CAPITAL REGULATORY

MARKET

ISSUES

Team Ecstasy
The Initial Public Offering (IPO)
Initial Public Offering (IPO)

● A company’s first equity issue made available to the public.

● This issue occurs when a privately held company decides to go
public
● Also called an “unseasoned new issue.”
Why do companies go public?
● New capital
– Almost all companies go public primarily because they need money to expand the
business
● Future capital
– Once public, firms have greater and easier access to capital in the future
● Mergers and acquisitions
– Its easier for other companies to notice and evaluate a public firm for potential
synergies
– IPOs are often used to finance acquisitions
Disadvantages of the IPO
● Expensive
– A typical firm may spend about 15-25% of the money raised on direct
expenses
● Reporting responsibilities
– Public companies must continuously file reports with the SEC and the
stock exchange they list on
● Loss of control
– Ownership is transferred to outsiders who can take control and even fire
the entrepreneur
Is it a good time to do an IPO?

● There are clear “windows of opportunity” that open and close for
IPO issuers
● Determinants of suitability:
– The general stock market condition
– The industry market condition
– The frequency and size of all IPO’s in the financial cycle
Outline of the IPO process:

1. Select an underwriter
2. Register IPO with the SEC
3. Print prospectus
4. Present roadshow
5. Price the securities
6. Sell the securities
Select an underwriter

● An underwriter is an investment firm that acts as an

intermediary between a company selling securities and the
investing public
● The underwriter is the principal player in the IPO
● Typically, the underwriter buys the securities for less than the
offering price and accepts the risk of not being able to sell them
Types of underwriting

● Firm commitment underwriting:

– The underwriter buys the entire issue, assuming full financial
responsibility for any unsold shares
– Most prevalent type of underwriting in the U. S.
● Best efforts underwriting:
– The underwriter sells as much of the issue as possible, but can return
any unsold shares to the issuer without financial responsibility
Register IPO with SEC

● The firm must prepare a registration statement and file it with

the SEC
● The registration statement discloses all material information
concerning the corporation making a public offering
Print prospectus

● The prospectus is a legal document describing details of the

issuing corporation and the proposed offering to potential
investors
● Contains much of the information in the registration statement
● The preliminary prospectus is sometimes called a “red herring”
Present road-show

● The road-show is presented to institutional investors around the

country
● The road-show allows firms to raise interest in the company and
thus the price
● Allows the firm and its underwriters to gather information from
potential purchasers
Price the securities

● How much to charge for giving away a part of the firm is very
important to the issuers
● The securities are priced based on the value of the company
and expected demand for the securities
● Examples of valuation methods:
– Net Present Value
– Earnings/Price ratios
Sell the securities

● A full-fledged selling effort gets under way on the effective date

of the registration statement
● A final prospectus must accompany the delivery of securities
Book Building Method
Book Building is a capital issuance
process which aids price and demand
discovery of security being offered.
Application of Book Building Method

• Started in USA and CANADA from 1980s

• Practiced in most developed and developing
countries .
• Popular allover the world.
Eligibility of Issuer for Book Building Process

➢ The company must have at least Tk. 300 million

net-worth;
➢ Shall offer at least 10% shares of paid up capital
or Tk. 300 million whichever is higher;
➢ Shall be in commercial operation for at least
immediate past 3 years;
➢ Shall have profit in 2 years out of the last 3 years;
➢ Shall have no accumulated loss at the time of
application;
➢ Shall be regular in holding AGM;
Procedures of Book Building for Bangladesh

The Book Building Process will have two stages;

1. Price Discovery and Book Building by eligible

institutional Investors.
2. Public offer based on price found out through
Book Building Process.
 Stage 1

Price Discovery and Book Building by eligible

Institutional Investors.
 Eligible Institutional Investors

✓ Merchant Bankers
✓ Foreign Institutional Investors
✓ Recognized Pension Funds and Provident Funds
✓ Bank and Non-bank Financial Institutions
✓ Insurance Companies
✓ Institutional Venture capital
✓ Any other artificial juridical person permitted by the commission.
 Book Building Method for price Discovery

➢Issuer Shall invite for indicative price offer from the Eligible Institutional
investors through proper disclosure, presentation, documents, seminars
and road shows.
➢ Draft prospectus shall contain indicative price based on price indications
obtained from at least five eligible institutional investors covering at
least three different categories of investors.
➢ Issuer shall disclose in the prospectus about qualitative and quantitative
factors.
Book Building Method for price Discovery

➢ The indicative price shall be the basis for formal price

building with an upward and downward band of 20%
of indicative price;
➢ Institutional investors shall bid within the price band;
➢ If institutional quota is not cleared within the price
band the issue would be considered cancelled;
➢ Bidding shall commence after getting permission from
the commission
 Book Building Method for price Discovery

➢ No institutional investor shall be allowed to quote for more than 10% of

the total security earmarked for them;
➢ The bidding will be handled through an uniform and integrated
automated system of the stock exchanges;
➢ The institutional bidders will be allotted shares at the weighted average
price of the bids that would exhaust the total number of securities being
issued to them;
 Payment Mechanism of Institutional Investor

