i | P a g e

IPO PROCESS IN BANGLADESH

A REPORT OF FINANCIAL INSTITUTIONS AND MARKETS

COURSE CODE: FIN- 4101

SUBMITTED TO:

MOHAMMAD BAYEZID ALI

ASSOCIATE PROFESSOR

DEPARTMENT OF FINANCE

JAGANNATH UNIVERSITY, DHAKA

SUBMITTED BY:

RASEL AHAMED

REPRESENTATIVE OF GROUP 6

ID NO: B-120203047

SESSION: 2012-2013

DEPARTMENT OF FINANCE

JAGANNATH UNIVERSITY, DHAKA

DATE OF SUBMISSION: 27 OCTOBER 2016

ii | P a g e

MEMBERS OF GROUP: 6

SL ID NAME

1. B-120203032 RAJIB HUSSAIN

2. B-120203034 ASIBUL ISLAM MILU

3. B-120203043 TAJRIMA SULTANA SRISTI

4. B-120203045 MOHAMMAD WASHIM

5. B-120203047 RASEL AHAMED

6. B-120203051 SHARIF ASRAFUL HAQUE

7. B-120203055 MD. SUJON BHUIYAN

8. B-120203071 GAZI RAFSAN SHAHAB

9. B-120203082 MAHEDI HASAN SAGAR ZOARDER

10. B-120203137 AFRIN KHAN

11. B-110203091 EHSUN HOQUE

iii | P a g e

Letter of Transmittal

27th October, 2016

Mohammad. Bayezid Ali

Associate Professor,

Department of Finance,

Jagannath University, Dhaka.

Dear Sir,

With great pleasure, we have submitted this analysis report that we have been assigned to us as

an important requirement of BBA program at Jagannath University. We have found the study to

be quite interesting, beneficial and knowledgeable. We have tried our level best to prepare an

effective & creditable report.

This report is about the Process of IPO (Initial Public Offering) in Bangladesh. The report was

completed on the basis of Theoretical & Analysis learning.

We also want to thank you for your support and patience with us and we appreciate the

opportunity provided by Jagannath University and Department of Finance to work on this

wonderful project.

Yours sincerely,

On behalf of the group,

…………………………………………………….

Rasel Ahamed

ID: B-120203047

iv | P a g e

Acknowledgement

We would like to express our gratitude to all the people that were involved both directly

and indirectly in the preparation of this report. We apologize to the people whose names that we

have not mentioned, and their contribution is highly appreciated by us.

At first, we would like to thank our academic supervisor, Mohammad. Bayezid Ali - Associate

Professor, Jagannath University – for guiding us and for giving us the opportunity to initiate this

report. More specifically, we would like to thank him for imparting her time and wisdom.

Finally, we would like to thank our parents and friends whose influence and inspiration have

enabled us to complete this report.

v | P a g e

Executive Summery

Capital market ensures efficient transfer of resources from savers to borrowers. It ensures

this through the bourses it has. The Capital Market of Bangladesh is the subject of discussion in

the first chapter. The journey of our capital market begins in 1954. It is constituted with securities

& non-securities segment. The securities segment is constituted with two bourses namely Dhaka

Stock Exchange Limited (DSE) &Chittagong Stock Exchange Limited (CSE) as well as the

regulator namely Securities &Exchange Commission The securities market is regulated by many

laws & by-laws. Small number of listed issues, small numbers of investors, low liquidity level,

information asymmetry – all these characters are the salient features of capital market of

Bangladesh. This are the issues discussed in the first chapter.

In the second chapter an overview on the prime bourse of the country- DSE is provided. DSE was

established as East Pakistan Stock Exchange Association Limited on April, 1954 although formal

trading begun in 1956. Chief Executive Officer (CEO) is the head of the management. At present,

DSE is performed various activities related to the capital market through 26 departments under 4

divisions. The major departments are Surveillance, Listing Affairs, Market Operations,

Monitoring, Investigation, and Compliance & Legal Departments etc. DSE is going to shift at its

second building at Nikunja within a short time. DSE has announced its 5 year plan namely DSE

Vision-2013.

IPO denotes the means of collecting funds from the public through public offering procedure. In

Chapter three different aspects regarding IPO of companies, i.e. meaning, types, advantages of

IPO (from the view point of both the Companies and the Investors), Book-Building System, IPO

Requirements, Documents to be Submitted, Evaluation of the Draft Prospectus are discussed.

The present procedure of IPO is briefly described in the later chapter. Later on more discussion is

done on the Evaluation of Draft Prospectus and the Decision making process by the Exchange. In

the following chapter a case study based on the Golden Harvest Agro Industries Limited has been

vi | P a g e

provided to illustrate the Evaluation of Draft prospectus done by the Department of Listing Affairs

on behalf of the Exchange.

Some performance analysis of the securities floated by IPO in 2012 is presented in the fifth chapter.

