ipo process in bangladesh and performance analysis
TRANSCRIPT
I PO PROCESS ANALYSI S &
PERFORMANCE EVALUAT I ON
Contents CERTIFICATE ........................................................................................... Error! Bookmark not defined.
LETTER OF TRANSMITTAL ........................................................................ Error! Bookmark not defined.
ACKNOWLEDGEMENT ............................................................................. Error! Bookmark not defined.
EXECUTIVE SUMMARY ........................................................................................................................5
INTRODUCTION ..................................................................................................................................7
BACKGROUND OF THE STUDY..............................................................................................................7
OBJECTIVES OF THE STUDY..................................................................................................................8
METHODOLOGY OF THE STUDY ...........................................................................................................8
LIMITATIONS OF THE STUDY................................................................................................................9
CHAPTER- 1 ...................................................................................................................................... 10
1.1 AN OVERVIEW ..................................................................................................................... 10
A BRIEF HISTORY: CAPITAL MARKET OF BANGLADESH ................................................................. 11
1.3 STRUCTURE OF CAPITAL MARKET OF BANGLADESH ............................................................... 12
1.4 REGULATIONS OF THE SECURITIES MARKET........................................................................... 13
1.5 FEATURES OF BANGLADESH CAPITAL MARKET....................................................................... 14
1.6 REASONS FOR UNDERDEVELOPMENT ................................................................................... 16
1.7 STOCK MARKET BUBBLES ..................................................................................................... 17
1.8 SECURITIES MARKET: THE PRESENT SCENARIO....................................................................... 19
CHAPTER- 2 ...................................................................................................................................... 21
2.1 BRIEF HISTORY ..................................................................................................................... 22
2.2 ORGANIZATIONAL STRUCTURE &MANAGEMENT ................................................................... 24
2.3 FUNCTIONS OF DSE .............................................................................................................. 26
2.4 AUTOMATED TRADING SYSTEM ............................................................................................ 26
2.5 DEPARTMENTAL ACTIVITIES OF DSE ...................................................................................... 28
2.6 DSE VISION 2013 (5-YEAR PLAN) ........................................................................................... 31
2.7 SHARE CATEGORIZATION: A, B, G, N&Z ................................................................................. 32
2.8 CRITERIA OF SHARE CATEGORIZATION .................................................................................. 33
2.9 TYPES OF MARKET IN DSE ..................................................................................................... 33
2.10 CLEARING&SETTLEMENT .................................................................................................... 34
CHAPTER- 3 ...................................................................................................................................... 37
3.1 CONCEPT OF PO................................................................................................................... 37
3.2 TYPES OF PO ........................................................................................................................ 37
3.3 Types of IPO ........................................................................................................................ 37
3.4 ADVANTAGES OF IPO ........................................................................................................... 38
3.6 FEES REGARDING IPO ........................................................................................................... 39
3.7 DOCUMENTS TO BE SUBMITTED ........................................................................................... 40
3.8 THE IPO PROCESS................................................................................................................. 41
3.9 EVALUATION OF THE DRAFT PROSPECTUS ............................................................................. 42
3.10 DECISION OF IPO................................................................................................................ 46
3.11 DEPARTMENT OF LISTING AFFAIRS...................................................................................... 47
3.12 IPO SCENARIO ANALYSIS..................................................................................................... 48
CHAPTER- 4 ...................................................................................................................................... 50
4.1 BRIEF OVERVIEW OF THE COMPANY ..................................................................................... 51
4.2 HISTORY OF PAID UP CAPITAL ............................................................................................... 53
4.3 Risk Factors and Management’s Perceptions about the Risks ................................................. 55
4.4 BOARD OF DIRECTORS................................................................ Error! Bookmark not defined.
4.5 USE OF PROCEEDS................................................................................................................ 61
4.6 FINANCIAL STRUCTURE OF THE COMPANY ............................................................................ 62
4.7 PERFORMANCE AT A GLANCE ............................................................................................... 64
4.8 FAIR PRICE DETERMINATION BY THE COMPANY .................................................................... 64
Method 1 –Price based on Net Asset Value (NAV) based price per share ......................... 65
Method 2 –Price based on Earning per Share (EPS) ............................................................. 65
Method 3 - Price Based On P/E Ratio of Simi lar Stocks ....................................................... 66
Method 4 - Price based on P/BV Ratio of Simi lar Stocks ..................................................... 66
4.9 SELECTED RATIO ANALYSIS ................................................................................................... 67
4.10 Revaluation of Assets ......................................................................................................... 71
4.11 DSE observations On Information Documents Of Golden Harvest Agro Industries Limited ...... 71
CHAPTER- 5 ...................................................................................................................................... 73
5.1 COMPANIES come into market through IPO in 2012............................................................... 73
5.2 COMPARISON OF MARKET RETURN &SECURITIES RETURN ..................................................... 74
5.3 COMPARISON OF MARKET VARIANCE &SECURITIES VARIANCE ............................................... 76
5.4 CORRELATION BETWEEN DGEN&PRICES OF IPO FLOATED SECURITIES .................................... 77
CHAPTER- 6 ...................................................................................................................................... 80
6.1 PROBLEMS OF BANGLADESH CAPITAL MARKET ..................................................................... 80
6.2 PROBLEMS REGARDING IPO PROCESS ................................................................................... 83
6.3 RECOMMENDATIONS........................................................................................................... 84
6.4 CONCLUSIONS ..................................................................................................................... 85
6.5 REFERENCES ........................................................................................................................ 87
Appendices ...................................................................................................................................... 87
EXECUTIVE SUMMARY Capital market ensures efficient transfer of resources from savers to borrowers. It ensuresthis
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 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.
INTRODUCTION Internship program is a sophisticated way for acquiring practical knowledge. Departmentof
Finance is arranged this program for BBA students those who are going to pass under this
program. This is a three months full time internship program. After completing this program
each student will submit a report on a particular topic on the basis of his or her observation,
experience and analysis. The organization also follows some control mechanism to guide and
control the internship students.
This study has given me an opportunity to learn about the areas of operation of Dhaka Stock
Exchange Limited. These Pragmatic knowledge and experience will help me in my practical life.
In spite of my limited knowledge and experience I have devoted my assigned job with due
earnest. If any lacking prevails in my report, I have no objection to accept it sincerely. I expect
that this report will be accepted as a true picture of Dhaka Stock Exchange Limited.
BACKGROUND OF THE STUDY Capital market is absolutely a vital consider for the proper functioning of capitalisticeconomy,
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.
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 theeconomy
of Bangladesh.
To discuss the problems still prevailing in the Capital Market of Bangladesh.
METHODOLOGY OF THE STUDY Type of research
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 researchis intended to expand the boundaries of knowledge itself or verify the
acceptability of a given theory.
Applied researchis 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.
Type of data
This research will be focusing on both the secondaryandprimary 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.
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.
CHAPTER- 1
CAPITAL MARKET OF BANGLADESH
1.1 AN OVERVIEW
Capital market is one of the major determinants for economic development through
mobilization of scattered resources and their allocation to appropriate areas. The liquidity,
solvency and efficiency of the economic system of a country can be better accomplished by a
well-organized capital market. It acts as an intermediary between investors and corporate
seeking additional capital financing. 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. Therefore, a vibrant
capital market is likely to signal a robust economy.
The capital markets are those for long-term government securities, corporate bonds, stocks,
municipal bonds issued by state and local government units, and mortgages. A capital market is
a market for both debt and equity securities, where business enterprises and governments can
raise long-term funds. It is defined as a market in which money is lent for periods longer than a
year, as the raising of short-term funds takes place on other markets e.g., the money market.
The capital market includes the stock market (equity securities) and the bond market (debt).
Capital markets consist of the primary market and the secondary market. The primary markets
are where new stock and bonds issues are sold via underwriting to investors. The secondary
markets are where existing securities are sold and bought from one investor or trader to
another, usually on a securities exchange, over the counter, or elsewhere.
Industry and commerce as well as government and local authorities raise capital from the
capital market which performs several important functions in the process of economic
development. Most important among them are the promotion of savings and investment and
efficient allocation of funds among competing uses.
Participants in the capital markets are many. They include the commercial banks, saving and
loan associations, credit unions, mutual saving banks, finance houses, finance companies,
merchant bankers, discount houses, venture capital companies, leasing companies, investment
banks, investment companies, investment clubs, pension funds, stock exchanges, security
companies, underwriters, portfolio-managers, and insurance companies.
A BRIEF HISTORY: CAPITAL MARKET OF BANGLADESH
Capital market of Bangladesh was in a dormant stage during the decades of sixties, seventies
and early part of eighties. During that period, few companies accessed in capital market &
investors were not interested or familiar in corporate securities. The market registered an
impressive growth particularly from late eighties to mid-nineties.
The origin of the Stock Market in Dhaka goes back to 1954 when a Stock Exchange was formed
in Narayangonj. Then in 1958 the Stock Exchange was transferred to Dhaka. The
Companies Act 1913 and the Capital issues (Continuance of Control) Act 1954 were two pieces
of legislation governing the Stock Market in the country. Later the Securities &Exchange
Ordinance was promulgated in 1969. This Ordinance required the companies to take
permission from the Controller of Capital Issues (CCI) for issuing capital and making public offer
to securities. It also required the companies to submit annual reports and to provide
information as required. In addition, this ordinance required the stock exchange to take
registration from the CCI.
Following the emergence of Bangladesh in 1971, Bangladesh inherited from Pakistan a very
small capital market consisting of 1130 branches of 12 commercial banks, theDhaka Stock
Exchange (DSE), 10 insurance companies established between 1958 and 1971, and the
Samabaya (co-operative) Bank Ltd. The activity of DSE remained suspended until 1976, when it
renewed operations with nine listed companies having paid up capital of Tk 137.52 million.
This, along with the establishment of the INVESTMENT
CORPORATION OF BANGLADESH (ICB) in the same year, created a momentum in the country's
capital market.
The capital market in Bangladesh made significant progress until the independence of the
country. The era of opening up the economy began in 1976 & the operation of the exchange
resumed in that year. The Securities & Exchange Rules 1987 defined, more than one decade
after the resumption the Stock Market, disclosure requirements by the company. Although the
CCI was responsible for monitoring the securities market, in practice it failed to do so partially
because of lack of necessary powers. In spite of the existence of legislation, many companies
did not behave properly to serve the interest of the investors. Delayed holding of annual
general meeting, delayed payment of dividend & refund warrants, lack of timely reporting &
non-compliance with disclosure requirements were common experiences. This era ended with
the adoption of SEC Act in 1993. By this major piece of legislation, SEC came in existence to
monitor the securities market & to protect the interest of the investors. At the same time, the
SEC Act 1993 repealed the Capital Issues Act. The formation of SEC brought the li sted
companies under the supervision of SEC. With its power to make regulations, the SEC
promulgated two pieces of regulations, namely, the Securities & Exchange (insider trading)
Regulation 1994. Another major development in the legislation was the enactment of the
Companies Act 1994.
1.3 STRUCTURE OF CAPITAL MARKET OF BANGLADESH
SECURITIES SEGMENT
Securities’ segment of a capital market is concerned with the process a Company distributes its
securities to the public in the primary market & the securities are then traded in the secondary
markets. Basically, these trades are done in the stock Exchanges.
There are two Stock Exchanges in Bangladesh: The Dhaka Stock Exchange Ltd. & the Chittagong
Stock Exchange Ltd. For every pro-market economy, this securities segment plays the role of a
growth engine. A vibrant securities market segment is likely to signal a robust economy. While
lending by commercial banks and support from venture capital funds provide a valuable initial
support for corporate growth, a developed bond/ equity market is an important pre-requisite
to move into a more mature growth phase with more sophisticated companies. This Securities
segment is controlled by the Securities &Exchange Commission (SEC) which was established on
8th June 1993 under the Securities & Exchange Commission Act 1993. The chairman & the
members of the commission are appointed by the government and have overall responsibility
to administer securities legislation.
