SEC recommends measures to reform book building method

Express (July 31, 2011)

The securities regulator has prepared a set of recommendations to effect some major reforms in the existing book building method (BBM).

The government ordered suspension of the method in January this year following widespread allegation about its abuse and stock market crash.

The four-member stock- crash probe body, headed by Khandaker Ibrahim Khaled, also recommended for reforming the book building method.

The SEC has made some specific recommendations to reduce the time for bidding by the eligible institutional investors (EIIs) and the time gap between the bidding and the opening of subscription of issues under the method for general investors.

It also suggested hike in the quotas for the EIIs in the issues under the BBM and addition of the asset management companies (AMCs) to the list of EIIs.

The regulator has suggested the hike saying that the enhanced quotas would ensure proper valuation of an issue as institutions were expected to be more cautious before investing their own money. It also suggested trimming of the individual EII quota from 10 per cent to 5.0 per cent.

In a major deviation from the existing price discovery method, the SEC has proposed that the issuer and the issue manager send the draft prospectus first to the EIIs without mentioning any indicative price and the issuer and issue manger would disclose the indicative prices only after receiving the quotations from the EIIs.

Under the existing method, the issuer in association with the issue manager and EIIs quotes an indicative price in the prospectus and submit the same to the SEC with copies of the same to the bourses.

The new proposal said the indicative prices should be supported by at least 20 EIIs including at least five quotations from each of the three categories--- merchant banks, commercial banks and AMCs.

To scrutinize and verify the audited financial statements better, the regulator has recommended formation of an expert committee, where the capital issue department of the SEC will work as an observer.

The committee will be comprised of the president or a representative of Institute of Chartered Accountants of Bangladesh (ICAB), president or a representative of Institute of Cost and Management Accountant Bangladesh (ICMAB), chief executive officers of both the stock exchanges or their representatives and chairman or one representative professor from the department of finance or accounting of the Dhaka University.

One recommendation said the issuer company, its subsidiaries and any institution where directors, promoters, sponsors of the issuer company have interest under related party, issue manager and any private placement holder of the issue will not be eligible to participate in the road show and bidding process.

This recommendation has been made to eliminate the possibility of fixing security valuation by related parties.

The SEC has suggested that the representatives of both the stock exchanges be allowed to participate in the road show as observers in an effort to ensure more disclosure to the bourses as the security will eventually be listed there.

The SEC said the indicative price of an issue will be such that it does not exceed 15 times of weighted average earning per share of the preceding three years or three times of net asset value (NAV), whichever is lower but not less than net asset value per shares.

In this regard, the regulator said this will limit the maximum possible valuation of the share.

"Although conceptually there should not be any cap in the book building method, considering our unique situation, we may consider this," the draft of the recommendation said.

The SEC has also proposed to extend the lock-in period for EIIs from 15 days to six months.