Regulator alters share pricing system

The Securities and Exchange Commission (SEC) yesterday modified the book building method, removing the much-talked-about clause on stock valuation.

The clause was related to determining the indicative price of shares of a company, which will use the book building system for an initial public offering, based on the company’s earnings per share (EPS) and net asset value (NAV).

The removal of the clause underlines the importance of the mechanism of discovering demand and price of shares by market forces.

The clause that attracted criticism from analysts prescribed that indicative price does not exceed the following yardsticks: 15 times of weighted average EPS of the preceding three years, or three times of NAV, or whichever is lower but no less than NAV of a share.

The stockmarket regulator finalised the amendment at a meeting chaired by Prof M Khairul Hossain, chief of the SEC.

“The commission removed the proposed clause on valuation after scrutinising stakeholders’ observation and opinions and taking into account international practices on the method,” Saifur Rahman, a spokesperson for the SEC, told reporters after the meeting.

After the stockmarket debacle in January, the government directed the SEC to suspend the book building method. But following recommendations by a high-profile probe committee on the share market crash, the government later instructed the regulator to alter book-building rules, instead of suspending the system, as it is practised in other countries.

In line with the final modification, Rahman said, directors and sponsors of an issuer company would not be an issue manager for their own company under the system.

An issuer company will have to run advertisements in five national dailies with a 10-day notice about holding a road-show, and within next three workdays of the road-show, the issuer company must set the indicative price of its shares and submit it to the SEC, according to the rules.

In the bidding for price discovery, at least 20 institutions from six categories will have to participate. From each category, at least three institutions will have to take part in the bidding, said Rahman, also an executive director of the SEC.

The asset management companies would be allowed to become institutional investors, and they can participate in the bidding, he said.

Ten percent shares of an IPO will be reserved for the institutional investors who will set the indicative price, and the ratio of eligible institutional investors would be 40 percent. An eligible institutional investor can bid for the highest 5 percent share, he said.

The lock-in period for the eligible institutional investors would be six months, the SEC official said.

The SEC also finalised a draft on amendment of right issue rules and it will be published in the daily newspapers for public opinion. The regulator further completed a guideline on placement, and a notification will be issued soon to this effect, Rahman added.

Source: The Daily Star,  September 28, 2011