“Going Public through Capital Market in Bangladesh:

Challenges and opportunities”

Mohammad Abdul Hannan Zoarder

Executive President
Bangladesh Institute of Capital Market
 Contents of the Presentation
 Different ways of raising capital
 Public offering of Securities
 Incentives and legal requirements for public
offering
 Benefits and threats of public offering
 Different types of public offering including book
building
 IPO Pricing including premium
 Accounting, legal and administrative procedures
of public offering
 IPO trend analysis: Bangladesh and Global
Markets
 Parties involved in public offering and their
responsibilities
 Other relevant issues 2
Different Ways of Raising Capital
Different Ways of Financing
Owners’ capital
Venture capital
Loan from banks and connected persons
Shares issued through private placement
Initial public offering
Repeat public offering
Rights Issue;
Bonus Issue/Stock Dividend;
Retained earnings- undistributed profits
Issuance of debenture and bonds
Securitization- through private placement or public offering;
Grants
Bridge Financing
Leasing – finance and operating lease
Public Offering of Securities
 Public Offering

 Offering of security to general public who

respond to the invitation of the issuer to
make an offer to subscribe to the security
being issued.
 The invitation to make an offer is called
prospectus.

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 Security
 Govt. bonds as defined in Securities Act,
1920;
 Bonus entitlement voucher; and
 Includes – stock, transferable shares,
scrip, notes, debenture, debenture
stocks, bonds, pre-incorporation contract
or warrants etc., maturity of which is over
one year from the date of issuance.

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Legal Requirements of Public
Offering
 Legal Requirements
Securities and Exchange Ordinance, 1969

• No company incorporated in Bangladesh shall, except with the

consent of the Commission, make an issue of capital outside
Bangladesh [2A(1)];
• No company whether incorporated in Bangladesh or not, shall,
except with the consent of the Commission,-
(a) make an issue of capital in Bangladesh;
(b) make in Bangladesh any public offer of securities
for sale;
(c) renew of postpone the date of maturity or repayment of any
security maturing for payment in Bangladesh [ 2A (2)
• While according consent the Commission shall not fix the price
of the issue [2 (4)].

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Incentives for Public Offering
 Incentives
• Cash;
• Liquidity for investors;
• Creation of a currency that can be used for
acquisitions;
• Access to the public market for future
financings;
• Enhancement of the company’s stature,
perceived stability and competitive position;
• Enhancement of the company’s market value.

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 Incentives Contd.

• Enhanced net-worth;
• Ability to attract better personnel;
• Stakeholders are encouraged to buy
company’s goods and services;
• Avoidance of personal guarantee by the
sponsors/directors;
• Lower tax;
• Psychological sense of financial soundness.
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 Benefits from issuing Public Debt
 Operating/financial flexibility
 Creates loan capacity for future strategic
initiatives
 Ability to raise capital quickly and easily
 Broaden investor base (Debt and Equity)
 Potential benefit on future equity value
 Debt research coverage
 Positive future ramifications on credit rating
Burdens of Public Offering
 Burdens of Public Offering

• Distraction of management from the

operations of the company
• Restriction on publicity and other marketing
activities
• Compliance with SEC reporting requirements
• Reduced flexibility in managing corporate
affairs

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 Costs Associated with Public Offering
• Spread
• Other direct expenses – legal fees, filing fees,
etc.
• Indirect expenses – opportunity costs, i.e.,
management time spent working on issue
• Underpricing – below market issue price on IPOs
• Green Shoe option – cost of additional shares
that the syndicate can purchase after the issue
has gone to market
Different Types of Public Offering
 Distribution Methods
1. Negotiated Purchase – usual method
2. Competitive Bid – Selected by auction
3. Commission or Best Efforts Basis – sells securities
for a commission
4. Privileged Subscription (usually current
stockholders)
5. Direct Sales (Issuer company directly sells to the
public)
 Seasoned/Repeat Offering

 Sale of securities by a firm that is already publicly

traded;
 Market reaction to seasoned global equity
offering is insignificant i.e. only 1.5% greater
than price that existed immediate before such
offering;
 Seasoned offering helps ease market
segmentation the attendant cost of capital;
 Increases investor recognition, enhances liquidity
and protects minority shareholders better;
 Provision concerning listing of
securities on stock exchanges
[a] Upon public offering if the minimum number of
shareholder are 400 and above could be listed on stock
exchanges;
[b] Sponsors shares could be sold on the stock exchanges
upon listing the same through direct listing mechanism;
[c] Mandatory listing if directed by the Commission under
Section 10 of Securities and Exchange Ordinance, 1969;
[d] If Commission imposes condition on issuer of securities
under 2CC of Securities and Exchange Ordinance, 1969
either to raise capital through public offering or directly
list with the stock exchanges.