This analysis is basically done by comparing market return and variance withthe securities floated

by IPO. And finally correlation among securities is presented. In the concluding chapter different

problems of the capital market of Bangladesh are identified. Finally, some recommendations for

making the capital market more active &efficient have been provided to conclude the chapter as

well as the report.

vii | P a g e

Contents CHAPTER 1 ................................................................................................................................... 1

1.1 INTRODUCTION ................................................................................................................ 2

1.2 BACKGROUND OF THE STUDY ..................................................................................... 3

1.3 OBJECTIVES OF THE STUDY .......................................................................................... 4

1.4 METHODOLOGY OF THE STUDY .................................................................................. 5

1.5 LIMITATIONS OF THE STUDY........................................................................................ 6

CHAPTER- 2 .................................................................................................................................. 7

2.1 CONCEPT OF PO ................................................................................................................ 8

2.2 TYPES OF PO ...................................................................................................................... 8

2.3 Types of IPO ......................................................................................................................... 8

2.4 ADVANTAGES OF IPO .................................................................................................... 10

2.6 FEES REGARDING IPO ................................................................................................... 11

2.7 DOCUMENTS TO BE SUBMITTED ............................................................................... 12

2.8 THE IPO PROCESS ........................................................................................................... 13

2.9 EVALUATION OF THE DRAFT PROSPECTUS ............................................................ 15

2.10 DECISION OF IPO .......................................................................................................... 19

2.11 DEPARTMENT OF LISTING AFFAIRS ....................................................................... 21

2.12 IPO SCENARIO ANALYSIS .......................................................................................... 22

CHAPTER- 3 ................................................................................................................................ 23

3.1 PROBLEMS REGARDING IPO PROCESS ..................................................................... 24

3.2 RECOMMENDATIONS .................................................................................................... 25

3.3 CONCLUSIONS................................................................................................................. 27

3.4 REFERENCES ................................................................................................................... 29

1 | P a g e

CHAPTER 1

2 | P a g e

1.1 INTRODUCTION

Initial public offering (IPO) also referred to simply as a "public offering" or "flotation," is

when a company issues common stock or shares to the public for the first time. They are often

issued by smaller, younger companies seeking capital to expand, but can also be done by large

privately owned companies looking to become publicly traded. In an IPO the issuer may obtain

the assistance of an underwriting firm, which helps it determine what type of security to

issue(common or preferred), best offering price and time to bring it to market.

For the individual investor, it is tough to predict what the stock or shares will do on its

initial day of trading and in the near future since there is often little historical data with which to

analyze the company. For minimize the risk and attract more investor to the market The IPO has

three part as mention in the following diagram. 10% Shares are restricted for mutual fund; another

10% shares are restricted for Non Residence Bangladeshi (NRB); and rest of the 80% shares are

allocated for the general public.

We have used only secondary data source to conduct the study. The sources of secondary

data are: Secondary information was collected from different web site related to IPO listing

procedure in Bangladesh. We have collected much of the information through the internet and

those are mentioned in the bibliography page.

3 | P a g e

1.2 BACKGROUND OF THE STUDY Capital market is absolutely a vital consider for the proper functioning of capitalistic

economy, since they serve the channel funds from savers to borrowers. The securities market

allows sound listed companies to raise additional capital quickly and cheaply, as they enjoy

reputation. A vibrant and liquid securities market encourages increase in savings by offering

attractive and rewarding securities in terms of higher return, lower risk and easy option for

conversion to cash. Investors in Bangladesh became increasingly interested in equity markets

because many entrepreneurs look for requirements from the equity markets for many reasons. In

this connection Dhaka Stock Exchange Limited plays an integral part of the industrialization of

the country. For this regard floating securities through IPO in the stock market is very analytical

task and the whole procedure is the main focus of this report.

4 | P a g e

1.3 OBJECTIVES OF THE STUDY The main objective of the report is to comprehensive study on Dhaka Stock Exchange

Limited – its overall functions, detailed procedure of IPO, and to find out the problems inherent

with this. The following are the other objectives of the study-

To get an overall idea about the capital market of Bangladesh.

To get a fundamental idea about Dhaka Stock Exchange Limited and its activities.

To identify the advantages and disadvantages of IPO Process.

To identify the requirements to be fulfilled by the companies for collecting capital through

IPO.

To discuss the analyzing process of the Draft Prospectus submitted by the companies

willing to be held for IPO.

To know the performance of the post IPO companies.

To know the relationship of the company having IPO with market index.

To understand the role of Stock Exchange Market for the development of the economy of

Bangladesh.

To discuss the problems still prevailing in the Capital Market of Bangladesh.

5 | P a g e

1.4 METHODOLOGY OF THE STUDY The task of business research is to generate accurate information for use in decision

making. Business research is defined as the systematic and objective process of gathering,

recording, and analyzing data for aid in making business decisions. There are two types of

research.

