When foreign investment is costly

A local commercial bank once secured foreign investment against issuance of additional equity. The foreign investor was the IFC (International Finance Corporation), the market-oriented or commercial wing of the World Bank (WB). The IFC, unlike other organs of the WB, operates on commercial basis; the organisation invests in new ventures and partners with old ones in the Bank's member-countries. The collection of capital for investment purpose is also based on market rules. It sources capital from markets of the advanced economies against sale of bonds and other debt instruments.
In Bangladesh, the IFC has already invested a sizeable amount of money. It has stakes in different sectors of the economy, starting from power to financial sector. It also helps channelise foreign investment from other sources in Bangladesh. It works as a facilitator and mediator.
But IFC's investment does not always benefit local investors, specially the smaller ones, which purchase stocks of the companies where such investment takes place. For example, a few years back, the IFC selected a general insurance company for investment. In that company, either additional shares were issued in favour of the IFC or the IFC itself procured a big amount of shares from the market. As per the agreement with the insurance company, the IFC got the rights of nominating two directors to the management board of the company. When the news on the IFC's participation in the company came out, there had been a noticeable increase in the demand for shares of that company. The price of a stock of that company rose from Tk.70 to Tk.110. But the high price did not last long; it came down in the next two years to less than Tk.40, which now trades at Tk.65. Those who thought the IFC's participation would only boom business of that insurance company were proved wrong. Small retail investors lost half of the value of the price they paid for the company's stocks. Partnering of that company with the IFC did not bring any good to the small stock investors. The company's dividend payout ratio was better before investment from the IFC; the dividend rate since then only came down.
The same thing happened to the price of stock of a commercial bank in recent times on the news that the IFC was going to be a partner of that bank. The price of the share of the bank went up from Tk.20 or less to Tk.43 within a month or so. In this case, the IFC was issued 4,65,00,231 additional shares at the rate of Tk.28.30. The Corporation also got the rights of having two directors on the management board of the bank. Here what was noticeable was that the IFC invested $ 20 million in that bank, which will be repaid either in cash or by issuing additional equity by the bank. If everything is taken into consideration, in such a deal, the IFC would win and the bank might lose. The small investors, in our judgment, would be the worst losers. There is no certainty that with the additional capital, the bank will be able to do more business.
Banking business is very competitive in Bangladesh; even a shining bank will find it hard to maintain an increasing trend in business. What did prompt that bank to borrow such a huge amount of money in foreign exchange from the IFC? We think that borrowing in foreign exchange and issuance of additional shares will make it more burdensome and its liability will go up, but its business may not catch up. Also, we take pity at the small investors who purchased the shares of the bank at such a high price - at more than 35 per cent of the price the IFC paid for. Did these investors think about issues like future equity base and also future debt liability of the bank before they had purchased the shares at exorbitantly high price? We fear, the future growth of the bank will be compromised simply because of additional liability it has created by issuance of fresh shares as well as borrowing in foreign exchange. Another question is pertinent to be asked as to whether the bank would have agreed to issue such a huge quantity of shares at the price it sold to the IFC if the local investors wanted the same and also allowed two directors from them on the board. The IFC looks for partnering with strong companies. From its business strategy, this is all right, but what do the other investors in these strong companies get after partnering with the IFC?
The writer is Professor of Economics University of Dhaka,
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