Internship report on-

Comparative analysis between Fixed price & Book-building method of Stock pricing: The
Case of DSE

Exam Roll No: 110502

 Internship report on-

Comparative analysis between Fixed price & Book-building method of Stock pricing: The Case
of DSE

Prepared for—

Chairman

Internship Placement Committee

Prepared by—

Exam ID: 110502

4th Year, 8th Semester

20th Batch, BBA Program

Academic Session: 2010-11

Submission Date—

28th February, 2015

Institute of Business Administration

Jahangirnagar University

Savar, Dhaka-1342
28th February, 2015

Chairman

Internship Placement Committee

BBA Program

Institute of Business Administration

Jahangirnagar University

Subject: Submission of Internship Report.

Dear Sir,

I have the pleasure to submit my internship report on “Comparative analysis between Fixed price
& Book-building method of Stock pricing: The Case of DSE.”

I have given enough concentration to the successful completion of my internship and prepared an
internship report. It was my great opportunity to get a chance work on this challenging project and
to complete the report in time. I am grateful for your guidelines and lessons.

I tried to put my best effort for the preparation of this Report. Yet if any shortcomings or flaws
arise, it will be my pleasure to answer any clarification and suggestion regarding this report.

Thanking you

Sincerely yours

ID: 110502

Academic Session: 2010-11

 Acknowledgment

At the very outset, I am grateful to almighty Allah for giving me strength and ability to
accomplish the internship program as well as the internship report in spite of various difficulties.

It gives me immense pleasure to thank a large number of individuals for their cordial cooperation
and encouragement which has contributed directly or indirectly in preparing this report.

Firstly, I would like to express my thanks to my internship supervisor Mr. Kamrul Arefin. His
guidance, advice and timely feedback made this report possible.

I would also like to thank my line manager Mr. Mohammad Shafiqul Islam Bhuiyan, Manager,
Listing Affairs, Dhaka Stock Exchange Ltd. Without his mentorship, guidance and his
supervision I could not learn about the framework of pricing methods for Initial Public Offerings
and complete this report. I would also like to thank Mr. Robiul Islam for being helpful. Also my
heartfelt gratitude to Listing Affairs Department for accepting me as a member. With their
guidance and help I have grown as a young professional.

I would also like to show my gratitude to our director, Mr. Mohammad Nazmul Islam for his help
in internship completion.
Contents Page No.
Executive Summary vii
Chapter 1: Introduction
1.1 Background of the Study 1
1.2 Origin of the Study 1
1.3 Objectives 1
1.4 Scope 2
1.5 Methodology 2-4
1.6 Limitations 4
Chapter 2: An Overview of DSE
2.1 Brief history 5-6
2.2 DSE Vision 2013 6-7
2.3 DSE as an Organization 7
2.4 Functions of DSE 7-8
2.5 Legal Control 8
2.6 R&D, Information Department 8
2.7 Organizational Structure of DSE 9
2.8 Activities of Listing Affairs Department 10-11
Chapter 3: Literature review 12
Chapter 4: Comparison of Methods
4.1 Introduction 13
4.2 Why Book Building Method? Weakness of Fixed Price Method 13-14
4.3 Difference between Fixed Price and Book-Building Method 14
4.4 Advantages of Book Building Method 15
4.5 Criticism on Book Building Method 15
4.6 Probable Impact of Book Building Method on Bangladeshi Capital 16
Market
Chapter 5: Market Comparison
5.1 Comparison of Performance in the Capital Market 17-21
5.2 Effectiveness of book building method in Capital Market 21-22

5.3 Improper use of book building method 22-24

5.4 Manipulators Benefiting From Book Building Method 24

5.5 Re-introduction of BBM 24-26

Chapter 6: Findings & Suggestions
6.1 Findings 27-28
6.2 Suggestions 28
Chapter 7: Conclusion 29
Chapter 8: References 30
Chapter 9: Appendix 31-36
 List of Figures
Figure 01: Organizational Structure of DSE Page 9
Figure 2: Fuel & Power Sector Page 18
Figure 3: Ceramics Industry Page 18
Figure 4: Cement Sector Page 19
Figure 5 Close Price comparison Page 19
Figure 6 Offer Price vs Close Price Page 20
Figure 7 Cumulative Price fall Comparison Page 21
Figure 8 DSE Index Page 22

List of Tables
Table 1 Difference between Fixed Price and Book- Building Method Page 14
Table2: Recent Close Price, Offer Price & Opening Month Close Price comparison Page 17
 Acronyms

BBM – Book Building Method

BSEC – Bangladesh Securities and Exchange Commission

DSE – Dhaka Stock Exchange

FP – Fixed Price Method

SEC – Securities and Exchange Commission

Definitions

According to the Securities and Exchange Commission (Public Issue) Rules, 2006, published
in Bangladesh Gazette, March 19, 2003
(a) “associate” means any partner, employee or officer of a company or a body
corporate over which the directors or subscribers to the Memorandum of Association
and Articles of Association can exercise significant influence or control;
(b) “banker to the issue” means any bank so named in the prospectus to collect
money as subscription against security;

(c) “bidders” means the eligible institutional investors;

(d) “book-building method” means the process by which an issuer attempts to

determine the price to offer its security based on demand from institutional investors;

(e) “Commission” means the Securities and Exchange Commission (SEC)

established under the Securities and Exchange Commission Rules, 1993

(f) “commission” means any money paid to any person in connection with the public
offering of security under these Rules;

(g) “cut-off price” means the lowest price offered by the bidders at which the total
issue could be exhausted;

(h) “floor price” means the lowest price of the price band within which the eligible
institutional investors shall bid for security under book-building method;
(i) “indicative price” means the price which the issuer indicates in the draft
prospectus taking input from the eligible institutional investors on which the bidders bid
for final determination of price;

(j) “initial public offering” means first offering of security by an issuer to the general
public;

(k) “merchant banker” means a merchant banker as defined in the Securities and
Exchange Commission (Merchant Banker & Portfolio manager) Regulations, 1996
(l) non-resident Bangladeshi (NRB)” means an expatriate Bangladeshi or who has
dual citizenship or possesses a foreign passport bearing an endorsement from the
concerned Bangladesh Embassy to the effect that no visa is required for him to travel
Bangladesh;

(m) “price discovery” means a method of determining the price for a specific security
through demand and supply factors related to the market;

(n) “prospectus” means any document prepared for the purpose of communicating to
the general public an issuer’s plan to offer for sale of its security under these Rules;

(o) “public issue” means public issue of security through initial public offering or
repeat public offering;

(p) “registrar to the issue” means the merchant banker or any person employed by the
issuer registered with or approved by the Commission for carrying on the activities in
relation to an issue including collecting applications from investors, keeping record of
applications and money received from investors or paid to the seller of security,
assisting in determining the basis of allotment of security, finalizing the list of persons
entitled to allotment of security and processing and dispatching allotment letters, refund
orders or certificates and other related documents;

(q) “repeat public offering” means further public offering for issuance of additional
security by an issuer which is either listed with a stock exchange or has raised capital
earlier through public offering; and

(r) “Road show” means presentation by an issuer of security to potential investors

about its issuance of security.”
 EXECUTIVE SUMMARY

Initial Public Offerings are issued by companies who seek capital to expand or to become
publicly traded. Till 2010, Dhaka Stock Exchange only provided Fixed Price method for price
discovery for IPOs. This method is known to have a common flaw all over the world, the
underpricing issue. To make up for this fundamental weaknesses of Fixed price method for
stocks, SEC introduced The Bookbuilding method, a more advanced technique. Book
Building method theoretically can reduce underpricing, but in Bangladeshi scenario it worked
out poorly and was suspended after the stock market crash in 2011.

