Reform Task Force proposes allowing issue managers to participate in IPOs

The Capital Market Reform Task Force proposed that the issue manager — the entity responsible for managing the initial public offering (IPO) of a company — or any of its related parties (such as affiliates, directors, or subsidiaries) should be allowed to bid for or participate in the IPO process.

The task force has submitted the report titled, "Proposed Changes in Initial Public Offering (IPO) and Related Laws" to the Bangladesh Securities and Exchange Commission (BSEC) in March.

It presented detailed recommendations on IPO-related matters through a press conference at the BSEC office on 28 March.

In the proposed reform, the task force addressed 17 issues to reform the IPO rules.

It said the issue manager plays the most crucial role in the IPO process. They should rather be permitted to hold securities, transparent declaration of which makes them more accountable. In the developed world, the lead manager or underwriter buys shares from the company and then sells them to investors.

According to the existing rules, the issue manager or any of its connected persons is not connected with the issuer or its connected persons, nor do they hold any securities of the issuer. The task force recommends that the clause "nor do they hold any securities of the issuer" be omitted.

The task force also proposed that the government should review, if they can allow banks, non-bank financial institutions (NBFIs), insurance companies and stock brokers to underwrite, like India.

Currently, the Bangladesh Bank does not allow banks and NBFIs to do any business that requires licence from another regulator except for custodial business.

In the context of an IPO, underwriting refers to the process where an investment bank or financial institution guarantees the sale of a company's shares to the public, buying them from the company and then selling them to investors.

Meanwhile, the task force also recommended introducing a regulatory framework for cross-border IPO subscriptions.

In its report, the task force stated that the BSEC could allow fundraising through equity, bonds, or other financial instruments.

It added that governance standards would improve as companies would need to comply with the securities laws of foreign jurisdictions.

To ensure the minimum share offloading requirement under the bookbuilding method, the task force noted that companies must dilute at least 10% of their shares — as per BSEC rules — to qualify for reduced tax benefits. 

However, since the price fluctuates during the auction process, complying with both the absolute figure and the 10% threshold becomes technically infeasible, leading to the potential cancellation of the offering.

To address this issue, the IPO size would need to be expanded. Unlike neighboring countries, where bidding has both upper and lower limits, Bangladesh's current regulations do not prescribe an upper limit. The minimum offloading percentage can only be ensured if the upper limit is factored in. 

Since existing rules lack such a provision, increasing the issue size remains the only viable solution. The task force further recommended that the prospectus should accordingly adjust the "utilisation of funds" section to reflect this change.