NON-SECURITIES SEGMENT
These are markets in which Loans or Equity Loans are provided by the banks & financial
institutions, such as NCBs, Development Finance Institutions (DFIs), PCBs, ICB. We need to
recognize that the conditions in the bank-based system are unpalatable in the sense of huge
non-performing loans, high degree of classified & default loans, capital inadequacy of banks
and the like. These are causing the banking system in Bangladesh to maintain widespread gap
between lending & borrowing rates. It is, therefore, need of the time to s treamline the banking
regulatory and supervisory frameworks particularly in the wake of financial deregulation.
However, we are concerned about the securities segment which has been denoted as the
Capital Market.
1.4REGULATIONS OF THE SECURITIES MARKET
Certain rules & regulations as elsewhere govern the securities market in Bangladesh. We now
have improved versions of rules relating to capital market such as Public Issue Rules, Right Issue
Rules, and Acquisition & Mergers Rules and so on. Securities busines s in Bangladesh is
regulated by-
The controller of Capital Issues (CCI) operated under Capital Issues (Continuance of
Control) Act 1947
Trust Act 1882COMPANIES ACT 1994
Securities and Exchange Ordinance 1969
Securities and Exchange Rules 1987
Securities and Exchange Commission Act 1993
SEC (Brokers, Stock Dealers, Sub-Brokers) Regulation 1994
SEC (Insider Trading) Regulation 1994
SEC (Mutual Funds) Regulation 1994
SEC (Merchant Bankers and Portfolio Managers) Regulation 1994
Initial Public Offering (IPO) Rules 1998
The Central Depository Bill 1999
Margin Rules 1999
Depository Law 1999
SEC (Stock Dealer, Stock Broker and Authorized Representative) Rules 2000
SEC (Mutual Funds) Regulation 2001
SEC (Over-The-Counter) Rules 2001
SEC (Public Issue) Rules 2006
SEC (Right Issue) Rules 2006
Moreover, there are specific rules and regulations for controlling the operation of stock
exchanges. The Securities and Exchange Commission (SEC), established in 1993, regulates
overall activities of the capital market in Bangladesh. The objective of the SEC is to protect
interests of investors in securities, develop the securities market, and ensure compliance of
laws relating to proper issuance and exchange/trading of securities.
1.5 FEATURES OF BANGLADESH CAPITAL MARKET
The capital market of Bangladesh is growing. But the recent growth of capital market of
Bangladesh was behind time. 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 last but not least the capital market regulators. The salient features of capital
market of Bangladesh are discussed below-
NUMBER OF LISTED SECURITIES
The number of listed companies in general is very small in Bangladesh in comparison with that
in our neighboring countries. There are only 521 companies (up to March 2013) are enlisted
with DSE. It has been evidenced that there is a good number of commercially viable companies
which can go public to enjoy the benefit of tapping funds through share float.
INSTABILITY IN MARKET
A market is said to be unstable if stock prices exhibit significant variation that is considered to
be abnormal. During the past ten years there has been significant fluctuation in the index. The
day-double-digit jump during the early second part of 1996 took the index to more than 3600,
but it reduced, if not at the same pace, to 2300 at the end of the year. The fall was more
pronounced in 1997 when index reduced to 756.8 in 1997. The declining trend continues
through 1998 and 1999 at low pace with some minor fluctuations. After then, the DSE index
continued to improve overtime to 2960 in 2009. But again, in 2010, country’s major stock
market crash took place.
LOW FOREIGN INVESTMENT
The role of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) inthe
development of capital market of Bangladesh is undeniable. However the share market crash of
late 1996 and also in 2010 had particularly distanced foreign investors. FDI inflow as a
percentage of gross fixed capital formation was only 5.2%, 4.5% and 3.4% in 2005, 2006 and
2007 respectively. FDI stock as a percentage of GDP was 4.7%, 7.9% and 6.1% in 1990, 2000 and
2007 respectively.
INSUFFICIENT TRADABLE CAPITAL INSTRUMENTS
Illiquidity is rather intensified by the absence of varied tradable capital instruments. The
Bangladeshi and foreign investors are experiencing the scarcity of diversified products in
Bangladesh. The platform of this market is supply and demand mismatch. Due to the absence
of diversified products, the liquidity of market is declining. Most of our instruments are equity
now. Municipal bonds, mutual funds as well as derivative markets need to be developed to fill
in the gap. Introducing option and future market to our capital market can be a solution to the
above issue.
LOW LIQUIDITY LEVEL
The stock market in Bangladesh is characterized by a thin market having small market
capitalization ratio & low level of liquidity. If a big investor takes any attempt at selling a
relatively large quantity, this will cause a large decrease in prices, i.e. an erosion of capital
value, hence contributing to illiquidity. It is observed that trading on some stocks takes place
once a month or even some longer intervals. High turnover is often considered to be indicative
of low transaction costs. A small but active market will have small capitalization but high
turnover ratio.
LACK OF INVESTORS’ AWARENESS
A major portion of our educated population is yet to be attracted to the stock market. They
need to be persuaded, informed and trained. An investment culture needs to be developed in
our country. With this view, DSE & SEC organize Investors’ Awareness Program from time to
time and DSE has established a training academy to train up the general investors as well as the
authorized representatives.
INFORMATION ASYMMETRY
The access to the information remains a major problem in the market. While a handful of
institutional investors may enjoy certain benefits since they have an investment unit manned
with qualified officers, nothing exists for retail investors. And, in the absence of independent
research houses, retail investors primarily focus on advices given by their brokers, and rumors.
This is frightening and it often leads to enormous losses for small investors who are vital for a
low-income and pre-emerging market like Bangladesh.
Filtering of information among different types of investors may leave scopes for manipulation,
this assumptions has been proven in 1996 and also in 2010 at the cost of many individuals and
households.
WEAK CORPORATE GOVERNANCE
The level of corporate governance of international standard is lacking. Inadequate disclosure
requirement and culture of family-owned conglomerates deter the expansion of corporate
governance into the local industry. Unless the local market adheres to and effectively enforces
a standard corporate governance system, there will not be a level playing ground for
international business houses vis-à-vis local operators.
1.6 REASONS FOR UNDERDEVELOPMENT
Information asymmetry
Supply side constraints
Lack of professional portfolio management
Weak corporate governance
Valuation disparity
1.7 STOCK MARKET BUBBLES
Stock Market crash 1996
Bangladesh securities market experienced the worst turmoil in 1996. Until mid-1996
Bangladesh securities market failed to attract investors, both local and international. However,
between July and mid-November of 1996, both Dhaka and Chittagong Stock Exchanges
experienced an unprecedented bullish run. During this period, market capitalization went up by
265% and the average daily turnover increased by over 1000%. There were about 192 securities
listed with both the stock exchanges at that time. According to the official record, price index at
Dhaka Stock Exchange increased by 281% and at Chittagong Stock Exchange increased by 258%.
Then the bubble burst: share prices of both the stock exchanges dropped by 25% from their
peak in mid- November. It was reported that outside in the 'KERB’ (informal) market the prices
went down further.
The regulatory move to control the situation was very slow. The regulatory authority took time
to realize the possible impact of index crash on the entire economy. The Bangladesh Securities
and Exchange Commission (BSEC) declared that the market would be viewed as 'normal' till the
index remained above the 1500 points. The government carried on a massive media campaign
striking out any possibility of crash and further promised recovery measures only if the index
dropped below 1500. The Finance Minister even made public statement to the effect that 'It's
not at all a crashing situation. The market has become over heated and now it is stabilizing
through correction.'
It was only in late December 1996 that the SEC constituted an Enquiry Committee to investigate
into the irregularities of stock market activities during July 1996 to November 1996. In March
1997, the Enquiry Committee prepared a lengthy report identifying a number of companies
being in breach of specific provisions of securities market regulation and commented that such
companies were guilty of fraudulent acts in relation to securities trading. The Enquiry
Committee also identified some of the country's biggest brokers who were apparently involved
in market manipulation. Based upon the Enquiry Committee Report, the SEC obtained warrants
of arrest against 32 people in 7 brokerage firms and 8 listed companies. The SEC also filed 15
share-scam cases in the High Court Division of the Supreme Court of Bangladesh.
Stock Market Crash: 2010
Since mid-2010, as the index crossed the 5000 mark, the market has clearly been driven by
speculative forces. During the last two-month period leading up to the peak, the index
increased by more than 2000 points before crossing the 8900 level on December 5. To put it in
proper perspective, the index level was at about 1500 until this recent surge started in 2007.
Daily market turnover increased 30 fold about Tk. 1.0 billion to Tk. 33 billion over the three-
year period. Clearly, economic fundamentals cannot support this level of valuation gain and
turnover, and the market is bound to correct itself once it runs out of steam. Prices of shares
have suffered a series of slides since early December after the stock regulator and the central
bank took measures to cool the market, prompting some street protests.
The TA experts have found some reasons of this share market fall down. These are –
1. Syndicates are working behind this recent plunge. These syndicates have a
huge investment in Stock Market and they take control of the price of the
shares. They are united and buy a share simultaneously so a want is created in
the whole market. So the prices of share become higher and general investors
suffer with it.
2. Most of investors in share market is either newbie or have no analysis power.
They are just trading on the basis of seeing what other peoples are trading. So
without seeing a company’s saturation point; the invest money and lose money.
3. Government has changed lots of rules of local stock market and applied lots of
limited on Debt and other facilities. And this is another reason of this recent
Bangladeshi share market plunge.
4. The sudden spurt in the inter-bank call money rate to 175 per cent in
December, which was earlier pegged at 60 per cent, due to ongoing liquidity
crisis in the money market, also affected the stock market and led to a steep
decline towards the middle of December. Though the regulator raised the
margin loan ratio to 1:1, it failed to uplift the market, as the financial institutions
themselves are suffering from low liquidity due to high call money rate. Apart
from same, the Bangladesh Bank’s directive in December against diversion of
industrial credit to the stock market was also partly responsible for the fall in
markets witnessed in December.
5. The major fall in index was triggered by a central bank interest-rate hike. The
central bank raised the mandatory Cash Reserve Requirement (CRR) of the banks
to six per cent, which contributed to reduce the turnover and raise the volatility
in markets, prompting institutions to withdraw from stock markets.
SEC allowed the necessary correction on the prevailing act. Traditionally, after setting the price
by the company and regulatory institution, a company can sell its share. But, in case of book
building method, the investors set the prices of the shares.
In the corrected act, to set the price of the shares, 20 institutions must participate in the 6
category. At the same time, they must show the amount of the shares they want to buy. But, a
single institution will not be allowed to buy more than 5% of total shares.
1.8 SECURITIES MARKET: THE PRESENT SCENARIO
Tradable Securities
The total number of enlisted securities stands at 521 at Dhaka Stock Exchange on April 11,
2013. Of these 248 are companies,41 mutual funds, 8 debentures, 221 treasury bonds, and 3
corporate bonds.
Market Capitalization
The DSE’s market capitalization was TK 2491612 million at the beginning of the fiscal year 2012
that went up to TK 2345008 million on December, 2012. On April,2012, market capitalization
crossed its highest level in the FY 2012 which was TK 2790618 million.
Trade of Securities
On the 1st half of December’ 2012, a total of 586.07 million securities were traded on the Dhaka
Stock Exchange, the value of which stands at TK 21115.87 million which was respectively 645.85
million securities having a value of TK 22584.97 million. The average number of securities
traded was 58.61 million and average transaction was TK 2111.59 million.
Share Price Index
DSE launches Two New Indices
Dhaka Stock Exchange (DSE) recently launched two new indices, by the name of DSE Broad
Index (DSEX) and DSE 30 Index (DS30), both based on Free Float (FF) Market Capitalization
(MCAP) of the listed securities. DSE worked with a team of Standard & Poor’s (S&P) in order to
formulate the two new indices using S&P methodology. The indices were launched on January
28, 2013. Prior to that DSE has been maintaining three indices – All Share Price Index (DSI), DSE
General Index (DGEN) and DSE-20 Index (DS20). DSEX is going to replace DGEN as the broad
index of the Exchange – the benchmark index, while DS30 is going to replace DS20; there will be
no substitute for DSI. Three types of indices, General Price Index, DSE 30, and DSE Broad Index
(DSEX) are now in operation at the DSE to highlight the condition of the market correctly. All
the indices of the Fiscal year 2012-13 are described as follows-
DSE’s General Price Index
Z category securities are excluded, but no mutual fund, Bond and Debenture are
considered in the index. DSE General Index is formed with the securities. The DSE’s General
Price Index stood at 3,794.29 on April 4, 2013 by losing 137.25 points from the previous week.