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 Provision concerning listing of
securities on stock exchanges
 Private limited companies need to convert it to public
limited companies if their existing paid up capital and
the further capital they intend to raise exceeds, in
total, taka forty crore;
 And public limited companies whose paid up capital
exceed taka fifty crore shall, adhering to due legal
process, apply to the Commission for making an issue
of capital through public offering to the extent of at
least 30 percent of the amount they intend to raise as
additional capital.

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Accounting, legal and administrative
procedures of public offering
 Procedures of Raising Capital
• Memorandum and Articles of Association of the
Company must have specific provision for raising capital;
• Management must obtain permission from the Board of
Directors;
• Approval from the general body of shareholders must be
obtained;
• Financial statements must be prepared in accordance
with IAS as adopted in Bangladesh;
• Issue manager and underwriter must be engaged;
• Issuer and issue manager shall determine the issue price
• Firm must file a prospectus along with requisite
documents and fees with the Commission;
• Issue manager and underwriters must carry out due
diligence actions and certify that prospectus contains
factual information.
 Procedure of Raising Capital
• SEC examines the prospectus to ensure full disclosure of
material information as per Public Offering Rules, 2006;
• Commission shall not fix price while according consent
to publish prospectus;
• Commission’s responsibility is to ensure full disclosure
only;
• Onus of the truthfulness and objectivity of the contents
of prospectus rest with the issuer, underwriter, issue
manager, auditor and parties associated with
preparation of prospectus;
• Upon publication of prospectus any person who intends
to buy the security may apply through banker to the
issue;
• In case of oversubscription share are issued through
lottery.
IPO Trend Analysis: Bangladesh
 Primary Market: Issuance of Securities through IPO

Financial Nos. of Total IPO Value Subscription Oversubscription

Year (FY) IPO (million Tk.) Received (Times)
(million Tk.)
2003-04 5 723.00 6,147.83 8.5

2004-05 14 1159.10 12,709.69 11.0

2005-06 8 990.50 14,033.07 14.0

2006-07 3,584.78 29,824.41 8.3

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July 2007- 8 2,828.14 24,233.71 8.6

May 2008
 Statistics of IPO Subscription in
2008-2009
Sl. Name of the Issue Public Offer Public Subs. Over Sub.
No. Taka in mn Taka in mn in times
1 First Security Bank Ltd. 1150.00 5054.69 4.40
2 Summit Alliance Port Limited 100.00 2509.68 25.10
3 Takaful Islami Insurance Limited 90.00 2095.54 23.28
4 Standard Insurance Limited 90.00 1849.78 20.55
5 Northern General Insurance Company Limited90.00 1855.00 20.61
6 National Housing Finance & Investments Ltd. 50.00 3612.04 72.24
7 Maksons Spinning Mills Limited 80.00 2164.55 27.06
8 Republic Insurance Co. Ltd. 90.00 1906.51 21.18
9 BSRM Steels Limited 200.00 3927.85 19.64
10 Prime Finance First Mutual Fund 100.00 2855.00 28.55
11 Bay Leasing and Investment 102.00 6521.61 25.57

Total 2,142.00 34,352.25 16.04

US$ 44.14mn US$ 548.54mn
Sl. Name of the Issue Public Offer Public S ubs. Over Sub.
No. Taka in mn Taka in mn in times
1 Islami Insurance Bangladesh Ltd. 90.00 3685.54 40.95
2 Grameen Phone 694.39 2511.07 3.62
3 Provati Insurance Co. Ltd. 90.00 5076.04 56.40
4 ICB Employee Provident Mutual Fund One 525.00 4154.06 7.91
5 Trust Bank 1st Mutual Fund 400.00 4112.60 10.28
6 Prime bank 1st Mf 400.00 4307.85 10.77
7 DBH 1st Mutual Fund 400.00 5289.73 13.22
8 R.N. Spinning Mills Limited 300.00 5326.30 17.75
9 Dhaka Insurance 90.00 5525.65 17.75
10 ACI Zero Coupon Bond 534.34 2116.18 3.96
11 Phoenix Finance 1st Mutual fund 100.00 2855.03 28.55
12 IFIC Bank 1st Mutual Fund 400.00 7034.88 17.59
Total 4,023.73 51,994.93 12.92
US$ 58.10mn US$ 750.72mn
IPO Trend – Developed Jurisdictions
Book Building Process – Dev.
Jurisdictions
Performance of IPOs - US
Parties Associated with Capital
Market
 Parties Associated with Capital Market
Investor Custodian
Trustee
CRA Portfolio Manager

