Market for Capital in Bangladesh

Changes in the capital markets and interest rates

The interest rates will never be the same because of the inverse relationship; we have a bigger
capital risk premium, which means that even in an equilibrium, capital market returns will be
higher. Movements in interest rates serve as early warning systems for the stock market. Market
returns begin to rise as deposit rates fall.

One by the basic equities and one by trash shares typically lead to two rallies in BD. Refer to
the tools for predicting interest rates. Despite being a poor predictor of interest rates, the money
supply is one of the indicators because it is growing steadily. Deposit growth and credit
expansion are reliable indicators of interest rate. Interest rates often rise when credit growth
exceeds deposit growth and vice versa. Interest rates should decline as the growth disparity
widens. Credit growth minus deposit growth is the growth disparity.

IPOs and rights

Only the primary market is where the company gets its funding. The secondary market provides
liquidity for us. The process of offering securing in an effort to raise money is known as issue
management.

Companies go public for a variety of reasons, including financial (funding source, maximising
value when selling the company off, exit strategy, privatisation), non-financial (external growth
like M&A, reputation or positive image, management compensation like stock options and
similar performance-based compensation), and financial reasons.

Case Study: Rupali Bank issued shares in the market to become a private corporation.
Governance and the government's unwillingness to increase capital are two factors.

The burden of disclosure requirements that follow (new regulations must be followed like FS
must be issued and confidentiality must be publicly issued), making information available to the
public, compliance costs, and other direct and indirect costs are all drawbacks of becoming
public.

Look into "which security", "to whom", "where", and "which market" while taking the offering
structure into account.

Initial public offerings, repeat public offerings (issued after an IPO, which dilute investors'
shareholdings), private placement, privileged subscriptions (rights offerings, similar to RPO but
does not dilute holding), bonus shares (stock dividends, more of an accounting treatment, but
with legal repercussions such as I cannot do whatever I want with retained earnings but can do
so with capital), employee stock options plan (ESOP), and direct list are some methods of
issuing securities.
Mechanism for Setting Prices

When a business goes public, there are two ways to decide the price. There is nothing to set the
price if I issue shares at face value. However, there is a problem with price setting from the
standpoint of an investor if I issue the price with a premium. The term "fixed price method"
refers to when I provide a price at face value. However, I'll have to use the book building
strategy if I issue the shares at a premium. Refer to Public Issue Rules 2015, Section 3. The
eligible investors' bids determine the price when using the book building process.

IPO Procedure

Visit an investment bank -> Investigation performed by the investment bank (due diligence) ->
Documents submitted to the Security Exchange Commission (SEC) -> Approval received ->
Red hearing prospectus issued for eligible investors (EIs) (includes everything like any other
prospectus apart from the price) -> Arrangement of road show to present the red hearing
prospectus to EIs -> Start of price discovery period in ESS Bangladesh for 72 hours

The procedure will begin with the release of the prospectus if the share is issued using the fixed
price approach.

Refer to the slides for the three steps in the procedure.

Underwriting

There are two forms of underwriting: best effort (will try to sell all shares, but is not required to
buy leftover shares) and firm commitment (the institution will acquire all shares and there is a
guarantee that all my shares will be sold).

Conditions for Submitting an IPO Application (Section 3 of the 2015 Public Issue Rules)

has a minimum of Tk. 15 crore in current paid-up capital. A company may issue funding from
the SME Board if its capital is less than Tk. 15 crore. Offer a minimum of Tk. 15 crore at par
value or at least 10% of the paid up capital, whichever is higher.

Capital After IPO = Amount Raise Through IPO (10% or 15 crore) + Capital Prior To IPO

The IPO distribution process

The General Public (EIs) are Eligible Investors

Investment funds Various EIs Others NRB

10% Fixed Price 40% 10% 40%

Book Creation 10% 50% 10% 30%

Book Building Method in Math

First, figure out how much was distributed to qualified investors. Other bidders who placed their
bids below the cut-off price will have the opportunity to raise their prices. Pro-rata shares will be
distributed to investors who bid at or above the cutoff price. According to the most recent laws,
investors can currently bid no more than +/-20% of the value obtained through the BSEC
valuation method, and shares are issued on a first-come, first-served basis.

The price of issuing securities

Spread or underwriting discount plus other direct charges plus indirect expenses equals
floatation costs.

Unusual returns plus underpricing plus green shoe alternatives equal additional costs.

The authorization of an over- or under-allotment of shares is known as green shoe options.