DSEX
This resembles S & P index with the view of balancing the market disorder.
DSE-30 Price Index
DS30 has been structured with the best 30 enlisted companies depending on their performance
and specific criteria. The DS30 Index
CHAPTER- 2
AN OVERVIEW OF DHAKA STOCK EXCHANGE LIMITED
2.1 BRIEF HISTORY
The Dhaka Stock Exchange (DSE) was established as The East Pakistan Stock Exchange
Association Limited on April 28, 1954 after realizing the necessity of establishing such bourse by
the then Government in 1952. Formal trading of the bourse began in 1956. On June 23, 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, 13, 1964.
If we look back to the beginning, it was learnt that the Calcutta Stock Exchange prohibited the
transactions in Pakistani shares and securities. The provincial industrial advisory council soon
thereafter set up an organizing committee for the formation of a Stock Exchange in East
Pakistan. The then Central Government’s proposal regarding the Karachi Stock Exchange
opening a branch at Dhaka, did not find favor with the meeting who felt that East Pakistan
should have an independent Stock Exchange. It was suggested that Dhaka Chamber of
Commerce & Industry should approach its members for purchase of membership cards. The
location of the Exchange was thought to be Dhaka, Narayanganj or Chittagong. An organizing
committee was appointed consisting of leading commercial and industrial personalities of the
province with Mr. Mehdi Ispahanias the convener in order to organize the Exchange.
It was also decided that membership fee would be Rs. 2000 and the subscription rate Rs. 15 per
month. The Exchange was to consist of not more than 150 members. A meeting of the
promoters was held at the chamber on 03.09.1953. It was decided to appoint Orr Dignam &
Co., solicitors to draw up the Memorandum and Articles of Association of the Stock Exchange
based on the rules of Stock Exchange existing in other countries and taking into account local
conditions.
In 1958 it was shifted to Dhaka and started functioning at the Narayangonj Chamber building in
Motijheel C/A. On 01.10.1957 the Stock Exchange purchased a land measuring 8.75 Katha at 9f
Motijheel C/A from the government and shifted the Stock Exchange to its own location in 1959.
The service on the Stock Exchange continued uninterrupted until 1971.The trading was
suspended during the Liberation War and resumed in 1976 with the change of economic policy
of the government.Since then the bourse did not look back and continued its journey
contributing its journey contributing to the development activities of the nation. On August 10,
1998 the DSEintroduced screen-based state-of-the-art automated online real-time trading
through Local Area Network (LAN) and Wide Area Network (WAN). DSE upgraded its
Automated Trading System on August 21, 2005. Central Depository System (CDS) for electronic
settlement of share trading made a debut in the DSE. Later on, the Exchange became a full
Depository Participant (DP) of CDBL to facilitate the trading of its non-DP members.
Government Bonds made a debut on the DSE on 1st January, 2005.
The Stock Exchange is in a relentless process of modernization and up-gradation of its systems
and facilities to home in latest technologies available. Over the years, the bourse has earned
confidence of the investors. The SEC approved the Dhaka Stock Exchange Direct Listing
Regulations-2006 as proposed by the DSE which paved the way for direct listing of large and
profitable companies with the DSE. A new listing Regulation is also at final stage to
accommodate the changing needs of the economy. After the introduction of automation on
August 21, 2005 brokers of DSE have been conducting trading of securities from Chittagong,
Sylhet, Rajshahi, Comilla, Narayanganj, and Uttara. Withinvery much s hort time trading of
securities will start in different divisional and districtlevel cities. Thus, in its 50-year journey the
Dhaka Stock Exchange has made significantcontribution to the economy of Bangladesh
providing the unique venue to raiseinvestment from the members of the public.
2.2ORGANIZATIONAL STRUCTURE &MANAGEMENT
The Dhaka Stock Exchange is registered as a Public Limited Company and its activitiesare
regulated by-
Articles of Association
Rules, Regulations & Bye-Laws
The Securities And Exchange Ordinance, 1969
Companies Act 1994 &
Securities & Exchange Commission Act, 1993.
The day to day affairs of the DSE are run by a highly qualified and trained executiveteam and
professionals who work independently under the policies set by the Board ofDirectors. The DSE
Board comprises of 25 members of whom 12 are elected throughdirect election from the 238
shareholders (members) of DSE.
The remaining 13 board members are Ex-Officio. They include 12 representingdistinguished
personalities from different key economic and social arena of the country.The CEO is also a
Director of the Board. One Chief Financial Officer, Head of ICT and GM (Admin) & Secretary
assist the CEO to manage day to day affairs of the bourse.
Manager, Senior Executive, Executive, Junior Executive & some other lower ranks suchas Senior
Office Assistant, Office Assistant & Junior Office Assistant are departmentwiseemployees of the
bourse.
The Board also includes one Executive Director of Bangladesh Bank & ManagingDirector of
Investment Corporation of Bangladesh, one member representing investors inlisted securities
and one member representing Listed Issuer Companies & the remainingeight (8) members are
selected from the elite and other distinguished persons who are notassociated either with the
Exchange or with any of its members of the Exchange.
ORGANOGRAM OF DSE
OWNERS OF DSE
Members are the owners of DSE. DSE has 238 members who are also the shareholders of the
Exchange. The members are licensed by the SEC for conducting trading as Stock Dealer or
Broker. All broker houses have been corporatized in 2006. There is a provision for 500
members.
2.3 FUNCTIONS OF DSE
Listing of companies
Providing the market place for trading of listed securities, settlement of trading.
Publication of daily index and Monthly Review etc.
Monitoring the activities of listed Companies.
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 bye laws 1997).
Investors Protection Fund (As per investor protection fund Regulations 1999)
Announcement of Price sensitive or other information about listed companies through
online.
The Clearing and Settlement module provides the management of trade from the point
of entry into the Settlement Pool trade database until it has been delivered and settled
and removed from the Settlement Pool. It consists of three major business processes.
2.4 AUTOMATED TRADING SYSTEM
DSE introduced Automated Trading System on 10th August 1998. The trading floor moved right
into the member's office premises where an investor started to place buy/sell orders.
Considering market growth, the Automated Trading System has been a subject to continuous
up-gradation for time to time. Recently Dhaka Stock Exchange Ltd. has added two new CPUs
increasing its daily average transaction capacity to minimum 150,000 transactions from its
existing 100,000 per day effective from December 21, 2008. It ensured transparency and
efficiency in securities market. Now the mainframe HP Non Stop S7806 is able to handle the
above (150,000) number of transactions per day. Earlier the transaction capacity of DSE was
upgraded to 100,000 in March 2008 from 50,000 in 2005 by improving the capacity of CPU.
Before 2008, the main Trading Server was HP Non Stop 7802 mainframe Server which was
implemented during 2005. The System was capable to handle 50,000 trades per day.
The WAN (Wide Area Network) setup Connectivity has been further expanded by incorporating
another 3 (three) Network Service Provider (NSP) named “Ranks ITT Ltd.”, “Link3 Ltd.” and
“Royal Green Online Ltd.” in addition to earlier four NSP (“XNet”, “MetroNet Ltd.”, “DNS Ltd.” &
“DhakaCom Ltd. ”) to different area of Dhaka City and others major cities of Bangladesh
through Dial-up, ADSL, Radio Link Wi-MAX and Optical Fiber connectivity. More than 165
members have already established their Branches/offices away from DSE building by using this
data communicating connectivity. “BracNet Ltd.” is also in process to be incorporated to DSE
network.
Currently members are trading from approximately 480 locations of 14 districts. The traders
can trade on the Stock Exchange using either TESA supplied workstation software or through
their own custom developed broker system. The TWS application offers a lot of support to the
traders, in the form of information flow, to enable them to perform their trading activities
efficiently. DSE TESA automated trading system is run by the traders in following sequence-
Collecting Orders from the Customers
Viewing all details of Orders (instrument, price, quantity, current status of the order) in
the Broker Order Book.
Modifying the Orders.
Tracing the Order History such as the time it was executed, withdrawn, rejected or
deleted.
Connecting to the Central Trading System at the Dhaka Stock Exchange premises.
Order Matching by either Automated Order Matching or Pick and Match Order
Matching.
2.5DEPARTMENTAL ACTIVITIES OF DSE
Basically, there are four Divisions of Dhaka Stock Exchange Ltd. The Divisions are:
Information & Communication Technologies (ICT) Division,
Finance Division,
Administrative Division and
Operation Division.
There are different departments under these four divisions. Among them some major
departments and their functions are as follows-
CLEARING ACCOUNTS &EXCHANGE DP
This Department is under the Finance Division. With a vision of adopting an onl ine system for
settlement this department has been working continuously from the year 1996.
The major functions of this department are to have the financial settlement of the traded
shares, to maintain the member margin, and to settle any kind of defaulter case.
CLEARING HOUSE &SPECIAL CLEARING HOUSE
Another major Department of Dhaka Stock Exchange is Clearing House & Special Clearing
House. It is also under the Finance division. Some major functions of this department are
receiving, posting, sorting, reconciliation & delivery of shares, printing of buyer & seller advice
and prepare the defaulter list for physical share.
DSE FULL SERVICE DP
With a vision to further develop the modus-operandi DP clearly the Full Service DP department
was established on 20th January, 2004. Some of the major functions of this department are
Receiving the request for DEMAT share and then doing the setup, uploading & posting in
register, giving input to DEMAT bills, opening & closing BO accounts, doing inquiry for BO
account status, receiving BO accounts annual fee and to deposit to the accounts department.
Keeping liaison with the CDBL is another major function for this department.
HRM, ADMINISTRATION &TRAINING AFFAIRS
On October 2005, the HRM department was established under the Administration division. The
vision of this department is to achieve the organizational goal and develop the capital market
through the best squad talents. There are four committees under this department namely A.
Selection & Disciplinary Committee for Officers, B. Selection Committee for Staffs, C. Human
Resources Development Committee and finally, D. New CEO Recruitment Committee. Some
major functions are Employee recruitment, promotion, control, confirmation, training and
terminating. Supervision of the DSE Branch offices is another major activity of this department.
DEPARTMENT OF LISTING AFFAIRS
The main focus of this report is based on this particular department. So, elaborate discussion
will be done later.
LOGISTICS, PROTOCOL &MAINTENANCE DEPARTMENT
With a great vision to run DSE smoothly and fulfill the acute needs of different departments
with immediate effect and present the department as an effective, energetic, successful &
vibrant to the Organization this particular department was established in 2003 under
Operations Divisions. Conducting different meetings of DSE, processing the VISA for
organizational purpose, conducting national international road shows, seminars and
workshops, surveying the market and to prepare & approve purchase requisition for
procurement goods based on the requirements of different departments (consumable &
capital) are some of the major functions of this department.
DEPARTMENT OF MARKET OPERATIONS
Our market is expanding with a great speed. As a result, numbers of listed companies/
securities are increasing day by day. To ensure that the listed securities are operating by
maintaining the security laws, the Market Operation department was established. The vision of
this department is to be one of the most vibrant departments of the Exchange & to ensure
100% compliance of securities laws by the listed companies for the development of the capital
market. Basically, this department is a highly sensitive department with some major functions
of preparing & disseminating of on-line news covering wide range of information of listed
companies, regulators, stock Exchange & others, maintaining correspondence with listed
companies regarding the compliance of relevant securities rules & regulations & other issues,
making query to all listed companies for unusual price hike, maintaining database & taking
necessary actions for spot trading/ trade suspension/ resumption/ price limit open of the listed
companies following record date/book-closure and maintaining database relating to different
types of non- compliance companies and take necessary action.
MONITORING, INVESTIGATION &COMPLIANCE DEPARTMENT
To ensure compliance with SEC Rules & Regulations to mitigate any fraudulent activities in
securities market operation and to attain a high level of efficiency in all of its operations
through effective & efficient management of human resources & proper utilization of time are
the visions of this department. Smooth capital market operating is another vision of this
department. There are three sub-division of this department namely A. Monitoring B.