The intention of this report is to compare the two pricing methods for Initial Public Offerings
available for companies who want to list themselves in the Dhaka Stock Exchange Ltd. by
analyzing the procedures of both method and making qualitative interpretation of recent
market performance. This study concentrates on finding out how effective both these methods
are concerning the scenario present in Bangladesh.

It is observed that both Fixed & Book-building method showed identical decline in share
prices after IPO, although in case of Book-building companies the fall of prices was steeper.
Book-building pricing method introduced into Bangladesh’s market has not reduced price
manipulation as expected; on the other hand, it has significantly increased possibly due to
other external effects. The process of BBM followed in DSE resembles the process used in
other successful (USA) bourses, the fault mainly lies with the market manipulators. Strong
allegations are there that there is a prior understanding among the issuer company and the
institutional investors participating in the road shows. CPD analysis found those who hold the
private placements took out a substantial amount of money by selling shares at high prices
during the first one month.

Book-building pricing method introduced into Bangladesh’s market has not reduced price
manipulation as expected; on the other hand, it has significantly increased possibly due to
other external effects. Positive changes has been made to re-introduce the BBM method, but
unless the market behavior changes, those changes will mean little. Regulatory bodies of
Bangladesh stock market must educate the current and potential investors about the market
mechanism and provide them the accurate information so that investors trade their shares
carefully.

In conclusion it can be said that the Book-building method was misused with some motive.
The recent reforms does not ensure its success unless regulators take a strict approach and
maintain their fidelity.

vii
 1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

During November 2010, The Board of Directors of DSE decided to introduce book-building
technique to reduce IPO underpricing and thus develop the potency of capital market through
attracting organizations who fear their stocks will not be fairly valued in the capital market. Up
until then, only fixed price method was used to determine the price of Initial Public Offerings.

The new Book building mechanism was a new method of listing, so it was vague to some
investors, which could have been the reason this method did not gain popularity. This method was
used only 3 times, twice in 2011 and once in 2010. Moreover, during 2012 and 2013, Book
Building method was deemed un-usable by the BSEC because of various complaints lodged
against this method. But it was being re-introduced in 2014 with few changes.

This study will strive to analyze the shortcomings of Book-building method in this country’s
scenario even though this technique is meant to reduce under/overpricing.

1.2 ORIGIN OF THE REPORT

As a part of my BBA Program I have completed my internship at Listing Affairs Department of

Dhaka Stock Exchange Limited. I have been working there for three (3) months as an internship
student from 11th October 2015 to 11th January 2015. I have chosen to do a comparative analysis
between fixed price method stocks and book-building method stocks. Book-building method was
put on hold following the debacle of the most recent market crash but now it is being re-
introduced. So, to find out what went wrong before and will it be successful this time around is
the purpose of this report.

1.3 OBJECTIVES:

Broad Objective:

Explaining the differences between Fixed Price method and Book-building method and
finding out the reasons behind the failure of book-building method.

Specific Objective:

 Presenting an overview of Dhaka Stock Exchange Ltd.

 Explaining the activities of Listing Affairs Department, Dhaka Stock Exchange Ltd.

 Exploring the Fixed Price and Book-Building method

Page 1 of 36
  Analyzing the advantages & disadvantages of book building method

 Measuring efficiency of each method in relation to market performance in recent years

 Discuss possible fixes and solutions/alternatives for Book-building method

1.4 SCOPE:

To prepare this report, I had a great opportunity to have real life knowledge about different
functions of the Dhaka Stock Exchange Limited. I also tried to increase my knowledge about
listing affairs and some other activities and I think the information collected from different
personnel will help me to understand the importance of these functions for Dhaka Stock
Exchange Limited. In the time of preparing this report, I have also gathered various types of
knowledge about official activities & various responsibilities of DSE. In this study I will try to
find out only the rationality of re-introducing Book Building Method for issuing capital in the
capital market of Bangladesh.

1.5 METHODOLOGY:

Type of Report

As this report basically tries to expand the boundaries of knowledge regarding the IPO process
and pricing mechanisms, the nature of this study will be descriptive. However, to measure the
performance of stocks in recent years data gathered will mostly be quantitative, and qualitative
data will be used to explicate their implications.

Data Collection & Interpretation

The focus of this report was the comparison of two pricing mechanism regarding IPO. Therefore,
to understand the overall market status and core issues following sources were used to collect
data:

Primary

 A structured, open-ended interview was conducted with the manager, Mr. Shafiqul Islam
Bhuiyan, of Listing Affairs Department, DSE.

Secondary

 DSE monthly review

 DSE annual report

  Publications provided by the DSE Officials

 Extensive literature search on the basis of these documents

 www.dsebd.org and other relevant websites

To interpret the data collected from secondary sources Microsoft Office Excel was used.
Graphical representation of data through bar diagram, Line graph, Tabular representation etc. is
applied where deemed necessary.

Research Methodology

Since the type of the report is descriptive, it has information that will only describe the regulatory
framework for Fixed Price and Book-building method. It has full description of the compliance
issues that must be met in order to be listed in Dhaka Stock Exchange under any of the two
methods. I have taken a qualitative interview with my line manager to get an understanding of
both these methods, their advantages and disadvantages and the reasons why the book-building
method was suspended and was being re-introduced. Quantitative analysis was done to compare
the performance of companies that chose both these methods. Entire methodology can be grouped
as following:

1) Comparative Analysis of Public Issue performance under both methods: In order to

compare performance between fixed price method and Book-building method,
a. 4 companies who used Book-building Method as their price discovery
mechanism during IPO. There are currently only 4 Book-building companies,
those are: RAK Ceramics Bangladesh Ltd., Khulna Power Company Ltd., M.I.
Cement Ltd. and MJL Bangladesh Ltd.
b. 6 companies who used fixed price method during IPO were chosen. The 6 Fixed
Price companies were chosen on the basis of their industry and their IPO year. As
the 4 companies of BBM are listed under 3 industries; Fuel & Power, Ceramics
and Cement, the FP companies chosen are from these industry and their IPO year
is close to the BBM companies IPO year if not the same year, the only exception
is Lafarge Surma Cement which had its IPO in 2003, but the other companies in
that sector all had their IPO’s before year 2000 except Premier Cement (2013)
which is also chosen for this comparison. The companies are – Barakatullah
Electro Dynamics Ltd., Premier Cement Limited, Shinepukur Ceramics Ltd.,
GBB Power Ltd., Summit Purbanchol Power Co. Ltd. and Lafarge Surma
Cement Company Ltd.
c. The recent performance of these companies (2011-2014) regarding the close price
and the Initial Offer and Opening month close price data was collected from the
DSE archive.
 2) Procedure analysis of both Methods: Different published periodicals and journals were
studied in order to understand the core issues of both pricing methods. They have been
accessed from online public domain and some of them were accessed from the archive of
Dhaka Stock Exchange Ltd.
3) Interview sessions: On the job interview and formal personal interview was conducted as
required with the manager and the executives of Listing affairs department, Dhaka Stock
Exchange Ltd. to find out the