Basic research is intended to expand the boundaries of knowledge itself or verify the

acceptability of a given theory.

Applied research is conducted when a decision must be made about a specific real life

problem. Applied research encompasses those studies undertaken to answer questions about

specific problems or to make decisions about a particular course of action or policy. This research

type is basic research as I am trying to expand our boundaries of knowledge of the IPO process.

From the view point nature of data the research is qualitative research.

This research will be focusing on both the secondary & primary data.

Secondary Data source

Annual report of the DSE.

Monthly review of DSE.

Prospectus of Direct Listing companies.

Different publications regarding IPO.

Extensive literature search on the basis of these documents of publication.

www.dsebd.org and other relevant websites.

Primary Data source

Face to face conversation with the respective officers and Staff of DSE.

Oral interview of the responsible officers.

Relevant document’s studies as provided by the officers concerned.

Observation of department of DSE.

6 | P a g e

1.5 LIMITATIONS OF THE STUDY In preparing the internship report I have faced some problems which are mentioned below-

IPO process is mainly descriptive and little scope for analysis.

Sufficient books, publications and journals were not available.

Insufficiency of necessary information and data.

Sometimes officials deny disclosing some information as to maintain secrecy.

Improper combination among various departments.

Up-to-date information was not available.

Unwillingness to give information more because of extra harassment that are without their

responsibility.

7 | P a g e

CHAPTER- 2

IPO PROCEDURE ANALYSIS

8 | P a g e

2.1 CONCEPT OF PO Public Offering (PO) means collecting funds for capital from the public. It is one of most crucial

sources of getting funds collected.

2.2 TYPES OF PO Mainly, there are two types of public offering namely seasoned public offering and initial public

offering (IPO). The first one represents the fact when a company having already floated securities

through IPO further collects funds from public through public offering. On the other hand, IPO is

the process of collecting fund for the first time in the market.

2.3 Types of IPO

a) FIXED PRICING METHOD

Under fixed price method, the company cannot fix up its price for IPO. Rather regulatory body i.e.

BSEC fixes up the price. In accordance with SEC Ordinance, 1969, this price has been fixed as

TK 10. There remains no chance for manipulating price under this system.

b) BOOK-BUILDING SYSTEM FOR INITIAL PUBLIC OFFER

In a major shakeup in the capital market, the Securities and Exchange Commission introduced

book-building system for initial public offer. Book Building alternative to fixed price system is

basically a capital issuance process used in initial public offer and during the period for which the

book for the IPO is open, bids are collected from investors at various prices, which are above or

equal to the floor price.

The SEC introduced book-building system for IPO to attract national and multinational companies

which want competitive price of their initial offers. A SEC technical committee consisting

representatives from major stakeholders of the capital market is working to expedite the process

for the introduction of the book-building system. Commission asked the technical committee to

scrutinize ins and outs of the proposed book-building system and place its report to the commission

soon.

At first, the BSEC consultative committee prepared a draft policy guideline on book-building

system and made recommendations to the commission for introducing the system which ensures

competitive pricing of company’s IPOs. Different financial institutions and business houses

including the Bangladesh Bank, chamber bodies and merchant bankers gave their inputs in

preparing the draft policy guideline. The book-building system would encourage multinational

companies to raise capital from the capital market. The multinational companies prefer book-

9 | P a g e

building system as an appropriate policy to ensure proper pricing of their stakes before going

public.

However, the commission would also keep its existing system of IPO fixed price system.

Under the proposed book-building system, the underwriters will buy all shares to be floated by a

business enterprise in the stock markets through competitive bidding. Underwriters will then

choose some seller groups or brokers to put up those shares for sale to retail investors. The share

issuing companies will get their share prices from the underwriter who will be the highest bidder

in the bidding process.

10 | P a g e

2.4 ADVANTAGES OF IPO

FROM THE VIEW POINT OF THE COMPANY

The advantages reaped by the Companies from IPO are as follows-

The company enjoys concessions under Direct Tax laws as such companies are known as

companies in which public are substantially interested resulting in lower rate of income-

tax payable by them.

Financial Institutions/Bankers extend term loan facilities in the form of domestic currency

and foreign currency loan.

It ensures wide distribution of shareholding thus avoiding fears of easy take-over of the

organization by others.

It reduces the reliance on debt financing as borrowing and their prescheduled compulsory

debt servicing could be avoided if the company is listed on the bourse.

The company gains national and international importance by its share value quoted on the

stock exchanges.

FROM THE VIEW POINT OF THE INVESTORS

The management of a public company must be accountable to their shareholders, which in

turn play a role in ensuring that the company operates in an efficient manner. Shareholders

will be benefited from the enhancement of the company's operational efficiency.

Since securities are quoted; there is no secrecy of the price realization of securities sold by

the investors.