Investigation & C. Compliance. Formal monitoring of Members Companies, Investigation of the
companies (enlisted) and ensuring compliance with the SEC rules & regulations are the major
functions of this department. Beside this, this department assists DSE in various legal matters
like as dealing with outside solicitor if any litigation arises as against DSE and settling of any
dispute between the Members and the Stock Exchange.
PUBLIC RELATIONS DEPARTMENT
Proper handling of media people including providing them with different sorts of data, news
and securities market related information, press release presentation and provide information
to different stakeholders on demand and reply to the query of investors are the major functions
of this department.
PUBLICATION DEPARTMENT
After establishment in 1993, the Publication Department is working to publish Monthly
Reviews, Half Yearly Reviews, Year- End Reviews, Annual reports, Diary, Magazines, and Cards
for different occasions. This department also publishes all DSE Rules & Regulation & makes it
ready for DSE Website. To prepare & update member & company information, daily disclosure
and other information & data for DSE Website & addresses of renowned companies &
organizations for invitation & greetings is another major function of this department.
R&D AND INFORMATION DEPARTMENT
The department which is working from the beginning of establishment of Dhaka Stock Exchange
is R&D Department. To guide the investors efficiently on their day to day business operations
fully supported by furnishing the listed companies’ financials as apparent as possible is the
vision of this department. Updating the DSE Website with different relevant data and providing
necessary information to different authorities as well as to the investors are some major
functions of this department.
SURVEILLANCE
For ensuring the smooth operations of the capital market the surveillance department was
established in February, 2000. Price monitoring, position monitoring, on-line real time
surveillance, verifications, investigation, reviews, monitoring the price movements of newly
listed securities, giving warning to members and penalizing them if they are involved in
irregularities of the market are some major functions of this department. The vision of this
department is to improve the standard of this department to international level.
Basically, all the departments are working very hard to keep the market as it should be and
assure the performance of due job responsibilities for the respective departments.
2.6 DSE VISION 2013 (5-YEAR PLAN)
The Country’s prime and oldest capital market, Dhaka Stock Exchange, is continuing its journey
through the last 54 years 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 2,000 crore.
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 into 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 instruments and to reduce time lag.
To review the Necessary Rules and Regulations (particularly Settlement Regulation 1998
and CDBL By-laws.
INVESTORS’ INTEREST PROTECTION
o To lay time-bound emphasis on protecting the interest of investors to bring dynamism
and more vibrant participants in market.
o To give more emphasis on Investors’ awareness program for the sake of educating them
properly.
o Information dissemination and active strategies to reduce the degree and dimension of
rumors.
Other targets of the Vision 2013 are SEC-DSE Joint Collaboration and Contribution to
Country’s Economy.
2.7 SHARE CATEGORIZATION: A, B, G, N&Z
The prime bourse of the country introduced “Group A” and Group B” from July 2, 2000
based on its financial strength and performance to give clear information to investors
for taking informed decision.
DSE has further categorized the securities by introducing “Group Z” which came into
effect from September 26, 2000.
The Stock Exchange introduced another company category “Group G” on June 30, 2002.
“N”- Category the newest one was launched through an order of SEC on July 3, 2006.
The categorization helps a lot the investors in choosing companies before making investment
decision.
2.8 CRITERIA OF SHARE CATEGORIZATION
“A” CATEGORY COMPANIES
Companies which are regular in holding the current Annual General meetings and havedeclared
dividend at the rate of 10% or more in a calendar year are categorized in category “A”(Mutual
Funds, Debentures & Bonds are being traded in this Category).
“B” CATEGORY COMPANIES
Companies which are regular in holding the current Annual General Meetings but have failed to
declare dividend at least at the rate of 10% in a calendar year.
“Z” CATEGORY COMPANIES
Companies which have failed to hold the current Annual General Meetings or failed to declare
any dividend or which are not in operation continuously for more than six monthsor whose
accumulated loss after adjustment of revenue reserve, if any, is negative and exceeded its paid
up capital.
“G” CATEGORY COMPANIES
Greenfield companies – companies that will start operation after taking money from the
market.
“N” CATEGORY COMPANIES
All newly listed companies except Greenfield Companies will be placed in this category and
their settlement system would be like B category companies .
2.9 TYPES OF MARKET IN DSE
There are four types of market in DSE which are described below-
PUBLIC MARKET
The public market is the market where instruments (shares, bonds, etc.) are traded in normal
volume. This is the general market where investor’s trade in securities and the place where the
new investor will probably start off trading in his/her desired shares.
Here all securities are traded in multiples of lots. By lots we mean the numbers of shares the
company issues that can be traded at a time, e.g. a lot of 50 shares means that the shares of the
company can only be bought/sold in lots of 50, i.e. buy/sell 200 shares meaning buy/sell 50*4
shares, so 4 lots of 50 shares each.
SPOT MARKET
In this market instruments are traded in normal volume (under corporate action, if any) without
the settlement process as both trade and payment occur at the same time. Sharesare also
traded in lots in the spot market.
ODD LOT MARKET
In this market odd lots of all instruments are traded. Lots can become ‘odd’ , i.e. not conforming
to the lot specification of the company if the company offers say a share ‘bonus’ of 20%, so
someone with 50 shares now has 50+10 shares of the company where 50 is the lot and the 10 is
the odd lot. However, if the lot is 50, then 5 odd lots of 10 shares each will constitute a single
50 share lot again.
BLOCK MARKET
The block market is the market where instruments are traded in bulk (very large volumes). All
large volume trades take place in the block market where the minimum limit has been set at Tk.
5 lakh i.e. trades in the block market must exceed Tk. 5 lakh to be a valid block trade. Block
trades are not auto-matched but rather open to negotiation between participants who may
decide on a price that differs from the current market value.
2.10 CLEARING&SETTLEMENT
The Clearing and Settlement process manages trade from the point of entry into the Settlement
Pool Database (where all transactions wait on hold until they are ‘settled’) until all items in the
Pool have been delivered and ‘settled’.
By Clearing, we mean the process of participant trade reporting and affirmation, billing, and
assigning settlement instructions. By Settlement and by saying that such and such item has
been settled, we mean the process of monitoring that the delivery of all instruments to the
buyer and payment of all dues to the seller has occurred before removing the trade waiting to
be settled from the Settlement Pool. All instruments are categorized into 5 groups as per their
respective clearing and settlement cycles. The cycle durations are denoted by symbols like
‘T+1’, ‘T+3’, etc. Here the T stands for the day the trade takes place. The ‘+1’ added to the T
means trade day plus 1 more working day (not a holiday or weekend), i.e. the working day after
trade takes place. In a similar manner, the symbolism ‘T+n’, where ‘n’ denotes the number of
days after trade takes place, will be used in the following explanation. What this signifies is that,
if the security is T+3, then you will have to wait Trading Day plus Three Working Days for the
settlement process to finish before selling that particular security or using funds from the sale
of that security. Securities are also be of two forms; Non-Demat(physical shares that have not
been made in to electronic shares) and Demat (electronic shares without any physical form). All
said securities are divided into Groups A, B, N, G and Z.
Fig: The above cycle is valid for A, B, G & N category instruments traded in Public, Block & Odd-
lot market.
Fig: This cycle is valid only for Z group instruments traded in Public, Block & Odd-lot market.
For Instruments of Foreign Trade in the A, B, G, N and Z categories: All foreign trade
instruments will follow the settlement standard set in the figure below-
The current settlement date for different categories instrument under CDBL is shown below-
For A, B, G & N Group Instruments
Market name Trade for Trade System Settlement &
Settlement Period
Public Trade for Trade * T+1 & T+3
Odd + Block Trade for Trade T+1 & T+3
Spot Trade for Trade T+0 & T+1
For Z Group Instruments
Market name Trade for Trade System Settlement &
Settlement Period
Public Trade for Trade * T+3 & T+7
Odd + Block Trade for Trade T+3 & T+7
Spot Trade for Trade T+0 & T+1
CHAPTER- 3
IPO PROCEDURE ANALYSIS
3.1 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.
3.2 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 publ ic offering. On the other
hand, IPO is the process of collecting fund for the first time in the market.
3.3 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-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.
3.4 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 companiesare known as
companies in which public are substantially interested resultingin 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
prescheduledcompulsory debt servicing could be avoided if the company is listed on
thebourse.
The company gains national and international importance by its share valuequoted on
the stock exchanges.
FROM THE VIEW POINT OF THE INVESTORS
The management of a public company must be accountable to theirshareholders, which
in turn play a role in ensuring that the company operatesin an efficient manner.
Shareholders will be benefited from the enhancementof 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.
3.6 FEES REGARDING IPO
(1) The following fees shall be applicable for payment by the issuercompany:-
(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 applicationfee along
with the application for consent of the Commission to issue oroffer 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, theissuer
company shall pay consent fee @ 0.15%, by way of a pay order ordemand 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.
3.7 DOCUMENTS TO BE SUBMITTED
According to the Regulations the applicant company has to submit somedocuments 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 (iflinked
with the public issue).
Copy of Consent order issued by the Commission
Names of Directors along with directorship of other companies listed on
theExchange
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.
3.8 THE IPO PROCESS
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.
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.
3.9 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.
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.
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.
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.
3.10 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. Such
situation occurred in case of ‘Jago Corporation’ which is currently listed in Chittagong Stock
Exchange Ltd. under the category of ‘Z’.
The process of analyzing the prospectus and decision taken by the exchange can be shown in
the following flow chart-
Issuer (Submission of
Prospectus)
Department of Listing Affairs
Securities &Exchange Commission
Q
u
e
ri C
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.
3.11 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
Carrying out any delisting related process.
3.12 IPO SCENARIO ANALYSIS
As the securities market drew investors in geometric progression in 1996 largest number of
companies came to the market through IPOs. Many of the offerings were on high premium
although balanced sheet, profit & loss account preparation was affected by manipulation.
Afterwards the market experienced continuous ups & downs in case of number of companies
coming to the market through IPO. Year 2009 witnessed a surge in the primary market as there
were 21 IPO subscriptions.
IPO subscription throughout years 2007-2012 are shown below-
It has been evidenced that there is a good number of commercially viable companieswhich can
go public to enjoy the benefit of tapping funds through share float. “A market based Initial
Public Offering (IPO) mechanism is largely absent in the Bangladesh stock market which hugely
undermine the potential for IPOs & is the prime reason for the weak supply of quality shares” –
the latest Quarterly Economic Update (QEU) of ADB said. The probable cause for most of the
companies has not come yet in the IPO is the under-pricing performance of IPO. After the
primary market transaction through IPO, the share price of the companies increases
significantly higher in the secondary market. But the companies do not get the increased price
except the offer price.
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012
Series1
IPO Subscription
CHAPTER- 4
CASE STUDY: GOLDEN HARVEST AGRO INDUSTRIES LTD.
4.1 BRIEF OVERVIEW OF THE COMPANY
CORPORATE STATUS AND BACKGROUND
Golden Harvest Agro Industries Ltd (Golden Harvest) is located in Bokran, Monipur, Gazipur and
came into operation in May 2006. It is the first ever purpose built frozen vegetables and snack
food processing plant in Bangladesh. The entire Plant was designed and supervised by the
Danish experts with the full technical assistance from DANIDA (Danish International
Development Agency under the Danish Embassy). Golden Harvest is set up on a 67,576 square
feet state-of-the-art purpose built, fully computerized processing facility built in international
standards with the capacity to expand by additional 100,000 SFT.
Golden Harvest is a BRC-Food certified (British Retail Consortium-Food) food processing facility.
BRC Food is regarded as the highest global standard for best practice in the food processing
Industry. Being an ISO 9001:2008 certified, Golden Harvest is also the only TESCO approved
Food Processing factory in Bangladesh. TESCO is the third largest retail chain superstores in the
world. Golden Harvest is also a member of SEDEX which upholds Ethics in industry in all
aspects.
