BSEC to revise IPO rules, ending private share offerings for issuer employees
The Bangladesh Securities and Exchange Commission (BSEC) has moved to amend initial public offering (IPO) rules, eliminating provisions for private share offerings to issuer company employees.
The move aims to ensure transparency and fairness in the IPO process, preventing misuse of the private offer facility.
The stock market regulator published a draft notification on 2 March, inviting stakeholders to submit their feedback by 17 March.
In the draft, the BSEC proposed eliminating the private offer facility for employees, which was initially introduced as part of the IPO process.
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The private offer facility was introduced on 24 August 2021 by the Shibli Rubayat Ul Islam-led commission through an amendment to the Public Issue Rules 2015.
Under the rules, issuer companies were allowed to allocate up to 15% of their IPO shares to employees or other individuals at face value under the fixed-price method or at fair value under the book-building method. These shares were considered part of the IPO.
However, the BSEC has observed misuse of the provision.
Abul Kalam, spokesperson for the BSEC, told TBS, "The private offer was introduced to allow employees of issuer companies to participate in IPOs. However, the commission received allegations that many companies misused the rule by allocating shares to individuals who were not their employees. To curb these malpractices, the commission has decided to amend the rules."
Kalam said that the BSEC would finalise the draft rules after reviewing feedback from stakeholders.
This decision marks a significant shift in the regulatory framework governing IPOs, as the BSEC seeks to strengthen investor confidence and maintain market integrity, he added.
Under the private offer provision, Robi Axiata and Midland Bank each allocated 15% of their IPO shares to their employees.
Exploitation of private offer provision
A managing director of a merchant bank, on condition of anonymity, said that market intermediaries have been exploiting the private offer by using other individuals' provisions to gain undue benefits. These intermediaries received IPO shares under the private offer, enabling them to earn additional profits illegally.
He explained that the BSEC introduced the private offer provision to allow IPO shares for employees, but market intermediaries misused it for personal gain. Removing the provision will close this loophole and end unethical practices.
He noted that malpractices in Bangladesh's IPO market have raised concerns about its integrity, deterring reputable entrepreneurs and hindering growth.
According to market insiders, prior to 2021, there were no restrictions on selling company shares through private offerings. Companies often sold a significant portion of their shares under the guise of private placements before initiating the IPO process.
There have been some stock market listings over the last decade where some companies allegedly fabricated their sizes just before applying for IPOs so that they could get a better response from public investors.
The capital fattening has two common aspects – increasing capital in the immediate past years before filing for market listing, and the increased capital usually comes from the pre-IPO placement shareholders who count on an unsustainable stock price hike after debut for a profitable exit, they added.
To address this unethical practice, the BSEC introduced new regulations in 2021. Under these rules, companies are now barred from selling any shares for two years before filing for an IPO. Instead, the commission introduced a limited private offer, allowing issuers to allocate up to 15% of the IPO shares primarily for their employees, according to market insiders.
