The stock market regulator yesterday approved the much-talked-about 'book building,' a widely practised price fixing mechanism for initial public offering (IPO).
Capital market experts see this a move to encourage private-sector entrepreneurs to list their companies on bourses at fair prices.
However the existing IPO system will remain intact, officials of the Securities and Exchange Commission said.
A gazette notification on book building will be published within the next 15 days. “After the gazette notification, it will take three months to set up a unique platform on the Dhaka and Chittagong stock exchanges to implement the book building system,” said Farhad Ahmed, SEC's executive director.
“It's a milestone for Bangladesh capital market. It will enhance market depth, turnover and the supply side,” he said.
The SEC official also pointed to the fact that many a big and profitable companies keep them aloof from listing on bourses, for they fear that they might be denied proper prices of their shares under the existing IPO process.
“Now such companies will be interested to enter the market for capital raising, as the book building will ensure a fair price of their shares,” Ahmed said.
Book building is the process by which a price will be determined by institutional investors on the basis of an indicative price the issuer company offers.
“We believe that the introduction of book building in Bangladesh capital market will facilitate inclusion of large and profitable corporate houses in the market,” said Silmat Chisti, head of Citigroup Global Markets Bangladesh Private Limited.
The SEC executive director said the book building is not for all companies. “There are some preconditions that a company will have to fulfil first to float shares under the book building method,” he said.
A company will have at least a Tk 30 crore paid up capital, it will have to be in commercial operation for three years and made a net profit for the last two years of its operation.
The company will also have to show it has no accumulated loss at the time of application and holds regular annual general meetings.
The company will also be required to conduct an independent audit, annual reports by a chartered accountant firm selected by the SEC.
The IPO will have to be worth at least Tk 30 crore, or 10 percent of the company's paid-up capital, whichever is higher, if a company wants to make use of the book-building process to set the stocks price.
The institutions which can participate in the price discovery system under the book building are: merchant banks (excluding the issue manager of the issuer company), foreign institutional investors registered with or approved by the SEC, recognised pension and provident fund, banks and financial institutions, insurance companies, institutional venture capital registered with or authorised by the SEC, stock dealers and any institution authorised by the SEC.
Share prices of an intending issuer company will be discovered and fixed for both institutional and general investors through various measures.
First, the issuer company will ask for share prices from the institutional investors through organising road show, projection meeting and seminar on the company. Then the company in association with its issue manager will fix an indicative price, which will have to be based on offering prices by at least five institutions in three categories, and send it to the SEC and stock exchanges.
Based on the indicative price, the institutions will bid for shares. However, the bidders could not quote 20 percent more or less from the indicative price. Then a weighted average price will be fixed based on the higher and lower prices and shares will be allotted for institutions at the weighted average price.
The lowest will be considered as cut-off price for public offer or general investors.
The institutions will not be allowed to sell shares in the first 15 trading days under the book building's lock-in system.
by- Sarwar A Chowdhury
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