Pressure grows on BSEC to allow loan clearance with IPO proceeds

The securities regulator has come under intensifying pressure to lift the limit on using IPO (initial public offering) proceeds for bank loan repayments.

Amid liquidity stress in banks due to a high volume of bad loans and the repayment burden on businesses caused by high interest rates, entrepreneurs and top bank officials at a meeting with the regulator last month insisted that restrictions on using IPO proceeds to repay loans and rescheduled loans be withdrawn.

The issue was raised again last week at a meeting between the central bank and the Dhaka Stock Exchange (DSE), according to meeting participants.

Under the revised IPO rules that came into effect last December, a maximum of 30 per cent of IPO proceeds may be used to repay outstanding loans taken for any project or BMRE (Balancing, Modernization, Rehabilitation, and Expansion) purposes, subject to an auditor's report on the proper utilisation of such funds. However, the rules outright forbid the repayment of classified loans or the rescheduling of non-performing loans using IPO funds.

At the latest meeting, Bangladesh Bank Governor Md Mostaqur Rahman made no comments on the matter. However, sources at the Bangladesh Securities and Exchange Commission (BSEC) said they feared pressure would mount on them to allow bank loan repayments with IPO proceeds beyond the permissible limit.

The BSEC must take into account the risks that relaxed rules may pose to investors before taking any decision in this regard.

There have been instances in which companies' sponsor-directors fled the country after an IPO, such as Emerald Oil. There are also cases in which companies inflated their balance sheets by issuing placement shares before IPOs without receiving payment for them and later laundered the money, such as Ring Shine Textiles.

Although entrepreneurs could raise money from the capital market, they instead took easily available bank loans. Persistent non-payment of instalments due to scams, global conflicts, and macroeconomic distress has turned a large volume of bank loans sour.

Now, banks are unable to disburse fresh loans, while many companies no longer qualify to raise funds through IPOs after years of shrinking balance sheets.

"But it will not be rational to allow repayment of a loan that has been rescheduled, say, with a 3 percent down payment, with IPO funds," said Minhaz Mannan Emon, one of the DSE directors.

He, however, said enterprises should be allowed to repay loans with IPO proceeds, as it would facilitate companies' profit growth by reducing the interest payment burden.

"Repayment of loans should be allowed in a prudent way considering shareholders' interests," Mr Emon added.

At last month's meeting, entrepreneurs and capital market stakeholders justified lifting the restriction, saying there was no such limit on utilising IPO proceeds in other countries.

They also demanded that repayment of loans that had been rescheduled up to two times be allowed with IPO proceeds.

A BSEC official, wishing not to be named, said funds had been laundered from the banking system and that lenders now wanted to clean up their balance sheets through the scope for loan repayment with IPO funds.

If a loan has been rescheduled twice, it generally indicates that the borrower is facing significant financial distress and that the lender has already provided multiple opportunities to restructure repayment before the loan is classified as a total loss.

"Many of such loans might not have any role in business expansion," said the BSEC official.

In that case, clearing such loans would help ease liquidity pressure on banks, but investors might suffer if they receive no return on their investments.

"The regulator may consider increasing the existing limit (30 percent) on IPO proceeds to repay performing loans. But a complete withdrawal of the ceiling will not benefit investors," said the BSEC official.

Moreover, there is no restriction on using funds raised through debt securities to repay bank loans. Therefore, companies could issue bonds to repay loans.

Entrepreneurs and bank owners argue that the scope for repaying bank loans with IPO funds could be widened in line with practices in other countries.

They say even good companies might incur losses and be forced to reschedule loans amid global economic turmoil. Therefore, bank loan repayments with IPO funds should be allowed for the sake of capital restructuring.

The BSEC in the meantime has requested market stakeholders to submit a concrete proposal so that the regulator can weigh the pros and cons before making a decision.

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