SPV Asset Management Company

Guarantor Broker/Dealer/AR

Credit Enhancer Underwriter

Orignator Banker to the Issue

Capital Market
Issue Manager
Obligor

E. Media Auditor

F. Press Issuer

Court RJSC & Firms

Govt. CCI
SEC S. Ex. B. Bank
 Institutional Investors and Money
Managers
Institutional Investors Money Managers

Mutual Funds

Insurance Companies
Money managers

Pension Funds

Hedge funds, Stocks

Central banks, etc. and
bonds
Primary Market Performance
INITIAL PUBLIC OFFERING
 Prospectus

An impersonal invitation to make an offer to

buy securities of an issuer by prospective
investors.
Different IPO Pricing Mechanism
 Different IPO Pricing Systems

• Fixed Price- price set by the issuer and issue

manager at which all the shares are issued.
• Auction – Price is determined from the bids
received in sealed envelope.
• Book Building- IPO offering price is determined
based on demand from institutional investors.
Existing IPO Pricing System in
Bangladesh
 Determination of Offering Price
and Distribution of Shares

Fixed Price Method

Issuer and issue manager fix price;
All the shares are issued at same price;
10% shares are reserved for Non-resident
Bangladeshi
10% shares are reserved for Mutual Funds
If oversubscribed allocated holding lottery
Book Building Method for Price
Discovery
 Book Building Method - Meaning

Book Building is a capital issuance process

which aids price and demand discovery of
security being offered;
It minimizes the chance of over/under pricing;
Application of Book Building Method
for Price Discovery
 Application of Book Building Method

• Started in USA and Canada from 1980s;

• Practiced in most developed and developing
countries including our neighbors.
Eligibility for Offering Shares under Book Building
Method
 Eligibility of Issuer for Book Building Process

[a] The company must have at least Tk. 300

million net-worth;
[b] Shall offer at least 10% shares of paid up capital
(including intended offer) or Tk. 300 million
whichever is higher;
[c] Shall be in commercial operation for at least
immediate past three years;
[d] Shall have profit in two years out of the
immediate last three completed financial year;
 Eligibility of Issuer for Book Building Process
[Contd.]

[e] Shall have no accumulated loss at the time of

application;
[f] Shall get its financial statements audited by a
firm of chartered accountants from the panel
of auditors of the Commission;
[g] Shall be regular in holding annual general
meeting;
[h] The Commission if deems appropriate for the
interest of investor or development of capital
market, may exempt or relax any of the above
requirements.
Procedures of Book Building Method for
Bangladesh Capital Market
Procedures of Book Building for Bangladesh

The Book Building Process will have two

stages:

Price Discovery and Book Building by eligible

institutional investors;
Public offer based on price found out through
Book Building Process.
 Stage I

Price Discovery and Book Building by eligible

institutional investors
Book Building Method for Price Discovery

• Issuer shall invite for indicative price offer from

the eligible institutional investors through
proper disclosure, presentations, documents,
seminars and road shows;
• “Indicative price“ is the price that the issuer is
required to indicate in the draft prospectus
taking input from the eligible institutional
investors on the which the bidders bid for final
determination of price;
 Book Building Method for Price Discovery

• Draft prospectus shall contain indicative price

based on price indications obtained from at
least five eligible institutional investors
covering at least three different categories of
investors;
• Issuer shall disclose in the prospectus detail
about the qualitative and quantitative factors
justifying the indicative price.
 Eligible Institutional Investors

[a] Merchant Bankers excepting the issue manager

to the proposed issue;
[b] Foreign Institutional Investors registered with
or approved by the Commission;
[c] Recognized Pension Funds and Provident
Funds;
[d] Bank and Non-bank Financial Institutions
under regulatory control of Bangladesh Bank;
 Eligible Institutional Investors [Contd.]

