Lift Tk 50,000 investment prerequisite for IPO subscription

In order to increase vibrancy and attract more investors to the stock market, a taskforce on capital market reforms has recommended the regulator lift a prerequisite stipulating that anyone intending to subscribe to an initial public offering (IPO) must have at least Tk 50,000 invested in the secondary market.

It also recommended allocating primary shares of IPOs to individuals with a high net-worth.

To bring more quality stocks, the panel, formed by the Bangladesh Securities and Exchange Commission (BSEC) in October last year, proposed direct listing of multinational companies and large corporates that have more than Tk 1,000 crore in annual turnover.

Corporations with outstanding loans of over Tk 1,000 crore and high debt-to-equity ratios should face mandatory listing, the five-member taskforce said while recommending amendments to public issue, debt, rights, and capital issue rules.

The panel submitted its proposals to the BSEC on Monday, aiming to modernise regulatory frameworks, enhance market efficiency, and ensure transparency in the capital market.

The panel also proposed direct listing of multinational companies and large corporates that have over Tk 1,000 crore in annual turnover

The recommendations come at a time when Bangladesh's stock market is suffering from a lack of vibrancy due to an inadequate supply of good scrips and a lack of local and foreign institutional investors.

The taskforce suggested measures in eight areas to ensure fair prices, reduce the time needed for interested firms to get listed, encourage new investors, increase the supply of quality stocks, improve audit quality, empower stock exchanges and enhance operational and cost efficiency.

To ensure fair prices of IPOs through a market-based price discovery mechanism, the taskforce suggested reinstating the Dutch Auction method -- a price discovery process where the auctioneer starts with the highest asking price and lowers it until it reaches an optimum price.

The panel favoured imposing a three-month lock-in for half of the holdings of institutional investors, meaning they cannot sell shares for that period, so they take a well-thought-out decision during bidding for the price discovery.

The 10 percent cap -- also known as a circuit breaker -- should not apply to share prices in the first three days of any firm being listed.

"This is likely to reduce the post-IPO euphoria and reduce the risk of investors buying shares at high prices," the task force said.

The panel proposed the regulator cut the time for IPOs to get listed with the stock exchanges to six months. At present, it takes as much as one year to float shares and get listed as per the fixed method and up to three years for a firm to be listed under the book-building or price discovery method.

"The IPO checklist is to be revamped so that the issuers know what to file with the IPO application.

"There will be only one approval from BSEC," it said, adding that the regulator currently approves prospectuses twice.

"This will reduce time," said the taskforce, suggesting opening an online dashboard to track the progress of IPO files.

To encourage new investors, the taskforce proposed a 15 percent quota for high net-worth individuals in IPO schemes.

The panel recommended increasing the minimum paid-up capital requirement to Tk 30 crore for fixed price and Tk 50 crore for book building IPO.

To improve audit quality, the panel proposed the regulator create a list of 20 auditors through fit and proper tests.

The auditor should be selected based on score, it said, suggesting stricter guidelines on financial reporting responsibilities, with penalties for non-compliance to be levied on auditors, issuers, issue managers and credit rating companies.

The taskforce suggested incorporating additional disclosure requirements in critical areas for financial statements to bring greater transparency and to create user-friendly and reliable statements.

To empower the stock exchanges, the panel said the BSEC should not approve any IPO if a bourse rejects it. The bourses should be allowed to submit recommendations instead of observations.

The team proposed that the BSEC allow more institutes to be underwriters and choose the right underwriters so that they can take up undersubscribed portions of IPOs.

"The underwriters should have liquid assets and free credit lines to support their underwriting capability.

 "The government should review if they can allow banks, non-bank financial institutions, insurance companies and stockbrokers to be underwriters, as is the case in India."

The taskforce said the Bangladesh Bank currently does not allow banks and non-bank financial institutions to do any business that requires a licence from another regulator.

Regarding operational and cost efficiency, the taskforce suggested the requirement to distribute hard copies of prospectuses should be abolished.

It also suggested a reduction in regulatory fees and simplification of compliance processes.