The rules of the Sock Exchange protect the interest of the investors in respect of their

holdings.

11 | P a g e

2.6 FEES REGARDING IPO

1. The following fees shall be applicable for payment by the issuer company:-

(i) Issue management fee: maximum 1% on the public offering amount or Tk. 20 Lacs

whichever is lower.

(ii) Underwriting fee shall be calculated on 50% of public offer amount, and the said amount

shall not exceed 1% on the amount underwritten.

(iii)Bankers to the issue fee: maximum 0.1% on the amount collected against public offering

applications.

(iv) Fees to SEC:

a) The issuer company shall pay Taka 10,000 (non-refundable) as application fee

along with the application for consent of the Commission to issue or offer of

securities, by way of a pay order or demand draft issued in favor of the “Securities

and Exchange Commission”; and

b) Upon according of consent by the Commission to issue prospectus, the issuer

company shall pay consent fee @ 0.15%, by way of a pay order or demand draft

issued in favor of the “Securities and Exchange Commission”, on the amount of

public offering.

2. No seal commission shall be paid to any persons including the members of the stock

exchanges.

12 | P a g e

2.7 DOCUMENTS TO BE SUBMITTED

According to the Regulations the applicant company has to submit some documents duly certified

by the Company or the Authorized Representative presenting the security to the Exchange.

Generally, the following documents have to be submitted in addition to the application form-

Memorandum & Articles of Association

Copy of the Certificate of Incorporation

Copy of the Certificate of Commencement of Business

Copy of the certificate of registration of the industrial Units

Copies of all material contracts and agreements entered into

Copies of Letter(s) of Credit established in favor of Machinery Suppliers (if linked with

the public issue).

Copy of Consent order issued by the Commission

Names of Directors along with directorship of other companies listed on the Exchange

Draft prospectus/Offer for sale

Auditors Certificate for the amount subscribed by the promoters/ directors/ subsidiaries/

associates

Copy of underwriting agreement (if any);

Statement of audited accounts for the last 5 years or for a shorter number of years if the

company is in operation only for such shorter period

Statement showing the cost of project and means of finance

Copies of the approval of tax-holiday application under Ordinance, 1984

Copies of the consent Letters from Bankers/Financial Institution to the Issues

Application for submission of Undertaking and payment of fees

Copy of approval of prospectus/offer for sale from Commission

However, in case of a new project a Copy of the Feasibility Report should be submitted in addition

to the above documents. Beside this, if there is any agreement relating issue to securities for

consideration other than cash then a Copy of such agreement has to be submitted.

13 | P a g e

2.8 THE IPO PROCESS

Bangladesh Securities and Exchange Commission took initiatives to simplify the IPO process and

to reduce the time requirements from public subscription to listing application for the convenience

of the investors. as part of this effort, BSEC met with representatives of top brokerage houses,

merchant banks and concerned TreC Holders several times to get their opinions. Opinions were

collected on the issues how a company could be listed within a short period of time and how to

eliminate refund related complexities.

Under the newly approved IPO subscription guidelines, IPO subscription of Hamid Fabrics started

on September 28, 2015 as the first issue under a pilot project. 151brokerage houses of DSE and 16

merchant banks took part in the pilot project complying with BSEC guidelines. subsequently

National Feed Limited, C & a Textile, Ifad autos, Shasha denims, Zahin spinning and BSRM

also completed the IPO subscription process under the pilot project. In the meantime, all

brokerage houses of DSE have become eligible to compete in the IPO subscription process.

Accordingly on May 25, 2015, DSE completed fully the IPO subscription of Aman Feeds with all

the brokerage houses. DSE is entitled to receive IPO data transmission fee @ Tk. 2,00,000 from

every issuer company under the guidelines for performing the IPO related tasks.

The companies are required to complete certain procedure to get permission for raising capital

through IPO on the Dhaka Stock Exchange. The present procedure f this can be described briefly

as follows-

APPOINTING THE ISSUE MANAGER

Every company intending to get permission for raising capital through IPO to DSE by issuing its

securities is required to appoint Issue Manager to proceed with the listing process of the company

in the Exchange.

SUBMITTING THE DRAFT PROSPECTUS

The Issue Manager prepares the draft prospectus of the company as per Public Issue Rules of SEC

and submits the same to the SEC and the Exchange(s) for necessary approval.

MAKING AGREEMENT

The Issuer is also required to make agreement with the Underwriter(s) and Bankers to the Issue

for IPO purpose.

ANALYSIS OF DRAFT PROSPECTUS BY THE EXCHANGE

After receiving the draft prospectus, the Exchange examines and evaluates overall performance as

well as financial features of the company which may have short term and long term impact on the

market.

14 | P a g e

ANALYSIS BY SEC

The Exchange sends its opinion to SEC within 15 days of receipt of draft prospectus for SEC's

consideration. And SEC evaluates the different aspects of the Company as well as it also considers

the Recommendation provided by the Exchange regarding this.

