Using IPO as a tool to cheat investors

Using IPO as a tool to cheat investors

The Bangladesh Securities and Exchange Commission (BSEC) has reportedly moved to take action against some merchant banks for their role in getting some non-performing companies listed on the country's bourses.

The relevant merchant banks have acted as issue managers and provided due diligence certificates in favour of companies wanting to float initial public offerings (IPOs). The merchant banks certified that information furnished by the companies was true, fair and adequate. Now that the performance of the companies in question is not in conformity with what has been stated in their prospectuses, the BSEC is out to seek an explanation from the relevant merchant banks.

The move on the part of the securities regulator though well-directed is bound to raise a few questions. A merchant bank that acts as an issue manager is only one player in the entire process of approving the IPOs. There are others also. The BSEC itself plays a very important role. Then, the role of the audit firms that certify the financials of the firms seeking to go public cannot be sidetracked.

That some companies perform poorly soon after their listing is nothing new. It had happened in the past. A good number of companies melted into thin air within months after mopping up investors' money using the IPO as a tool. Their financials submitted along with the application for listing had painted all the rosy pictures, and none cared to go through those in detail.

 In the months before the crash of the market in 1996, taking advantage of the investors' euphoria to gobble up what came their way, a good number of companies got listed, some with hefty premium value. Following the collapse of the market, it was found that most documents submitted by these companies were either fake or forged. Some listed manufacturing companies even did not have any physical existence. Mark Shoes and Wonderland Toys were among those infamous companies.

The market crash of 1996 was an eye-opener for both investors and others, including the securities regulator. Many had expected that all concerned would learn from their mistakes. Unfortunately, that did not happen. The 2010 bubble burst is a pointer to that fact. The IPO approval mechanism also did not improve much. Before approving any company seeking to float IPO, it is important to examine in detail its financials by experts at the BSEC. It has been observed that the profit earnings by companies seeking to go public abruptly soar in the years preceding the submission of their IPO applications. But soon after listing, profits go dry. Audit firms concerned do have a role in preparing the doctored financials. It is not known whether the BSEC has referred this issue to the Institute of Chartered Accountants, Bangladesh (ICAB) or the Financial Reporting Council (FRC).

 More importantly, there should be physical verification to see that the firms/ industries wanting to go public exist physically. This job should be done, first, by the merchant banks working as issue managers. The BSEC, on its part, should also make the necessary checks.

Holding the merchant banks alone responsible for the folly of non-performing newly-listed companies will not do. The BSEC and the relevant other regulatory bodies will also have to shoulder responsibilities. Most investors here bother least about scrutinising the IPO details, as they are more concerned about quick gains. In such a situation, the regulator/s will have to walk the extra mile  to protect the investors from being cheated by dodgy entrepreneurs.


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