Book building and stock market schemers

Shamsul Huq Zahid

The Securities and Exchange Commission (SEC) and the so-called stakeholders have been in brain-storming sessions to right the Book Building Method (BBM) that was deliberately wronged during the recent heydays of the stock market.

What is being done now to correct a method can be better described as the post-facto evaluation of the BBM that is widely practiced in the capital markets across the globe. The Bangladeshmarket has been exposed to it only recently and the experience gathered so far is highly unpalatable, thanks to capital market schemers and an otherwise lenient securities regulator.

Following widespread criticisms from different quarters against fleecing of small investors through the abuse of the BBM, the SEC on March 14 recommended some changes in it and sought opinion from the stakeholders concerned.

The securities regulator has proposed that the maximum allowable price earning (PE) ratio will be 15 for a company willing to go public under the BBM and offer price must not exceed five times its net asset value per share. And the P/E should be calculated on the basis of the average earning per share in preceding three years. The SEC has also suggested 60 days’ lock-in period for successful bidders under BBM, instead of existing 15 days and subscription period to 15 days down from 25 days. It has also recommended a cut in institutional bidding period from 72 hours down to 48 hours.

The stakeholders, according to media reports, at a meeting convened by the SEC last Monday, did not agree with most of the SEC proposals and recommended that the exercise be postponed until the publication of the much-hyped report of the stock market probe committee, headed by Khandaker Ibrahim Khaled.

The stakeholders who included people from the country’s two bourses, associations of merchant bankers and publicly listed companies said since the probe committee would deal with the BBM and suggest necessary changes in it, it would be better to wait until the publication of its report. The SEC later endorsed this view.

In fact, there is nothing wrong with the BBM, introduced through a gazette notification on March 19, 2009. It is almost identical to the BBM introduced in neighbouring India more than two decades back.

The problems, it seems, were with the issuers, the bidders, the auditors and the securities regulator. There are ample reasons to believe that the BBM was deliberately abused in a market dominated by ignorant retail investors who were under the sway of rumours. The investors devoured everything that came in their way.

The issuers who included people with strong political connections made the best use of the opportunity as the regulator proved to be less assertive and vulnerable to outside pressure.

That the regulator is weak was well demonstrated when in a notification issued on November 14, 2010, it relaxed some mandatory BBM provisions for power and gas companies included in the so-called thrust sectors. In the original rules, a company willing to go public under BBM, was required to be in commercial operation for at least immediate past three years and profit-earning entity for two out of last three complete financial years. But the SEC in its November 14 amendments to the BBM rules reduced both the periods to one year for the ‘thrust sector’ companies, namely power and gas infrastructure companies. The people concerned are in the know of the things that had prompted the SEC to amend the rules.

Actually, the introduction of the BBM was aimed at luring big companies to the stock market since the method offers the opportunities to companies with strong fundamentals to get real worth of their stocks which is not possible under the fixed price floatation of issues. But, unfortunately, not a single big company has availed itself of the BBM facility to become public. The proponents of the BBM do need to examine the reasons behind the reluctance of large companies about not exploiting the BBM.

The expectation of the stakeholders and the regulator from the probe committee, which is expected to submit its report to the government soon, appears to be high, to some extent. The primary task of the probe body to identify the individuals and institutions involved in the stock market scam, methods used to siphon off money from the market and suggest remedial measures. But it would be too much to expect that the probe body would look into all the provisions of the BBM, locate loopholes in the same and suggest amendments.

Realistically speaking, what happened in the name of BBM in recent months would not happen now if any company decides to go public following the existing BBM provisions. Institutional investors who clamoured for bidding issues are unlikely to be enthusiastic now because of the prevailing market conditions. Manipulators, no matter how expert they are, would find it hard to lure retail investors to new issues.

Source: The financial express, 30 March, 2011

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