BSEC rejects Borak Real Estate’s Tk400cr IPO

The Bangladesh Securities and Exchange Commission (BSEC) has declined the application for an initial public offering (IPO) of Tk400 crore from Borak Real Estate Limited.

The decision was made during a commission meeting in November last year due to the company's failure to fulfill key regulatory and financial criteria required for public listing, said Rezaul Karim, spokesperson and executive director of BSEC, in a statement to The Business Standard.

The rejection highlights the BSEC's commitment to ensuring transparency and adherence to standards in the capital market, he said. 

This development underscores the importance for prospective issuers to maintain compliance with all IPO prerequisites, including financial health and disclosure norms, before seeking public investment, Karim added.

In November, the BSEC issued a formal letter to the company and its issue managers, notifying them of the IPO cancellation. The letter included a detailed explanation outlining the reasons behind the rejection of the proposal.

BMSL Investment Limited and Swadesh Investment Management Limited served as the issue managers for Borak Real Estate's IPO.

Borak Real Estate had planned to utilise the IPO proceeds by allocating Tk200 crore for the construction of a seven-star hotel in Gulshan, Tk100 crore for the development of Hotel Taj, and Tk100 crore for loan repayment.

The BSEC, in its letter, highlighted several critical issues with Borak Real Estate's financial disclosures. 

The company reported the value of its housing investment assets at Tk700 crore, with a profit after tax of Tk652 crore as of 30 June 2023. 

However, according to International Accounting Standards, companies investing in housing projects must calculate profit or loss upon the completion of the work. The profit figure presented by Borak Real Estate was deemed unrealistic, raising concerns about potential dishonest intentions, said the letter.  

Regarding the net asset value (NAV), the BSEC noted discrepancies. The company's asset value was Tk81.37 as of 30 June 2022, which sharply increased to Tk148.54 as of 30 June 2023. 

After excluding fair value adjustments and unrealised gains, the adjusted NAV would have been Tk85.20. This overvaluation raised significant questions, as listing the company at this inflated valuation could mislead investors and harm their interests.  

On dividends, the BSEC observed that the company had artificially inflated unrealised profits as of 30 June 2023. This manipulation would leave the company unable to pay dividends due to insufficient real cash flow.  

The letter also flagged concerns about the company's financial stability. Borak Real Estate's property, plant, and equipment are heavily mortgaged to banks and non-bank financial institutions, serving as collateral for loans. 

Additionally, shares of Borak Real Estate held by Unique Hotels and Resorts are also pledged as collateral for loans from banks and NBFIs, according to the letter.

This situation significantly increases the risk of loan defaults, as these assets, shares, and inventories are at risk of seizure by lenders to recover dues. Such an event could severely disrupt the company's operations and misrepresent its financial position to stakeholders.  

In light of these concerns, the BSEC concluded that Borak Real Estate's financial disclosures failed to meet the required standards, presenting a misleading picture of the company's actual financial health.