Bangladesh Stock Market: Ploy of Modern Poly

Wednesday, November 10

Ploy of Modern Poly

FE Report (November 10, 2010)

The Securities and Exchange Commission (SEC) has nullified its own permission given to a company to go public through book building method for alleged violation of securities laws.

The regulator at a meeting held last Monday decided to scrap its permission on the ground that the company, Modern Poly Industries Ltd. had concealed certain information about its sister concern more than 83 per cent stakes of which the company would have acquired with the IPO (initial public offering) proceeds.

The SEC on August 25 last granted permission to the Modern Poly to initiate the book building process for raising funds from the market. But only recently the officials concerned detected that the sister concern in question-Modern Fibre-had not taken any permission from the Commission for raising its paid-up capital from Tk. 100 million to Tk. 600 million, which is a mandatory provision.

However, besides such a flaw, the securities regulator should have thought twice before granting permission to the company, that too under book building method, to raise fund from investors for buying the most part of the stakes of its sister concern at an abnormally high price. In the prospectus submitted to the SEC, the Modern Poly had expressed its intention to buy each share of the Modern Fibre at Tk. 3880 inclusive of its face value of Tk. 1000 and a premium of Tk. 2880.

The SEC permission is unique in the sense only listed companies are allowed after necessary scrutiny to raise funds from the market to acquire stakes of other companies. Moreover, such a practice goes against the very objectives of the companies coming to the market and raise capital for their own expansion.

Actually, had the sponsors of the Modern Poly been successful, the money would have gone to its owners. And then it is the performance of the Modern Fibre, not the Modern Poly, would have mattered as far as investors' interest is concerned.

The SEC has tried to shift the blame on to the issue manger for sending necessary documents to it without proper verification. But should the Commission be entirely dependent on the checks of documents, including audited financial reports, by the issue managers? Does not it sound strange?

The section 2A of the Securities Exchange Ordinance makes the verification of the authenticity of the documents relating to every prospectus or sale of securities through public offering a joint responsibility of both the SEC and the issuer.

The SEC has to be satisfied that the issuer concerned has complied with all requirements under the Ordinance and rules concerned. And in the case of issuer, the section says consent of the Commission to the issue or offer of the securities 'shall not absolve the responsibility of the issuer for the merit and accuracy of the offering.'

However, the issue manager is supposed to confirm the authenticity of the information given and documents submitted with the draft prospectus in a 'Due Diligence Certificate' in accordance with Securities and Exchange Commission (Public Issue) Rules, 2006.

The withdrawal of permission in the case of Modern Poly could be accidental during a period when bull market creates easy opportunities for both scrupulous and unscrupulous companies to raise funds from the market.

One cannot be certain that some unscrupulous sponsors of both listed and unlisted companies have not already cheated the over-enthusiastic investors through primary or placement or preference offers. In an overheated market, the regulator generally remains busy with the task of solving day-to-day market problems and protecting the interest of the investors. And when cries for the supply of fresh shares grow louder from the investors and other stakeholders, the regulator, deliberately or otherwise, overlooks a few flaws with a view to beefing up the supply of securities.

Surprisingly, a large number of well-performing privately-owned companies are found to be not interested to take advantage of a bullish market and get listed with the bourses offering their shares at a high premium.

Maybe, these companies are either not willing to give up the family-control or subject them to scrutiny of securities regulator and general shareholders. In fact, except for scrutiny by the SEC, the control of families concerned over the management of the listed companies remains in tact, at least, in the case of Bangladesh. So, it is high time the private companies with strong fundamentals to come to the market and raise funds for their expansion, if they find it feasible.

zahidmar10@gmail.com