1.6 LIMITATIONS

 There was a time constraint while doing the report. If there were more time available the
report would have been more comprehensive.
 Dhaka Stock Exchange Ltd. is very strict about giving details about their business
operation for any kind of external reports.
 Due to insufficient time, entire market scenario wasn’t captured, only few selected
companies who chose fixed price method for their IPO were studied to compare
performance.
 Only on the job informal interaction session was held with the department head. Because
of the busy schedule of different line managers, this sessions were often fragmented and
unstructured and information were collected one at a time.
 Because the Book-Building Method is a delicate matter and subject to much debate, there
is much controversy regarding its fairness.
 2.0 AN OVERVIEW OF DSE

2.1 BRIEF HISTORY

The Dhaka Stock Exchange (DSE) was first established as East Pakistan Stock Exchange
Association Ltd. on April 28th, 1954, but it was not until 1956 that formal trading started. On June
23rd, 1962, it was renamed as East Pakistan Stock Exchange Ltd. The Name of the stock exchange
was once again changed to Dacca Stock Exchange Ltd. on May 13th, 1964. The service on the
stock Exchange continued uninterrupted until 1971. The trading was suspended during the
Liberation War, and trading resumed in 1976 with changes to the Key economic policy of the
government. It has continued uninterrupted since.
In its 50 year journey, the Stock Exchange has made significant contributions to the economy of
Bangladesh by acting as a platform for investors to raise capital from the public, The organization
is in a relentless process of modernization to catch up to the successful bourses of develops
nations, by implementing the latest in technology and utilization of the computer marvel. By
implementing the latest in technology and utilization of the computer marvel. The Stock
Exchange implemented automated trading on networked computers for the first time in 2004.
Since then it has upgraded once again in 2005, and is still in the process of gauging new
technological advances for implementation.

Formation
Dhaka Stock Exchange (DSE) is a public limited company. It is formed and managed under
Company Act 1994, Security and Exchange Commission Act 1993, Security and Exchange
Commission Regulation 1994, and Security Exchange (Inside Trading) regulation 1994. The
issued capital of this company is Tk. 500,000 which is divided up to 250 shares each pricing Tk.
2000. No individual or firm can buy more than one share. According to stock market rule only
members can participate in the floor and can buy shares for himself or his clients. At present it
has 238 members. Market capitalization of the Dhaka Stock Exchange reached nearly $9 billion
in September 2007 and $27.4 billion on Dec 9, 2009.

Management
The management and operation of Dhaka Stock Exchange is entrusted on a 25 members Board of
Director. Among them 12 are elected from DSE members, another 12 are selected from different
trade bodies and relevant organizations. The CEO is the 25th ex-officio member of the board. The
following organizations are currently holding positions in DSE Board:

 Bangladesh Bank
  ICB
 President of Institute of Chartered Accountants of Bangladesh
 President of Federation of Bangladesh Chambers of Commerce and Industries
 President of Metropolitan Chambers of Commerce and Industries
 Professor of Finance Department of Dhaka University
 President of Dhaka Chamber of Commerce & Industry (DCCI)

DSE VISION – 2013

The Country’s prime and oldest capital market, Dhaka Stock Exchange, is continuing its journey
through the last 54years and to reach a new height it has set another visionary target namely DSE
Vision 2013 (a 5-year Plan). Through adopting this mission and target-based approach DSE
virtually heralds its arrival into the new era of serving the country’s economy, industrial sector
and overall mission with a catalyst role. The Committee of DSE Vision 2013 (5- Year Plan) of
DSE sat together on January 04, 2009 and opted out the following conspicuous points to be
achieved by the above mentioned time frame.

Market- Based Targets

 To increase the market capitalization to US$ 30 billion
 Market Capitalization to GDP ratio to be increased to 35%
 Daily trade volume to be increased to Tk,2000 core
 To expand trading facilities to the door of investors
 Through facilitating the process of introducing Book Building Method fundamentally
sound and good companies should be enticed to get listed in to the bourse
 Introducing financial to broaden and deepen the capital market
 Bond market to be activated to increase the depth and dimension of capital market.

Institutionally Internal Visions

 To create a skilled and trained human resource team for DSE who will carry out the
responsibilities and will be shouldered with all sort of duties to discharge with efficiency
and professionalism.
 State-of-the-Art Technology in IT Infrastructure to facilitate the automated trading
activities faultlessly, which will ensure the accountability and visible transparency.
 To set up an effectively On-line based National Clearing House; aiming to bring more
transparency in trading financial instrument and to reduce time lag.
 To review the Necessary Rules and Regulations (particularly Settlement Regulation 1998
and CDBL By-laws)
Vision for Investors Interest Protection
 To lay time-bond emphasis on protecting the interest of investors to bring dynamism and
more vibrant participants in market.
 To give more Emphasis on Investors awareness program for the sake of educating them
properly.
 Information dissemination and active strategies to reduce the degree and dimension of
rumors.

Two other targets of the Vision 2013 (a-5years plan) of are

 SEC-DSE Joint Collaboration and
 Contribution to Country’s Economy.

2.3 DSE AS AN ORGANIZATION

The Dhaka Stock Exchange is registered as a Public Limited Company. It’s a self- regulatory
Organization, i.e. it governs itself, but as with all organizations, there are a set of rules / policies
that guide its activities. They are as follows:
 Articles of Association
 DSE-constructed rules and regulation and own by laws
 Companies Act 1994
 Securities and Exchange Ordinance 1969
 Securities and Exchange Rules 1987

2.4 FUNCTION’S OF DSE

The major functions are:

 Listing of Companies. (As per Listing Regulations).
 Providing the screen based automated trading of listed Securities.
 Settlement of trading.(As per Settlement of Transaction Regulations)
 Gifting of share / granting approval to the transaction/transfer of share outside the trading
system of the exchange (As per Listing Regulations 42)
 Market Administration & Control.
 Market Surveillance.
 Publication of Monthly Review.
 Monitoring the activities of listed companies. (As per Listing Regulations).
 Investor’s grievance Cell (Disposal of complaint by laws 1997).
 Investors Protection Fund (As per investor protection fund Regulations 1999)
  Announcement of Price sensitive or other information about listed companies through
online.

2.5 LEGAL CONTROL

The Dhaka Stock Exchange is registered as Public Limited Company and its activities are
regulated by its Articles of Association and own rules, regulation and bye-laws along with the
Securities and Exchange Ordinance, 1969 and Companies Act 1994.

2.6 R & D, INFORMATION DEPARTMENT

The Research & Development, Information department is concerned with providing assistance to
all types of research work and supervising the DSE library.

Functions of R&D, Information Department

 Preparing database for all listed companies.
 Supporting to teachers and students in their research works and projects by providing
necessary data listed companies.
 Distribution of required information to members and investors to meet up their quarries
regarding listed companies, any regulation, etc.
 Inform the listing department of any announcement regarding company degradation,
share addition, etc. which the listing Department sends to IT for announcement.
 Provision of data and information for publication & Public Relation Department for any
publication of DSE like Monthly review, Annual report, Profile, Diary, etc.
 Submission of monthly data regarding market trade to SEC.
 Regular provision of data to SEC as per requirement.
2.7 ORGANIZATIONAL STRUCTURE OF DSE

The management of DSE is totally separated from the council. A professional Management Team
is running day-to-day operation and Chief Executive Officer (CEO) is the head of Management
Team of the exchange other members are the secretary.

Board of Directors
Policy Making
headed by President

Management CEO

COO CFO CTO

Manager Secretary Financial Head of IT

Controller

- Company Affairs
- Members
Registration
-Surveillance - Admin & HR - Clearing & - System
- Listing Settlement
-Inspection & - Accounts - Network
- Legal
Enforcement - Research - Budget - Application
- Publication - CDBL
- DP Support
- Monitoring of Listed
Company. - MIS &
Development

Figure 01: Organizational Structure of DSE

2.8 ACTIVITIES OF LISTING AFFAIRS DEPARTMENT

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

Carrying out any delisting related process.

