Task force revises up IPO quota for general investors to 60%

Infographics: TBS

In the final amendments submitted by the Capital Market Reform Task force, the share allocation for general investors in initial public offerings (IPOs) has been increased by 10 percentage points to 60%, while the allocation for eligible investors has been reduced to 40%.

The task force submitted the finalised amendments to the IPO and mutual fund rules to the Bangladesh Securities and Exchange Commission (BSEC) on Monday.

Previously, in March, the task force submitted draft proposals, which were made public for feedback. After reviewing public opinion, the rules were finalised and sent to the BSEC for final approval.

In the draft proposals, the task force had set IPO share allocation at 50% for general investors, with the remaining 50% allocated to institutional investors.

 "Initially, we had set an equal IPO share allocation between general and institutional investors to minimise risk for retail investors while strengthening institutional participation. However, during the public consultation process, the majority of feedback supported increasing the quota for general investors, which is why it was raised," a member of the task force stated.

 "We received feedback from over 600 individuals regarding the proposed IPO rule changes. However, there were no significant suggestions for altering the draft rules, so only minor adjustments were made" he added.

"Interestingly, many respondents requested that no new IPOs be approved over the next three years. Some even suggested that IPO approvals be halted until the DSE's key index reaches 7,000 points. While such suggestions are irrelevant to the legal framework, they were still surprising to the task force," he noted.

According to BSEC sources, the IPO quota has been revised several times in the past. Under the Khairul- led commission, the allocation was last set at 30% for general investors and 70% for institutional investors.

Later, during the Shibli-led commission, the allocation was reversed—75% for general investors and 25% for institutions. As a result, IPOs like that of Midland Bank were undersubscribed in the public category and had to be covered by underwriters.

The task force has made several key provisions to improve the IPO.

The bidding limit for eligible investors under the book building method to determine the share price will be reduced from 2% to 1% to encourage broader participation.

The 10% circuit breaker will not apply for the first three days post-listing to prevent excessive price fluctuations.

Furthermore, no discounts will be offered from the cut-off price, ensuring issuers receive their expected premium.  

To attract investors, the Tk50,000 investment requirement for IPO applications will be removed.

Market quality will be improved by increasing the supply of quality stocks. Direct listing will be allowed for multinational companies and large corporations with turnovers exceeding Tk1,000 crore, with a reduced offload requirement of 10%.  

Large corporations with outstanding loans above Tk1,000 crore will be required to list. The minimum paid-up capital for IPOs will be raised to Tk30 crore for fixed-price offerings and Tk50 crore for book-building IPOs.  

Mutual fund

The Capital Market Reform Task force has submitted its final recommendations on the Mutual Fund Rules, introducing several significant changes. 

One of the key proposals mandates that all closed-end funds be redeemed upon completion of their initial term, as defined in the trust deed. However, if 75% of unit holders (by ownership) present at an Extraordinary General Meeting (EGM) vote in favour, the fund may be converted into an open-end fund. 

For closed-end funds that have previously had their tenures extended, an EGM must be held within six months of the new rules taking effect. If 75% of unit holders approve the conversion, the fund will be transformed; otherwise, it must be redeemed within three months.

The recommendations also call for specific asset allocation policies tailored to different fund types, including growth, balanced, Shariah-compliant, fixed income, and money market funds.

Investment limits have been revised, raising the cap for single-stock investment from 10% to 15%, and increasing the sectoral investment limit from 25% to 30%. 

Investments in unlisted equity securities are now prohibited, with the exception of bonds or preference shares issued by 'A' category companies listed on the main board.

To ensure cost efficiency, the Total Annual Expense Ratio (TER) has been capped at 3%, with a lower limit of 2% set for fixed income and money market funds. 

Regarding dividend distribution, closed-end funds are now required to distribute at least 70% of their annual profits as dividends. Open-end funds must distribute a minimum of 30%, based on either the annual profit or the weighted average earnings per unit—whichever is lower.