✓ Shall deposit 20% of the amount of bid in advance to the designated

bank account;
✓ The rest 80% shall be deposited within 5 working days prior to the date
of opening for general public;
✓ In case of failure to deposit remaining amount 50% of bid money
deposited by them shall be forfeited by the commission;
 Stage
2

PUBLIC OFFER BASED ON BOOK

BUILDING PROCESS

❖ General investors, mutual funds and NRB’s shall buy at

cut off price

❖ Issuer may issue below cut off point with approval of DISCLOUSURE
the Commission
Draft prospectus shall be
posted on SEC, DSE, CSE, Issue
❖ General investors shall apply through banker to the
manager and issuer’s website
issue ATLEAST two weeks prior to
bidding
❖ In case of over subscription distribution will be made
through lottery
Book
BookBuilding
BuildingMethod
Methodfor
forDirect
DirectListing
Listing

❖ SEC has made it mandatory to follow BBM to discover

price for Direct Listing

❖ It would help the investors have a good feel about the

price

❖ Direct listing created an opportunity for issuers without

additional capital

❖ Has created exit route for multinational companies

❖ Enhancing market depth and liquidity

❖ Government can load of its shares and focus on priority

areas
 ❖ At least 100 million paid up capital

Requirement for Direct

Listing
❖ In commercial operation for last 5 years with

Securitie
no accumulated losses

s of ❖ Has Profit in the last 3 years

s ❖ Credit rated by a credit rating agency
registered with SEC

❖ No objection certificate from the lending

financial institutions

❖ At least 25% of total paid up capital should

be offered for sale within 30 days of listing

❖ Shall not be permitted to sell over 50% to

existing shareholders until the company holds
AGM

❖ Sponsors are required to place their security

with their designated broker
 POSITIVE IMPACTS OF BOOK
BUILDING

❖ Good issuers would be encouraged to raise

fund

❖ Difference between issue price and first day

trading price will narrow down

❖ Tendency to open fake BO accounts

will be reduced

❖ There will be balance between

demand and supply

❖ Investor shall have a good idea

about the price of security
 Negative IMPACTS OF BOOK
BUILDING

❖ Institutional investors may to bid higher

prices disregarding higher price in bullish
markets and lower price in bearish market

❖ Retail investors may be disinclined

to buy security at higher price

❖ Shares may be issued at price

higher than the intrinsic value of
underlying assets
Issues
Concerning
Book
Building
 Bangladesh Capital Market
Consists of DSE and CSE which were incorporated in 1954 and 1995
respectively.

Both are members in South Asian Federation Exchange (SAFE).

SEC supervises activities of the bourses and members.

Automated Trading Facilities are available in both bourses.

 AN INTRODUCTORY GUIDELINE FOR FOREIGN INVESTORS

Any Foreigners residing in

Bangladesh or abroad willing
to invest in Bangladesh Capital
Markets are considered Foreign
Investors.

Long established legislative and legal

framework p r o t e c t s foreign
investment in Bangladesh.
 The flow of Investment activity may take place in
the following form:
❑ Open NITA Account with AD of foreign
currency department of any financial
institution or through any custodians.

❑ Select Custodian Banks in Bangladesh.

Foreign Investor Global Custodian

❑ Open BO through custodian .

Fund Manager Local Custodian
❑ Open Trading Account with preferred
broker (optional as the custodian will
provide the service through holding cash
account (NITA) on behalf of the Investors). International Broker Local Broker

❑ Start Trading.
BIO with CDBL Local SEC
What makes Stock Prices Go up & Down?
 Motivation for investing Capital Market
Other Motivation
❖ Expectation of extended
tenure for limiting Bankers
Exposure.
❖ Reduction of interest rate on
National Savings Certificate.
➢ 2.5% tax on banks, insurance.
➢ No tax for Capital Gain.
➢ 10% for of all IPOs are reserved for NBS.
➢ Income Up to 25000tk from investment is Fixed
Income Mutual Fund is also brought tax waiver.
➢ Reinvestment of Repatriable dividend treated as
new investment.
➢ Easy access to ownership of infrastructure
development Companies.
INVESTMENT STRATEGIES
KNOW THYSELF FIRST
• Risk Return Profile
• Return Objective
• Risk Tolerance Limit
• Time Horizon
• Liquidity Need
 HOW TO SELECT A BOND
INVESTMENT
TIME FRAME
GOAL
DIVERSIFICATIO
N

RISK TAKING TAX STATUS

 HOW TO SELECT A STOCK
Business Tenets

UNDERSTANDABL
E

LONG TERM
CONSISTENT
PROSPECT
THINGS TO LOOK

Management Tenets
Financial Tenets
Value Tenets
FOCUS INVESTING
• Strong Management
• Limit Yourself
• Pick The Very Best
• Think At Least Medium Term
• Volatility
PORTFOLIO & RISK MANAGEMENT
• Stock Selection Is Half Story
• Diversification Serves As Protection
• Decision To Buy & Sell
• Risk Is Related With Time Horizon
• Risky Transaction