Stakeholders oppose major amendments to BB method ==>> Mirza Aziz backs the SEC move

Express (August 12, 2011)

The regulator's plan to make sweeping changes in the book building method faced resistance from listed companies, fund mangers and merchant banks who have opposed two key amendments to the price discovery system.

The newly recast Securities and Exchange Commission has moved to overhaul the book building method after the government suspended the system as it was blamed as a reason for the December-January stock crash.

Under the move, the regulator has planned to extend the existing 15-day lock-in period for the eligible institutional investors (EIIs) to six months and introduce an indicative price limit for firms seeking to raise fund through the BB system.

At a meeting with the SEC on Thursday, representatives of the two bourses, listed companies, merchant banks, insurers and asset managers opposed the move, saying the changes could sow the seed for liquidity crisis in future.

They asked the regulator to cut the lock-in period to at least three months for half the stakes owned by institutional investors or stagger the embargo from the first month when one-sixth stake could be sold off.

According to the Chief Executive Officer of the Chittagong Stock Exchange Sajid Hosen, stakeholders told the meeting that an extended lock-in would stuck up fund, creating liquidity crunch in a market still suffering from scarcity of fresh fund since the crash.

"During the meeting, the stakeholders said the lock-in period should be reduced. They presented their arguments and highlighted the pitfalls of an extended lock-in period," he said.

An official said the regulator stuck to its gun on the planned lock-in period, saying the market will face manipulation if such period is relaxed.

Former advisor to the caretaker government and an ex-SEC chairman AB Mirza Azizul Islam, however, came to the defence of the regulator, saying the proposed six months lock-in period for EIIs makes sense.

"I don't think the market will face liquidity crisis due to a longer lock-in period. If the market is well supplied, there is no way this measure would cause fund crisis," he told the FE.

To avert price distortion, the SEC has said the indicative prices of a firm using BB method 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.

It said the indicative price of an issue will be such that it does not exceed 15 times of the 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 the NAV per shares.

Most merchant bankers, listed firms and asset managers, however, opposed the indicative price limit, as they argued that it contradicts with the concept of book building method, a source in the parley said.

But the regulator stood by its ground, saying it is imposing the indicative price limit in an effort to prevent manipulation in share valuation.

Ex-SEC chief Mr. Islam also backed the regulator, noting the indicative price limit should be imposed due to the current market situation.

Other recommendations, which have been finalised for the amendment of book building method, included increasing quota for EIIs to a maximum 60 per cent and the eligibility of AMCs as EIIs.

The SEC's decision to cut down institutional bidding period to 48 hours from the 3-4 days got unqualified support from all the stakeholders.

The maximum limit for one EII in the bidding will be five per cent, instead of existing 10 per cent, according to the SEC proposal.

In preparing the financial statements, the SEC said, the EPS should also be disclosed on fully diluted basis and future projected net income will not be considered while calculating the weighted average EPS.

To review the audited financial statements, the regulator and stakeholders have also reached a consensus on forming an expert committee, where the capital issue department of the SEC will work as an observer.

Representatives of both the country's stock exchanges, Bangladesh Association of Publicly Listed Companies (BAPLC), Bangladesh Merchant Bankers Association (BMBA), Association of Asset Management Companies (AAMC) and Bangladesh Insurance Association (Bia).