The new method of determining the allowable price of primary stocks at the initial public offering (IPO) using the bookbuilding method is frustrating for entrepreneurs who expect a fair price for their company’s stock.
The Bangladesh Securities and Exchange Commission (BSEC) introduced the new conservative valuation methodology for bookbuilding IPOs in February 2021 to prevent primary stocks from being overvalued, which hurt investors after the debut.
An August 2020 study previously reported by The Business Standard found that fewer than half of the 91 IPOs in the 2010s brought their primary shareholders above-average returns, while primary investors lost money on 20 IPOs and 27 saved their backs on some have meager positive returns.
Md Moniruzzaman, chief executive of IDLC Investments, said the regulatory move to enforce the conservative pricing methodology makes sense to prevent bad IPOs — both in terms of financial performance and the credibility of their numbers — from being overpriced.
But the overly strict stance is now making it difficult to list good companies, and a large number of good companies are reluctant to go public in IPOs for less money, while the investment bankers, the exchanges and the regulator are making it difficult to bring reputable companies to the market to make it a barometer of the economy, added Moniruzzaman, who is also vice president of the Bangladesh Merchant Bankers Association (BMBA).
The pipeline for good IPOs is drying up, largely due to the low asking price, while the number of bookbuilding IPOs has fallen to three in the past 14 months from an annual average of 4.3 over the previous decade.
Analysis of the 10 bookbuilding IPOs using the previous method suggests that companies are being offered 20% to 70% less price for their primary stocks.
Omera Petroleum, the second largest player in the expanding LPG market in Bangladesh, received a premium of Tk 8 on the par value of Tk 10 per share from foreign investors in 2012. In 2018, they paid 15k premium for the right shares of the energy company.
The previous method of bookbuilding valuation offered a reasonable price. But the new method offers a price even lower than what foreign investors paid a few years ago.
“That (the reserve price allowed) is not the price a good company deserves and our sponsors and foreign investors ahead of the IPO are very frustrated,” Mohammad Asaduzzaman, corporate secretary of Omera Petroleum, told The Business Standard.
At an IPO program in Dhaka involving the country’s big unlisted companies, entrepreneurs called for less surveillance of good firms and an easing of restrictive measures.
BMBA President Md Sayadur Rahman said: “Facing the problems, we, the stakeholders, have discussed them with the regulators and asked them for suggestions. We hope that the problems will be resolved in the coming days.”
“We need to attract reputable and successful big companies in the market,” he added.
Two analysts at a merchant bank said even the conservative method is generous to the companies that are leaning their books toward IPOs while smothering the honest, well-functioning companies.
There is no one-size-fits-all cloak, and fair pricing of IPOs would depend on the professionalism of institutional investors and the prudence of regulators, they suggested.
“The BSEC is open to granting exemptions to deserving companies, for example, well-known multinationals, large local companies, that generate tremendous sales and consistent profits,” said Rezaul Karim, a BSEC executive and spokesman.
Under the Public Issue Rules, companies that do not want a premium above par for their primary stocks go public in fixed-price IPOs, while companies seeking premium must go through the bookbuilding method, in which institutional investors bid to set the reference price to the public, technically called the cut-off price.
As erroneous bidders had long led to inflated prices in IPOs, the regulator gradually imposed mechanisms to hold bidders accountable, first requiring their offering rationale papers and later imposing the more stringent valuation method.
Bidders can now go as far as the average of a company’s net asset value and its historical and expected earnings, significantly reducing the cutoff price over the previous open auction method, which used to give analysts discretion.