RECEIVING SEC’S CONSIDERATION

After proper scrutiny and analysis, the Securities & Exchange Commission (SEC) gives it consent

for floating IPO as per Public Issue Rule.

FILLING LISTING APPLICATION

Having consent from SEC, the Issuer is required to file application to the Dhaka Stock Exchange

for listing its securities within 5 days of issuance of its prospectus.

SUBSCRIPTION

The next step is opening the subscription to the general people. After a successful subscription,

the company is required to complete distribution of allotment/refund warrants within 42 days of

closing of subscription.

PLACEMENT OF LISTING APPLICATION

After 100% distribution of shares/refund warrants and compliance of other requirements, the

application for listing filed by the Issuer Company is placed to the Exchange's meeting for

necessary decision of the Board of the Dhaka Stock Exchange.

DECISION OF LISTING

The Board of Dhaka Stock Exchange takes the decision regarding listing/non-listing of the

company which must be completed within 75 days from the closure of the subscription.

IPO DATA TRANSMISSION SOFTWARE DEVELOPMENT

A software system was designed and implemented to collect IPO related files from all TreC Holder

in a single store for further processing as well as to redistribute to the corresponding TreC Holders'

houses after processing in collaboration with listing affairs department. Go-live of this IPO data

Transmission software was on 23rd March 2015. This solution is now running successfully

15 | P a g e

2.9 EVALUATION OF THE DRAFT PROSPECTUS

Basically, while analyzing the different aspects of the applicant company different issues may

come in front. However, the Exchange, especially the Department of Listing Affairs, follows a

standard method to evaluate the prospectus submitted by the applicant company. The method is

described as follows-

PREPARING THE CHECKLIST

A checklist is prepared by the Department before starting the analysis of draft prospectus.

This checklist ensures whether the prospectus is prepared according to the Security and

Exchange Commission (Public Issue) Rules, 2006. Page numbers of items under each section of

the rule are also included in this checklist.

OVERVIEW OF THE COMPANY

The analysis begins with a brief overview of the Company. In this section a brief overview on the

Date of Incorporation, Commencement of Business, Authorized Capital, and Paid up Capital of

the company is provided.

DETAILS OF THE ISSUE

A detail of the issue, for which the Applicant Company has submitted the Draft Prospectus, is

summarized in this section. This section covers the public offering as well as the as the private

placement (if any) with the amount, number of shares and offer value of the shares. All data is

available in the prospectus.

NAME OF THE ISSUEMANAGER, &INDEPENDENT AUDITOR

In this section the name of the Issue Manager and the Independent Auditor is provided.

HISTORY OF PAID UP CAPITAL

A history of the paid up capital for the company (if available) for a 5-year period is provided in

this section. This history covers the amount of paid up capital with the sources i.e. cash issue,

bonus issue or right issue, of those capital. Any remark is also provided in this section related to

the paid up capital.

PAID UP CAPITAL AFTER IPO

The main objective of this section is to provide an overview on the Post IPO Paid up

Capital assuming the company will be allowed to go for offering.

16 | P a g e

COMPANY DESCRIPTION

A brief description of the company is provided in this section. The operation of the

Company, amount of Authorized capital, special features, name of the foreign countries in which

the company exports its products (in case of an exporter company) are provided in this section.

Basically, this information is available in the prospectus.

RISK FACTORS

Any investment always associates with risks. Among those risks some can be averted, others are

beyond control, which may causes of loss. Before making any investment decision, Investor should

take the risk factors into consideration. Major such factors are identified and provided in this

section. However, the basis of this section is the management perception about different risks

identified by them and provided in the Prospectus. The Stock Exchange provides some remarks if

there is any difference between the Management’s perceptions about risks and the DSE’s

perception.

BOARD OF DIRECTORS

The name of the Board of Directors and their involvement in other businesses are summarized in

this section. If there is any involvement of any director with other companies which are listed on

DSE that is marked. An overview on the shareholding structure of the Directors and the family

relationship among them is also provided in this section. This can be called as analyzing the Human

Aspect.

SHAREHOLDING STRUCTURE

Another process of analyzing the human aspect is analyzing the shareholding structure of the

company. In this section the Percentage of holding shares by the directors of the company is

provided. Basically, according to Securities and Exchange Commission (Public Issue) Rules, 2006,

the company has to provide the name and address of any person who owns, beneficially or of

record, 5% or more of the securities of the issuer, indicating the amount of securities owned, and

the percentage of the securities represented by such ownership. From this shareholder’ list the

percentage of holding of shares by the Chairman and Directors are sorted and presented.

