Regulator charts new course to revive IPO market amid capital crunch

Infographic: TBS

Bangladesh's stock market regulator is set to implement reforms to be recommended by a taskforce aimed at ensuring fair pricing, providing incentives, and streamlining the fundraising process to accelerate IPO launches. These measures aim to ease challenges for companies seeking equity capital as an alternative to expensive bank loans.

Already, the reform agenda has sparked anticipation among stakeholders, who are pinning hopes on a turnaround in the IPO market by 2025. Industry watchers say the changes could address a growing demand for equity capital while rejuvenating investor confidence.

The urgency for reform is underscored by stark numbers: the Dhaka Stock Exchange (DSE) saw just four new listings in 2024, repeating the subdued performance of the previous year. The two years marked the lowest tally since 2009, reflecting a waning appetite for IPOs amid challenging market dynamics. 

"Capital market reform taskforce will come up with the primary market overhauling recommendations by the end of March," said its member Al-Amin, an associate professor of accounting and information systems at the University of Dhaka.

According to him, through the ongoing expert consultation the taskforce learned about the dire need to ease the restrictive IPO pricing method to let investors pay enough to deserving companies, alongside fast-tracking the IPO process to ensure their timely fund collection.

The taskforce also eyes an end to the bad profiteering in the IPO system that hurt the whole market.

After the expert consultation, an in depth focus group discussion will take place before the final recommendations.

Bangladesh Securities and Exchange Commission (BSEC) Spokesperson, Executive Director Rezaul Karim said the commission is ready to enact new regulations in a few months after receiving a draft of the new regulations.

Apart from engaging the reform taskforce, the regulator itself is talking to the government and top business groups for a robust IPO market, he said.

In November, the BSEC requested the finance ministry and the National Board of Revenue for a five year tax holiday to companies that will float 30% of more shares in IPOs. It also sought further cuts in corporate tax for listed companies that will float 10%-30% shares.

"Positive shifts should be visible in 2025," said new DSE Chairman Mominul Islam who is a banker by profession.

Business expansion is a must to prepare for the future demand in a growing economy, but it is not feasible with expensive bank loans, said East Coast Group Chairman Azam J Chowdhury.

"Borrowing cost, reaching over 14%, surpassed the profit margin for many. Firms now need equity capital from the stock market," he said.

Like many others, Rubayet-E-Ferdous, CEO of investment bank Shanta Equity, is witnessing an increasing interest in going public for equity, especially among the prudent entrepreneurs.

"But they want a fair price for their shares, a quicker fundraising and some incentives for going public," he said.

Faulty financing model

The stock market is not providing even 1% of the business capital, according to the Bangladesh Merchant Bankers Association (BMBA).  

In an economy where BRAC Bank's loan book is growing by more than Tk10,000 crore a year, the stock market in the past sixteen years provided only Tk11,614 crore equity in some 150 IPOs.

On the other hand, due to the deserted IPO market, the value of the entire stock market dropped to 7.2% of the country's GDP, from around 40% in 2010. Sri Lanka took it to 22% while the Indian stock market surpassed the size of its GDP.

"The prevailing loan-dependent model is faulty. Post reforms, a favourable equity raising system should turn entrepreneurs to the stock market," DSE chairman told TBS.

According to him, big projects roughly take a decade to pay back, while bank loans are given for 5-7 years and the gap translates into financial struggle for companies in an adverse environment including during high interest rates.

Faulty borrowing weakened many companies due to project delays or any other unforeseen revenue disruption, he witnessed.

Not only companies, the government, and the regulators are aware of the problem now.

Bank loans are available in 2-3 months for running projects which takes up to seven months for new projects.

City Group Executive Director for finance and investments Reza Uddin Ahmad said, "After deciding for more capital, the same companies have to wait 18-24 months for raising capital from the stock market."

In a meeting between top conglomerates and the BSEC in October, he suggested the regulator not to scrutinise micro-level information companies provide in audited statements, instead, leaving it to the strictly pooled professional service providers.

His conglomerate, a top in the country, has built its several billion dollar business empire in the commodities and consumer stapled segments without any IPO.

