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Business enterprises have suggested on-the-spot inspections of companies willing to go public to assess whether their financial and operational strength is sufficient to protect shareholders' interests.
The proposal came at a meeting held on Wednesday at the Bangladesh Securities and Exchange Commission (BSEC), convened to discuss the revised public issue rules that are yet to be finalised. Owners of large business groups, including Meghna, DBL, AkijBashir, PHP, Incepta, City, Electromart and Fair, attended the meeting.
They made the proposal while insisting that companies they own would not be listed unless proper valuation is ensured.
City Group Director Reza Uddin Ahmed said banks and foreign lenders visit local companies before deciding to disburse loans. They also gather information on their own about companies' operations to ensure their ability to repay.
"The securities regulator should also have an inspection team to visit companies that are willing to go public," a source quoted Mr Ahmed as saying at the meeting.
In the last two years, inspection teams of the stock exchanges have visited factories of poorly performing listed entities and found a significant number of them closed.
Mr Ahmed said, "There is no point in any visit after listing and the closure of operations. So, an inspection [before listing] would help the regulator assess whether shareholders' interests will be secured after the company's listing."
The market watchdog welcomed the proposal. "It's really a good proposal that made us pleased," said BSEC spokesperson Md Abul Kalam Azad.
The proposed public issue rules state that peer companies within the same industry should be taken into account to determine the relative valuation of an entity willing to go public.
Under the relative valuation method, the indicative price or offer price is to be justified by the industry P/E ratio. In the absence of an industry P/E ratio, the market P/E ratio shall be considered.
In that case, the ratio shall be the average of the industry P/E or market P/E over the last 12 months, whichever is lower.
At the meeting, a representative from Incepta Group said the industry P/E ratio would not ensure proper valuation of companies that have advanced further than their peers.
As per the existing rules, a listed company is allowed to use 30 per cent of IPO (initial public offering) proceeds for loan repayment.
However, the revised rules forbid repayment of bank loans with IPO funds altogether.
Meeting participants said mature companies do not require capital for business expansion. Instead, they would like to reduce the burden of interest payments using IPO proceeds.
The business leaders also requested the regulator to reduce the required number of indicative prices from 75, as stipulated under the revised rules.
Most eligible investors (EIs), such as banks and financial institutions, are currently not in a position to bid for primary shares due to capital shortages. As a result, companies seeking listing would not be able to collect indicative prices from as many EIs.
"If the proposed number of EIs is not reduced, many companies may adopt unfair means," said a representative of a business group.
At the meeting, business representatives also blamed corrupt auditors for fictitious balance sheets.
Although the securities regulator does not accept audit reports unless they are prepared by auditors on its approved list, window-dressed financial reports remain common.
At present, 54 audit firms are approved by the regulator to audit companies.
One meeting participant urged the regulator to cleanse the list by dropping firms found to be engaged in illegal practices.
"The BSEC has been receiving opinions from all stakeholders. The revised public issue rules will be finalised by evaluating their opinions," said the BSEC spokesperson.
BSEC Chief Khondoker Rashed Maqsood, Commissioner Farzana Lalarukh, Meghna Group Chairman Mostafa Kamal, DBL Group Vice-Chairman Mohammed Abdur Rahim (Feroz), AkijBashir Group Finance Director Mohammad Zahid Hossain, PHP Family Senior Executive Director Mostafa Zamal Hossain, and Incepta Pharmaceuticals Executive Director Nazmul Huda, among others, were present at the meeting.
The regulator will hold a final meeting today with representatives of regulatory bodies, including the central bank, the Financial Reporting Council (FRC), the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), brokers and dealers, before finalising the revised rules.
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