Controversy at DSE over Best Holdings’ direct listing

Dhaka Stock Exchange (DSE) is divided over the premature agenda for direct listing of Best Holdings Ltd.

The company, which is the infrastructure owner and operations partner of five-star hotel Le Meridien Dhaka, is looking for direct listing on the DSE after the Ministry of Finance ordered the securities regulator to pave the way for direct listing of private sector projects with government banks owning at least 20% equity.

The Bangladesh Securities and Exchange Commission (BSEC) is yet to change its regulations in this regard, while it prohibited direct listing of non-state companies in mid-2010s due to the market's bitter experience with the most liberal price building and listing method for new shares.

Meanwhile, the premier bourse, allegedly influenced by one of its powerful shareholder directors, prematurely included the direct listing of Best Holdings in its additional agenda for Thursday's board meeting.

The hurry by a portion of DSE board members sparks criticism and it worries the others as the DSE expert panel for reviewing initial public offering (IPO) has observed six points where the company's direct listing plan conflicts with the existing listing regulations.

No DSE official agreed to comment in this regard.

Conflicts with existing regulations

Direct listing is the listing process where incumbent companies offer their existing stocks to the bourses directly for price discovery instead of going through the traditional price building process seen in the book building method of IPO.

However, the documents seen by The Business Standard reveal that 52% of the company shares are held by its sponsors, while private placement holders' ownership is nearly 48%.

Among the private placement holders, government banks, which also financed the company through bonds, own 29.58% of the company and their investments in it in the last fiscal year at a high rate of Tk65 per share also drew criticism.

Before the BSEC's regulation modification, the direct listing initiative is non-compliant with the DSEs existing listing rule, said the IPO review panel members.

DSE Listing Regulations 2015, in alignment with the BSEC's regulation, do not allow a company to go public if it has raised any capital through any method other than bonus share issuance in the two preceding years.

Best Holdings raised its paid-up capital through private placements by Tk472.88 crore in 2019-20 fiscal year.

The company raised capital amounting to Tk189 crore through other than cash receipts in the last fiscal year. 

In direct listing, a company must offload at least 25% of shares in the first 30 trading days from the date of commencement of normal trading, subject to compliances with all other provisions in respect of shareholding pattern. Best Holdings intends to offload only 5% of shares.  

Direct listing builds primary shares' price based on first day's first 30-minute auction on trading screen but Best Holdings fixed its offer price at Tk65, the rate at which government banks bought the company's shares in private placement in the last fiscal year.

The panel also observed that the company's net current assets have been negative over the 2016-19 period, while the listing regulations need three immediate preceding years of positive net current assets.

Other basis of concern

Despite its stunning infrastructure for Le Meridien Dhaka just beside the DSE Tower in the capital and recognition as the Asia-Pacific flagship hotel by international operator Marriott International Inc USA, Best Holdings appeared to be a controversial company since the Anti-Corruption Commission had launched its money laundering investigation against the company's managing director Amin Ahmad alongside some other allegations like grabbing vast areas of state-owned lands.

A number of DSE IPO review panel members and also some top DSE officials expressed their concern as they observed a "vested quarter's" desperation for listing the company at any cost.

One of them said the company's pre-listing valuation by investor banks was controversial, and now it is pushing to justify the price by trying to make the Tk65 rate the de facto floor price.

The current plan might be helpful for the government banks in terms of their exit but might be harmful for the market ultimately, he added.

It is not noncompliance, but a matter of concern for sure. Because the company invested more than Tk948 crore in three of its subsidiaries as of June 30 this year. Of the three, only Best Services Ltd receiving Tk631.22 crore investment from the holding company generated less than Tk5 crore in revenues.

Best Hotels Ltd and Dhamsur Economic Zone have no revenue yet. 

Best Holdings' paid-up capital grew to over Tk870 crore at the end of last June from less than Tk9 crore a year ago. Alongside private placement, the company issued 2,265% bonus shares last year.

Against Tk66.68 in net asset value per share, the company posted earnings per share of Tk1.35 for the last fiscal year, according to the draft information paper.

Direct listing: Back in discussion

In 2000s, many state-owned companies came to the stock market through direct listing process, while a few private sector companies also followed the way.

But the immature market of Bangladesh is widely believed to be a victim of mispricing of new scrips in direct listing as it involves the least regulatory overseeing in the most liberal price building mechanism.

Analysing some previous overpricing cases in direct listing of non-government companies, the BSEC in the middle of last decade prohibited private sector companies from direct listing on the bourses.

However, the finance ministry a few months ago wrote to the BSEC to allow private sector companies in direct listing on the condition that they are engaged in infrastructure building and government banks own at least 20% of their equities.

The ease was meant to reduce lending pressure on banks and inspire them to invest in alternative financing tools like bonds, asset-backed securities and also equity.

The central bank also has opened the windows for banks to opt in by outlining easier regulations.

A senior BSEC official told The Business Standard, "Of course, we are working on the finance ministry order, but we did not find any rationale why the DSE included the said direct listing agenda in its board meeting so fast."

Seeking anonymity, he informed that his office had already asked the bourse to drop the additional premature agenda from its Thursday's meeting and explain several points in three working days.