 3.0 LITERATURE REVIEW

The purpose of the study was to highlight the Bangladesh Capital Market status with having Book
Building method compared with fixed price method and identify the problems regarding this
method and that impedes the development of capital market in Bangladesh.

A number of papers have documented the decline of fixed-price mechanisms and auctions for
selling IPOs in Europe, and the growth of bookbuilding, such as Biais and Faugeron-Crouzet
(2002), Sherman (2001), and Ljungqvist, Jenkinson, and Wilhelm (2003). Ljungqvist, Jenkinson,
and Wilhelm (2003) examined 2,143 IPOs brought to market in 65 countries outside the U.S.
between 1992 and mid-1999, of which about 1,300 involved a book-building effort, that is, there
is an international trend toward increased use of book building method. By the end of the decade
book-building had largely displaced traditional methods. What’s more, this displacement took
place even though the direct costs of book-building were about double those of local alternatives
(Wilhelm, 2005). Sherman (2000a) reports that in 40 countries the book-building method of
selling IPOs has increased and dominates other selling regimes. Sherman (2004) has provided a
broader list of countries regarding IPO pricing patterns. Moreover, Sherman (2000a) concludes
that book-building .gives underwriter/issuer greater flexibility in designing a solution that reflects
the individual issuer’s preferences, generally leading to a more efficient outcome.

According to a study by Islam, Siddique & Rahman (2006), Book-building also reduces
uncertainty for both issuers and investors. However, they also found that the critics have strongly
opposed the idea as they believe the new system will drive away general investors from the
capital market. Market experts suggested that rather than using book-building solely, traditional
practices may be reshaped as a consequence of recent technological advances for better IPO
pricing as book-building system lacks transparency evidenced in the spinning allegations during
the tech IPO bubble in the United States. In conclusion, from the public policy point of view, SEC
should not introduce such system. But they suggested SEC could try running both the existing
IPO system and Book building in parallel like in the United States.

In a journal article by Rashida (2013), she tried to focus on Book Building method in the security
market of Bangladesh and discussed about its problems created by manipulators. Her study
concludes that Book building method is apparently a sophisticated and widely used concept but
unfortunately, this method is being misused with some motive. It needs adequate efforts by
regulatory agencies to customize it for implementation in Bangladesh context.
4.1 INTRODUCTION:

Companies issue IPO to raise capital from the primary market, but it was judged by SEC and
issuing companies that they are not earning fair pricing of their stocks through fixed pricing
method, as underpricing of offer price is the case most often as reflected by the post IPO scenario
of the securities. So, in 2010 the stock market regulator approved the 'book building,' method a
widely practiced price fixing mechanism for initial public offering (IPO), which theoretically,
reduces underpricing. Capital market experts showed it as an encouragement for private-sector
entrepreneurs to list their companies on bourses at fair prices. However the existing IPO system
will remain intact. BBM is expected to enhance market depth, turnover and the supply side. Many
big and profitable companies keep themselves aloof from listing on bourses, as they fear to be
denied proper prices of their shares under the existing IPO process. After initiating this method,
SEC thought that such companies will be interested to enter the market for capital rising, as this
method will ensure a fair price of their shares. It was believed that the introduction of book
building in Bangladesh capital market will facilitate inclusion of large and profitable corporate
houses in the market.

4.2 WHY BOOK BUILDING METHOD? WEAKNESS OF FIXED PRICE METHOD:

There are some fundamental weaknesses in existing fixed pricing method. These weaknesses
compelled the relevant parties to introduce a new pricing system which would create benefits for
all parties (investor along with the issuer). The first and most common flaw of existing fixed
pricing method to all over the world is that it is, almost in each case, the underpricing issue. In
addition there are other flaws of fixed pricing method, which are:

 Existing fixed pricing method cannot catch the demand of the market, resulting
oversubscription which create aims match between the demand and supply of market,
which is the case of IPOs in Bangladesh. In fact fixed price offering are priced without
first soliciting investor demand, with price discovery mainly taking place in the
aftermarket.
 If there is an oversubscription, allocation is done in prorate basis in fixed pricing method
and underwriter does not have any control over allocation.
 The ownership depends on the winning of the lottery. No one can become an owner of
share in existing fixed pricing method if investor does not win the lottery, which means the
entire thing depends on luck.
Under the fixed pricing method, IPO does not attract the investors due to (Saha, 2002)-

 The inherent weakness of the system which is underpricing, leading companies having
good and authentically strong fundamental cannot set appropriate price for their issues.
 It seals the way of attracting more fund in near future, which can be done in Book-building
through repeat Public Offering.
 In the prevailing system, retail investors gain more than entrepreneurs (sponsors) of well
performing companies.
In fact stock market is not reaping much benefit under the existing disclosure based distribution
system-

 As most of the shareholders who are allotted with primary shares dispose of the same
immediately, generally in the first three days in order to reap the benefits of high demand
of primary shares. The stock market cannot be developed in such a way where millions of
small traders remained glued for applying in the primary shares of new issues. It does not
help to build depth and maturities of securities market (Lali & Moshen, 2007).
So, due to the above flaws of fixed pricing method concepts of book building Method has
emerged.

4.3 DIFFERENCE BETWEEN FIXED PRICE AND BOOK-BUILDING METHOD

Features Fixed Price process Book Building process

Pricing Price at which the securities are
offered/allotted is known in advance
to the investor.
Demand Demand for the securities offered is
known only after the closure of the
issue.
Payment Payment is made at the time of
subscription wherein refund is given
after allocation.
Table 1 Difference Between Fixed Price and Book- Building Method
Price at which securities will be
offered/allotted is not known in
advance to the investor. Only an
indicative price range is known.
Demand for the securities offered
can be known everyday as the book
is built.
Payment only after allocation.
4.4 ADVANTAGES OF BOOK BUILDING METHOD

Introduction of book building is a big step towards developing Bangladesh capital markets. Book
Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price
and demand discovery.

 In theory, Book building reduces risk of undervaluation for issuers (Ritter and
Welch,2002)
 Ensures fair pricing by factoring in demand, likely to encourage listing of large, well
reputed companies
 It enables small and riskier companies to access equity markets as compared to auction
method
 It provides early investors with liquidity
 For large issuer book building is less expensive.
 It enables issuer to raise large amounts of capital.
 SEC qualifying conditions for book-building set certain criteria for companies to be
eligible

4.5 CRITICISM ON BOOK BUILDING METHOD

Book building method is not out of drawbacks. The first problem associate with this mechanism is
that it gives underwriter discretion in setting the offer price and allocating shares to investors (Lali
& Moshen 2002). In addition there are other disadvantages of book building method:

 Book building method favors institutional investors

 It is a mechanism of giving special favor to exclusive favor at the expenses of everyone
else
 For general investor book building method is expensive
 In the IPOs through the Book-Building route, it would be difficult to find dubious issues of
the kind that put off investors.
 In fact book building method reduces underpricing is somewhat controversial, as some
studies show that it does not actually reduce underpricing (Mishra, 2012).
4.6 PROBABLE IMPACT OF BOOK BUILDING METHOD ON BANGLADESHI
CAPITAL MARKET

Positive Impacts
 Good issuers would be encouraged to raise fund from capital market;
 Difference between issue price and first day trading price will be narrowed down (Khan
2007).
 There will be a balance between the demand for and supply of the security since book-built
price will be close to the market price (Rashid).

