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Dhaka Tribune

Companies fear bringing new primary shares in a depressed market

Update : 29 Apr 2013, 10:04 AM

A mood of caution hangs over the initial public offering (IPO) in the back drop of heavy volatility in the capital market, fear of unfair IPO pricing and economic slowdown, market analysts said.

Over the last two years, IPOs were often tense with market marred by a number of shelved share sales and the poor performance of those stocks went public.

Issue managers and analysts fear the disappointments over the last two years might well carry on into this year too as depressing sentiments still persisted in the IPO market. Political uncertainty is the new addition to it, they said. 

“Volatility is the bane of IPOs,” said Mahmood Osman Imam, a market analyst.  Entrepreneurs might have been shying away from stock market because of negative sentiment and economic slowdown, he said.

The benchmark index of Dhaka Stock Exchange, DGEN, lost more than half of its value since December 2010, when the market began to slide and it is still maintaining the falling momentum.

Imam said that extended periods of heightened volatility are the most treacherous for new issues. “But reversals can be quick, if we see a measure of repair and stability.”

Bangladesh Bank says GDP growth will be around 6.2% this fiscal year, which falls far short of government target of 7%. The World Bank recently revised down its GDP growth forecast for Bangladesh to 5.8% due to slow exports and investments.

“Heightening political tension will intensify the GDP forecast,” said Imam, also professor of finance at Dhaka University.

Owing to the unsettled market, Bangladesh Securities and Exchange Commission (BSEC) has cautiously taken steps to relieve the pressure on the country’s equity market caused by the backlog of companies waiting to be listed, but in slow process, said an official.

The IPO market remained sluggish since the beginning of 2011 when the market boomed and then doomed as the regulator has tried to boost investors’ confidence by limiting new issues.

The backlog of IPOs filed with the BSEC so far stands at more than 50, the highest level not seen before.

“Majority of the issues submitted with the BSEC is not top quality. We are careful to give approval,” said a high official of the BSEC. The commission also asked some companies to cut higher premium taking the current market situation into account, he said.

The backlog has also discouraged both issuer and issue manager for not filing fresh IPO with the regulator because of time consuming process. 

“IPO backlog has put a lid on going public for the companies,” said MA Hafiz, president of Bangladesh Merchant Banks Association.

“A large number of companies are planning to put their IPO plans on the backburner because of the present condition,” said Hafiz, also a director of AAA Consultant, a leading issue management company.

Companies hardly file their plan in recent months for future IPOs, a bright spot in an otherwise dim market. One issue manager has said that it was abstaining from managing IPOs because of the risk of dealing with small companies of unproved quality and also delayed process.

“Recently, I have discouraged a company not to go public right now as the delayed process might affect its investment plan,” he said.

The pace of IPOs, however, picked up in January this year when six new issues were approved after a slow of two year.  In 2012, 10 private companies raised money through IPOs amounting to Tk10.17bn in Dhaka Stock Exchange.

Seven private companies made IPOs worth over Tk1.4bn at the Dhaka Stock Exchange in 2011 — a year of gloom as the market lost one-fourths of its value to Tk2.6tn.

"Fund flow acts like the oxygen in the IPO market,” said Hafiz. So, more new issue means more fund flow, he added.

Yawer Sayeed, a capital market analyst, said: “Wheel of IPO flow needs to keep running for the economic growth.” The roll-call of the companies hoping to list shares seems cautious because of the concern about reputation risk and volatility,” he said.

Since 2005, IPO activity began to rise to tap the primary markets, taking advantage of growing demand for shares.

“Maintaining the normal flow of IPOs is very important to overcome any shortage of quality issues in future,” said Akter H Sannamat, managing director and chief executive officer at the Union Capital, an investment bank.

“But lack of approval for IPOs in view of the present market situation continued to hamper the IPO flow,” he said.

In mid-last year, Envoy Textiles and Summit Purbanchol Power Company had to shelve their IPO plans as the outlook for a recovery seemed murky.

A good number of companies -- Unique Hotel and Resorts, Saiham Cotton Mills and Aamra Technologies Ltd -- lost value below their offer prices in first trading day last year. The dismal debut of these companies has made many companies scary about going public.

However, the most recent debutants received impressive responses from the investors, pushing up their prices higher than the offer prices. But this euphoria ended in heavy price corrections within next few days.  

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