Star (August 19, 2011)
Market stakeholders and analysts came down heavily on the Securities and Exchange Commission for keeping a clause on valuation in the final amendment to the book building method.
They said, with the inclusion of the clause the true spirit of the amendment has been destroyed, and the key objective of the book building system has been lost.
The clause is related to determining the indicative price of shares of a company, which will use the book building system for an initial public offer (IPO), based on the firm's earnings per share (EPS) and net asset value (NAV).
The clause reads: indicative price will be such that it does not exceed the following yardstick: 15 times of weighted average EPS of the preceding three years or three times of net asset value, whichever is lower but not less than the NAV of a share.
But the key objective of the book building method is that share price of a company would be built up or determined from the market. In other words, market participants will set the price of a company's share through bidding.
The ceiling in indicative price collides with main objective of the book building method.
The method has been suspended on a government instruction since January.
Following recommendations by a high-profile probe committee on the share market crash, the government instructed the SEC to alter the book building rules, instead of stopping the system, as it is well practised in other countries.
The SEC on Wednesday approved in principle the changes in the book building method. However, before issuing the gazette notification on the book building amendment, the draft proposal will be published in the national dailies for public opinion.
“It would be a restricted book building, and I don't think there should be any cap or ceiling in determining the indicative price,” said Faruq Ahmad Siddiqi, a former chairman of the SEC.
“I don't think it's a good decision,” he said, adding that instead of identifying the basic problems and solving those, inclusion of new clauses such as the valuation ones will hamper the spirit of the book building method.
Before the suspension of the book building, which is a modern pricing mechanism, there had been complaints that many companies misused the system taking the advantage of some rules of the method and in connivance with the regulator, auditors and issue managers.
The misuse evoked huge criticism from market analysts, economists, business leaders and even from market stakeholders.
Those who will take part in the pricing could be brought under accountability, said a merchant banker who did not want to be named. “The pricing should be done professionally,” Siddiqi said.
“If the valuation clause remains in the book building method, the system will lose its effectiveness,” he said. “It will be nothing but another option of fixed price method for IPO, as the price would not cross certain limits.”
But, he added, according to the book building rules, the market will determine the price of a company's share.
Fakhor Uddin Ali Ahmed, president of Chittagong Stock Exchange, said: “Conceptually it is not right to limit the price. If it is fixed, then it is not book building.”
He, however, said: “Let's see what happens with the amended book building. If it does not work then we will re-fix it.”
According to people close to the book building amendment, the commission previously decided in principle to eliminate the clause on valuation following recommendations from market stakeholders at a meeting a week ago.
But, they said a member of the SEC had put pressure on other commissioners to keep the clause.
In line with the other amendments to the book building method, the lock-in period for eligible institutional investors (EIIs) will be four months, instead of the previously proposed six months.
The SEC also added three more categories to the indicative price discovery section. Along with merchant banks, commercial banks and asset management companies, non-bank financial institutions, insurance companies and stock dealers should also support the indicative price.
The indicative price should be supported by at least 20 EIIs including at least three quotations from each of the six categories.
The commission removed the proposal of having a committee for verification of audited financial statements of companies that will use the book building method.
However, the SEC would re-examine the audited financial statements through the panel of auditors if the regulator receives any allegation or have any doubts over the statements.
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