What stops good companies in Bangladesh from going public?

Infographics: TBS

The country's merchant bankers have identified several barriers that prevent good and fundamental companies, including multinational corporations, from going public to raise funds for business expansion through initial public offerings (IPOs). 

The Bangladesh Merchant Bankers Association (BMBA) has recently proposed several measures to the Dhaka Stock Exchange (DSE) to address these barriers for the development of the capital market. 

The merchant bankers, who specialise in managing IPOs, have also proposed significant changes to public issue rules and relevant notifications to attract quality IPOs to the capital market.

The proposed changes include revising the code of conduct for eligible investors participating in bidding, altering the share distributions quota, relaxing the lock-in period for those other than the company owners, and ensuring that at least 50% of the raised funds are used for loan repayment. 

Additionally, they proposed to keep an opportunity that would allow private entities to offload shares through direct listing to attract reputable and large conglomerates as well as multinational companies.

The DSE, with a plan to modernise and make efficient rules to strengthen the market and attract good fundamental companies in the stock market, has been holding meetings with stakeholders to identify problems in the existing rules and has requested written proposals from them.

Following DSE's request, the BMBA submitted its proposal to the DSE at the beginning of this month. Other stakeholders are in the process of sending their proposals. 

Once all the proposals are received, the DSE will compile a compact list of stakeholders' demands and forward the proposals to the Bangladesh Securities and Exchange Commission (BSEC), the main regulator of the capital market, according to DSE officials.

One of the main issues discussed among stock market stakeholders is the current IPO rules, which have failed to attract good fundamental companies to the stock market for raising funds for expansion. As a result, these companies have relied on bank financing instead. 

This mismatch, where bank financing is more suitable for short-term needs while the capital market is ideal for long-term funding, has led to only weaker companies getting listed in recent years.

Allowing raising paid-up capital with cash 

According to a clause of the Public Issue Rules 2015, a company cannot apply for an IPO if it raises paid-up capital through cash within two years from the date of application for public offer.

Only share issuance to raise paid-up capital through bonus shares is allowed, in the rules. 

With valid consideration, except for intangible assets or intellectual property, other forms of collaborative investments may be allowed within the said period subject to prior approval of the commission. 

The BMBA said this clause appeared as a barrier for the companies to get listed when companies opted for low-cost equity financing during the growth period. 

Currently, the rules prohibit the issue manager or any of its connected persons from holding shares in the company. The BMBA proposed repealing this clause to allow issue managers, who are well informed about the financial strength of the company, to hold shares.

Changes sought for notifications

Including the public issue rules, the BMBA proposed amendments to the notification regarding capital raising and listing regulations. 

Currently, non-listed companies are exempted from seeking permission from the commission when raising capital through the issuance of equity securities, as per a notification gazetted in August 2019.

The BMBA said this exemption should be removed because the lack of commission approval results in incomplete capital raising processes and inadequate supporting documentation. 

"The mismanagement in the capital raising process appeared as a major barrier subsequently at the time of public offering and other issues," reads the BMBA proposal.

Allowing MNCs, large conglomerates for direct listing 

At present, only state-owned firms are allowed to list on the bourse through direct listing.

Proposing to repeal the rules issued in 2016, the BMBA suggested extending this opportunity to private entities, including reputed and large conglomerates, as well as multinational companies.

The BMBA said that allowing this opportunity would encourage well-established, non-listed MNCs with strong fundamentals to get listed. 

These MNCs rarely require funding through issuing securities due to their substantial cash reserves, parent company support, and other operational covenants, the association added.

"Additionally, large conglomerates may seek liquidity benefits for their mature and significant concerns," the proposal reads.

Conducting road-show after consent for IPO

The merchant bankers proposed conducting a roadshow to inform potential investors about the issuers' financials and overall affairs after securing consent for an IPO from the commission.

Currently, the issuer or issue manager conducts roadshows when a company plans to raise funds from the stock market through the book-building method.

The BMBA, referring to practices in neighbouring India, proposed holding the roadshow after obtaining consent to commence bidding by eligible investors. This would provide information about the company's recent positions. 

In India, bidding is conducted after the approval of the Securities and Exchange Board of India.

At least 50% share allocation of eligible investors' 

The BMBA proposed increasing the share allocation for eligible investors to at least 50% in IPOs under the fixed price or book-building method, up from the current 25%, citing the existing mechanism as a hindrance for the large size IPO and owing to the risk of IPO cancellation.

At present, a large portion of the IPO quota is allotted to the general public. 

Under the fixed price and book-building methods, the share distribution quota is 20% for eligible investors, 5% for mutual funds, 5% for non-resident Bangladeshis (NRB), and 70% for the general public.

The BMBA proposed revising these quotas to 50% for eligible investors, including mutual funds and collective investment schemes, 5% for NRB, and 45% for the general public. 

The merchant bankers said the large quota for the general public increases the risk of IPO cancellation. The number of eligible general public applicants decreases due to minimum investment conditions leading to the risk of substantial under-subscription IPOs, BMBA said in its proposal.

Decreasing the lock-in period of shares allotted other than owners'

The merchant bankers also proposed reducing the lock-in period for shares allocated to investors other than the company sponsor-directors by one year.

In the existing rules, the lock-in period for shares held by any person other than the owners of the company is two years. 

The merchant bankers said strategic investors are discouraged by the high lock-in period. They suggested that private equity investors, who typically invest in mature-stage companies, should be facilitated with a lower lock-in period, as it could attract foreign funds and contribute to foreign reserves.

At least 50% raised funds for loan repayment

At present, any issuer company may use one-third of the raised funds from the stock market for the repayment of loans or as working capital.

The BMBA proposed 50% of the raised funds as the maximum that will be used for repayment of loans or as working capital. This measure aims to provide issuers with breathing space during the IPO process, and a probable way to secure required interim funds for intended projects, it added.