Use of IPO-money in subsidiaries opposed

Experts and bourse leaders have opposed regulatory consent to initial public offering (IPO) proposal of companies willing to invest IPO funds in their subsidiaries.

A number of companies recently submitted draft prospectus to the Securities and Exchange Commission (SEC) for approval, seeking to invest the IPO-money in their subsidiary firms.

The SEC had expressed its regret to give its approval to such a proposal made by a private sector company – LSI Industries. However, other companies, including Fareast Knitting and Dyeing Industries, later submitted a similar proposal in their IPO prospectus.

In such a situation, the securities regulator formed a committee to make recommendation whether it should allow the companies to invest their IPO-money in subsidiary firms.

Former finance adviser to the caretaker government A B Mirza Azizul Islam expressed his inability to make specific comment on the issue, as he was yet to analyse the legal justification of the proposal.

But, as matter of principle, he said, he is opposed to the use of IPO-money in subsidiary firms of the companies.

“I think the companies should invest the IPO money only in their respective companies for ensuring their proper growth,” Mr. Islam, also a former chairman of the SEC, told the FE.

Another former SEC chairman Faruq Ahmad Siddiqi, however, said a company, willing to go public, may invest its IPO-money in a profitable subsidiary firm, fully owned by the company.

“But I think the regulator should not allow any such proposal, especially that of a private sector company, as the regulator will have no direct control over the subsidiary firms, in which the IPO-money will be invested,” Mr. Siddiqi told the FE.

The immediate past president of the Dhaka Stock Exchange (DSE) Shakil Rizvi said such proposals should not be entertained by the securities regulator.

“The proposals are not logical, as it is not possible for the regulator to oversee what is going on in a subsidiary firm,” Rizvi told the FE.

Besides, he said the shareholders of a listed company will remain in darkness about the balance sheet of its subsidiary firm.

“The subsidiary firms can go public, if they need fund for operational purposes,” Rizvi added.

Former president of the Chittagong Stock Exchange (CSE) Fakhor Uddin Ali Ahmed echoed the former DSE president, saying that the regulator should strictly prevent any possible malpractice.

“The sister concerns of the companies were made subsidiary to strengthen the corporate governance. So what was the necessity of a firm to be subsidiary, if its operation depends on the IPO-money of its main company?” Mr. Ahmed said.

He also said a subsidiary firm itself should go public, if it needs additional fund for operation.

However, the SEC officials have refused to make any comment on the issue.

Source: The Financial Express, March 13, 2012

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