FAMILY RELATIONSHIP AMONG THE DIRECTORS

In this section the family relationship among the directors are provided. Basically, the information

is available in the Prospectus as according to Securities and Exchange

Commission (Public Issue) Rules, 2006, the company has to provide the information regarding

any family relationship among directors and top five officers. The main purpose of this section is

to analyzing the human aspect of the company. A strong family bonding among the directors put

a negative impression on the company.

17 | P a g e

PERFORMANCE AT A GLANCE

In this section there are two parts. In the first part, the performance analysis of the Company is

done based on the historical data provided in the prospectus. Generally, Growth of Turnover, Cost

of Goods Sold, Operating and Net Profit, Net Assets is calculated for five years. Special attention

is given to the Dilution. Diluted EPS and Net Asset Value per share are calculated to consider

comparative performance of the company. Dilution is also done by considering the after IPO effect

on the Shareholders of the applicant company. The second part deals with different ratios

calculated by the Exchange. The ratios include Return on Equity (ROE), Return on Assets (ROA),

Profit Margin, Asset Utilization, Equity Multiplier, Debt Equity ratio, Time Interest Earned etc.

the performance analysis is done to consider the past performance of the applicant company which

would allow considering the probable future performance of it.

SELECTED RATIOS

This part or information is provided by company. The purpose of focusing this section is to find

or justify any deviation between the calculated figures in the previous section and the company

reported figures. If there is any significant deviation found, the possible reasons behind that are

identified if possible. Otherwise, the proper explanation of such deviation is asked to the Company.

DIVIDEND INFORMATION

The history of Dividend payment by the Company is provided in this section. Both the Cash and

Stock/Bonus dividend payment are presented here.

NET TANGIBLE ASSET PER SHARE

In this section Net Tangible Asset per share is calculated. Basically, Net Tangible Asset is

calculated as the Total Assets of a Company minus any Intangible Assets such as Goodwill, Patents

and Trademarks, less all Liabilities. However, this calculation is provided in the prospectus.

However, the Exchange calculates and focuses on the Diluted Net Tangible Asset per share to

consider the after IPO effect on the Tangible Assets for the Company.

DESCRIPTION OF FIXED ASSETS

Fixed assets are valuable assets for a company. To consider the strength of the company a

description of the fixed assets are provided in this section.

DETERMINATION OF OFFER PRICE

The determination of offer price is presented here. Basically, the offer price is determined by the

Issue Manger of the applicant Company. There are various methods of determining the offering

price. However, the most common method is based on Net Asset Value. If there is any objection

by the Exchange, that is provided in the analysis.

18 | P a g e

COMPARISON

A comparison between the applicant company and other companies, already having IPO completed

on the market and has the common issues similar with the applicant company, is done. The basic

issues being compared are the Turnover, Cost of Goods Sold, SG&A, and Diluted NAV & EPS

etc. the current market prices for the listed companies are also provided to forecast roughly the

probable market price of the upcoming securities.

DSE OBSERVATION

In this section the summarized version of the analysis is provided. The key points are provided

here. That means the findings through the analysis are provided in this section.

RECOMMENDATION

This is the last section of the analysis. In this section the Listing Committee of Dhaka Stock

Exchange provides a Recommendation regarding the listing of the applicant company.

19 | P a g e

2.10 DECISION OF IPO Basically, the Securities & Exchange Commission (SEC) has the full authority to take decision

whether to allow the applicant Company to go for IPO. It may happen that in spite of negative

recommendation from the Exchange the company obtains the permission from SEC to go for IPO.

In that case the Exchange has the authority to reject the Listing of such company.

The process of analyzing the prospectus and decision taken by the exchange can be shown in the

following flow chart-

Issuer (Submission of

Prospectus)

Expert Panel

Department of Listing Affairs

Securities &Exchange Commission

Consent for IPO/rejected

DSE Board

Q

u

e

ri

e

s

C

o

n

s

e

nt

Recommendation

Recommendation for Listing

20 | P a g e

The Listing department, after analyzing the Prospectus, provides the recommendation to the listing

committee. The discussion is done, may be for several times (sometimes queries are made to the

company), and the recommendation is provided to the BSEC. BSEC, after analyzing, gives the

decision of IPO. The Exchange then decides whether to accept the decision by giving accordance

of the permission for IPO or reject the decision by doing otherwise.

21 | P a g e

2.11 DEPARTMENT OF LISTING AFFAIRS The department through which the companies get entry into the Capital Market is Department of

Listing Affairs. With a vision of getting the best companies to be listed and keeping the all listed

companies as transparent and compliant as possible and safe guard investors’ interest doing all

these at all costs the Listing Affairs Department was established in October 5, 2008 under

Operations Division. Before the date the department was named Listing & Market Operations

Department. Headed by 1 AGM, 1 Manager and 2 Sr. Executives this department has five

employees remaining busy with their jobs.

The department has a vast job area to do. Some of the major functions of this department are as

follows-

Corresponding with the listed companies regarding compliance.