Golden Harvest is processing over sixty varieties of frozen food products, such as Chicken
Nuggets, Chicken Burger Patty, Beef Burger Patty, French Fries, Tortilla, Tempura, Chicken
Cutlet, Fish Cutlet, Meat Ball, Lentil stuffed Tortilla, Potato stuffed Tortilla, Somosa, Vegetable
Puff, Stuffed Potato Balls, Fish Fingers, Fish Ball, Spring Roll, Pop Corn Chicken, Pop Corn
Shrimp, Hash Brown and different kinds of Vegetables and Fruits. All products are hygienically
processed and packed in frozen Ready-to-Cook form.
Golden Harvest’s procurement, production/processing and marketing are well structured and
clearly defined meeting the international standards. These include food safety certification such
as Hazard Analysis Critical Control Points (HACCP) and Good Manufacturing Practice (GMP).
Safety control mechanism is of high standard specially by conforming to standards of European
Union (EU), Australian Quarantine Inspection Services (AQIS) and United States Food & Drug
Administration (USFDA) food quality benchmarking. Golden Harvest is approved by EU, USA,
UAE, Australia and Russian Health and Quarantine authority for export of Frozen Foods from
Bangladesh.
The Refrigeration System of Golden Harvest is imported from Grasso Netherlands, Freezing
Systems from KM Denmark, DSI Denmark, Geneglace France, Helpmann Belgium. The
Processing Machines are procured from Crown Canada, Nilma Italy, Anko Taiwan. Power is
connected through a fully automatic voltage stabilizer and full back-up power generator from
Duetz Germany capable of running the entire factory during power disruptions.
There are 3 separate large Cold Storages within the factory premises, built using entirely
imported Insulated Panels capable of maintaining -30 Degree Celsius. Additionally, there are 3
separate chiller rooms built using imported Insulated Panels capable of maintaining +4 Degree
Celsius.
The entire factory has installation of fully exposed Stainless Steel water piping throughout the
plant fitted with US origin UV Water Purification Plant. The plant is equipped with Stainless
Steel Tables and Utensils, food grade anti-bacterial Epoxy Paints on all exposed walls and fully
Tiled floors and man height walls as required by the latest EU and USA food safety regulations.
NATURE OF BUSINESS
The principal activity and operation of Golden Harvest Agro Industries Limited (GHAIL) is the
production and processing of frozen vegetables and snack foods in Bangladesh.
The addition of Golden Harvest Sea Food and Fish Processing Limited (A subsidiary Company of
GHAIL), which processes, markets and exports sea foods and fishes.
4.2 HISTORY OF PAID UP CAPITAL
Description Allotme
nt Date
Shares
Wei
ght
2007 2008 2009 2010 2011
Cash 10/Aug/
04
2,000,000
1.00
2,000,000
2,000,000
2,000,000
2,000,000
2,000,000
Cash 04/Jun/
05
1,250,000
1.00
1,250,000
1,250,000
1,250,000
1,250,000
1,250,000
Cash 26/Jun/
07
500,000
0.01
5,000
500,000
500,000
500,000
500,000
Bonus 06/May/
10
1,250,000
1.00
1,250,000
1,250,000
1,250,000
1,250,000
1,250,000
Other than
cash
18/Jun/
10
5,000,000
0.04
-
-
-
178,000
5,000,000
Placement 11/Oct/
10
25,000,00
0
0.72
-
-
-
18,000,00
0
Total
35,000,00
0
4,505,000
5,000,000
5,000,000
5,178,000
28,000,00
0
Profit After
Tax
(689,831)
10,495,58
6
13,173,47
9
105,885,7
37
132,269,5
49
Issue Manager(s)
Banco Finance and Investment Limited
Baitul View Tower (11th Floor)
56/1, PuranaPaltan
Dhaka-1000
Royal Green Capital Market Limited
Shah Ali Tower (2nd Floor), 33 Kawran
Bazar, Tejgaon, Dhaka-1215
Underwriters
Auditor
Less: Extra-Ordinary
Income
Net Profit (689,831) 10,495,58
6
13,173,47
9
105,885,7
37
132,269,5
49
EPS
(Restated)
(0.15)
2.10
2.63
20.45
4.72
Prime Finance Capital Management Limited First Security Islami Capital and Investment
Limited
Bangladesh Mutual Securities Limited Mercantile Bank Limited
Continental Insurance Limited Royal Green Capital Market Limited
Green Delta Insurance Company Limited ICB Capital Management Limited
S.F. Ahmed & Co.
Chartered Accountants
4.3 Risk Factors and Management’s Perceptions about the Risks
An investment in equity shares involves a high degree of risk. The Company is operating in an
industry involving both external and internal risk factors having direct as well as indirect effects
on the investment by the investors. All the investor should carefully consider all of the
information in this memorandum, including the risk factors, both external and internal, and
management perception thereabout enumerated hereunder before making an investment
decision. If any of following risks actually occurs, their business, result of operations and
financial condition could suffer, the trading price of their equity shares decline, and investors
may lose all or part of their investment.
(a) Interest rate risks
Interest rate is concerned with borrowed funds of short term & long-term maturity. Interest
rate risk is the risk that Company faces due to unfavorable movements in the interest rates.
Volatility in money market & increase demand for loans /investment funds raise the rate of
interest. A change in the government’s policy also tends to increase the interest rate. High rate
of interest enhances the cost of fund of a company. Such rises in interest rates however mostly
affect companies having floating rate loans.
Management perception
Golden Harvest Agro Industries Ltd. (Golden Harvest) maintains low debt/ equity ratio; and
accordingly, adverse impact of interest rate fluctuation is insignificant. The project was started
with the Company’s own funds and the capacity was also expanded with own funds.
Additionally, the management of the Company emphasizes on equity base financing to reduce
the dependency on borrowing. Therefore, management perceives that the fluctuation of
interest rate on borrowing would have little impact upon the performance of the Company.
(b) Exchange rate risks
If exchange rate is increased against local currency opportunity is created for getting more
revenue against sale in local currency. On the other hand if exchange rate goes down margin is
squeezed in local currency.
Management perception
The products of the company are sold against foreign (12%) as well as local currency (88%) and
payments for raw materials are also made mostly in local currency. The exchange rate of the
country traditionally witnessed upward trends, which makes ample opportunity of export. If
foreign exchange rate rises, export will increase and local sales will be less and vice versa.
Therefore, volatility of exchange rate will have no impact on profitability of the Company.
(c) Industry risks
Industry risk refers to the risk of increased competition from foreign and domestic sources
leading to lower prices, revenues, profit margin, and market share which could have an adverse
impact on the business, financial condition and results of operation. Agro industry in
Bangladesh is an emerging sector with vast local demand for its different product lines. Locally
produced frozen products now play a significant role in this sector, which has been dominated
by imports in the past. However, the infrastructure required for this indus try is inadequate in
Bangladesh, as can be noted below:
No organized collection centers for agricultural produce exist in Bangladesh; as a result,
there is a high fluctuation in prices both for the growers and for processors.
Absence of Cold Storage or Cold Chains although the whole process of collection,
processing and distribution depends on cold temperature maintenance due to the
nature of the finished product.
Management perception
Golden Harvest Agro Industries Ltd. (Golden Harvest). has established its brand name in Frozen
Food market with its quality products, range of products and customer services. However, to
develop an infrastructure, both public and private sector participation is required. This is the
focal point of Golden Harvest’s future expansion plans. To eliminate fluctuation in prices both
for the growers and for the processors, Golden Harvest will organize collection centers to
eliminate intermediary cost for both the parties. Deploying 15,000 refrigerators with 24 cold
storages at -30 degree Celsius nationwide, Golden Harvest will have infrastructure backbone of
Cold Chain which will ensure proper supply of Frozen Foods all over the country through its 60
temperature controlled transport. Our neighboring country like India has over 50 cold chains,
generating revenue over US$3.5 billion which is targeted to reach US$8 .5 Billion by 2015.
(d) Market and technology-related risks
i) Market risks
Market risk refers to the risk of adverse market conditions affecting the sales and profitability
of the company. Mostly, the risk arises from falling demand for the product or service which
would harm the performance of the company. On the other hand, strong marketing and brand
management would help the company to increase their customer base.
Management perception
Market for Ready to Cook frozen foods in Bangladesh is growing at an exponential rate with
growth of urbanization and incremental income level of consumers along with their preference
to convenience. In spite of high growth of this market, there is scarcity of investment in this
sector which creates a huge demand-supply gap resulting in very expensive imports.
International market for Ready to Cook frozen food sector is already matured and is growing
further at a high rate. Golden Harvest Agro Industries Ltd. (Golden Harvest) is one of the
earliest entrants in international market with very promising and loyal customer base in USA,
Canada, Australia, Europe and Middle East. In Bangladesh market, Golden Harvest has made a
rapid penetration and has captured the leading position with its unique branding and
positioning strategy taking opportunity of this fast growing market.
ii) Technology-related Risks
Technology always plays a vital role for the existence of any industrial concern, ensuring better
services to the customers and minimizing the cost in various aspects. The production facilities
of the Company are based on currently available technology. Any invention of new and more
cost involving technology may cause technological obsolescence and negative operational
efficiency. Any serious defects in the plant and machinery may affect production and
profitability calling for additional investment for replacement. Since Golden Harvest Agro
Industries Ltd. deals in food processing, health risk is the most critical factor to be addressed.
Management perception
The key to securing market share in FMCG (Fast Moving Consumer Goods) is by satisfying the
needs of the customers. Golden Harvest Agro Industries Ltd. utilizes a fully equipped Research
& Development (R & D) setup that is continuously working for in-depth understanding of the
customer needs and preferences and accordingly blending its product range. The product line is
carefully developed for the consumers with longer shelf life, creating a true niche market in
Bangladesh, foods of convenience.
USAID is the major partner of R & D of Golden Harvest. A team of USAID experts in Food
Engineering and Microbiology with foreign and local expertise are involved in the R & D
continuously.
Quality is ensured at every stage of the process, starting from receiving raw material, different
stages of processing up to finished packaged frozen foods. The in-house fully equipped Quality
Assurance Laboratory is carrying out all types of Physical, Chemical and Biological tests using
most modern European testing equipment. Hygiene factors are uncompromised at all level of
the process.
(e) Potential or existing government regulations risks
The Company operates under Companies Act 1994 and other related regulation, Income-tax
Ordinance 1984, Income Tax Rules 1984, Value Added Tax (VAT) Act 1991 and Value Added Tax
(VAT) Rules 1991. Any abrupt changes of the policies made by the regulatory authorities may
adversely affect the business of the Company.
Management perception
Unless any policy change that may negatively and materially affect the industry as a whole, the
business of the Company is expected not to be affected significantly. Agro industry in
Bangladesh is an emerging sector with considerable local demand for different product lines.
Therefore, it is highly unlikely that the Government will initiate any fiscal measure that may
have adverse effect on the growth of the industry.
(f) Potential changes in global or national policies
The performance of the company may be affected by the political and economic instability both
in Bangladesh and worldwide. Any instance of political turmoil and disturbance in the country
may adversely affect the economy in general.
The company can prosper in a situation of political stability and a cong enial business
environment. Political turmoil and disturbance are bad for the economy and so also for this
sector. The Company is always aware of all types of turmoil and even though if the smooth
supply of raw material (TOW) is hampered or faces any kind of disruptions it will produce it in
future and try to keep the production smooth.
(g) History of non-operation, if any
Is there any history for the Company to become non-operative from its commercial operation?
The Company is in commercial operation since May, 2006. There is no history of non-operation
in business of the company till now. The Company has an independent body which is operated
by its Memorandum & Articles of Association and other applicable laws and regulations of the
country. The financial strength of the Company is very satisfactory. The Directors of the Board
are well reputed and experienced and the operation of the company is guided by good team of
professionals. The chance of non-operation of the business of the Company is negligible.
(h) Operational Risks
The core business operation of Golden Harvest Agro Industries Ltd. is directly related to very
low temperature maintenance. Country wide severe power shortage is compelling Golden
Harvest Agro Industries Ltd. to utilize captive power which builds up cost. Also port congestion
and inland immobility due to political instability poses a great operational risk to Golden
Harvest Agro Industries Ltd.
Management perception
Bangladesh Government is meeting this challenge by opening the energy generation to private
sector; and also making massive investment, which is expected to ensure availability of energy
for uninterrupted operation. Golden Harvest Agro Industries Ltd. perceives that allocation of its
resources properly with contingency approaches can reduce this risk factor to great extent.
