How to prevent misuse of the pricing mechanism

Star (July 11, 2011)

The Securities and Exchange Commission is now working on modifying the suspended book building method. The regulator expects work to finish by the end of this month.
Before the modification works began, market experts said the stockmarket regulator should focus on the price bidding mechanism and companies' fundamentals so that the method is not misused, like what happened before the suspension of the system.
Finance adviser to the last caretaker government AB Mirza Azizul Islam said: “The book building method needs to encourage the private sector as some private companies do not want to be listed through the fixed price method.”
Islam, also a former chairman of the SEC, said: “It's a good system for the private companies that want to be listed on the stock exchanges. But we should be careful so that no company can use the method to manipulate the share prices.”
He suggested the SEC should look into a company's fundamentals carefully and then approve the indicative price.
He also suggested the SEC set an upper limit of the price earnings ratio and net asset value so that no one can cross the limit and misuse the system.
On the lock-in period, he said the period may harm the supply side in the market.
The regulator should increase the portion of institutional investors' quota to stop unusual price bidding, said M Shakil Islam Bhuiyan, chief executive officer of LankaBangla Investments Ltd, a merchant bank.
Bhuiyan said some institutional investors went for high bidding as the portion is very low. In India, 75 percent of the shares to be floated are kept for institutional investors that helps discover a fair price.
“The SEC can set unique rules for all bidders so that they are bound to follow them in bidding the prices,” he said.
He also said the future projection value was one of the main problems, as most companies add high future projection values in their statements to get higher prices.
The market regulator should issue a directive on future projection values so that the future prices are fixed on the basis of existing fundamentals, which will help discover fair prices. “In India, they do not add the future projection value to the company's prospectus,” Bhuiyan said.
If the regulator decides that the price will be discovered on the basis of the price earnings ratio and net asset value, it will create problems, as the price earnings ratio of the new companies is always high, said the chief executive.
The new companies will not be interested in being listed in the capital market as most companies' price earning ratio is high, he said.
The price earnings ratio of matured companies is low and they are interested in the bourses, he added.
He also said the net asset value of the leasing and financial companies is different. As a result, he said, the regulator should fix the individual value for different sectors.
Salahuddin Ahmed Khan, former chief executive officer of Dhaka Stock Exchange, said the first work should be to identify the problems of the book building system and then solve them by taking proper measures.
Khan said the bidders should participate in the price bidding, in line with the guidelines the SEC would set.
The bidding price should not be lower than the indicative price, he said.
The lock-in period helps determine a fair price of the shares in the secondary market, he added.