IPO rules must evolve from restrictive to facilitative to attract quality companies

One of the most remarkable aspects of Bangladesh's recent economic journey has been its fantastic rebound following the July Mass Uprising. Remittance inflows grew by 26.8%, export earnings increased by 8.8%, and import activity rebounded by 4.3% in FY25. 

Foreign exchange reserves have now crossed the $30 Bn mark, with a current account surplus of $149 Mn. The World Bank's latest forecast also echoes this optimism, projecting GDP growth to rise to 4.8% in FY26 from 4% a year earlier, and accelerate further to 6.3% in FY27 — a clear indication that the economy is regaining its rhythm after the political transition of August 2024.

Despite these encouraging macroeconomic developments, the performance of Bangladesh's capital market has remained subdued. In fact, it was the second worst-performing frontier market in Asia in H12025, with no new listings in the last one and a half years. 

The divergence between macroeconomic recovery and capital market stagnation raises an important concern: why has the stock market failed to mirror the broader economic rebound?

The answer lies in the persistent shortage of quality stocks to invest in. A vibrant secondary market depends on a steady flow of fundamentally strong companies — a pipeline that Bangladesh currently lacks. The success of GP, Walton's IPO demonstrated that investor demand always follows quality supply. Strengthening the equity market, therefore, hinges on attracting more such companies to list.

In this context, it is commendable that the regulator and exchanges have been working proactively to list high-quality companies. As part of this broader effort, BSEC is in process to finalize the Bangladesh Securities and Exchange Commission (Public Offer of Equity Securities) Rules, 2025. This initiative deserves appreciation, as it reflects the regulator's intent to modernize and discipline the framework. However, while the draft rules embody well-meaning reforms, several clauses could inadvertently discourage good companies from pursuing listings.

A proposed clause states that post-IPO paid-up cannot exceed Tk100 crore under the fixed price method, with a minimum IPO size of Tk30 crore. This essentially caps pre-IPO paid-up to Tk70 crore, making many mature companies ineligible for listing at par. If we consider the banking sector, every bank must have a minimum paid-up of Tk500 crore, this clause makes listing difficult for non-listed banks at fixed price. Moreover, large family-owned or corporations often have equity well above Tk100 crore. The rule, therefore, may unintentionally favor smaller less seasoned firms while sidelining established ones.

Another proposed amendment shortens the validity of audited financials from 120 to 90 days. The current 120-days window is already tight given the extensive pre-IPO activities. Reducing it further to 90-days risks compromising due diligence. Furthermore, the amendment contradicts BSEC's existing notification-BSEC/CMRRCD/2006-158/208/Admin/81, which mandates to-be-listed companies to have their financials audited within 120-days. 

One of the most debated topics among market participants has been the valuation methodology for IPOs. Many have argued that the existing valuation methods do not adequately capture a company's fair value, discouraging strong firms from getting listed. Hence, BSEC's initiative to incorporate globally accepted valuation models deserves recognition. However, the proposed mechanism for determining the indicative price — requiring valuation reports from 75 eligible investors appears to be overly ambitious. The number of institutions in Bangladesh with the analytical capacity to conduct valuation of this nature is far smaller. If BSEC proceeds with the proposed structure without reconsideration, then EIs must be brought under a regulatory obligation requiring them to submit valuation for IPOs.

Since EIs are not obligated to do valuation, the issuer and issue manager would need to actively pursue them for the required 75 valuation reports. This could shift the process from being market-based to relationship-oriented, where the indicative price is influenced more by who can be convinced to participate than by objective valuation principles. Such a dynamic might unintentionally introduce biases into the pricing mechanism. 

The draft also proposes allocating shares to all investors at a single cut-off price. This approach could inadvertently suppress genuine price discovery. Different investors value the same stock differently based on their portfolio strategies and risk appetite. True market efficiency is achieved when investors are allowed to invest freely at prices reflecting their perceived value. As the saying goes, price is what we pay, and value is what we get. Allowing a more open and competitive bidding system under the Real Dutch Auction System would promote genuine price discovery which will encourage companies to get listed.

The proposed 180-day lock-in period for EIs also warrants careful reconsideration. If a company offers 10% of its shares, the proportion allocated to EIs and permanent employees — 3.5% in the fixed price method and 4.5% in the book-building method — would remain locked for six months to a year. This effectively reduces the free float in the secondary market to 6.5% under fixed price and 5.5% under book-building during the initial trading period. Such limited liquidity in the early months may restrict genuine price discovery and heighten the risk of speculation. There should be no lock-in imposed on shares issued through an IPO — except to permanent employees — to allow market-driven pricing dynamics to function effectively from day one.

BSEC's intent to broaden investor base by introducing mutual funds and HNIs as investor classes is praiseworthy, but the proportion must be reviewed. The total AUM of the mutual fund industry accounts for less than 3% of the total equity market capitalization of DSE. Expecting this small segment to absorb a fifth of every IPO may not be realistic. Hence, the quota for mutual funds should be brought down to 10%. 

Another important consideration is the permissible use of IPO proceeds. The draft rules currently limit proceeds to financing expansion or new projects, excluding loan repayment or working capital management. The present macroeconomic climate characterized by high borrowing costs and low consumer demand calls for flexibility. For companies that already have sufficient capacity to meet market demand, directing IPO proceeds toward BMRE projects can be counterproductive.

Allowing IPO proceeds to repay genuine business-related loans would immediately strengthen the balance sheet and reduce interest burdens, thereby improving profitability. Given that issue managers are accountable for post-listing IPO fund utilization, adequate safeguards already exist to ensure that only legitimate debt tied to business operations is repaid. This flexibility could make IPOs more attractive. Rather than limiting how IPO proceeds may be used, BSEC should emphasize strengthening the institutional capacity of the Commission and the stock exchanges to ensure that investors ultimately benefit financially from the projects financed with IPO proceeds.

The proposed rules risk creating procedural rigidity and uncertainty — the very factors that deter good companies from getting listed. Regulatory reform is most effective when it combines ambition with realism. BSEC's efforts to modernise the IPO rules should be seen as a positive and forward-looking step. However, fine-tuning to simplify the listing process without diluting accountability is essential to ensure that the well-intentioned measures do not inadvertently discourage participation.

Bangladesh has reached a pivotal juncture. The economy is strengthening, investor interest is reviving, and regional peers are rapidly evolving their capital markets. To keep pace, our regulatory framework must evolve from restrictive to facilitative — one that attracts investment-grade issuers while protecting investor trust. The goal should not be to keep average companies out, but to make it easier for good companies to come in, under a regime of transparency, fairness, and efficiency.

Sketch: TBS

Tanzim Alamgir is the Managing Director and CEO of UCB Investment Limited (UCBIL).

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.