It took almost three years to formulate a new and modern IPO pricing mechanism. Mirza Azizul Islam, a former chairman of the Securities and Exchange Commission (SEC), first moved to develop the 'book building method' in 2006. After the book building regulations were put in place on March 19, 2009, it was believed the new system would be one of the best and most transparent rules, as opinions were taken from policymakers to retail investors before finalising the rules.
But it was unfortunate that companies except RAK Ceramics, the first company that used the book building method entirely for listing, misused the method in connivance with the regulator, auditors and issue managers. This evoked huge criticism from market experts and analysts, economists, business leaders and even from market stakeholders.
The government in January this year, after the stockmarket debacle, directed the SEC to suspend the book building method until further instructions. Following recommendations by the high-profile probe committee on the share market scam, the government instructed the SEC to bring changes to the book building rules, instead of stopping it, as the system is well practised in other countries.
The SEC, which was restructured recently as well, is now adding finishing touches to the much-talked-about book building method, which would be finalised this month.
The major change would be the inclusion of compulsory purchase of shares by institutional investors, who will participate in the bidding to discover the indicative price of a company's shares.
It means the institutional investors must buy a minimum number of shares after bidding, officials of the SEC said.
There will also be a bigger lock-in period, and the institutional investors or bidders can sell shares after the lock-in period set by SEC.
As per the suspended book building method, there was a 15-day lock-in allowed for institutions. Now, there is a possibility of imposing at least a 60-day lock-in period for the institutional investors.
The new rules would stop the ill practice of quoting higher prices in fixing the indicative price of a company's shares that the institutional investors did on many occasions, when there was no binding to purchase shares after bidding.
“No institution can offer higher prices by going beyond a company's fundamentals, as it will have to buy a portion of shares,” said a senior SEC official.
He said the reserve surplus generated from asset revaluation cannot be used in calculating net asset value (NAV) or earnings per share (EPS).
Previously, many companies performed asset revaluation and used reserve surplus to inflate the NAV or EPS, thus seeking a higher premium.
He said there will be some more changes in the existing book building method, but he did not elaborate on the modifications. He said the amendments to the system will be finalised within July.
However, people related to the matter said the subscription period would surely be reduced from the existing 25 days, while the institutional bidding period will be cut from 72 hours.
After the bidding, the issuer company and the issue manager may have to submit the final IPO prospectus to the SEC within 48 hours.
The printed draft IPO prospectus may have to be sent to the related institutions and organisations at least five days before the roadshow.
DSE and CSE officials will be present at the roadshow, and indicative price would be mentioned in the draft prospectus.
The book building method was suspended by the government in January this year, following strong criticism that companies misused the system to be listed on the stockmarket.
The SEC has initiated a move to amend the book building system after the government-sponsored probe committee on stockmarket recommended formulating a guideline to make the price discovery method of a company's shares effective.
The probe committee also conducted case studies on some companies including GMG Airlines, MJL Bangladesh and MI Cement, which used the book building method for price discovery.
With the suspension, many companies got stranded while launching the IPOs under the book building method.
The SEC, however, said after fine-tuning the book building method, the commission would take a decision about the companies. The commission may even ask the companies to go for IPO under the fixed price method.
As there are allegations that certain companies sold placement shares at higher prices, their fate is yet to be decided.
At least seven companies sold primary shares worth around Tk 1,500 crore through placement.
A market analyst said most of the companies' price earning ratio was high as they misused the book building system. “The commission should take action against them,” he said, asking not to be named.
STS Holdings that owns Apollo Hospitals, GMG Airlines, Navana Real Estate, LankaBangla Securities, Unique Hotel and Resorts that owns Westin Hotel, Alliance Holdings and Orion Pharma -- are companies that issued placement shares.
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