For long there had been many regulatory holes in the system of stock market regulation which gave a scope to the market sharks to exploit the investors. Though late, the regulator has taken some steps to plug those holes. But the unscrupulous stock market players, including licensed certifying agencies like auditors and issue managers, proved to be cleverer than the regulator. They found holes or created those in the system only to benefit themselves and the companies or issuers they represented at the cost of the interest of the investing public. Sometimes, they took the advantage of stock market buoyancy, sometimes they made figures in their own houses to press for high prices both for IPOs (initial public offerings) and right offers. The regulator very often yielded to their manoeuvrings.
But the true picture of the actual worth of the stocks they off-loaded for public subscription was revealed when the market took a normal ride or slipped into a somewhat depressed condition. Whether the IPOs or even the right offers offered to the public were rightly valued or overvalued, became clear when those prices plummeted within one year of the offerings.
In the last few years, very few investors could benefit from the purchase of the IPOs or right offers. Permitting the IPOs in the context of the market condition basing on prices of stocks in the first few weeks of their debut in the secondary market is dangerous, as market condition in those few weeks normally overvalue the offers. Sale of IPOs means selling the companies, though, partly. Before such sale, the companies normally got their assets valued by a valuer who might be the same auditor who signed and certified the audit report for the IPOs or any other auditor from the same clan. Investors are kept in the darkness as to whether the asset valuations of the IPO offering issuers were rightly done or not. In Bangladesh context, as neither auditors' report nor regulators' vigilance represents the true value of the IPOs or right offers.
The investors are to go by their luck or depend on their confidence on the issuing companies. The issue manager, the main licensed entity to prepare and compile information required for such issues under regulation, are found not to be exercising due diligence properly. They are apt to prepare lengthy papers confusing both the regulator and the investing public. Every entity that acts as a party to preparation of the IPO and right offers prospectus is after money as it gets hefty commission if it can get through what it wants. Actually, some issuers sell their overvalued assets in the name of IPO selling and they do not stop there; they go on selling bonus shares which they issue to themselves and to the investors on a pro-rata basis within the very first year of the IPO selling.
The attention of the regulator was drawn on a number of occasions to the issue of bonus share sale by the issuers or sponsors of the companies simply for making themselves rich in a very short period. The bonus shares were the major contributory source of oversupply of stocks in the market. It is being felt now that supplies of shares are overtaking the demand for those pushing the share prices down. Though late, the regulator, the Bangladesh Securities Exchange Commission (BSEC) has understood the logic of making conditional the bonus share sale. But more important is to make the very issuance of bonus shares conditional.
The regulator recently imposed a lock-in period of two years on the sale of the sponsors' bonus shares. We hope this time, at least to some extent, this way of making money by the issuers or sponsors of the IPO selling companies will be stopped. At least, now the sponsors who sit on the management board of the companies will think twice before issuing bonus issues as they no longer will be able to sell those shares to the public within two years. Nowhere in the world issuance of bonus share is kept so easy. The company wanting to issue bonus shares needs to present a business expansion plan before the regulator and the investing public explaining that for such and such reason it needs to increase the equity base of the business.
Here in Bangladesh, no explanation is needed to issue bonus shares. Taking advantage of no accountability in this regard many companies issue bonus shares easily and thereby increase the equity base of the businesses. This brings the EPS (earning per share) drastically down, at the end. The investing public who were purchasers of the shares, whether through IPOs or from the market, bear the brunt of the price falls. In the last few years, it was noticed the companies which issued bonus shares without commensurate business expansion plan the stocks of those companies lost values in the market. After getting cheated time and again, the investors are no longer willing to have more bonus shares in their accounts. They prefer cash dividends over the bonus or stock dividends, and they think the companies which issue cash dividends are stronger than the companies issuing bonus share or stock dividends. Regulatory orders are seen to be addressing the investors' concerns in the recent days. We hope the regulator will keep its eyes and ears open as far as the investors' interests are concerned.
The writer is Professor of Economics University of Dhaka.