Maintaining AGM/ EGM and other relevant data in collaboration with R&D and DSE

Library.

Visiting listed companies as per instruction or randomly and also visiting prospective

companies that may get listed.

Taking initiatives for new listing and processing listing of Govt. Bonds.

Processing and evaluating of the draft prospectus/Information Documents for different

upcoming companies for IPO/Direct Listing.

Preparing comments based on Draft Prospectus/Information Documents for listing

committee of DSE and thereby intimating to SEC on behalf of DSE upon DSE Board

approval.

Arranging listing committee meeting, agenda and minutes

Assuring impartial IPO lottery (if any) by sending representatives

Corresponding with the companies (issuer) and issue managers regarding IPO Direct

Listing issues.

Arranging Listing Agreement Signing and First Trading ceremonies for newly companies.

Preparation of System Files/database for newly listed companies (through IPO/ Direct

Listing).

Evaluating and processing gift of shares.

Take necessary steps for different Training Programs/ Workshops/ Seminar/Symposium/

Workshop/ Road show etc.

Listing promotional activities & maintaining information base of defaulter companies.

Updating the web department of ICT Division with relevant information for the DSE

website and

22 | P a g e

FY 2010-11 FY 2011-12 FY 2012-13 FY 2013-14 FY 2014-15

17 16 14 16 16

FY 2010-11 FY 2011-12 FY 2012-13 FY 2013-14 FY 2014-15

16,803.00 16,238.23 9,104.00 9,338.70 12,469.72

Carrying out any delisting related process.

2.12 IPO SCENARIO ANALYSIS During 2014-15 financial year, sixteen companies including 1 Mutual Fund, 5 from, engineering

sector, 5 from Textile sector, 1 from Fuel & Power sector, 1 from services and real estate and 1

from Miscellaneous sector came to the Capital Market with Tk. 16 thousand 930 million paid up

capital and raised capital Tk. 12 thousand 469 million through Initial Public offering (IPO). Of

these, 10 companies raised Tk. 7 thousand 936 million as premium. On the other hand, in 2013-14

financial year, sixteen companies including 1 from Financial sector, 3 from engineering sector, 1

from Food & allied sector, 6 from Textile sector, 2 from Pharmaceuticals & Chemical sector, 1

from Fuel & Power, 1 from Paper & Printing sector and 1 from Travel & Leisure sector raised

capital Tk. 9,338.70 million through Initial Public offering (IPO). Of these, 6 companies raised

BDT 4,375 million as premium.

Total No. of IPOs

Capital Raised through IPOs (million BDT)

0

2

4

6

8

10

12

14

16

18

2011 2012 2013 2014 2015

Series 1 IPO Subscription

23 | P a g e

CHAPTER- 3

PROBLEMS, RECOMMENDATIONS & CONCLUSIONS

24 | P a g e

3.1 PROBLEMS REGARDING IPO PROCESS

THE COST ASPECT

Going public is costly both in terms of money and time. Accounting, legal, printing, travel,

manpower devoted to preparing for a public offering can be substantial. There are numerous

additional expenses annually, including audited financial reports, preparation and distribution of

proxy materials, quarterly and annual reports to shareholders, fees for transfer agents, public

relations, and other costs, including the time required by a company officers devoted to these

matters. In addition to the upfront costs of the IPO, there are also costs of maintaining a quote

on stock exchanges.

THE TIME ASPECT

Flotation process is also a time consuming exercise. Because of red-tapism and other lengthy

processes, it might take six months to years to complete the IPO process fully.

DISCLOSURE OF INFORMATION

When a company moves from private ownership to public, much information must be disclosed

- for instance, salaries, transactions with management, sales, profits, competitive position, mode

of operation and other material information. The companies may find it against their business

secrecy.

LOOSING FLEXIBILITY

Management of the company may lose some flexibility in managing the company's affairs,

particularly with actions which require shareholders' approval. The company may not have the

ability to act quickly if approval is required by shareholders or outside directors.

CURRENT IPO PROCESS

Due to the current process of IPO most of the time the companies are not getting the actual

equity value for their stocks. The companies further allege, and sometimes correctly, that it is the

IPO Hunters who benefit from the current system by selling the shares when they win it in the

lottery and sell the shares at a much higher price (even 6 to 8 times of the face value) in the

secondary market. When they are traded the issuing Companies get nothing except the face

value of the shares. So, the companies are not getting interest in IPO.

25 | P a g e

3.2 RECOMMENDATIONS A strong capital market acts as a vehicle for growth of the economy. Listing of companies with

well fundamentals ensures this growth for the economy. So, proper steps should be taken to

ensure the listing of good companies. The total listing procedures as well as the analysis

procedure of draft prospectus have got some sort of problems. The following recommendations

can minimize the problems-

The regulatory bodies can highlight the benefits of IPO such as tax advantages, lower cost

fund raising etc. so that more firms become willing for listing in the stock market.