(g) Input Cost Risks
Input cost risk is the risk of a business when procuring materials or commodities in high global
demand. Increasing demand and supply shortages create volatility in these commodity values;
and therefore, the timing, quantity and price of purchase must be closely planned.
Management Perception
Management of Golden Harvest Agro Industries Ltd. would hedge their exposure to input price
volatility by making purchases of inputs in season; and providing for contingency against such
inputs in its selling price.
(h) Distribution Risk
For any company, the most crucial wing is the distribution channel. Wide distribution network
and monitoring over the network is essential to make its product available to the consumer at
right time and price. Golden Harvest Agro Industries Ltd. every now and then faces this
challenge from non-accessibility for its wide range of products.
Management perception
Golden Harvest Agro Industries Ltd. offers a wide range of frozen food products both in global
and local market. Its distribution strategy comprises of distributors for international markets
and distribution network of dealers and outlets for domestic market. Golden Harvest Agro
Industries Ltd. plans to eliminate distribution risk implications by smartly planning its
distribution network with great flexibility.
Credit rating status
Date of Rating October 23, 2011
Long Term Short Term
Surveillance Rating- 2011 A+ ST-3
Previous Rating- 2010 A+ ST-3
Outlook Positive
4.5 USE OF PROCEEDS
Future Plan of IPO Fund Utilization
(Amount in BDT)
Particulars Amount in Taka
Sources of Fund:
Issue size (Number of share to be issued) 30,000,000
Issue price (including premium Taka 50 each) 60
Total Amount 1,800,000,000
Less: Income Tax @ 3% on premium 45,000,000
Net IPO Proceeds 1,755,000,000
Net IPO Proceeds from initial public offering will be used for repayment outstanding loan and
expansion of business activities to boost the profitability. The details of which is stated as
under:
Particulars Amount Projected Date/ Period
Loan Repayment:
Bank Loan 223,397,787 June ‘2012
Business Expansion:
Establishment of Cold Chain
778,837,268
May ‘2013
Establishment of Ice Cream Factory 408,673,903 March ‘2013
Working Capital requirement
344,091,042
June ‘2012
Total 1,755,000,000
4.6 FINANCIAL STRUCTURE OF THE COMPANY
The capital structure of Golden Harvest Agro Industries Limited before and after IPO will be as
under:
Before IPO
Particulars of
Allotment
Date of
Allotment
No. of shares issued Amount of
share capital Consideratio Consideration
Particulars No. Of Shares Face Value (Taka) Amount in Taka
Authorized Capital 100,000,000 10.00 1,000,000,000.00
n in cash other than
cash
(Taka)
First (subscription to the
Memorandum &
Articles of Association
at the time of
incorporation)
August 10, 2004 20,000,000 - 20,000,000
Second June 4, 2005 12,500,000 - 12,500,000
Third June 26, 2007 5,000,000 - 5,000,000
Fourth May 6, 2010 - 12,500,000 12,500,000
Fifth June 18, 2010 - 50,000,000 50,000,000
Sixth October
11,2010
250,000,000 - 250,000,000
Totals 287,500,000 62,500,000 350,000,000
The Company raised its paid up capital from Taka 100,000,000 to Taka 350,000,000 on 11
October 2010 in terms of Securities and Exchange Commission Consent letter no. SEC/CI/ CPLC -
250/2010-301 dated September 26, 2010.
Particulars No. Of
Shares
Face Value (Taka) Amount in Taka
After IPO
To be issued as IPO 30,000,000 10.00 300,000,000.00
Total no of shares (post IPO) 65,000,000
Paid up capital (post IPO) 650,000,000.00
4.7 PERFORMANCE AT A GLANCE
Particulars 30.06.07 30.06.08 30.06.09 30.06.10 30.06.11
Total Assets 71,845,372 76,214,014 196,077,172 531,420,577 983,102,632
Growth 6.08% 157.27% 171.03% 85.00%
Non-Current Asset 99,306,090 99,463,242 214,648,634 476,539,255 933,576,350
Growth 0.16% 115.81% 122.01% 95.91%
Current Asset 22,225,477 37,441,690 61,201,209 272,751,764 349,702,346
Growth 68.46% 63.46% 345.66% 28.21%
Paid Up Capital 37,500,000 37,500,000 37,500,000 100,000,000 350,000,000
Growth 0.00% 0.00% 166.67% 250.00%
Owners Equity 36,810,169 47,305,755 169,852,152 482,639,743 893,616,252
Growth 28.51% 259.05% 184.15% 85.15%
Reserve (distributable as dividend) (689,831) 9,805,755 22,979,234 182,824,729 318,269,063
Growth -1521.47% 134.34% 695.61% 74.08%
Revaluation Reserve (if any) - - 109,372,918 107,064,709 225,346,706
Growth 0.00% 0.00% -2.11% 110.48%
Non-Current Liability 35,035,203 28,908,269 26,225,020 48,780,834 84,765,546
Growth -17.49% -9.28% 86.01% 73.77%
Current Liability 49,686,195 30,690,908 79,772,671 217,870,441 300,176,064
Growth -38.23% 159.92% 173.11% 37.78%
Revenue/Sale 52,737,330 60,364,441 61,611,094 387,783,620 526,526,457
Growth 14.46% 2.07% 529.41% 35.78%
Gross Profit 10,536,918 22,792,554 26,144,574 189,299,140 280,753,272
Growth 116.31% 14.71% 624.05% 48.31%
Net Profit after Tax (689,831) 10,495,586 13,173,479 105,885,737 132,269,549
Growth -1621.47% 25.51% 703.78% 24.92%
Cash Flow at the end of the year 3,080,455 417,324 111,836 13,879,026 693,692
Growth -86.45% -73.20% 12310.16% -95.00%
Net Cash Flow 2,786,506 (2,663,131) (305,488) (6,296,862) (13,185,335)
Growth -195.57% -88.53% 1961.25% 109.40%
Cash Flow from Operating Activity (6,462,570) (1,487,732) 2,573,906 36,777,718 130,867,033
Growth -76.98% -273.01% 1328.87% 255.83%
Cash Flow from Investment Activity (38,773,043) (3,519,484) (9,712,876) (145,103,378) (340,705,422)
Growth -90.92% 175.97% 1393.93% 134.80%
Cash Flow from Financing Activity 48,022,119 2,344,085 6,833,482 102,028,798 196,653,054
Growth -95.12% 191.52% 1393.07% 92.74%
EPS (0.15) 2.10 2.63 13.04 4.72
Growth -1500.00% 25.24% 395.82% -63.80%
4.8 FAIR PRICE DETERMINATION BY THE COMPANY
GOLDEN HARVEST AGRO-INDUSTRIES LTD. is a leading processed food company of Bangladesh.
The Company is enjoying a high growth in revenue, net profit and net assets in the past over 5
years. Thus, Net Asset Value (NAV) and Earning-Based Value (EBV) may be used in determining
the IPO price of the shares of the Company. Net Asset Value (NAV) gives asset-backing to the
shares of the Company. Earnings Per Share (EPS) indicates profitability aga inst shares of the
Company. Earnings-based Value and Book Value-based Value of similar stocks have been taken
to estimate a theoretical fair price, considering market demand for the shares of the Company.
The weighted average price derived from the four valuation methods, giving equal weight, is
the IPO price for the shares of GOLDEN HARVEST AGRO-INDUSTRIES LTD. to be issued through
the IPO under Fixed Price Method.
Different methods to determine the fair price per share of the Company are presented below-
Method 1 –Price based on Net Asset Value (NAV) based price per share
Particulars Amount
A. Share Capital as at 30 June 2011 350,000,000
B. Reserve and Surplus as at 30 June 2011 543,615,769
C. Total Shareholders' Equity as at 30 June 2011 (A+B) 893,615,769
D. Number of shares as of 30 June 2011 35,000,000
E. Net Asset Value (NAV) Per Share as of 30 June 2011
(D/E)
25.53
Method 2 –Price based on Earning per Share (EPS)
The Company’s operational performances and financial results reflect its growth, financial
strength, earning and prospects that help investors in making informed investment decision.
These are summarized as follows:
Financial Year Net Profit
(Taka)
Paid-up Capital
(Taka)
No. of
outstanding
shares
Earnings per
share (EPS) (Taka)
30-Jun-11 132,269,451 350,000,000 35,000,000 3.78
30-Jun-10 105,885,737 100,000,000 10,000,000 10.59
30-Jun-09 13,169,104 37,500,000 3,750,000 3.51
30-Jun-08 10,502,894 37,500,000 3,750,000 2.80
30-Jun-07 -602,331 37,500,000 3,750,000 -0.16
Weighted Average 261,224,855 562,500,000 56,250,000 4.64
The weighted average EPS for the last 5 (five) years stands at Tk. 4.64. If we consider the share
price on the basis of price/earnings multiple of 15, the earning-based value of shares of the
Company at a weighted average EPS of 4.64 stands at Tk. 69.60.
Method 3 - Price Based On P/E Ratio of Similar Stocks
Sl. Company Face Value
(Taka)
EPS
(Taka)
Market Price
(19-10-2010)
P/E Ratio
1 Apex Foods Limited 100 18.93 787.00 41.57
2 Fine Foods Limited 10 2.49 58.80 23.61
3 Rahima Foods Limited 100 8.22 405.75 49.36
4 Fu-Wang Foods
Limited
10 1.11 50.00 45.05
Simple Average 39.90
Determining the Fair Value of share of GHAIL
Average EPS 4.64
Representative P/E Multiple (X) 39.90
Fair Value (Taka) 185.14
Method 4 - Price based on P/BV Ratio of Similar Stocks
Sl.
No.
Company Face
Value
(Taka)
NAV
(Taka)
Market Price
(19-10-2011)
P/BV Ratio
1 Apex Foods Limited 100 710.56 787.00 1.11
2 Fine Foods Limited 10 11.41 58.80 5.15
3 Rahima Foods Limited 100 53.05 405.75 7.65
4 Fu-Wang Foods
Limited
10 11.64 50.00 4.30
Simple Average 4.55
Determining the Fair Value of share of GHAIL
NAV 25.53
Representative P/BV Multiple (X) 4.55
Fair Value (Taka) 116.16
Finding and Calculation of the fair Price of share of GHAIL
Particulars Amount
Price based on Net Asset Value (NAV) 25.53
Price based on Earning Per Share (EPS) 69.60
Price Based on P/E Ratio of Similar Stocks 185.14
Price Based on P/BV Ratio of Similar Stocks 116.16
Average 99.11
Based on the foregoing, the fair value of the share of the Company stands at Tk. 99.11 and we
conservatively fix up the price @ Tk. 60.00 per share including a premium of Tk. 50.00 per
share.
4.9 SELECTED RATIO ANALYSIS
RATIO ANALYSIS
30.06.2007 30.06.2008 30.06.2009 30.06.2010 30.06.2011
Solvency Ratio
Current Ratio 0.45 0.62 0.77 1.25 1.17
Quick Ratio 0.26 0.29 0.50 1.04 0.86
Inventory Turnover 4.46 1.87 1.66 4.21 2.71
Average Collection Period 0.00 9.48 19.69 179.25 104.68
Efficiency Ratio
Fixed Asset Turnover 0.53 0.61 0.29 0.81 0.56
Total Asset Turnover 0.43 0.44 0.22 0.52 0.41
Leverage Ratio
Debt Ratio 0.70 0.65 0.38 0.36 0.30
Debt-to-Equity 2.30 1.89 0.62 0.55 0.44
Times Interest Earned 0.84 -2.19 -3.20 -5.68 -8.45
Gross Profit Margin 19.98% 37.76% 42.43% 48.82% 53.32%
Operating Profit Margin -8.72% 22.45% 29.20% 40.96% 43.89%
Net Profit Margin -1.31% 17.40% 21.38% 27.30% 25.12%
Return on Total Assets (ROA) -0.57% 7.67% 4.77% 14.13% 10.31%
Return on Equity (ROE) -1.87% 22.19% 7.75% 21.94% 14.80%
Earnings Per Share -0.15 2.10 2.63 20.45 4.72
Growth 1470.85% 25.51% 676.15% -76.90%
Price/Earnings Ratio (Basic) -235.10 17.15 13.66 1.76 7.62
DUPONT ANALYSIS
Net Profit AT/Sales -1.31% 17.40% 21.38% 27.30% 25.12%
Sales/Total Assets 43.40% 44.09% 22.33% 51.75% 41.03%
ROA -0.57% 7.67% 4.77% 14.13% 10.31%
Net Profit AT/Total Assets -0.57% 7.67% 4.77% 14.13% 10.31%
Total Assets/Stockhldrs. Equity 330.13% 289.37% 162.41% 155.25% 143.60%
ROE -1.87% 22.19% 7.75% 21.94% 14.80%
Liquidity Ratios graph
Current ratios have experienced almost a stable level from the financial year 2007 to 2011. It
means that the company kept a stable level of assets during those years. Quick ratios also have
a small fluctuating trend in the last five years. It indicates the company uses its inventory
efficiently. Inventory turnover shows a fluctuating figure resembling company’s policy. On the
other hand, average collection period shows a declining level in comparison to the previous 4
years.