Probable Negative Impacts

 Institutional Investors may tend to bid higher price disregarding fundamentals of the
company in bullish market and lower price in the bearish market (Rashid).
 Retail investors may be disinclined to buy security at higher price of the issue.
 Shares may be issued at price which is more than the real value of underlying asset
5.1 COMPARISON OF PERFORMANCE IN THE CAPITAL MARKET
Indicative Opening Month Close IPO
Company Name Offer Price Industry 2011 2012 2013 2014
Price Price Method
Khulna Power Company Direct Fuel &
162 273.6 62.80 49.80 49.10 54.50 Book
Limited Listing Power
RAK Ceramics (Bangladesh)
40 48 Ceramics 170.5 78.4 56.8 53.3 53.60 Book
Limited
Fuel &
MJL Bangladesh Limited 127 152.40 184.7 99.90 79.70 75.1 118.1 Book
Power
M.I. Cement Factory Limited 93 111.60 Cement 176.8 110.5 82.9 78.2 75.6 Book
Barakatullah Electro Dynamics Fuel &
N/A 60 64.7 47.60 32.60 33.8 34.5 Fixed
Limited Power
Premier Cement Limited N/A 22 Cement 75.60 - - 99.6 81.9 Fixed
(Direct
Shinepukur Ceramics Limited N/A Ceramics 60 40.90 27.2 18.3 13.8 Fixed
Listing)
Fuel &
GBB Power Limited N/A 40 33.5 - - 29.9 23.9 Fixed
Power
Summit Purbanchol Power Co. Fuel &
N/A 40 72.3 - - 61.6 50.3 Fixed
Limited Power
Lafarge Surma Cement Limited N/A 50 Cement 124.5 26.6 32.9 33.5 107.4 Fixed

Table2: Recent Close Price, Offer Price & Opening Month Close Price comparison

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So far, only 4 companies has issued their public offering through the Book-building method and
those companies are listed throughout three industry; Fuel & Power, Ceramics and Cement. The
number is low due to the fact that in order to use Book-building method for price discovery
companies need to meet certain requirements (Public Issue Rules, 2006). So most companies do
not get approval from SEC, also this method was suspended after 2011.

Figure 2: Fuel & Power Sector

In the Fuel & Power industry, KPPL and MJL Bangladesh used BBM and their share prices, in
recent years, has fallen the most as shown in graph. The other three companies, BEDL, GBB
Power and SPPCL, chose fixed price method and their share prices has seen less volatility. The
graph also shows that the prices of MJL Bangladesh has started to rise, but it’s not certain if it
will keep rising.

Figure 3: Ceramics Industry

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The pioneer company in Book-building method, RAK Ceramics Bangladesh belongs to the
Ceramics industry. In comparison with its competitor, Shinepukur Ceramics, the recent fall of
share prices of RAK ceramics is steeper. Although Shinepukur Ceramics was listed through direct
listing, but fall of prices of RAK Ceramics stock looks unnatural.

Figure 4: Cement Sector

Again in the Cement industry, it is observed that the company that chose BBM has a steep fall
compared with the other companies who used fixed price method. Although Lafarge Surma
Cement has a similar curve, but the historical data of Lafarge Surma Cement gives insight to its
all too erratic stock price behavior. In all the years it’s been listed, Lafarge Surma’s highest stock
price was in 589.50 in 2008 and lowest was 25.6 in 2013. The data shows that the price is on the
up again which is not the case for M.I. Cement Limited.
All the above represents that the companies that followed the BBM has encountered a steep fall of
their prices after their IPO.

Figure 5 Close Price comparison

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It has been noted that all the companies that followed BBM has experienced all large fall in their
stock prices comparing the price of opening month and the immediate year ending close price.
Even though all the fixed price companies has experienced some fall of prices, none except
Lafarge Surma Cement has experienced such steep falls in prices. Premier Cement’s prices went
up instead.

Figure 6 Offer Price vs Close Price

The first anomaly to be noted here is that all the companies that used BBM for price discovery
had their offer prices higher than their indicative prices even though a lower band was equally
possible but it was not the case. The graph here shows that in case of offer price and opening
month close price, the prices went higher steeply. But in this case companies with fixed price
method are seen to have experienced similar trends, except for GBB Power Company Limited.

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 Figure 7 Cumulative Price fall Comparison

So, it can be said that most companies that go through IPO experience a rise in their share prices
in the first few months. But it is not beneficial to those companies themselves. It can also be said
that for both these methods, underpricing is still an issue.

5.2 EFFECTIVENESS OF BOOK BUILDING METHOD IN CAPITAL MARKET

In Bangladesh, a large difference is observed between the offer price and closing price on the first
day of trading of an IPO under the fixed pricing method and Securities and Exchange
Commission (SEC) has the exclusive right to justify the offer price of a stock, intended for going
public with no mechanism in place to assess its market demand. There arises the question whether
the book building method itself is faulty or it is getting misused. In case of being faulty, why it
has been used successfully in both developed and developing countries. In reality capital market
must be allowed to operate on its mechanism where like any other market.

The companies that get green signal from the SEC to go public under the book building method
have to complete their road shows where price of the proposed issue has to be determined by
using methods like price earrings multiple, market value multiples, price to book value multiple
of the similar companies, expected earnings per share (EPS), and so forth. In the price earning
multiple, the issuer company takes P/E ratios of the similar listed stocks in the related sector etc.,
and then multiply it with the issuer company's latest audited EPS, or weighted average EPS to
determine the price. Strong allegations are there that there is a prior understanding among the
issuer company and the institutional investors participating in the road shows. The situation is
further worsened when formal bidding is arranged with such inflated indicative price where it is

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observed that all the bidders offers at upper band ( +20% of indicative price) although lower band
( -20% of indicative price) is allowed.
Perhaps only 15 days lock-in period provides incentives to bid for such higher prices. In a recent
study carried out by the CPD, it was observed that out of three companies going to public under
the book building method, the prices of the two company's shares fall significantly below the
offer price and a handsome amount of money was taken out of the market.

Although the book building mechanism in Bangladesh capital market has not yielded the expected
success yet the market is not likely to move in the way other international ones do, without with
sufficient success with book building systems by undertaking some measures such as (Hossai,
2011):
 Forcing issuer company to be conservative in using methods like P/E multiples,
 Looking primarily on its inherent ability to generate future cash flows in offering
indicative pricing
 Increasing lock-in period to discourage higher bidding by the institutional investors
and devising specific and consistent pricing mechanism to be used by all companies
intending to go public.

5.3 IMPROPER USE OF BOOK BUILDING METHOD

Book building method, it was anticipated at the time of its operationalization will ensure fair
pricing of a stock to woo prospective large local and foreign profitable firms enlisting in the stock
exchanges, enhance the depth of our local market, and strengthen the corporate governance.
Furthermore, it was expected that the method would make, disclosure and reporting to public
more transparent and credible and, more importantly, help accelerate the pace of industrialization.