The depth, breadth & liquidity of our capital market should be increase so that more firms

become willing to enter into the market through IPO.

The whole procedure of IPO process should be arranged quickly enough by which new

companies could be inspired to raise necessary fund in a timely manner.

IPO awareness program should be arranged after certain interval by the DSE management

to send the message of listing advantages to the entrepreneurs.

The risk of losing control or flexibility can be minimized by limiting the number of shares

sold to the public, seeking to ensure a broad distribution of shares to the public, creating

different ranked classes of stock with differential voting rights, entering into voting

agreements among pre-IPO shareholders, adopting supermajority provisions or

staggering the terms of the directors.

The rules of Direct Listing regarding the disposal of shares need modification.

There should be a time period within which all firms have to offload their all shares

mentioned in the information documents for offering directly.

To increase the liquidity of the market, derivative instruments such as Futures &

Options should be introduced with the existing bond market by introducing Derivative

instrument rules and their listing procedure.

Information documents should be analyzed carefully to overlook any discrepancy in the

information provided and thereby prohibit the fundamentally weak company into listed

in the stock exchange.

26 | P a g e

To make the market more efficient, weak companies should be de-listed by the listing

authority.

Bring the State Owned Enterprises, large local companies and telecommunication

companies to the capital market through enforcement of the recently considerable book

building method.

The process of selling shares initially to a corporation should be prohibited by making laws

so that both the issuers and the general investors can get the benefit.

The standard procedure for analysis of draft prospectus also has got some problems or

weaknesses. Basically, the analysis is a prospectus based analysis. The risk factors

identified and the data provided in the prospectus are considered to be enough for

analysis purpose. The Exchange should spread its focusing area from the prospectus to

the analysis based on the external factors which might not be present in the Prospectus.

It is a matter of hope that Query Response method has been introduced in the analysis

process recently. However, proper SWOT analysis and a little focus on the Forecasting

should be ensured by the Exchange while analyzing the Draft Prospectus.

27 | P a g e

3.3 CONCLUSIONS Our economy is starving for a matured and stable capital market. The stability came through a

variety of sources namely, educated retail investors, institutional investors and capital market

regulators. Through various forms of reforms and automation the capital market of Bangladesh

won the confidence of investors from all walks of life. In addition to that, the government

facilitated our capital market by structuring its monetary and fiscal policies in a pro-capital

market manner.

Our emerging economy mostly invited the funds from all over the globe. Market capital has

shown amazing growth. Although current market price earnings ratio is higher than that of the

neighboring country but it is my belief that considering the demand for lack of avenue to invest,

the capital market of our country has a bright and attractive future and untapped sector.

From the present point of time the future seems bright, not only because of our vibrant capital

market but also of our room for new products. With the introduction of direct listing and fixed

price method, our primary market is improving in line with the secondary market. The market

capitalization will grow significantly within next few years and turnover shall reach an

international level. Generally, the main reason for a company to obtain a listing is to gain wider

access to capital. The ability to raise finance remains the single most important facility that a

listing provides. Entrepreneurs or families descended from entrepreneurial founders have

enjoyed and benefited from the enhanced marketability of shares that comes with a public

offering. Flotation gives those backers an exit- either at the time of listing or subsequently but

some care has to be taken not to appear greedy. The Mutual Fund Investment is attracting more

popularity. The managers of these funds are sensitive the notion that pre-float backers may be

cashing in chips and leaving them with overpriced shares.

The IPO has got some disadvantages also. It brings cost and obligations that could be off-putting.

There are costs associated with gaining quotation. Significant amounts of management time can

be taken up fulfilling the obligation that goes with IPO, too. Moreover, reporting requirements

can mean the surrender of personal privacy and there are complaints of undervaluing some

shares in the market.

28 | P a g e

However, though there are some drawbacks of IPO we can sum up that an IPO provides the

opportunity for greater firepower in the market. Increased visibility and liquidity gives a

competition with it a certain amount of prestige for a firm, helping it to attract and retain highly

qualified staff. Importantly, an Exchange listing enables tracking of the market’s perception of a

company’s performance and strengthens the focus on shareholder value.

29 | P a g e

3.4 REFERENCES www.dsebd.org (the official website for Dhaka Stock Exchange Ltd.)

www.secbd.org (the official website for Securities & Exchange Commission)

Dhaka Stock Exchange Ltd.- Annual Report, 2015

Chandratre, K.R.; “Compendium of SEBI- Capital Issues & Listing“

Ahmed, Salma; 2005, “Reviving the Role of Regulators in Bangladesh Capital

Market”; Pakistan Journal of Social Sciences 3(4)

Hasan, M. Kabir; Islam, Anisul. M and Bashed, SayedAbul; “Market Efficiency,

Time-Varying Volatility and Equity Returns in Bangladesh Stock Market”; fourthdraft.