Luring more companies to go public

All concerned — investors, securities regulator, the management of the bourses, experts and policymakers — are convinced that the stock market is overheated and sporadic measures taken by the regulator has failed to rein in the bull that has been roaming freely for a period of more than a year. And the outcome has been quite obvious. The general index of the country’s premier bourse, the Dhaka Stock Exchange (DSE), has gone up by more than 130 per cent during that period. However, the market deserved a certain amount of boost after its lacklustre performance since its collapse in 1996. But a host of factors, greed being at the top of those, have taken the indices beyond what can be described as justified limit. Sceptics suspect foul play by organized groups, including a few who masterminded the 1996 share scam, while some others hold some built-in weaknesses of the market responsible for it.

And the lack of regular infusion of new issues into the market has been cited as one of the leading reasons for the market being overheated. The arrival of new issues, either through initial public offering (IPO) or through direct listing has actually been highly inadequate compared to the soaring demand for stocks from the investors, individuals and institutions. The government more than a year back pledged to offload partially the stocks of more than two dozen state-owned enterprises (SoEs). But the promise until now has remained unfulfilled due to opposition from within. The leaders of the bourses and the parliamentary standing committee on the finance ministry have time and again taken exception to the government’s failure to offload the SoE stocks as promised earlier claiming that the replenishment could have helped in easing the current pressure on the market. In the meanwhile, theSecurities Exchange Commission (SEC) had put into effect some restrictions, in terms of paid-up capital and size of the IPO, hindering further the normal flow of new issues into the market. The SEC move, that had its origin in the finance ministry, drew strong criticism from the bourses and the investors alike.

However, the SEC action was taken not without a reason. When the market heats up and investors develop a sort of insatiable appetite for stocks, some small cap companies having questionable track records try to enter the market, collect funds and vanish in thin air. Actually, it did happen during the 1996 stock bubble in this country. Investors lost a sizeable amount of money that they had put in the stocks of a good number of issues that, either by design or default, managed the regulator’s permission to enter the market that was full of schizophrenic investors. A good number of non-performing small cap companies, having a combined paid-up capital worth over Tk.6.0 billion, have already been de-listed and placed in the over-the-counter (OTC) market.

The SEC, in view of the need for adding new issues under the circumstances prevailing in the market, has decided to modify its capital issue rules, allowing a company with a minimum paid-up capital of Tk 300 million to float IPO. The minimum paid-up capital for a company for floating IPO was earlier set at Tk 400 million. The regulator has also brought about changes in the rules concerned for medium and large cap companies. However, the SEC while relaxing the requirements for floating IPOs should ensure that the companies with dubious track records cannot sneak into the market. But the latest changes in capital rules are unlikely to encourage many private companies having strong fundamentals to go public, primarily for two reasons — lack of enough incentives and their reluctance to face the scrutiny of the general shareholders and the regulator.

Source: The financial express, 24 October, 2010

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