IPO funds can't be used to repay rescheduled loans

Infographic: TBS

The Bangladesh Securities and Exchange Commission (BSEC) has introduced the Public Offer of Equity Securities Rules, 2025, significantly tightening regulations on initial public offerings (IPOs) to ensure greater transparency, discipline and long-term stability in the capital market.

Under the new regulations, up to 30% of IPO proceeds can be used for debt repayment or investment, subject to certain conditions. In the case of debt repayment, the loan must be used for a company's project, business, machinery, renovation, or expansion, and an auditor's report must confirm the proper use of funds.

Furthermore, loans being repaid cannot be classified or rescheduled, meaning they cannot be listed as overdue or deferred due to any repayment issues. Companies must also submit a banker's certificate proving that the loans being repaid are neither classified nor rescheduled.

These provisions are much stricter compared to the previous 2015 rules. Earlier, up to one-third of IPO funds could be used for debt repayment or working capital, and there were no conditions regarding project linkage or loan classification.

Market experts believe that the new rules will make the use of IPO funds more transparent and responsible, increasing investor confidence. Additionally, this is expected to enhance long-term market stability and allow companies to focus on project development and expansion.

BSEC's move is seen as a necessary reform to ensure discipline and integrity in the capital market, providing a safer environment for investors. Local merchant bank UCB Investment has presented the law from multiple perspectives, calling the new rules a landmark change.

According to UCB Investment, the new regulations restructure IPO price determination, share allocation, eligibility, lock-in, and the role of institutional investors. The main goal of the rules is to emphasise a company's actual business capability, financial foundation, and future prospects rather than just paperwork. This will reduce the tendency of weakly structured companies to list on the market merely by maintaining documents.

For the first time, the new rules allow IPOs to be launched at a premium under the fixed-price method, subject to strict eligibility criteria. Companies must have at least three years of commercial production, positive net profits and cash flow in the last two years, and a specified long-term credit rating.

The most significant change is in the book-building process. From now on, indicative prices of book-building IPOs must be determined using at least four internationally recognised valuation methods, of which two must be absolute and two relative. Opinions from at least 40 institutional investors must be collected, including 10 portfolio managers, stock dealers, and asset managers each.

The most discussed change for retail investors is the removal of price discounts in book-building IPOs. Now, institutional, retail, and non-resident investors must all purchase shares at the same cut-off price. The BSEC states that previous discount mechanisms caused unjustified price shifts in the market, disrupting market normalcy in the long term.

Changes have also been made to the share allocation process. Retail and non-resident investors will again receive shares through a lottery system, reducing disappointment and increasing investor participation.

There are also changes regarding IPO size and capital. Companies must have a minimum paid-up capital of Tk30 crore before the IPO and Tk50 crore after the IPO. Generally, at least 10% of post-IPO paid-up capital must be offered to the public.

A separate framework has been introduced for greenfield or new project-based companies. Entrepreneurs and sponsors must retain at least 75% of post-IPO paid-up capital, and shares cannot be sold within two years if the company does not generate profit.

The role and authority of stock exchanges have been significantly enhanced. Exchanges will act as gatekeepers, verifying draft and red herring prospectuses, inspecting factories if necessary, and collecting opinions from institutional investors. Bidding for book-building IPOs cannot start without proven recommendations.

A lock-in period for institutional investors has also been introduced. In book-building IPOs, 50% of allocated shares will be locked for 90 days, 25% for 120 days, and the remaining 25% for 180 days.

From an investor perspective, the new rules may reduce the number of IPOs in the short term and increase costs. However, in the long term, market transparency, quality, and investor confidence are expected to improve.

Once implemented, the Public Offer of Equity Securities Rules, 2025 are expected to usher Bangladesh's IPO market into a new era of transparency, discipline, and stability.