A dismal primary market could be viewed as a major reason behind the prolonged weakness of the secondary market, said investment banker Rubayet-E-Ferdous, CEO of Shanta Equity Ltd.

The primary market, through initial public offerings (IPOs), enables companies to raise capital and allows investors to participate in the growth potential of businesses.

"Scarcity of good scrips has become increasingly prominent as a problem for stock investors, especially large institutional funds, in Bangladesh," he said in a recent interview with The Business Standard. "Poor supply of good scrips discourages serious investors, ultimately deterring demand."

For instance, he noted that in the last nine years since 2015, only 75 firms, including a handful of sizable ones like Walton, Robi, and Acme, have collectively raised a meagre total equity capital of Tk5,700 crore. In contrast, BRAC Bank alone disbursed more than Tk10,000 crore in loans in 2023, while Eastern Bank disbursed over Tk4,300 crore in the same year.

According to the investment banker with over two decades of experience, annual capital raised through IPOs in Bangladesh is even less than what some individual bank branches disburse as loans. This heavy reliance on bank loans for business expansion has become an increasing concern.

Despite Bangladesh's economy being significantly smaller than India's, Indian companies (excluding SMEs) raised around 100 times more equity capital from their bourses. This listing activity attracted investors from both domestic and international markets, and the Indian stock market size rose to 130% of its GDP. In contrast, the total value of all listed companies on the Dhaka Stock Exchange (DSE) is still less than 10% of Bangladesh's GDP, highlighting the severe underdevelopment of the country's stock market.

The lack of enough good scrips has deterred large, especially institutional investors in Bangladesh, whereas the Indian market has a robust mutual fund industry that grew five times in a decade to $770 billion, engaging four crore investors. In Bangladesh, the struggling mutual fund industry affects market behaviour due to a severe lack of contrarian investors who help maintain market stability while generating wealth for investors over time.

Problems with the primary market in Bangladesh

"Entrepreneurs' appetite for IPO capital has been lacking due to stringent rules regarding the pricing of primary shares and the usage of public money," said Rubayet-E-Ferdous, who has led teams managing several large-cap IPOs in the past decade.

"The pricing method for primary shares is too inclined towards past performance and asset base, which does not adequately value asset-light companies with high growth potential."

He also suggested that the structure for distributing primary shares among investor classes should be revised, with institutional investors – who are better at taking risks – receiving fewer shares compared to retail investors.

"On the other hand, retail investors often oversubscribe to IPOs, regardless of the firm's quality, mainly focusing on short-term capital gains post-debut."

Ferdous believes that entrepreneurs or firms should not be deprived of their expected share prices, only for the shares to later surge several times in the secondary market.

"Just as profitable state-owned companies, many successful multinational companies in Bangladesh are hesitant to go public, despite potential tax benefits. The government should prioritise efforts to encourage their listing on the stock market. If not through IPOs, direct listing of MNCs could significantly strengthen the stock market."

"The government, despite sacrificing some revenue due to tax cuts for listed firms, should offer incentives for listing, as tax revenue from firms' share trading could offset these costs," Ferdous emphasised, noting that listed companies generally exhibit greater transparency in their accounting practices.

"We can initiate the journey towards a robust capital market by doubling the number of IPOs annually, both in terms of IPO numbers and the capital raised. At least Tk2,500 crore worth of IPOs should be conducted each year to attract new investors and revitalise existing ones," he concluded.

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