TBS Focus Group Discussion : Why big companies shy away from capital market

Worldwide, the stock market indicates how an economy is progressing. It is the main source of investment in many countries. But in our country, the capital market is not the first choice for investors to raise funds. 

A large portion of players in the stock market here are found to be gambling. There are healthy companies, but they are often overshadowed by companies with weak fundamentals, who in fact rule the market and whose stocks are high-priced and on high demand. 

Cumbersome listing, conservative pricing, and over-regulations have made the stock market unattractive to entrepreneurs. And the series of measures taken over the years in the stock market has discouraged many large and good companies from participating in it for long-term financing, experts and stakeholders said recently at a Focus Group Discussion held by TBS.

Does our stock market really reflect our economic growth?

Arif Khan

Vice Chairman, Shanta Asset Management Limited

There are several reasons why many entrepreneurs do not want to come to the stock market (to raise funds). One of the reasons is they can get bank loans with more ease and less time. It takes at maximum a month for someone to get Tk100 crore or Tk500 crore in loans from a bank. 
But the process and time are much longer when someone plans to go to the stock market. Why? Because companies are not designed in a way needed to raise funds from the capital market. It is seen that the company's paid-up capital base is very low, short of the minimum capital required for a stock market. 

A company needs to restructure itself, which takes two to three years in some cases, and entrepreneurs think this will make their fund expensive. Valuation is one part, another is the time consumed and other steps needed to clear the way. 

Next generation companies need to prepare themselves accordingly to get listed to meet their financing needs from the capital market. Issue managers, merchant banks and other facilitators will have to work to make the process convenient for entrepreneurs and ensure them of right valuation. 

Here it is generally assumed that some companies launch IPOs just to take away money.  But big companies should be allured that 'you come and join the market'. If not, how will you raise market capitalisation from 15-20% to a hundred percent (of GDP)? 

The fundamental point is that the stock market is for raising money for businesspeople to make investment — an objective that takes a back seat here. Stock market here is taken as a secondary market. Whether share prices are rising or falling is the major focus in Bangladesh's stock market. How much money the business has raised from the market is something rarely discussed.  

When small investors make investments on their own, 90% of them risk making losses for a long period. I have been working in this sector for 30 years and I even find it hard to analyse financial statements. So, small investors should invest through mutual funds. 

We will work out a national strategy on how to make the stock market stronger. Let's take a five to 10 years' time, if we can start today we will be able to say in 2030 that something has been done to help the market perform better. If we do not move today, we are likely to remain at the same place even 40 years from now.  

IPOs do not help generate the money required

A M Shamim

Managing Director, LabAid Group

LabAid has already made an investment of Tk3,000-Tk4,000 crore. We have got about a $150 million loan from IFC. In 2000, we stepped into the stock market with our cardiac hospital project and found that IPO subscription would generate Tk30 crore, enough for just buying two generators. 

We have tried several times and found that an IPO does not help generate the money required. From media reports, we now know that there are some mafia groups active in the market. When we inquired about two IPOs, we were told those were from a particular group and if we would enter that group. 

Dhaka Stock Exchange should understand such problems and help us overcome those, since we are investors for 30-40 years and we are not leaving the country. We can provide health services as those in Singapore or Bangkok if we get financial investment or capex at a cheap rate. 

Bureaucracy must be reduced. Interest of those small investors, whose money will enter our company, must be protected. But the stock market must not be turned into a Desa, Wasa or Rajuk office, where investors will have to wait for 3-4 hours to see officials, answer to a hundred queries and get another appointment three days' later. 

Why should we go there when we see they behave like a dictator? Fix this issue first and you will see how the situation improves as a whole.               

Cost of funds is higher at stock market than banks

Kyser Hamid

CEO, Bangladesh Finance

What we feel is that there is no dearth of sincerity from the top level. But the reality is different when we go to work. It is hard to find any IPO or a bond that has been processed in a short time. We need to think why we cannot mean what we say, where problems lie. 

Many listed companies are now finding their cost of governance higher than the benefit they are getting. You are getting 7.5-8% tax incentive, but what is the cost of governance you are paying for that benefit? 

There has been a lot of pressure for the last few years from BSEC to raise the minimum paid-up capital requirement to Tk30 crore. Many companies have explained that they do not need any new expansion, they do not have any bank loan, then why do they have to further raise funds? BSEC might have some stand here as we see gamblers take much interest in companies with paid-up capital below Tk30 crore to manipulate in a bigger way.  

You need to find out a different way to see why gamblers are attracted more to such companies and how to control it. Then you no longer need to apply the same law to force listed companies to raise funds further even though they do not need additional funds. It should be considered on a merit basis why companies, which are getting bank loans easily and repaying the money, should be dragged into a 3-5 years' process in the name of getting listed. 
If we cannot fix these issues in a broader aspect, then not only new IPOs, other instruments will continue to shy away from our market. At the same time, routine market monitoring on a regular basis should be ensured.

Make people believe they won't be cheated in stock market

Md Moniruzzaman

Managing Director, Prime Bank Securities

We naively think that when market valuation rose too high in 2010, that was the right valuation and that price should stay for life. And we tried to protect that. There was a bubble in the market, which we could not recognise consciously at the beginning. We noticed only at the end and some measures had been taken abruptly, leading to the market crash. 