Figure 8 DSE Index

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Paradoxically, the method has been found to be used as a mechanism to raise money from capital
market by inflating the stock price even before being traded started on the same in the stock
exchanges (Rashida, 2013). In November 2011, DGEN decreases from 5000 to 4877, creating
panic in the investors, as they tried to leave the market before it is too late. The chaos followed by
the prime minister intervention and finally SEC declared multilevel incentive packages in
November 23rd 2011. This incentive package included, 30% stakes hold by the sponsors,
allowing banks in capital market investments, and opening up sell side research and investment
advisory service (DSE Annual Report, 2011). As investors had mixed feelings on the
implementation of the initiative, all shares started to trade in uniform value of BDT 10 on
December 2011. On December 29, the last trading session of the year 2011, DGEN ended at
5257.6. DSE General) increased to 4685.04 Index points in February from 4654.95 Index points
in January of 2015. Stock Market in Bangladesh averaged 1919.76 Index points from 1990 until
2015, reaching an all-time high of 8918.51 Index points in December of 2010.
Stock market of Bangladesh has got the adjective “the worst stock market in the world”. It had its
impressive growth since 2007. DGEN Index climbed at point 8918.51 on December 05, 2010
which was overvalued in all aspect. Then the market crashed at point 4877 in November 2011.
Since Bangladesh is heading toward the developing nation, capital market can be the engine of
growth for its economy if market becomes structured and efficient. Around the world well reputed
stock markets like - New York Stock Exchange, London Stock Exchange, Shanghai Stock
Exchange, Tokyo Stock Exchange, Australian Securities Exchange, Dubai Stock Exchange and so
on, are regulated and running efficiently that provides significant contribution to their individual
economy. Since, stock market is knowledge based game rather than place of gambling; there must
be rational win-lose situation always. But Bangladeshi stock markets inefficient and irrational
fluctuation of DGEN Index in the year 1996 and 2011 resembles it as a place of gambling.

In the context of Bangladesh, a large difference is observed. Questions now arise as to whether
the book building method is itself faulty or getting misused. If it is really faulty, then why it has
been used successfully in both developed and developing countries, even in our neighboring
country like India. To put it in the right perspective, capital market must be allowed to operate on
its mechanism where like any other market; the price of a particular security should be determined
matching the demand for, and supply of, the same.

For the time being, if it is assumed that book-building method is OK, then problem lies with how
it is being misused. Before digging dip into the determination of price under the book building
method, it should be recalled as to what the fair price of a security is. The fair value of a stock is
the present value of future cash flows to be generated in the foreseeable period considering a risk
adjusted discount rate (which includes risk premium, commonly derived from CAPM). However,

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such a practice of determining the price is not highly noticeable in our country (Rashida, 2013).
Most of the methods used in determining the price are P/Es of market, or respective industry or
similar stocks. Moreover, when Issuer Company arranges road show with this inflated price to
invite offer for indicative price from the institutional investors, it has been observed that
institutional investors usually agree to give very high price - or even higher one then proposed by
the company. Strong allegations are there that there is a prior understanding among the issuer
company and the institutional investors participating in the road shows. The situation is further
worsened when formal bidding is arranged with such inflated indicative price where it is observed
that all the bidders offer at upper band (+20% of indicative price) although lower band (-20% of
indicative price) is allowed. Perhaps only 15 days lock-in period provides incentives to bid for
such higher prices (Hossai, 2011). In the meantime, book-building method has been postponed
and that is being demanded for cancellation, in the face of strong criticism. Now, it is a situation
about the book-building method that can be likened to that of whether the head should be chopped
off not in case of a serious headache.

5.4 MANIPULATORS BENEFITING FROM BOOK BUILDING METHOD

The introduction of book building system has turned out to be a tool for manipulating market
prices, the Centre for Policy Dialogue has observed. Instead of ensuring competition among big
investors at the 'price discovery' stage, the market syndicates are abusing it for placement shares
at an artificially high price. The artificial price is being maintained for some time (particularly till
the lifting of the lock-in period (15 days) and after that investors are found to offload their shares
at higher prices, said the think-tank. Book building is a new system in Bangladesh and only three
instances of such practice are there. The CPD analysis found those who hold the private
placements took out a substantial amount of money by selling shares at high prices during the first
one month. As a result, share prices of a particular company fell by 33 percent within one month
and 50 percent in the next two months and did not rise thereafter.

5.5 RE-INTRODUCTION OF BBM

The book building method was resumed in a new shape after more than two years. Amid wide
criticism from every corner for its flaws, the securities regulator in January 2011 temporarily
suspended the method that was largely blamed for the market debacle in late 2010 and later in
September 2011 modified it taking views and opinions from stakeholders.

Before the suspension of the method, there had been complains that many companies were
misusing the system taking advantage of some rules of the method and in connivance with the

Page 24 of 36
regulator, auditors and issue managers inflated indicative prices, which do not match with their
fundamentals.

In some cases, some auditors helped the company authorities in fixing high indicative prices
through window-dressed balance sheets. As a result, a vast amount of money was allegedly
siphoned off from the stock market causing liquidity crisis.

But following recommendations by a probe committee on the share market crash, the government
later instructed the regulator to bring changes to the book building norms, instead of suspending
the system, as it is practiced in other countries (SEC Monthly). Since then the method has been
struggling to take off, but recently some companies were preparing to go public using the method.

Some issue management companies are working to file IPO using the method to the regulator
while others has taken “wait and see” policy in the wake of market volatility, according to the
officials of those companies. As the method has earned some bad name, many issuers feel
discouraged to go public under this method.

Under the modified book building method, the changes (The Daily Star) are as follows:
 Indicative price will not exceed 15 times of weighted average earnings per share (EPS) of
the preceding three years, or three times of net asset value (NAV), or whichever is lower
but not less than the NAV of a stock.
 In the bidding for price discovery, at least 20 institutions from six categories will have to
participate. From each category, at least three institutions will have to take part in the
bidding.
 Final indicative price will have to be supported by at least 15 institutional investors who
will receive shares preserved for them.
 Directors and sponsors of an issuer company would not be an issue manager for their own
company under the system.
 An issuer company will have to run advertisements in five national dailies with a 10-day
notice about holding a road-show, and within next three workdays of the road-show, the
issuer company must set the indicative price of its shares and submit it to the SEC.
 The asset management companies would be allowed to become institutional investors and
they can participate in the bidding.
 Some 10% shares of an IPO will be reserved for the institutional investors who will set
the indicative price, and the ratio of eligible institutional investors would be 40%. An

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 eligible institutional investor can bid for the highest 5% share. The lock-in period for the
eligible institutional investors would be six months.

The method is still cumbersome and time consuming which is why when any issuer hears the
procedure of this method they prefer to go for fixed price method instead of book-building
method.

Issue management companies think that the price discovery method should be simplified
reasoning that the market will determine the price of a company’s share in line with the book
building rules.

The market lacks enough analysts for valuation of a company, which reflected earlier through
inflating pricing. The pricing should be done professionally taking company’s fundamentals and
present market situation into account.

Bangladesh Securities and Exchange Commission (BSEC) has allowed United Power Generation
and Distribution (February 2014) to commence bidding by the eligible institutional investors for
price discovery of issuance. That company recently submitted the list of prices quoted by 42
institutional investors to the securities regulator. According to the list, out of 42 institutional
investors, 37 offered Tk 80 and the remaining seven offered price within the range of Tk 80.15 to
Tk 86. Experts and market insiders said the identical price offered by 88 per cent institutional
investors indicates the strong possibility of 'nexus' occurred before offering price. It clearly
seemed that a nexus occurred during offering of same indicative price by majority number of
institutional investors. But these is no proof so the securities regulators brought amendment to the
public issue rules.
The changes in BB system is an effort to curb alleged nexus of fixing indicative price. The
possible change in BB system will be cleared when the amendment to public issue rules will be
completed according to the official report while there are other investigations to review the
allegations of fixing indicative price through nexus.

