The busiest year ever for issuing IPOs (Initial Public Offerings) is poised to pass away with a bang infested by mostly poor quality issues.
Though record number of public offerings hit the market in 2014, quality of most of the IPOs is under question as some companies allegedly received IPO nod by cooking their financial health, taking advantage of the securities regulator’s weak monitoring and political clout, according to investors and industry insiders.
Firms like Khulna Printing and Packaging Ltd (KPPL), C&A Textile, Shurwid Industries and Shasha Denims have already stuck with legal tangle for providing false documents to Bangladesh Securities and Exchange Commission (BSEC).
Analysts feared that this development bodes ill for the stock market and investors’ confidence that is yet to recover from the shock of the stock market debacle from late 2010 to early 2011, would sink it further.
According to the BSEC, a total of 20 IPOs was approved by the BSEC in the outgoing year, raising an estimated total of Tk927 crore. That makes 2014 the best year for IPOs by both number of IPOs and amount raised since 2000. During last year, numbers of IPOs were 12 worth more than Tk829 crore.
This year was particularly busy for textile firms that accounted for half of all IPOs, the data shows.
“This is the best year for the new IPOs but we have failed to see the good brands of the corporate world getting listed,” said Md Moniruzzaman, managing director of IDLC Investments Limited.
“Profit margins of some are better even than the leaders of the very sector, which is too good to believe,” he said.
He also opined that there should be a due diligence guideline for the issue managers –as BSEC is approving IPOs based on their checklist of disclosures and not on merit.
C&A Textile got IPO approval providing false documents about their directorships to the securities regulator. The company increased its paid up capital by issuing only shares for their directors to Tk120 crore in 2013 from only Tk5 lakh in 2001. Then, it applied and got permission easily and swiftly to raise Tk45 crore from the stock market.
Recently, some investors have brought allegation against Shasha Denims as saying, “The company’s pre-IPO net asset value (NAV) was Tk29 but in its IPO prospectus, it showed NAV Tk52.95, which is not fair.’’
On December 15, High Court issued a rule asking BSEC and other government agencies concerned to explain in four weeks why Shasha Denims IPO should not be declared illegal.
According to the prospectus of Khan Brothers PP Woven Bags Industries, it showed its net profit stood at Tk7.5 crore in the fiscal year 2013-2014, Tk6.5 crore in 2012 and 2013, Tk1.8 crore in 2011-2012 and Tk2.2 crore in 2010-2011.
The rising profits over the last four years showed that the company’s net profit jumped more than 261% in 2012-2013 from 2011-2012 just before proposing the IPO.
In this context, the company explained in its prospectus that though, in the years of 2011-12 and 2010-11, Khan Brothers made few of its exports through deferred L/C. So, in those years the amount of accounts receivables remained at much greater percentages on sales compared to that of the previous years.
In case of KPPL, the firm’s revenue in 2009-10 was only Tk34 crore, soaring 247% to Tk119 crore in next year. Then, its revenue shot up to Tk208 crore in 2011-12 before losing more than 8% to Tk191 crore in 2012-13.
On behalf of investors, lawyer Md Rahanul Mostafa filed a writ in May last, accusing the KPPL of providing false and fabricated information in its IPO prospectus.
Shruwid Industries is the latest company that never held any annual general meeting before getting IPO approval but in securities rules, a company needs to hold regular AGM for eligibility of going public.
Interestingly enough, issue manager to the controversial four companies—C&A Textile, Khan Brothers, KPPL and Shasha Denims –is same company named ‘AFC Capital’ having link with a top leader of the ruling party, according to sources concerned.
Another vicious trend in the market is that the newly listed companies are traded at very high prices on debut, declare high bonus shares and no cash and sell the bonus part swiftly which are lock-in free, market players said. They (issuers) often go for rights offering to fetch in more cash from the public, they alleged.
“Such unexpected development is bringing very bad message for the market because the market is yet to recover from earlier shock and this will be like rubbing salt over wounds,” said former finance adviser to the caretaker government Mirza Azizul Islam.
Islam, also former SEC chairman, suggested the regulator to become more cautious before giving IPO approval for the betterment of the market as well as investors.
The BSEC kept mum itself over giving IPO approval to some firms despite their fictitious documents. BSEC spokesperson, however, did not respond to several phone calls and texts message sent by the Dhaka Tribune.
The IPO market was sluggish since the beginning of 2010 when the market boomed and then doomed as the regulator had tried to limit new issues. However, from 2013 it got some pace.
Since 2005 in Bangladesh stock market, IPO activity began rising to tap the primary markets, taking advantage of growing demand for shares.
