capable of executing them.
Issue Manager experienced in the process can help the company prepare for the offering by
Coordinating the preparation of a corporate profile that incorporates all the necessary prospectus requirements
Providing assistance in determining the information required for the audited historical and interim financial statements for inclusion in the prospectus
Coordinating the presentation of any forecasts and related disclosures
Developing a model to assist in identifying the valuation parameters for the company, funds to be raised, equity stake to be sold to the company, and number of shares to be issued
Providing strategic direction and assisting in the selection of the underwriters, including attending all the meetings, discussions, and negotiations that management considers appropriate throughout the offering process.
Appendix A provides list of Merchant bankers approved by Securities & Exchange Commission as per SEC (Portfolio Manager & Merchant Banker) Regulation 1996.
The financial institution that guarantees to buy a proportion of any unsold securities when a new issue is offered to public, provided that the minimum subscription stated in the prospectus has been cold to the public. As per SEC’s guidel