Under the amended BB system, so far three companies moved to go public. The companies are:
Energypac Power Generation (EPG), United Power Generation & Distribution Company Limited
(UPGD) and Acme Laboratories. The BSEC officials said Energypac Power Generation (EPG),
which earlier completed road show, changed their decision of going public under BB system.
United Power Generation & Distribution Company Limited (UPGD) is awaiting the public
subscription which will be started from January 2015. Another company Acme Laboratories
received prices offered by eligible institutional investors ahead of going for electronic bidding.

Page 26 of 36
6.1 FINDINGS

Book-building is regarded as an effective pricing method that causes lower underpricing

according to literatures and is adopted by the majority of world’s primary markets. SEC of
Bangladesh therefore introduced book-building in IPO pricing process in 2010 in order to-

1) Increase the accuracy of pricing

2) Increase the pricing capabilities of institutional investors.

Whether or not the original objectives have been achieved, due to the limitation of data, there are
not many empirical studies conducted so far to test the effectiveness of book-building in
Bangladesh. However all literature agreed that book-building should reduce underpricing and
increased the pricing accuracy.

In summary,
1) Book-building pricing method introduced into Bangladesh’s market has not reduced price
manipulation as expected; on the other hand, it has significantly increased possibly due to
other external effects.

2) Book-building has to some extent reduced the signaling and ex-ante uncertainty effect on
underpricing. That is probably because through the delivery of due diligence report to
investors and two rounds of book-building, more information has been disclosed from the
issuer-side that reduced the unnecessary price discount.

3) IPOs on Dhaka Stock Exchange after book-building that have higher initial return have
significantly under-perform more than IPOs with lower initial returns. This is probably
due to the overwhelming demand for blue-chip stocks.

4) Large number of institutional investors involved in book-building are distorted as signal

of “hot issue” and cause “herding behavior” that sarcastically increased price
manipulation, as public investors on secondary market in Bangladesh closely observe the
actions from institutions. Besides, under-writers tend to over-adjust offer price based on
the information collected from book-building.

Page 27 of 36
 5) As for the re-introduction, a “nexus” is still being observed in case of majority of the EII
offering same indicative price, which points to prior understanding between the issue
manager and the investors.

Under this poor satisfaction level SEC & the relevant authorities should come forward to
implement the best IPO pricing method specially the BBM to gain the confidence of investors,
issuers as well as ensure an efficient capital market in Bangladesh.

6.2 SUGGESTIONS

To protect the share market of Bangladesh, the regulatory body should take some effective
measures. It should introduce some monitoring systems to protect the price manipulations of the
share. Provisions should be made to provide all the financial data to the investors so that they can
get a proper idea about the company. The market should be free from fake certificates. The
government should offer income tax rebate on the income of share market and encourage the
banks and non-banking institutions to come to the market directly. Some incentives package for
the investors like getting financing at a low cost has to be offered to bring back the investors in
the market. Market stabilization fund must be introduced so that it can help to meet up with crisis
situation.

It is observed that, there are problems like – Big Gap between the Demand and Supply of stock,
extraordinary over pricing of stock, market manipulation, lack of knowledge about the stock
market mechanism among the general investors, price distortion, inefficient regulations, political
unrest, etc. caused the steepest downward fall of DGEN Index in the FY2011. As a result, about
millions of investors lost their capital which turned them empty within few months. Security and
Exchange Commission (SEC) of Bangladesh and government should take the short term and long
term initiatives to stabilize the market. They should encourage more public limited companies to
offer more share to meet the current demands. Income tax rebate, Injection of Market
Stabilization Fund, Mandatory holding certain percentage of share among the board of directors,
short term incentives packages should be introduced to get back the confidence among the
existing investors. Regulatory bodies of Bangladesh stock market must educate the current and
potential investors about the market mechanism and provide them the accurate information so that
investors trade their shares carefully. Unless, there are any corrective measures, Bangladeshi
stock market will be facing this irrational downward of DGEN Index again in the near future, and
the re-introduction of book building method will further fan the flame.

Page 28 of 36
 CONCLUSION

It is a common knowledge that both quantitative and qualitative fundamentals are considered for
buying shares in the stock market. Future potentials are of course very important for valuing
business and shares but this should not be the major criterion in valuing shares on IPO ignoring
other fundamentals. Besides, in an uncertain market scenario like ours, this kind of approach
should not be considered as major criteria. Further, in our country, it is unfortunate that many of
the sponsors of listed companies could not discharge their obligations properly towards small
investors and in few cases, investors have been cheated and SEC's actions were not enough to
change this culture to a remarkable level. In such a situation, pricing of IPO obviously deserve
special attention of the SEC for a stable, growth oriented and healthy capital market. It has been
noticed that before going for IPO, the auditors are changed. Change of auditors is not unusual and
not always bad. The intention behind the change is important. If the change is aimed at ensuring
quality, it is fine. Otherwise, the reason for change of auditors should strictly be reviewed
including pre-change period financial performance of the company and qualifications
(observations) made by previous auditors. Book building method is apparently a sophisticated and
widely used concept but unfortunately, this method is being misused with some motive. The
recent reforms of BBM does not ensure its success unless every person acts according to his
responsibility job without regard to personal monetary gains. It needs adequate efforts by
regulatory agencies to customize it for implementation in Bangladesh context.

Page 29 of 36
 REFERENCES

 www.dsebd.org (The official website of Dhaka Stock Exchange)

 www.sec.gov.bd (The official website of Bangladesh Securities & Exchange Commission)
 Bangladesh Bank, Economic Trends (Various Issue)
 DSE & SEC Monthly reviews, 2010-2014 (November)
 DSE Annual Report, 2008-2013
 Khan, Salahuddin Ahmed; “Capital Market in Bangladesh: Some Observations”;
Launching Ceremony, Capital Market Journalists’ Forum.
 Ahmed Rashid Lali & M. Talha Moshen “Book Building” DSE Monthly Review, 2007.
 Islam, K.M. Zahidul, Mohammad Moniruzzan Rahman, Masud Ibn, “Book-Building System:
Will it really help to build the Market?” Journal of business research, Vol. 8, June 2006.
 Saha, Siddhartha Sankar; The Book Building Mechanism of IPOs, August 2004
 Khan Salahuddin Ahmed; “Bangladesh Economy and its Capital Market. DSE Monthly
Review,June,2007
 Rashid,Mamun; “Bangladesh Capital Market: Prospect and challenges” Launching Ceremony-
Capital Market Journalist‟ Forum.
 Has book building method been used properly?” By Md Sajib Hossai; The Financial Express
VOL 18 NO -77 REGD NO DA 1589 | Dhaka, Sunday January 30 2011
 Rashida, Amreen; “IPO Procedure: An Analysis on the Book Building Method in
Bangladesh,” The International Journal of Social Sciences Vol.7 No.1, January 2013
 The Financial Express, The Daily Star, Dhaka Tribune
 Asim Kumar Mishra, Underpricing of initial public offerings in India, Investment
Management and Financial Innovations, Volume 9, Issue 2, 2012

Page 30 of 36
 APPENDIX

Public Issue Rules, 2006

General requirements for filing application for consent to an issue of capital through public
offering.⎯ (1) Application for consent under these Rules may be based on any of the following
pricing methods: ⎯ (a) Fixed price method; (b) book-building method.

