Attracting companies to go for IPO

Syed Mahbubur Rashid | Published: March 30, 2018 21:25:15 | Updated: March 31, 2018 20:55:33

Recently both the bourses of the country experienced sharp declines in share prices, of course followed by an increase again. However, this situation led to a lot of brouhaha among the persons and agencies concerned.

A section of stakeholders of the share market have alleged that the companies are unwilling to go public because they are scared of falling into the trap of taxes by the National Board of Revenue (NBR). This has resulted, according to them, in poor supply of share in the initial public offering (IPO). They have also mentioned the names of some business houses who are basking in the sunshine of trading but not going public. These allegations are unfounded and have originated from lack of knowledge.

The Ministry of Finance has always been friendly to the issue of IPO and took some favourable decisions from time to time. For the past couple of years, the listed companies have been paying 25 per cent corporate tax against 35 per cent being paid by the non-listed companies. If we look at the US, their companies were paying 35 per cent corporate taxes. It was reduced to 21 per cent recently by the Trump administration. Some companies in European countries pay lower corporate taxes but they have to also pay a social security tax which varies between 15 to 20 per cent. So, listed companies in our country are actually getting more facilities than their counterparts in other developed countries.

Additionally, listed companies in our country are exempted from paying share transfer fees whereas a non listed company has to pay Tk 15 per thousand shares. Also, concession of capital appreciation and tax exemption of dividend income till a certain amount indicate the favourable attitude of the government toward listed companies.

The greatest advantage of a company to go for IPO is that it can raise money for long term investment without trapping itself in the cobweb of bank loans. Not only at the initial stage, but also for any ongoing projects, the company's management can raise funds for further expansion and payment of loan, thereby increasing the profitability of the concern. Hence, the basis for the claim that a company will run into trouble with tax matters, if it wants to go public is not understandable. This is especially because the company is not supposed to fall under additional tax requirements.

On the flip side, a listed company's activities are more transparent as it has to publish annual reports, duly audited by the qualified auditors and attested by the authorities. The reports are posted in the company website and not just discussed in the annual general meetings.

Also, with the increase in the middle class segment in our society, there has been a continuous increase in the demand of domestic goods including cosmetics, television, freeze and various electronic and electric items. Some companies are flourishing in these sectors and so they do not want to be listed.

 Also, companies involved in trading are not very interested in raising fund through public offering. They would rather borrow on short term basis and the bank loan mechanism suits this purpose as there is scope for under and over invoicing.

The long and short of the story is that NBR cannot create any additional problem and or impede IPO growth. A listed company has to comply with certain requirements as desired or directed by the concerned stock exchange and the regulatory authority. Rather it can be said that if any non-listed company wants to evade lawful tax, it may connive with the tax officials. A listed company cannot do this.

However, apart from the trading companies, there are a number of good manufacturing concerns of different sectors who can raise funds through IPO. It is a question of psyche and culture. There are a large number of members of DSE who are owners of famous industrial and commercial concerns. They are not going public despite bourses' authorities continuously asking for newer shares to enter the primary market.

Finally, a stock exchange is a market. So it will witness rise and fall in prices. No market moves in the same direction. The advantage of this market is that as an urban elite institute it quickly draws the attention of the media particularly electronic media and the Finance Ministry becomes nervous and overreacts. They forget that the investors go to the stock exchange without their direction or instruction. It is their personal decision and the government has nothing to do, save and except to investigate if there has been any foul play.

From time to time an agricultural product faces serious crises in marketing and the producers incur heavy loss. This disaster can be termed as cataclysm. But unfortunately nobody comes to their rescue. Destruction or damage of any agricultural product is not only personal but also national, because its value is added to the gross domestic product (GDP). This kind of loss is no less than what happens in the share market.

A traditional investor is conservative. His main attraction will be the primary market where he will apply for initial public offering (IPO).

Another group of investors are rather professional traders. So naturally they will always remain concerned because their target is to earn maximum profit. Trading in the stock exchange is a zero-sum game--the market does not create any wealth, so one group will always gain at the cost of the other.

Occasionally it is said that there is a liquidity crisis in the share market. Does it not sound contradictory? It is claimed that capital market is the bastion of finance that will be supplied for the industrial and infrastructure development of the country. Actually the primary market is the bastion of the capital that can be collected through IPO. The liquidity crisis is for the traders, brokers and merchant bankers who need financial assistance for carrying out their trade. Well, they should be provided with loan in order to be kept active. The more they become action-oriented, the more the market will be buoyant. Moreover merchant banks play a great role in attracting companies to go for IPO.    

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