Ground ready for new listings but conflicting rules stand in the way

Many well-reputed conglomerates, including City Group, are willing to proceed with listing on the bourses, but they face roadblocks, says its executive director, Reza Uddin Ahmed, in talks with The FE

Many big businesses now view the capital market as an alternative to bank financing after the single borrower exposure limit was reduced to 25 per cent of a bank's capital from 35 per cent.

They have already exhausted the limit set by the Bank Company (Amendment) Act 2023 at a time when the banking sector is undergoing major reforms, burdened by high levels of non-performing loans and an acute liquidity crisis.

One such large conglomerate is City Group, which is considering going public to raise funds for its operations.

The group's executive director (finance and investments), Reza Uddin Ahmed, spoke with The Financial Express to explain their current position on listing and the reasons supporting it.

If a company has hit the credit ceiling in one bank, it can go to another bank for loans.

As a large business entity, City Group has been a corporate client of many banks. That means it has also reached the borrowing limit in several banks.

On the other hand, many banks' lending capacity has declined due to provisioning shortfalls. In a sorry state of the sector, five troubled Shariah-compliant banks are being merged into one after their liabilities surpassed their assets.

"In this situation, the City Group will move to the capital market for funds."

The intention should be a good sign for the secondary market, which needs IPOs of fundamentally strong companies for quality growth after more than a decade of exploitation by scamsters, political nepotism, and manipulation.

But Mr Ahmed pointed out the problematic provisions of the revised public issue rules that would hinder new listings if enforced.

The proposed IPO (initial public offering) rules say a company willing to be listed must have positive cash flow.

"A company having positive cash flow indicates that it has enough cash in hand. If so, why would the company be interested in going to the market to raise funds?" Mr Ahmed posed the question.

Another provision of the proposed public issue rules disqualifies companies from listing if they had changes in their board structure or the shareholding of sponsor-directors in the preceding two years.

In Bangladesh, a large number of businesses are run by families, and they have at most four or five directors on the board.

These privately run companies need to complete two steps before listing on the stock exchanges.

First, to become a public limited entity, a company must have seven directors on the board. Then it can proceed to issue a public offer for listing on the stock exchanges.

The revised rules require all sponsor-directors to hold at least 2 per cent stake each in the company before listing. To comply with this provision, the ownership structure will have to change - but that is forbidden by the same rules.

The conflicts must be addressed if the market watchdog wants new listings to enhance the depth of the market.

Mr Ahmed said there is willingness among new-generation business owners for listing.

When City Group was founded, the owner would enter his office before breakfast and return home - only a few buildings away - after completing initial discussions or supervision. After breakfast, he would visit the factory regularly and again return to his office.

The successors, who have studied abroad in the UK or the USA, would like to elevate the company to the status of a corporation "through proper valuation which is possible through a public offer."

The securities regulator needs to cater to this demand.

Another provision of the proposed IPO rules says companies should not have collected funds in any way other than by issuing bonus shares to sponsor-directors in the two years before listing.

But the reality is that many local companies form equity partnerships with foreigners from time to time. They do not receive equity support with the issue of listing in mind.

Moreover, foreign investors provide equity support to companies with prospects.

Well-reputed companies easily obtain foreign funds in long-term loans for imports of expensive machinery.

For example, PRAN-RFL Group has signed a loan deal with a German company to import machinery from that country. In that case, a German state-run agency acts as the guarantor of the loan to be provided to PRAN.

"I've mentioned the case to highlight that Bangladeshi local state agencies should play a supportive role like that to facilitate fund raising by local companies."

Now, if the regulator does not allow any change in ownership within two years before listing, many prospective companies will not be able to go public, said Mr Ahmed.

"The companies will also not wait for two years, the period when the ownership structure must remain static before a public offer. They will search for alternative options for fund-raising," said Ahmed.

He said City Group was contemplating both foreign strategic partnerships and public offerings.

"To this effect, the group is redefining internal structures. But regulatory support is needed to ensure the listing of the group's companies," Mr Ahmed added.

mufazzal.fe@gmail.com