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Dhaka Tribune

IPO proceeds spent on business expansion shrink

The nine private firms raised Tk540crore through the IPOs last year

Update : 04 Feb 2020, 10:19 PM

The publicly listed companies last year spent smaller amount of initial public offerings (IPOs) proceeds in business expansion compared to previous year amid economic volatility and low quality IPOs. 

The nine private firms raised Tk540crore through the IPOs last year. They spent Tk410.4 crore or7 6% of the total takings for expanding their businesses.

The amount collected in 2018 through IPOs was Tk495 crore, of which 85.25% was spent on their business expansion.

Former adviser to a caretaker government AB Mirza Azizul Islam told Dhaka Tribune, “The quality of the IPOs is a key factor for business expansion. If the IPO quality is low the expansion will be lower. Also, the overall economic situation last year was not optimistic for businesses.” 

“There will be more demand for working capital for the expansion of existing businesses as the economy grows rapidly. The stock market can be a great source of fund, although the potential remains still untapped,” he noted.

“To attract entrepreneurs, the government has to set an example by offloading shares of state-owned companies (to the stock market),” the economist said.

He also said the securities market regulator should take action if IPO funds were largely used for repaying bank loan violating the rules.

As per the  Bangladesh Securities and Exchange Commission's (BSEC) rules, no more than one-third of proceeds can be used for repaying bank loans or spent as working capital.

Last year, the remaining Tk102.6 crore or 19% of the fund was used for repaying bank loans and 5% or Tk27 crore against  IPO expenses.

In 2018, Tk86 crore or14.75% was used to repay bank loans, says a market valuation report of the City Bank Capital Limited.

In 2019, a total of nine companies raised Tk540 crore through IPOs including premiums, down from Tk581 crore from 12 offerings in the previous year. The figure is the lowest since 2010, when the raised amount was Tk3,390 crore.

An IPO refers to a process that collects first-time funds from public for a company intending to be listed with a bourse observing the set rules of regulators.

Analysts say that high bank interest rates, failing to secure bank loans, and the flexible terms of the stock market are some of the factors that made companies go public.

Moreover, good exposure to foreign buyers who favour listed firms for sourcing products, and the demutualization of DSE, also play a key role in encouraging firms to get listed at the premier bourse, initially by issuing IPOs.

The companies followed two methods, fixed price and book-building, while issuing IPOs in the capital market.

Of them, two companies raised Tk250 crore using the book building method, while the rest seven collected Tk290 crore under the fixed price method.

Esquire Knit raised Tk150 crore, Runner Automobiles Tk100 crore, New Line Clothings Tk30 crore, Silco Pharmaceuticals Tk30 crore, SS Steel Tk30 crore, Genex Infosys Tk20 crore, Copppertech Industries Tk20 crore, SEA Pearl and Resort Tk15 crore and Ring Shine Textiles Tk150 crore in 2019.

Stock market analysts think there is still a shortage of quality stocks, deemed fundamental requirement for the stability of the stock market. In absence of quality stocks there remains always a possibility of shares being overvalued, creating scopes for manipulation in the market.

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