For obtaining the consent, an issuer shall apply to the Commission along with the following
documents, namely: ⎯

(a) ten copies of the prospectus, duly completed, together with all annexes thereto,
duly signed on each page, by the issuer’s chief executive officer or managing
director, chief financial officer, company secretary and issue manager. The
chairman, the director and the chief executive officer or managing director of
the issuer shall sign a declaration as prescribed in Annexure-A;

(b) any amendment to the prospectus, signed by the said persons, shall also have to
be filed with the Commission, in accordance with clause (a);

(c) all stock exchanges shall be supplied simultaneously by the issuer with one
copy of each of the said prospectus, together with its annexes, and the
amendments thereto, if any, duly signed by the persons who have signed
prospectus submitted to the Commission;

(d) the audited financial statements of the issuer must be submitted to the
Commission along with the prospectus, but the said financial statements shall
not be older than 120 days at the time of submission to the Commission.”.

Determination of Offering Price:

(1) Under fixed price method

(a) If ordinary shares are being offered, the factors to be considered in determining
the offering price shall be set forth in the prospectus.

(b) If the issue price of the ordinary share is higher than the par value thereof,
justification of the premium should be stated with reference to⎯

(i) net asset value per share at historical or current costs;

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 (ii) earning-based-value per share calculated on the basis of weighted
average of net profit after tax for immediately preceding five years or
such shorter period during which the issuer was in commercial operation;

(iii) projected earnings per share for the next three accounting year as per the
issuers own assessment duly certified by the auditor of the issuer;

(iv) average market price per share of similar stock for the last one year
immediately prior to the offer for common stocks or if issuance is the
repeat public offering, market price per share of common stock of the
issuer for the aforesaid period; and

(v) all other factors with justification which have been taken into account by
the issuer for fixing the premium:

Provided that premium on public offering shall not exceed the amount of premium charged on
shares issued (excluding the bonus shares) within immediately preceding one year.

(2) Under Book Building Method

Notwithstanding anything contained otherwise in these Rules, the following shall be applicable to
an issuer which opts for pricing its security under book-building method, namely: ⎯

Prerequisites of an issuer for becoming eligible for book building method- An issuer may
determine issue price of its security being offered following book-building method (i.e. price
discovery process) subject to compliance with the following, namely: ⎯

(a) The issuer⎯

(i) must have at least Tk. 30 crore net-worth;

(ii) shall offer at least 10% shares of paid up capital (including intended
offer) or Tk. 30 crore at face value, whichever is higher;

(iii) shall be in commercial operation for at least immediate last three years;

(iv) shall have profit in two years out of the immediate last three completed
financial year;

(v) shall have no accumulated loss at the time of application;

(vi) shall be regular in holding annual general meeting;

(vii) shall audit at least its latest financial statements by a firm of chartered
accountants from the panel of auditors of the Commission;

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 (viii) shall appoint separate person as issue manager and registrar to the issue
for managing the offer; and

(ix) shall comply with all requirements of these Rules in preparing

prospectus.

(b) The Commission, if it deems appropriate for the interest of investor or development
of capital market, may exempt or relax any of the above prerequisites.

(3) Price discovery for determining indicative price.⎯

The price discovery process for determining indicative price of security will involve the
following institutional investors registered with or approved by the Commission in
this regard:-

(a) Merchant bankers excepting the issue manager concerned to the proposed
issue;

(b) Foreign institutional investors registered with or approved by the Commission;

(c) Recognized pension funds and provident funds;

(d) Bank and non-bank financial institutions under regulatory control of

Bangladesh Bank;

(e) Insurance companies regulated under Insurance Act, 1938 (Act No. IV of
1938);

(f) institutional venture capital and institutional investors registered with or

approved by the Commission;

(g) Stock Dealer registered with the Commission; and

(h) Any other artificial juridical person permitted by the Commission for this
purpose.

(4) Procedures to be followed for determining price under book building method :⎯

(a) Issuer shall invite for indicative price offer from the eligible institutional investors
through proper disclosure, presentation, document, seminar, road show, etc.;

(b) Issuer in association with issue manager and eligible institutional investors shall quote
an indicative price in the prospectus and submit the same to the Commission with copy
to the stock exchanges;

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(c) Such indicative price range shall be determined as per price indications obtained from
at least five eligible institutional investors covering at least three different categories of
such investors;

(d) Rationale for the indicative price must be included in the prospectus i.e. the issuer is
required to disclose in detail about the qualitative and quantitative factors justifying the
indicative price;

(e) The indicative price shall be the basis for formal price building with an upward and
downward band of 20% (twenty percent) of indicative price within which eligible
institutional investors shall bid for the allocated amount of security;

(f) Eligible institutional investors bidding shall commence after getting consent from the
Commission for this purpose;

(g) If institutional quota is not cleared at 20% (twenty percent) below indicative price, the
issue will be considered cancelled unless the floor price is further lowered within the
face value of security : Provided that, the issuer’s chance to lower the price shall not be
more than once;

(h) Prospectus will have to be posted on the Websites of the Commission, stock
exchanges, issue manager and issuer at least two weeks prior to the start of the bidding
to facilitate investors to know about the company and all aspect of offering ;

(i) No institutional investor shall be allowed to quote for more than 10% (ten percent) of
the total security offered for sale, subject to maximum of 5 (five) bids ;

(j) Institutional bidding period will be 3 to 5 (three to five) working days which may be
changed with the approval of the Commission ;
(k) The bidding will be handled through a uniform and integrated automated system of the
stock exchanges, or any other organization as decided by the Commission, especially
developed for book building method ;

(l) The volume and value of bid at different prices will be displayed on the monitor of the
said system without identifying the bidder ;
(m) The institutional bidders will be allotted security on pro-rata basis at the weighted
average price of the bids that would clear the total number of securities being issued to
them ;

(n) Institutional bidders shall deposit their bid with 20% (twenty percent) of the amount of
bid in advance to the designated bank account and the rest amount to settle the dues

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 against security to be issued to them shall be deposited within 5 (five) working days
prior to the date of opening subscription for general investors ;

(o) In case of failure to deposit remaining amount that is required to be paid by

institutional bidders for full settlement of the security to be issued in their favor, 50%
(fifty percent) of bid money deposited by them shall be forfeited by the Commission.
The securities earmarked for the bidder who defaulted in making payment shall be
added to the general investor quota.

(p) General investors, which include mutual funds and NRBs, shall buy at the cut-off price

(q) There shall be a time gap of 25 (twenty five) working days or as may be determined by
the Commission between closure of bidding by eligible institutional investors and
subscription opening for general investors ;

(r) Subscription for general investors shall remain open for the period as specified by the
Commission;

(s) General investors shall place their application through banker to the issue; and

(t) All application money shall be kept in a separate escrow account opened with a
designated bank with prior intimation to the Commission. Issuer will not be allowed to
utilize such money until all the process of issue is completed and Commission’s
consent to this effect is obtained.

(5) Distribution mechanism for issuance of security. The distribution of security to be issued
under book-building method will be made in accordance with the following ratio: ⎯

Size of Total Issue Eligible General Investors’Quota

Institutional Mutual Fund NRB Public Portion
Investors’ Portion portion
Quota

Tk. 30 to Tk. 50 Crore 20% 10% 10% 60% or balance amount

Over Tk. 50 Crore to Tk. 30% 10% 10%

50% or balance amount
100 Crore

Over Tk. 100 Crore to Tk. 40% 10% 10%

40% or balance amount
500 Crore

Over Tk. 500 Crore 50% 10% 10% 30% or balance amount

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(6) Lock-in.

There shall be lock-in of 15 (fifteen) trading days from the first trading day on the
security issued to the eligible institutional investors.

(7) Fee of issue manager and registrar to the issue.

Fee of issue manager and registrar to the issue could be on negotiated basis but not
exceeding 5% (five percent) in total of the issue size.”

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