Efficiency Ratio Graph
Both the fixed asset turnover and total asset turnover fluctuated during the last from years
staring from 2007 to 2011. However, fixed asset turnover ratio remains higher than the total
asset turnover ratio during these time periods indicating the fact that fixed assets of the
company have been provided return more efficiently.
Leverage Ratio Graph
Debt to equity ratio have been declining during the five years indicating that the company’s
level of debt has been reduced in comparison to its equity i.e. the company has been using
lesser amount of debt. On the other hand, times interest earned ratio has been declining.
Profitability Ratio
0.000.100.200.300.400.500.600.700.800.90
Fixed Asset Turnover
Total Asset Turnover
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
Debt Ratio
Debt-to-Equity
Times Interest Earned
GHAIL’s gross profit margin, operating profit margin, net profit margin, return on total assets
and return on equity show almost a stable level during the five year period indicating that
stability in earning profit remains similar. On the other hand, earnings per share showed a
fluctuated level rising up to the FY 2011 and during FY 2011, it showed a declining level. Again,
there is a good prospect indicted by price/earnings ratio because it has upgraded from FY 2007
to FY 2011 to a great extent.
4.10 Revaluation of Assets
The Company made revaluation of the Company’s its Land and Land developments, Buildings
and Plant and Machinery as of 30 June 2009 and also in 30 June 2011 to reflect fair value
thereof in terms of Depreciated current cost thereof, details of which has been attached on the
appendix 1.2.
4.11 DSE observations On Information Documents Of Golden Harvest Agro Industries
Limited
Panel Observations
1. Utilization of Proceeds of Pre-IPO Share Issue: In reply to DSE query the company
submitted item wise breakdown regarding utilization of proceeds of Pre-IPO share issue
-250.00
-200.00
-150.00
-100.00
-50.00
0.00
50.00
Gross Profit Margin
Operating Profit
Margin
Net Profit Margin
Return on Total Assets
(ROA)
Return on Equity (ROE)
Earnings Per Share
Price/Earnings Ratio
(Basic)
amounting to Tk. 250.00 million raised on October 11, 2010 which was acceptable to the
panel.
2. Shareholding Status: The Company submitted relevant information/documents
regarding issuance of total 62,500,000 shares in consideration other than cash which
was acceptable to the panel.
3. Transaction with Subsidiary/Holding Company or Associate Companies: In reply to
DSE’s query regarding current account with Subsidiary/Holding Company or Associate
Companies the Company reported that such account represents payments for material
supplies and business expenditures.
CHAPTER- 5
PERFORMANCE ANALYSIS
5.1 COMPANIES come into market through IPO in 2012
There are 14 companies that entered into the market in the year 2012 under IPO process.
The overall status of the company are given below-
Sl.No. Issuer Paid up Capital
Post-IPO Paid IPO/Issue Size IPO Premium Total IPO Size
Tk. (Pre-IPO) up capital (TK.)
Tk. (@FV) (TK.) (TK.)
1 Envoy Textiles Limited
1,000,000,000 1,900,000,000 300,000,000 600,000,000 900,000,000
2 Generation Next Fashions Limited
871,650,000 1,171,650,000 300,000,000 0 300,000,000
3 Aamra Technologies Limited
203,745,120 721,473,120 215,720,000 302,008,000 517,728,000
4 Unique Hotel & Resorts Limited
2,300,000,000 4,250,000,000 260,000,000 1,690,000,000 1,950,000,000
5 Saiham Cotton Mills Limited
877,500,000 1,827,500,000 475,000,000 475,000,000 950,000,000
6 Bangladesh Submarine Cable Company Limited
875,091,700 1,960,091,700 310,000,000 775,000,000 1,085,000,000
7 GBB Power Limited
304,999,900 1,124,999,900 205,000,000 615,000,000 820,000,000
8 NCCBL Mutual Fund-1
150,000,000 650,000,000 500,000,000 0 500,000,000
9 GPH Ispat Limited
700,000,000 1,300,000,000 200,000,000 400,000,000 600,000,000
10 Padma Islami Life Insurance
180,000,000 300,000,000 120,000,000 0 120,000,000
Limited
11 GSP Finance Company (Bangladesh) Limited
276,460,800 776,460,800 200,000,000 300,000,000 500,000,000
12 First Bangladesh Fixed Income Fund
2,000,000,000 4,500,000,000 2,500,000,000 0 2,500,000,000
13 NLI First Mutual Fund
100,000,000 357,580,000 257,580,000 0 257,580,000
14 AB Bank First Mutual Fund
300,000,000 300,000,000 0 0
5.2 COMPARISON OF MARKET RETURN &SECURITIES RETURN
The return and variance analysis of the securities that are listed in the stock market in2008 are
analyzed here for getting an overall idea to overlook how those securities return are related
with the market return of all securities. In this analysis the monthly stock market index and
monthly stock price are taken from the date of IPO to December, 2012. The closing prices have
been attached on the appendix no. 1.3 along with the value of DGEN for this time period. In the
following, the return of each of the companies for the twelve month period has been provided
which have been calculated from the closing prices.
Date
AB BANK 1ST MF∆
NLI 1ST MF ∆
1ST BD FIXED I.F.∆
GSP Finance Co.∆
GPH Ispat ∆
PADMA Islami L.I.L.∆
NCCBL MF1∆
GBB POWER ∆
Saiham Cotton ∆
BD Submarine ∆
Aamra Tech∆
Unique Hotel & Resorts∆
Generation Next Fashions Limited
Envoy Textiles Limited
31.01.12
28.02.12
-0.010
31.03.12 0.000
-0.098
30.04.12 0.073 0.033
-0.011
31.05.12 0.019
-0.074 0.076 -0.059
-0.046
-0.079
30.06.12
-0.048 0.045
-0.051 -0.005
-0.072
-0.207 0.020
31.07.12 0.000
-0.087
-0.021 -0.137 0.010
-0.338 0.019
-0.228 -0.083 0.200
31.08.12 0.030
-0.036 0.043 0.025 0.146 0.198 0.048 0.326 0.394 0.678 0.742 0.628
30.09.12 0.068 0.235 0.042 0.014
-0.255
-0.179 0.091 0.086 0.466 0.167 0.714
-0.054
31.10.12
-0.127 0.000
-0.060 -0.083
-0.065 0.032 0.017
-0.035 -0.130 0.049 -0.165 0.117
30.11.12
-0.073
-0.080
-0.032 -0.067
-0.073
-0.078 0.000
-0.200 0.009 -0.101 -0.318
-0.081
31.12.12 0.169 0.000 0.110 0.050
-0.084 0.048
-0.025 0.012 -0.160 -0.026 -0.073 0.089 0.344 0.524
MEAN 0.009 -
0.006 0.011 -0.033 -
0.055 -
0.075 0.024 -
0.007 0.082 0.161 0.180 0.140 0.344 0.524
S.DEV. 0.079 0.099 0.059 0.064 0.111 0.168 0.037 0.203 0.276 0.277 0.508 0.286 0.000 0.000
Average Market Return=.34% [Appendix 1.3]
COMMENTS
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
DG
EN
AB
Ba
nk
Firs
t…
NLI
Fir
st M
utu
al…
Firs
t B
angl
ade
sh…
GS
P F
inan
ce…
GP
H Is
pa
t Li
mit
ed
Pad
ma
Isla
mi L
ife…
NC
CB
L M
utu
al…
GB
B P
ow
er
Lim
ited
Saih
am C
ott
on
…
Ba
ngl
ade
sh…
Aam
ra…
Un
iqu
e H
ote
l &…
Ge
ne
rati
on
Ne
xt…
En
voy
Text
iles…
Market Return vs Securities return
Series1
Series2
Linear (Series2)
In the above analysis, I have presented the monthly Dhaka Stock Exchange General Index
(DGEN) from January 2012 to December 2012 and also the price of the company that have
floated IPO in this year. After that I have calculated the average return and risk of those
securities. Here I found that, the average return of the market is positive (.34%)and the
returngenerated from all the securities is positive except NLI First MF, GSP Finance Co. Ltd.,
GPH Ispat, Padma Islami Life Insurance Ltd., GBB Power Co. Ltd.
Again, the return from most of the companies is also higher than the overall market. This trend
clearly states that, the overall return of the newly floated securities performs well though the
market tends to decline. The main reason is that, investors seem the newly listed securities to
be less risky than the prevailing securities and as a result the volume of trade is also higher in
those securities.
5.3 COMPARISON OF MARKET VARIANCE &SECURITIES VARIANCE
Another issue is the market risk which can be measured by the standard deviation orvariance
analysis. Standard deviation or Variance of returns is the measure of risk where standard
deviation is the square root of the variance.
AB BANK 1ST MF
NLI 1ST MF
1ST BD FIXED I.F.
GSP Finance Co.
GPH Ispat
PADMA Islami L.I.L.
NCCBL MF1
GBB POWER
Saihal Cotton
BD Submarine
Aamra Tech
Unique Hotel & Resorts
Generation Next Fashions Limited
Envoy Textiles Ltd.
DGEN
S.DEV.
7.91%
9.89%
5.94%
6.39%
11.10%
16.83%
3.67%
20.33%
27.59%
27.75%
50.83%
28.60%
0.00%
0.00%
6.72%
COMMENTS
In that case, I have found that the standard deviation of all the newly listed securities ishigher than the market risk except some few companies. This is because the return is not obvious and
great uncertainty exists about the share performance. But it is obvious that, higher return cannot be gained without taking higher risk. Thus, the greater volatility cannot worsen the performance of newly listed securities in a little manner.
5.4 CORRELATION BETWEEN DGEN&PRICES OF IPO FLOATED SECURITIES
The tendency of two variables to move together is called correlation, and the
correlationcoefficient measures this tendency. The range of correlation coefficient can be
between -1 to +1. In the case where the correlation coefficient is zero, the risk of the portfolio
is less than the risk of either of the individual securities. The correlation between DSE
General Index and all the securities floated through IPO in 2012 are presented below-
DGEN
AB BANK 1ST MF
NLI 1ST MF
1ST BD FIXED I.F.
GSP Finance Co.
GPH Ispat
PADMA Islami L.I.L.
NCCBL MF1
GBB POWER
Saihal Cotton
BD Submarine
Aamra Tech
Unique Hotel & Resorts
DGEN 1.00 0.19 0.36 0.37 0.41 0.46 0.42 0.49 0.56 0.54 0.60 -0.09 0.52
The correlation of all the IPO floated securities among themselves in 2008 are presented below-
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%D
GEN
AB
BA
NK
1ST
MF
NLI
1ST
MF
1ST
BD
FIX
ED
I.F.
GS
P F
inan
ce C
o.
GP
H Is
pa
t
PA
DM
A Is
lam
i L.I
.L.
NC
CB
L M
F1
GB
B P
OW
ER
Saih
al C
ott
on
BD
Su
bm
ari
ne
Aam
ra T
ech
Un
iqu
e H
ote
l &…
Ge
ne
rati
on
Ne
xt…
En
voy
Text
iles
Ltd
.
