IPO restrictions may hinder market growth: Analysts

A hard time for stock market is ahead, as the government has clamped restrictions on initial public offerings by the new companies intending to raise capital from public, market experts say.

When demand for new issues is increasing day by day in line with the growing pace, the restriction has also pushed at least four companies into uncertainty.

Although the four companies -- RAK Ceramics, Beacon Pharmaceuticals, LSI Industries and IIDFC -- have been awaiting a nod from the regulator for months after submitted their IPO prospectuses, the Securities and Exchange Commission is stuck in indecision.

The finance ministry at a meeting on November 5 decided that from now on a company will have to go for IPO with minimum shares equivalent to 40 percent of its paid up capital. The SEC has also been directed to go by the new decision.

The amounts of share offloading by the four companies are far below the government's new imposition on capital rise from the stock market.

RAK Ceramics IPO size is Tk 30 crore, which is more than 16 percent compared to its existing paid up capital of Tk 185 crore, while Beacon Pharmaceuticals' Tk 30 crore is around 16 percent of its Tk 190 crore paid up capital.

LSI Industries IPO is offering Tk 20 crore worth shares each at Tk 80 including premium of Tk 70 per share. After issuance of new shares Tk 2.5 crore will be added with the existing Tk 22.6 crore paid up capital, which is around 11 percent of the paid up capital.

As of June 2009, IIDFC's paid up capital is Tk 14.72 crore, and with the IPO floatation another Tk 5 crore will be added to the existing paid up capital. The company is offering Tk 7.5 crore worth shares including premium of Tk 5 crore.

Asked about the IPO approvals, Mansur Alam, acting chairman of SEC, told The Daily Star that the commission would reach a decision on the scrutiny of all legal aspects.

Market analysts think government's fixing the amount of capital rise by any company may discourage going public. These companies will have, then, no other options than bank finance, they say.

Pointing to the fact that a company may not necessarily go for raising capital equivalent to 40 percent of its paid up capital, the analysts say any company may need to raise small size funds.

When his attention was drawn to the new restriction, former finance adviser Mirza Azizul Islam said it's not a market- friendly directive.

“Many companies, especially the big ones with large paid up capital, would not come up with share offloading,” he said.

Besides, he said, the market might not absorb IPO of large capital base companies like Grameenphone. “Grameenphone offered only five percent of its paid up capital through IPO and the IPO was oversubscribed by 3.5 times. If it offered 40 percent of its paid up capital, the IPO could be under-subscribed,” he explained.

“It's their wrong perception those who said the new decision will protect price fluctuation of small size IPO. Price fluctuation depends on investors' view of perspective,” said Islam, who also served as SEC chairman for three years.

The finance ministry at the meeting on November 5 also directed the SEC to introduce book-building method, a modern pricing system for IPO.

But the directive on book-building contradicts the earlier ones, which stated that no companies can come up with IPO less than 40 percent of its paid up capital.

According to book-building rules, a company can go for IPO with shares equivalent to 10 percent of its paid up capital, or Tk 30 crore, whichever is higher.