BO accounts drop below 20 lakh as IPO hunters shy away
Experts say a major portion of the BO accounts that had been being used only for IPO hunting vanished as soon as the account holders failed to pay the annual maintenance fees in time
Number of stock investment accounts, popularly called Beneficiary Owner (BO) accounts, has dramatically dropped below 20 lakh for the first time in more than a decade as IPO hunters closed the majority of their useless accounts following a new method of public issuance.
It may sound more surprising that the number dropped by over 22% in a month as depository service provider Central Depository Bangladesh Ltd (CDBL) reported only 19.7 lakh BO accounts opened at the end of July, where the month began with 25.4 lakh accounts.
"I am not surprised to see the drop since no actual investor fled the market" said Rakibur Rahman, a veteran stockbroker and director of the Dhaka Stock Exchange.
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In fact, a major portion of the BO accounts that had been being used only for IPO hunting vanished as soon as the account holders failed to pay the annual maintenance fees on time.
Stockbrokers closed their client accounts at the end of July due to the non-payment of annual fees.
IPO hunting: a lucrative business
Historically, in the Bangladesh capital market, investing in only primary shares proved to be a lucrative business as that virtually possessed no risk and offered huge gains after debut.
Being it for overenthusiasm or manipulation, IPO hunting offered 2-5 times or even more return in less than six months.
In cases of oversubscription in initial public offering (IPO), companies used to draw lotteries to pick lucky applicants.
An applicant only needed to pay the issue price of a lot of primary shares and wait for less than two months for the lottery to test their luck. Also, the IPO subscription money is refundable if they avail no share.
As one person could not apply for more than one lot from their individual BO accounts and another one from joint accounts, ambitious IPO hunters used to use others' accounts that were mainly opened and maintained by themselves.
It was not rare that one person used over a hundred accounts only for IPO subscription and their behaviour abnormally inflated the primary market.
The rush for primary shares in every IPO intensified in mid and late-2000s, said Rakibur Rahman.
The end of IPO hunting
An August 2020 study conducted by a top brokerage firm and reported by The Business Standard revealed that around half of the IPOs over the previous decade failed to sustainably generate annual average return higher than that from the popular fixed income alternatives, despite the fact the stocks returned abnormally high in debuts.
The Bangladesh Securities and Exchange Commission (BSEC) changed the way how to apply for primary shares.
Recently, it introduced pro-rata allocation of primary shares, which abolished the lottery system.
In the pro-rata system, investors collectively avail a portion of how many shares they applied for. The ratio of subscribed number of shares and issued number of shares is equal for all.
Also, as the regulator made it mandatory to hold securities worth at least Tk20,000 in a BO account for eligibility to apply for primary shares, IPO hunters now find a large number of their previously used accounts useless as the needed investment is not feasible.
Besides, an investor can subscribe for primary shares worth up to Tk50,000 from a single account now, which is five-ten times higher than the previous ceiling.
More than 6 lakh of such accounts might have been closed this year, estimates Rakibur Rahman, as the number of accounts holding securities has gone up to 13.7 lakh at the end of July from less than 12.5 lakh on 30 June 2021, but still down from nearly 16 lakh in 2016.
At the end of June 2020, over 35% of the active BO accounts had zero balance, which came below 24% at the end of July this year, reveal CDBL data.
Rakibur Rahman expects that the zero balance accounts should go further down in number for the sake of a real investment environment rather than cream skimming life before.
"I appreciate the development as IPO hunters used to cause fund bleeding in the secondary market. They put less in primary shares and if avail mostly used to sell off immediately after debut," he added.