[e] Insurance Companies regulated under

Insurance Act, 2010;
[f] Institutional venture capital and institutional
investors registered with or approved by the
Commission;
[g] Any other artificial juridical person permitted
by the Commission for this purpose.
 Book Building Method for Price Discovery

The indicative price shall be the basis for formal

price building with an upward and downward
band of 20% of indicative price;
Institutional investors shall bid within the price
band;
If institutional quota is not cleared within the
price band the issue would be considered
cancelled unless the floor price is further lowered
within the face value of security with the
approval of the Commission;
 Book Building Method for Price Discovery

Bidding shall commence after getting consent

from the Commission;
No institutional investor shall be allowed to
quote for more than 10% of the total security
earmarked for them;
Book Building Method for Price Discovery

The bidding will be handled through an uniform and

integrated automated system of the stock exchanges;
The volume and value of bid at different prices will be
displayed on the monitor without identifying the
bidder;
The institutional bidders will be allotted shares on pro-
rata basis at the weighted average price of the bids
that would exhaust the total number of securities
being issued to them;
Payment Mechanism of Institutional Investor

Institutional bidders shall deposit 20% of the

amount of bid in advance to the designated
bank account; and
the rest 80% shall be deposited within 5 [five]
working days prior to the date of opening
subscription for general public.
In case of failure to deposit remaining amount
50% of bid money deposited by them shall be
forfeited by the Commission;
Lock-in Provision for Institutional Investor

There shall be a lock-in of 15 [Fifteen] trading

days from the first trading day on the security
issued to the eligible institutional investor.
 Stage II

Public offer based on price found out through Book

Building Process
Mechanism of distribution of Shares to
General Public

General Investor, mutual funds and NRBs shall buy at

the cut-off price as was found out through book
building process through Stage I;
Cut- off price means the lowest price offered by the
bidders at which the total issue is exhausted.
Issuer may issue share at below cut off price to
general investor with the approval of the Commission;
General investor will apply through banker to the
issue and in case of over subscription distribution will
be made through lottery.
Disclosure and Information Availability
Disclosure and Information Availability

Draft prospectus shall have to be posted on the SEC, DSE,

CSE, Issue Manager and Issuer’s Website at least two weeks
prior to the start of the bidding to allow investors to inform
themselves on the company and all aspect of offering.
DISTRIBUTION MECHANISM
 Distribution Mechanism of Shares

Size of Total Issue Eligible General Public

Institutional
Investors’ Mutual NRB
Portion Fund Portion
Portion

Tk. 30 to Tk. 50 20% 10% 10% 60% or balance

Crore amount
Over 50 Crore to Tk. 30% 10% 10% 50% or balance
100 Crore amount
Over Tk. 100 Cr. to 40% 10% 10% 40% or balance
Tk. 500 Crore amount
Over Tk. 500 Crore 50% 10% 10% 30% or balance
amount
BOOK BUILDING METHOD FOR DIRECT LISTING
 Direct Listing of Securities with Stock
Exchanges

• Securities could be listed with the stock exchanges without the rigor
of IPO process.
• Has created an opportunity for issuers who do not require additional
capital but their shareholders want to off load their existing shares;
• Have created exit route for multinational companies;
• Have created opportunity for Govt. to off-load its shares and use the
proceeds for other priority areas;
• Enhancing market depth and liquidity;
• Have created alternative investment opportunity
• SEC has made mandatory to follow BBM to discover price in respect
of Direct Listing that would help investor to have a good feel about
the price at which they should buy.
Requirement to Follow BBM to Determine
Initial Price at which Trading will Start

SEC has made mandatory to follow BBM to

discover price in respect of Direct Listing that
would help investor to have a good feel
about the price at which they should buy.
Shares Offloaded through Stock
Exchanges under Direct Listing
Mechanism
 Direct Listing of Securities with Stock
Exchanges

• Securities could be listed with the stock exchanges

without the rigor of IPO process complying with
Direct Listing Regulations, 2006 of DSE and CSE.
• Has created an opportunity for issuers who do not
require additional capital but their shareholders
want to off load their existing shares;
• Have created exit route for multinational companies;
• Have created opportunity for Govt. to off-load its
shares and use the proceeds for other priority areas;
• Enhancing market depth and liquidity;
• Have created alternative investment opportunity.
 Direct Listing of Securities with Stock
Exchanges

