The securities regulator is under renewed pressure to allow companies to repay bank loans with IPO proceeds. Experts suggest this permission should be granted if the borrowing was undertaken for business growth. Otherwise, there is a risk of misappropriating public funds, as was the case with depositors' funds that banks mishandled, resulting in loan defaults.
At a meeting at the Bangladesh Securities and Exchange Commission (BSEC) on Wednesday, issuer companies sought the authority to decide how to utilize IPO proceeds.
The existing public issue rules allow a company to utilize up to 30 percent of IPO proceeds to repay debts received for Balancing, Modernization, Rehabilitation, and Expansion (BMRE) purposes. However, the loans must not be classified or rescheduled. The company is required to submit certification from both the auditor and the bank regarding the utilisation of the loans involved.
After the meeting, representatives of the Bangladesh Association of Publicly Listed Companies (BAPLC) told the media that they wanted permission to use more than 70 per cent of the funds raised through initial public offerings (IPOs) or repeat public offerings (RPOs) to repay bank loans.
BSEC sources also said there was a demand that the ceiling on repaying debts with IPO proceeds be revoked.
"Theoretically, repaying bank loans with IPO proceeds is correct," said Md. Ashequr Rahman, managing director of Midway Securities. A company that utilised bank loans strictly for expansion should be allowed to repay the debts with IPO proceeds. Such a facility would help reduce the debt burden and facilitate profit growth.
"But it will lead to another disaster if the facility is made available to companies that utilised more than half of [bank] loans for the personal purposes of the sponsors," Mr Rahman said.
The growth factor must be considered when allowing a company to repay bank loans with IPO proceeds, he said.
Renata could offer a good example. The company faced difficulties with foreign and local debts before the COVID-19 pandemic.
The company borrowed with the good intention of expanding its business. Later, currency depreciation increased the company's debt burden.
That explains why loans utilized for expansion should be eligible for repayment with IPO proceeds, Mr Rahman added.
Apart from the issuer companies, banks also spoke in favor of repaying bank loans with IPO proceeds, many of them disbursed without securing collateral. At a meeting held with the previous commission, representatives of the bank owners' association demanded the repayment of loans with IPO proceeds beyond the existing ceiling set in the public issue rules.
BSEC sources cautioned that the repayment facility, if expanded, may help clear the books of banks but will not help the market grow.
When asked, the chairman of the Investment Corporation of Bangladesh (ICB), Prof. Abu Ahmed, said the regulator should help ease the loan burden. At the same time, it should be examined whether the loans were siphoned off or utilised for the personal purposes of company owners.
The incumbent commission has moved to bring further amendments to the public issue rules to facilitate the listing of new companies against the backdrop of no listings in more than two years.
As part of this move, the BSEC sat down on Wednesday with stakeholders, including representatives of the BAPLC.
According to sources familiar with the meeting outcome, the BSEC's top brass wanted to know the problems issuers faced while floating an IPO proposal.
Representatives of the association of publicly listed companies said the submission process of IPO documents must be simplified.
In response, a top BSEC official said papers would be requested only once to reduce the hassle of documentation. However, a forensic audit of the financial statements and IPO documents would be required to certify that the documentation was true and fair.
The representatives of issuer companies expressed reluctance regarding the forensic audit, saying it would consume time and increase the cost burden.
The commission emphasized the importance of individual accountability and the roles of issuers, issue managers, auditors, and valuers.
BSEC sources said the regulator was positive about facilitating the listing of new companies, keeping in mind the best interests of the capital market, investors, and companies.
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