Small cap companies dominated initial public offering market in 2013 with fund withdrawal hitting five years low.
In the year, a total of 10 companies raised funds worth Tk859.5 crore by floating IPOs, which was down more than 27% from Tk1186.7 crore in the previous year, according to the Dhaka Stock Exchange.
Fund withdrawal through IPOs marked five years low since 2009.
Analysts said the trend might continue this year too, as most of the IPOs waiting for regulator’s approval are small-cap companies.
Primary market in 2013 was not very buoyant due to flat capital market situation. Money withdrawal from the primary market in the year was the lowest in last five years, says Lanka Bangla Securities in its analysis.
The fall of fund withdrawal through IPOs was accelerated by low cap companies that ruled the IPO market during the year.
At a worldwide level, there is no harmonised definition for large-cap, mid-cap, small-cap and micro-cap companies, and the generally accepted definitions vary from one geographical region to another.
In Bangladesh context, the threshold used for defining large-caps is above Tk500 crore while that of mid-caps between Tk500 crore and Tk300 crore and of small-caps is below Tk300 crore.
“Definition of market cap varies from stock exchange to stock exchange across the world,” said Yawer Sayeed, a market analyst.
Dominance of small cap companies in the stock market is quiet natural if sizes of Bangladesh economy and stock market are taken into account, he said.
According to Sayeed, the debate over premium issue, market jittery and recent amendment of rules are among key reasons behind the decline of fund withdrawal from stock market.
From the total amount of public offer, companies have withdrawn Tk709.5 crore and two mutual funds Tk150 crore from the primary capital market in 2013.
Of Tk709.5 crore offered by the companies in 2013, Tk322.5 crore was used for repayment of debt and Tk387 crore was used for expansion and other activities.
The ratio of fund-withdrawal for repayment of debt to total fund withdrawal is 45% in 2013 which was 34% in 2012, according to Lanka Bangla.
Amount withdrawal for expansion and other activities have come down sharply to Tk387 crore from Tk746.9 crore in 2012.
“IPO trend is likely to continue this year too,” said Akter H Sannamat, vice-president of Bangladesh Merchant Bankers Association.
“The stock regulator is slow to allow IPOs while a large number of IPO proposals are waiting for approval.”
On the rising repayment of fund withdrawal from IPOs, Akter H Sannamat said there is no regulatory bar in this regard.
“Actually, this loan was taken for business expansion from banks. To reduce dependency on banks and cost fund, companies go public to repay loans.”
Around 45 companies, most of them are low-caps from textile and power sectors, filed their IPO proposals to the Bangladesh Securities and Exchange Commission (BSEC), according to the issue management companies.
Of more than 300 companies listed with the DSE, only 95 companies are large-cap and the rest are small cap stocks.
According to the analysts, there are both advantages and disadvantages of trading small cap stocks over trading large and mid cap stocks.
“Small cap stocks are much less priced than large and mid cap stocks. So trader can trade more number of stocks with less money,” said Asaduzzaman Riyadh, an analyst at Lanka Bangla.
He added that the small cap companies are keener in their business areas and future developments with minimum wastage of resources.
He said disadvantage of small cap stock trading is that it is riskier than mid and large cap stocks, which have fairly stable prices.
“Small cap stock trading yields lesser dividends, as most companies invest their earnings to grow more.”