The reason behind this was, as I think, companies listed in the market here are mostly very weak, and hardly 20 or 50 quality companies can be found to be worth the investment. Foreigners find even less — five to seven companies. Even we, the local investors who take much risk, cannot name more than 20 companies. If we want the market to grow sustainably, there must be good companies listed, otherwise stock earnings will not rise, market capitalisation will not go up. Then the market will not be able to generate good returns for investors. 

There are many reasons, mainly in the secondary market, why we cannot attract a greater population toward the market, or why many investors have rather been wiped out. What are those secondary market reasons? 

Most investors are hesitant about telling relatives and friends that they are capital market investors as many feel like a casino syndrome there. If the market becomes totally speculative and investment activities do not even account for 5-10%, then you cannot help the market see a sustainable growth. We could not yet create a marketplace where wrongdoers are punished or discouraged to repeat the same misdeed. Exemplary actions are rare in front of people, which probably led to such a negative market sentiment. 

However, at least one example visible to us is that when the incumbent commission (BSEC) took over amid the coronavirus pandemic in 2020, they initiated a number of tough actions at the beginning and gave punishments for breaching market rules, but the drive lost its tempo later on. 
If you cannot create people's confidence in the market, cannot make them feel that they will not be cheated in the market or fall in the trap of any group, then you cannot expect people to withdraw their savings and put the money in stocks. 

Legal framework needed for big companies to get listed

Sayedur Rahman

Former president, Bangladesh Merchant Bankers Association

Regulatory framework is so intense for our capital market that regulations now scare the stakeholders like us. We often say good firms are not coming into the market for IPOs or listing. But why? Why isn't a single company of Abul Khair Group or Meghna Group or City Group getting listed? 

You will find a lot of such groups which have turnover of Tk1 lakh crore, but they never turn to the stock market. If the cost of a bank loan is 9%, then 10% dividend raises the cost of funds in the stock market to 12.5-13%. Then why should a company issue an IPO? All the firms in the financial sector are listed because it is mandatory in LOIs for banks, insurance and leasing to be listed after three years in operation. 

There is no such legal compulsion or guideline for non-financial firms. A guideline should be there so that these firms also come to the capital market after reaching a certain level of turnover. Since there is no such obligation, they are not thinking about getting listed. For them, 7.5% tax incentive is not a big incentive, they did not think it was big even when it was 10%, because they have many other ways to get much more benefits while staying non-listed. 

In the past we used to see share prices rise ahead of the record date. Now the trend has reversed, share prices fall in the couple of days before the record date, whatever good companies they might be. Investors are no longer interested in dividends, because capital gain is tax free whereas the highest tax rate applies to dividend income. Then how would you expect long-term investment in the capital market?

Dividend tax is a dual tax, which was even recognised by the finance minister (immediate past) soon after he took office and had pledged in his first budget speech to withdraw it. And there has been no progress since then. If investors do not make up their minds for long-term investment, then how will you increase depth of the market? Similarly, if good entrepreneurs, or big companies are not incentivised adequately, not encouraged or brought under mandatory legal framework, then they will not come here.

Must develop capital market for long-term financing to save banks

Masrur Reaz

Chairman, Policy Exchange Bangladesh

For growth financing, it was necessary to take efforts in a full-fledged vibrant manner to create a well-functioning capital market at least 20 years before. The role of the capital market is to meet long-term financing needs of an economy. We could not make it happen in the initial decades, making us heavily dependent on bank loans for long-term finance, a phenomenon not seen anywhere in the world, be it low-income, emerging, developing or developed countries. 

If we now really want to free the banking system from this pressure — in fact we have to do it to save banks and stabilise this sector — we must develop the capital market as the real source of long-term finance both from debt and equity markets. 

Do the policymakers really want to do that? It seems they do not. Long-term financing is still a less-discussed policy issue, because policymakers cannot yet link national economic strategy to the necessity of developing capital and bond markets for long-term financing. 

IPO rules obstacle for new firms' listing

ATM Tariquzzaman 

Managing Director, Dhaka Stock Exchange

If the legal framework is not market-friendly, then people will have little attraction for it. If the legal framework becomes over-burdened, willing companies will see more obstacles than incentives in the capital market. 

Rules and regulations need to be friendly to the market, those should be of global standard as well. Our stock market is not a leading stock exchange, and the ground has not yet been set for achieving something big through new innovations. We should proceed with whatever best practices are there globally and in neighbouring countries.

It was seen that in the past, while making some innovative approaches we rather intervened into the market, which has actually ruined the market, probably ruined the trust — which is the heart of the market.

If we look at the prerequisites set in the IPO rules, which have been in place for a long, a company needs to be in operation for three years, make profit for three years in a row to issue IPOs. If it is so, how a greenfield company will come into the capital market. But the path was smooth in our country also for a greenfield company to enter the capital market and Lafarge is a case, Beacon Pharma is a successful case too. These companies came into the market as greenfield ventures. 

The rules made later closed the door for greenfield projects. Now, a new firm, if it wants to go public, may have to manipulate accounts to show that it has been making profit for three years and make a false impression among investors that it will continue to remain profitable always. Once listed, real financial position becomes evident in the disclosed financial statement, which shows company made loss. 

This rule is very much wrong and I think it will not help bring IPOs in the market. I find these rules themselves are obstacles. Legal framework should be reviewed to make it more conducive, friendly. After taking office in the stock exchange, I realised that the stock exchange does not have any power. We are less empowered. Listed companies are the babies of a stock exchange and we are supposed to look after them, monitor them, punish them and make them aware. But our power has been curtailed.