• Have at least 100 million paid up capital

• No accumulated loss and regular in holding AGM;
• In commercial operation for at least immediate last
five years;
• Has profit in three years out the immediate last five
completed financial years with steady growth
pattern;
• Credit rated by a credit rating agency registered
with SEC with minimum rating of “BBB”;
• No objection certificate from the lending financial
institutions;
• Status of loan defaults.
 Direct Listing of Securities with Stock
Exchanges
• At least 25% [Requirement was 10% prior to 04
June, 2009] of total paid up capital should be
offered for sale within 30 days of listing and shall
not be permitted to sell over 50% of existing
shareholding until the company holds AGM after
completion of one full accounting year of the
company upon listing.
• Sponsors are required to place their security with
their designated broker immediate prior to the start
of trading of directly listed security.
• Tk. 4,243.50 million worth of shares of five
government and two privately owned companies
was offloaded.
 DIRECT LISTING
Cap. Face Off- Avg.
Issuer MTk. Value NAV loaded EPS Price

Dhaka Electric
Supply Co. Ltd. 1,271 100 273.06 317 55.94 255.31

Power Grid Co. of

BD. Ltd 3,643 100 270.21 910 34.41 248.94
Jamuna Oil Com.
Ltd. 450 10 21.55 135 6.73 664.93
Meghna petroleum
Ltd. 400 10 18.49 120 5.29 314.06
Titas Gas Tr. &
Dist. Com. Ltd. 8564 100 113.49 2141 30.07 385.43

ACI Formul. Ltd. 250 10 23.77 89 2.62 226.27

Shinepukur
Ceramics ltd. 700 10 15.66 350 1.97 94.32 

Navana CNG Ltd 300 10 17.28 181.50 6.74 207.52

 DIRECT LISTING
Paid up Total For General
Issuer Capital Offloading Public/Inst. Listing Trading
  Tk.in mn Tk.in mn Tk.in mn Date Date
Dhaka electric Supply Co.
Ltd. 1,271 317 286 18.05.06 18.06.06

Power Grid Co. of BD.

Ltd 3,643 910 865 18.05.06 09.10.06

Jamuna Oil Com. Ltd. 450 135 135 18.11.07 09.01.08

Meghna petroleum Ltd. 400 120 120 14.11.07 14.01.08

Titas Gas Trans. & Dist.
Com. Ltd. 8564 2141 2141 09.06.08 03.07.08

ACI Formulations Ltd. 250 89 89 30.10.08 18.11.08

Shinepukur Ceramics ltd. 700 350 350 30.10.08 18.11.08
Navana CNG Ltd. 300 181.50 181.50 26.7.09 30.8.09
Total 15,278 4,062 3,986    
 DIRECT LISTING
Paid up For General
Capital Total Offloading Public/Inst. Listing Trading
Issuer
  US$ mn US$ mn US$ mn Date Date

Dhaka Electric Supply Co. Ltd. 18.41 4.59 4.14 18.05.06 18.06.06

Power Grid Co. of BD. Ltd 52.77 13.18 12.53 18.05.06 09.10.06

Jamuna Oil Com. Ltd. 6.54 1.96 1.96 18.11.07 09.01.08

Meghna Petroleum Ltd. 5.81 1.74 1.74 14.11.07 14.01.08

Titas Gas Trans. & Dist. Com. 124.48 31.12 31.12 09.06.08 03.07.08

ACI Formulations Ltd. 3.63 1.29 1.29 30.10.08 18.11.08

Shinepukur Ceramics ltd. 10.17 5.09 5.09 30.10.08 18.11.08

Navana CNG Ltd. 5.23 2.62 2.62 26.07.09 30.08.09

Ocean Containers Limited 3.43 1.72 1.72 22.02.10 04.03.10

PROBABLE IMPACT OF BOOK BUILDING METHOD ON
BANGLADESH CAPITAL MARKET
 Positive Impacts

Good issuers would be encouraged to raise fund from

capital market;
Difference between issue price and first day trading
price will be narrowed down;
Tendency for opening fake BO accounts will be
reduced;
There will be a balance between the demand for and
supply of the security since book-built price will be close
to the market price;
In respect of Direct Listing the general investor will
have a good feel about the price of security at which
they should buy the security.
 Probable Negative Impacts

Institutional Investors may tend to bid higher price

disregarding fundamentals of the company in bullish
market and lower price in the bearish market;
Retail investors may be disinclined to buy security at
higher price of the issue;
Shares may be issued at price which is more than the
intrinsic value of underlying assets.
THANK YOU