Institutional investors' cry for primary shares

Institutional investors are running after primary shares and ending up being frustrated as new rules last year tightened their way to secure some primary shares in initial public offerings (IPOs) under the book-building method.

Even if they bid at the highest allowable price, they barely succeed nowadays as the maximum allowable price appears to be too low on top of the fact that the shares are allocated on a first-come-first-serve basis, while their IPO quota has dropped to one-fourth from half.

A 72-hour bidding process now practically ends in a few seconds.

For instance, at 5pm on 9 January this year, the Dhaka Stock Exchange (DSE) opened the 72-hour online bidding process to sell nearly one-fourth of the primary shares of JMI Hospital Requisite Manufacturing Ltd to institutional investors.

Within a few seconds, the institutional portion was exhausted leaving 84% of the top bidders unsuccessful to secure some of the profitable primary shares.

Investor firms realised that securing some profitable primary shares in the bidding process literally turned into a matter of luck, alongside the requirement of having the best connectivity and the fastest fingers.

The unprecedented story repeated on 4 July when the electronic subscription system platform opened to institutional bidders for Navana Pharmaceuticals' primary shares. Three in every four firms failed in the bidding, despite their same bid in a difference of seconds.

A brokerage firm's chief executive said many institutional investors feel that the bidding is synonymous to waste of the bidding entry fee of Tk5,000.

"Book building bidding turned into a matter of luck, I am not going for the next bid," he said, seeking anonymity.

Previously, institutional investors used to get some shares unless they were not too late or conservative in bidding.

In the book-building method, institutional investors bid for their portion and their lowest purchasing price is the cut-off price in the IPO and later the general public buys the shares allocated for them at a discount.

Companies which want a premium price over the face value of their shares have to go through a book-building process, while those that do not seek premium sell primary shares under a fixed price IPO process where there is no bidding.  

New regulations blamed

The IPO rules have been in continuous evolution in Bangladesh to tackle the practical problems, BSEC Executive Director and spokesperson Rezaul Karim told The Business Standard.   

However, several changes together made the rules too tight for institutional investors this year, said market people.

Previously, institutions used to bid based on a liberal indicative price to determine the cut-off price – at which price the institutional quota is exhausted. Later, the indicative price mechanism was revoked and institutional investors were allowed for independent bidding on condition to explain and justify their own pricing method later.

Following some criticism for book building IPO overpricing, in February 2021 the Bangladesh Securities and Exchange Commission (BSEC) gave the formula to set the maximum and minimum bid price and the entire range appeared to be much lower than the previous methods.

Meanwhile, institutional investors' quota has been cut down to one-fourth from half that reducing the supply of the shares during bids.  

Now everyone knows the exact ceiling price, almost each of the eligible institutional investors bid at the highest price and the institutional portion is being oversubscribed by four to six times by the equal top bidders, said Bangladesh Merchant Bankers Association President Md Sayadur Rahman.

Since the auction method-technically called "Dutch Auction" compels every successful bidder to buy their share at the exact price and it works on a "first-come, first-serve" basis, a fraction of a second becomes the deciding factor, Rahman said while explaining what created the institutional investors' cry for primary shares in book building IPOs.

Dhaka Stock Exchange's acting managing director M Shaifur Rahman Mazumdar said the DSE proposed to restore the previous method of proportionate, technically called "pro-rata" share allocation among the institutional investors who bid at a cut-off price so that the bidding war eases.

Associations of capital market intermediaries – broker-dealers, merchant banks and asset managers – are recommending changes to the IPO method.

Md Saifuddin, a director of the DSE Brokers Association, said, "We believe the book building pricing method that came in February 2021 is okay for the mediocre firms, but the maximum price is inadequate for the high performing, large and fast-growing firms whom the market needs most."

To attract good companies, IPO pricing methods should be flexible, eligible bidders should be allowed some breathing space as the stocks tend to enjoy much higher prices in secondary markets later, he added.

BSEC's Rezaul Karim said the regulator amends the IPO rules based on stakeholders' recommendations from time to time and it is hearing from them to find a pricing way which would be a win-win for all types of investors and also for the deserving issuer companies.