However, he observed a general difficulty in bank borrowing nowadays due to the weakness in the banking sector that might "intensify further".  

Bangladesh Merchant Bankers Association (BMBA) Secretary General Muhammad Nazrul Islam said in peer markets an IPO takes 3-8 months, while delays in fund accumulation often change the course within companies in Bangladesh.

"Capital required today is less worthy later," he added.

Associate Professor Al-Amin told TBS, it became an irony that firms that a banker hates flooded the stock market in the past one decade. On the other hand, welcomed by bankers, the economy's growth stars were not attracted to the stock market.

He blamed a corrupt force comprising some bad promoters, market players backed by corrupt regulatory officials that should not sustain anymore.

Deprived good

Existing regulations are too restrictive, past-dependent and completely ignore the future, entrepreneurs and investment bankers have long been complaining.

For instance, despite their maximum need for capital, greenfield projects are not being allowed to go public.

"It is irrational. The stock market offers us capital against the already built infrastructure, not for the next one, due to a profit history criteria," said healthcare entrepreneur AM Shamim, managing director of LabAid Group.

During the pandemic, LabAid Cardiac and General Hospital planned to raise some Tk80 crore for equipment purchases, it was suggested for an insufficient Tk30 crore IPO only.

In May 2023, the company borrowed the entire amount from the International Finance Corporation (IFC), the private sector financing arm of the World Bank Group.

"Meanwhile, a weaker firm I know raised more than double capital through IPO and ended up with several hundred crore taka in added bank loans," said Shamim, questioning the integrity of the regulatory system prevailing for more than a decade.

The stock market in the past fifteen years went under control of the corrupt syndicates. Mostly, IPOs involving their vested interest were being approved with ease, said Al-Amin.

STS Holdings, the company behind Apollo Hospitals Dhaka applied to go public in 2016 for building its Chattogram hospital.

It could have gone public if investors were allowed to determine the price of its primary shares, instead of regulatory restrictions on how much investors should pay for its shares, said investment bankers.

STS, giving up the equity raising plan, accomplished the project out of bank loans and later, in 2020, its 60% stake was acquired by a US investor for over Tk1,000 crore.

On the backdrop of the poor market performance of the previous decade's IPOs, the BSEC under the chairmanship of Shibli Rubayat Ul Islam at the end of 2020 came up with an extremely restrictive pricing method to limit the premium good companies seek in an IPO.

Since then, no real blue chip company has planned for an IPO since then. IPO application withdrawal also took place.

For instance, Omera Petroleum, the then second largest company in the country's growing liquefied petroleum gas market, was set to go public in 2021. It opted out due to the poor price capped by the formulae.

"No well-managed, growing company will be listed without a fair price," said Azam J Chowdhury.

Omera had attracted reputed foreign investors in the 2010s, and became the market leader in 2023. Its sales and profits also grew.

Now, private investors are ready to pay much more for Omera shares than the stock market had offered, said Chowdhury.

Ershad Hossain, MD of City Bank Capital Resources, said other market regulators neither dictate the valuation nor scrutinize minor things within an IPO application like that in Bangladesh.

With his long experience in developed markets, the investment banker suggested reliance on professional investors' judgment instead of regulatory dictation in the name of benefitting retail investors.

The world is relying on industry professionals, wrongdoing is prevented by legal actions post-happening and the extent of punishment discourages others from repeating the crime, he said.

Rubayet-E-Ferdous suggested empowering eligible institutional investors for better price building in IPOs as they are stronger in research and risk taking.

"Companies are not getting enough price for their shares. Ironically, the shares soar a lot after secondary market debuts," said Bangladesh Finance Managing Director Md Kyser Hamid.

"It reflects an unfair profiteering depriving issuer companies that should not continue," said Hamid, also board member at the Bangladesh Association of Publicly Listed Companies.

Al-Amin said the taskforce has planned to repair the structure to bring the system out of the problems. Eligible institutional investors' (EII) quota once emerged for profiteering by some fake EIIs may not remain, he hinted.

"Removing impediments will surely attract good companies to enter the stock market in the coming months," said Reza Ahmad.