Fundraising in stock market stalls, leaving investors on edge

Infographics: TBS

With the cancellation or withdrawal of applications of 18 companies to raise nearly Tk1,000 crore since the fall of the Awami League government, fundraising activities in the capital market have come to a standstill amid the ongoing political uncertainty, economic hardship, and business instability in the country.

Market insiders say entrepreneurs are losing interest in raising funds through initial public offerings (IPOs), while the prolonged absence of new company listings has further dampened investor enthusiasm for fresh investments.

They also note that this situation is negatively impacting both the primary and secondary markets, disrupting overall market stability and operations.

Applications cancelled and withdrawn

According to Bangladesh Securities and Exchange Commission (BSEC) officials, following the fall of the Hasina government on 5 August last year, the current commission has cancelled most of the IPOs, qualified investor offers (QIOs), rights offers, and preference share applications approved by the previous commission.

In many cases, applicants have been informally advised to withdraw their submissions, while some have been asked by the BSEC to reapply.

Among the companies whose applications have been cancelled or withdrawn, Borak Real Estate sought Tk400 crore, B Brothers Garments Tk50 crore, Ishana Fabrics Tk30 crore, Digicon Technologies Tk30 crore, two insurance companies Tk30 crore, Orion Infusion Tk20 crore, Gemini Sea Foods Tk128 crore, Salvo Chemical Tk6 crore, Berger Paints Tk303 crore, and iMart Engineering Tk20 crore.

Additionally, no company submitted an IPO application in the last quarter. Only five companies have applied to raise around Tk38 crore from the stock exchange's SME platform.

Mohammad Rezaul Karim, executive director of the BSEC, said considering the current situation, the commission has cancelled several applications in a short period. However, he is hopeful that many companies will be able to apply for raising funds through IPOs based on their December quarter accounts.

Additionally, he mentioned that amendments to the laws related to public issues and capital raising would be introduced, as recommended by the task force formed by the commission.

Former BSEC Chairman Faruq Ahmad Siddiqi said the challenging economic conditions over the past three years have made it difficult to bring high-quality companies to the market. He emphasised the importance of promptly reviewing and deciding on fundraising applications from entrepreneurs.

He said a task force has been formed, which is expected to provide recommendations soon. However, he stressed the need for swift action, as delays have already prolonged the process.

Additionally, he called for a reassessment of the entire IPO process, pointing out that, at times, companies' profits or capital suddenly surge, placement shares are issued, and IPO pricing is determined through various means – factors that require closer scrutiny.

Entrepreneurs in distress

Entrepreneurs have voiced their dissatisfaction with the cancellation of IPO applications and the ongoing issues in the capital market. They stated that their plans remain unimplemented, leading to a loss of trust in the IPO system.

An entrepreneur, who wished to remain anonymous, said, "There's no problem with my company. The BSEC cancelled the application citing trivial reasons. Now, I have to take a loan from the bank to expand my business because meeting customer demand is the primary task now."

An official from another company that applied for an IPO said, "Our application has been pending for a long time without any valid reason."

In October last year, the BSEC held a meeting with representatives from three renowned business groups in the country, encouraging them to enter the capital market. During the meeting, the groups suggested simplifying IPO rules and revising the company valuation process to the BSEC.

Mustafa Kamal, chairman of Meghna Group, expressed concern over the long and complex process of getting listed in the country's capital market.

He told TBS, "Raising funds from the capital market takes two to three years. We cannot afford to wait that long."

He also suggested that greenfield companies should be given the opportunity to raise funds from the capital market.

Reza Uddin Ahmed, executive director of City Group's Finance and Investment division, emphasised the importance of improving the IPO process. He said that by revising the valuation method, simplifying the listing process, and stabilising the policies, established companies could be encouraged to enter the capital market.

However, he noted that some established companies need time to meet certain conditions, such as appointing independent directors and getting audits from a Securities and Exchange Commission-approved auditor.

Stakeholders say that over the past two decades, many large business groups in Bangladesh, such as Meghna Group, City Group, Pran-RFL, TK Group, and others, have expanded their investments through bank loans rather than listing in the capital market, raising questions about the effectiveness of Bangladesh's capital market.

Complexities in IPO regulations

The procedural tasks of raising funds through IPOs in the stock market are handled by local merchant banks. However, due to the repeated cancellation of applications without reasonable justification, they are losing interest in bringing new companies to the market.

According to merchant bank officials, due to the country's economic downturn, companies are facing difficulties with their ongoing businesses.

They say when companies seek to raise funds through an IPO, they must comply with numerous regulations. Particularly, they must provide proper documentation on how the paid-up capital was increased, which is complex and time-consuming.

As a result, entrepreneurs are losing interest in following this process and are leaning towards bank loans as an alternative.

They argue that without reforming these processes, it will be impossible to bring strong companies into the capital market.

Mazeda Khatun, president of the Bangladesh Merchant Bankers Association (BMBA), said currently, merchant banks are operating in a downturn, and if new companies do not enter the market, it will not only reduce liquidity flow but also shrink the business of these institutions.

A CEO of a merchant bank, who wished to remain anonymous, said there is no precedent for a country where the capital market has been shut off for fundraising for six months. Regardless of whether the companies are good or bad, at least this flow should continue.

According to officials, merchant banks have proposed amendments to the IPO regulations, including changes in company valuation methods and reverting to the old rules for increasing paid-up capital for non-listed companies.

Role of the stock exchange

In the case of IPO approvals, stock exchanges generally provide their opinions to the regulatory authorities. However, it was alleged that these opinions were not given enough importance during the tenure of the previous commission.

Officials of the current commission have expressed hope that the opinions of stock exchanges will be prioritised in any future process for companies to raise funds.

Mominul Islam, chairman of the Dhaka Stock Exchange, said since assuming his position, the BSEC has been giving due consideration to the stock exchange's opinions.

He further said following the recommendations of the task force, several good companies will raise funds from the capital market.