Market Var. vs Securities Var.
S.DEV.
Linear (S.DEV.)
DGEN
AB BANK 1ST MF
NLI 1ST MF
1ST BD FIXED I.F.
GSP Finance Co.
GPH Ispat
PADMA Islami L.I.L.
NCCBL MF1
GBB POWER
SaihamCotton
BD Submarine
Aamra Tech
Unique Hotel & Resorts
DGEN 1.00
AB BANK 1ST MF 0.19 1.00
NLI 1ST MF 0.31 0.27 1.00
1ST BD FIXED I.F. 0.37 0.27 0.08 1.00
GSP Finance Co. 0.41 0.25 0.10 0.59 1.00
GPH Ispat 0.45 0.35 0.24 0.73 -0.13 1.00
PADMA Islami L.I.L. 0.42 0.38 0.39 0.87 -0.13 0.43 1.00
NCCBL MF1 0.49 0.38 0.31 0.94 -0.12 0.43 -0.14 1.00
GBB POWER 0.56 0.41 0.37 0.94 0.30 0.44 -0.16 0.47 1.00
Saihal Cotton 0.54 0.45 0.47 0.94 0.21 0.92 -0.30 0.51 0.68 1.00
BD Submarine 0.60 0.58 0.58 0.91 0.58 0.88 -0.44 0.54 0.65 0.64 1.00
Aamra Tech
-0.09 -0.02 0.04 0.79 0.57 0.77 0.28 0.49 0.45 0.69 0.81 1.00
Unique Hotel & Resorts 0.52 0.03 0.79 0.31 0.49 0.81 0.27 0.52 0.56 0.64 0.90 0.52 1.00
The correlation structure between DSE General Index and all other IPO floated securities in
2012 are presented graphically below-
COMMENTS
In the above chart correlation of the price of the newly floated securities and market indexis
shown. From this chart it can be said that most of the companies except Aamra Technologies
Ltd. have high positive correlation with market. Thus thecorrelation between DGEN and Aamra
Tech indicates that, Aamra Tech’s performance cannot be worsening when the market goes
down and its base is fundamentally strong.On the other hand, positive correlation indicates
that securities return is positively correlated with market return and if market index goes up
then securities price also goes up and vice versa.
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Correlation between DGEN & IPO floated securities
CHAPTER- 6
PROBLEMS, RECOMMENDATIONS & CONCLUSIONS
Development of the capital market is absolutely essential to Bangladesh's future. Major
industry investments create, directly and indirectly, the most jobs and to finance these
investments requires equity participation. The development of the industrial sector on the basis
of debt is a risky approach and perhaps simply does not work. Unfortunately as we have
reviewed on several occasions, the development of the capital market in Bangladesh has not
been successful. After its revival during the first BNP Government a reasonable basis was built
for the future of the market. The explosive rise of the market and its subsequent collapse led to
much anguish and ultimately imposition of many regulations that have strangled the
development of the market and removed it as a major player in financing the industrial growth
of the economy. There are three measures of success of a capital market-
The existence of a market for trading shares between members of the public thatis
transparent with prices established by market forces.
Accounts for companies listed on the exchanges should accurately reflect thecondition
of the companies.
A steady flow of IPOs bringing new companies into the market.
The first of these three has been reasonably achieved. The second has not been and the
unwillingness of the authorities to take a firm hand on this is a serious, continuing problem. The
third objective has not been reached. Apart from the financial institutions there have been few
IPOs in the past few years. We have then a capital market with fewnew entrants, uncertain
accounts leading to investors skeptical about the real value of shares, while we have a market
mechanism that works reasonably well.
6.1 PROBLEMS OF BANGLADESH CAPITAL MARKET
The major problems of Bangladesh Capital Market are described below-
LACK OF LIQUIDITY
Liquidity is the ability to absorb large amount of trades without causing excessive price
movements. Addressing the issue regarding our capital market, 'liquidity' would top the list of
challenges that we have right now.
LACK OF CONFIDENCE TO NEW INVESTORS
The shocking fall down of share market in 1996 and in 2010 has crushed the confidence of the
new investors. Thus, the challenge ahead of Bangladesh Stock market is to revamp the share
market by restoring confidence among investors.
UNUSUAL PRICE HIKE
Stock market is performing better in the present days. But the rise of price is not consistent
with the stock market and company fundamentals.
COMPLEXITY OF TAX STRUCTURE
The tax structure of our country is complex. Sometimes companies hide their real income
because of sickness in their sector. As result the potential investors cannot take appropriate
investment decision because of hidden income.
INABILITY TO REFLECT THE COMPANY FUNDAMENTALS ADEQUATELY
All the stakeholders, including the companies concerned, the regulator, the bourses and all-
important investors have never taken the issue of company fundamentals s eriously.
This has led to uninformed investment by the investors in companies having poor or not so-
impressive track record.
INFORMATION GAP
The companies concerned do need to present before their shareholders the true financial
strength and future prospects through proper auditing. But this regulation is not followed.
Information is handled by a small group. This information gap in the market creates scopes for
the investors for being misguided.
SCARCITY OF FOREIGN INVESTMENT
The flow of foreign investment in the stock market of Bangladesh is not satisfactory. But foreign
investment is urgent for the development of capital market.
LACK OF QUALITY SECURITIES
Quality securities are must for active stock market. But many of the listed securities in
Bangladesh stock market are in bad position. Even in some cases there is no operation of the
companies but trading is going on.
INSIDER TRADING
The danger of insider trading in manipulating market prices is another main problem. Insider
trading & related price manipulation creates huge distortions in the market place, transferring
value to insiders at the expense of general investors.
MARKET VOLATILITY
Both inadequate reflection of the fundamentals of listed issues and insider trading have the
potential to give rise to market volatility.
SMALL CONTRIBUTION OF DEBT MARKET
As the dependence on bank loan is substantial, the debt market, which means corporate debt
market, has played a minor role in investment financing in the country even in recent years.
LACK OF LEGISLATION REGARDING THE CAPITAL MARKET
There is lacking of legislation regarding the financial crimes. A total of 186 cases of SEC
including the cases against suspected culprit of the crash of 1996 and in 2010 are still pending
in high court, Judge Court & other courts.
GAME WITH SHARES OF WEEKLY PERFORMED COMPANIES
Weekly performed companies are traded under Z category. Z category shares transaction in
percentage of our total turnover may not be that high. But the damage caused by it goes much
deeper down the spine of our capital market system. It has produced such ridicule in our capital
market that sounds as it were: Invest in bad shares and be rewarded. Invest in good shares and
be punished. This hints at decaying of intrinsic valuein our capital market system.
GAME OF PRICE FIXING
Our regulation allows any investor to hold unto 10% shares of any listed company bothhigh and
low capital based. So a limited number of investors can thus join together to make an inner
circle of their own to buy the vastly major chunk of free-float shares of any of Z category
companies with their limited buying power added together. And then the fabulous game of
price fixing bonanza they embark on within their inner circle thereby raising prices of these low
capital based shares to any height they deem fit with complete disregard to their
performance/fundamentals.
However, depth of DSE is the main reason that failed to attract foreign firms including the
Telecommunication Companies. Surprisingly, even Government did not ask them to get listed.
However, Grameen Phone has come forward to get them listed on the Stock Exchange. But the
procedure is going on for a long time and yet to get the final decision.
6.2 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.
6.3 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 thestock market.
The depth, breadth & liquidity of our capital market should be increase so thatmore
firms become willing to enter into the market through IPO.
The whole procedure of IPO process should be arranged quickly enough bywhich new
companies could be inspired to raise necessary fund in a timelymanner.
IPO awareness program should be arranged after certain interval by the
DSEmanagement to send the message of listing advantages to the entrepreneurs.
The risk of losing control or flexibility can be minimized by limiting the numberof shares
sold to the public, seeking to ensure a broad distribution of shares to thepublic, creating
different ranked classes of stock with differential voting rights,entering into voting
agreements among pre-IPO shareholders, adoptingsupermajority 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 allshares
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 discrepancyin the
information provided and thereby prohibit the fundamentally weakcompany into listed
in the stock exchange.
To make the market more efficient, weak companies should be de-listed by thelisting
authority.
Bring the State Owned Enterprises, large local companies and
telecommunicationcompanies to the capital market through enforcement of the
recently considerablebook building method.
Increased disclosure on the part of the company may reduce its cost of capital.The more
a firm apparent in it’s reporting in financial statements & providesexplanations of its
operations, the more the possibility that it will get fund atlower cost. By reducing its
cost of capital, the firm can raise more capital whichcan use for the expans ion of the
firm.
The process of selling shares initially to a corporation should be prohibited bymaking
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 someproblems or
weaknesses. Basically, the analysis is a prospectus based analysis.The risk factors
identified and the data provided in the prospectus are consideredto be enough for
analysis purpose. The Exchange should spread its focusing areafrom the prospectus to
the analysis based on the external factors which might notbe present in the Prospectus.
It is a matter of hope that Query Response methodhas been introduced in the analysis
process recently. However, proper SWOTanalysis and a little focus on the Forecasting
should be ensured by the Exchangewhile analyzing the Draft Prospectus.
6.4 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 lis ting 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.
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.
6.5REFERENCES
www.dsebd.org (the official website for Dhaka Stock Exchange Ltd.)
www.secbd.org (the official website for Securities & Exchange Commission)
DSE Monthly Review, December 2012
Dhaka Stock Exchange Ltd.- Annual Report, 2011
Prospectus, Golden Harvest Agro Industries Ltd.
The Financial Express: Different articles published in 2012
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.
Appendices
1.1Revaluation of fixed assets of Golden Harvest Agro Industries Limited in 2011
Particulars of the
assets
Name of
the
Valuer
Qualificatio
n of the
Valuer
Date of
Revaluati
on
The
carrying
amount of
Assets
Value of
Assets
after
revaluation
Revaluatio
n Surplus
1
.
Land and Land
development
ATA
KHAN &
CO.
Chartered
Accountan
ts
30 June
2011
39,600,000 59,400,000 19,800,000
2
.
Buildings and
other
constructions
173,337,972 213,508,92
0 40,170,948
3 Plant and 51,232,043 72,509,790 21,277,747
. Machinery
Total 264,170,015 345,418,71
0 81,248,695
1.3 Closing Price of the 14 companies having IPO in 2012
Date
AB BANK 1ST MF
NLI 1ST MF
1ST BD FIXED I.F.
GSP Finance Co.
GPH Ispat
PADMA Islami L.I.L.
NCCBL MF1
GBB POWER
Saihal Cotton
BD Submarine
Aamra Tech
Unique Hotel & Resorts
Generation Next Fashions Limited
Envoy Textiles Ltd.
31.01.12 9.7
28.02.12 9.6 10.2
31.03.12 9.6 9.2 9.3
30.04.12 10.3 9.5 9.2 44.3 82.7 138.2
31.05.12 10.5 8.8 9.9 41.7 78.9 127.3 10.1
30.06.12 10 9.2 9.4 41.5 73.2 100.9 10.3 38.6 20.5 61.6
31.07.12 10 8.4 9.2 35.8 73.9 66.8 10.5 29.8 18.8 73.9 23.3 73.3
31.08.12 10.3 8.1 9.6 36.7 84.7 80 11 39.5 26.2 124 40.6 119.3
30.09.12 11 10 10 37.2 63.1 65.7 12 42.9 38.4 144.7 69.6 112.9
31.10.12 9.6 10 9.4 34.1 59 67.8 12.2 41.4 33.4 151.8 58.1 126.1
30.11.12 8.9 9.2 9.1 31.8 54.7 62.5 12.2 33.1 33.7 136.5 39.6 115.9
31.12.12 10.4 9.2 10.
1 33.4 50.1 65.5 11.9 33.5 28.3 132.9 36.7 126.2 34.4 52.4
Date 31.01.12
28.02.12
31.03.12
30.04.12
31.05.12
30.06.12
31.07.12
31.08.12
30.09.12
31.10.12
30.11.12
31.12.12
DGEN
4153.96
4695.41
4990.32
5098.9
4734.33
4572.88
4159.17
4446.9
4544.41
4493.9
4210.58
4219.31