15 April 2007
CSE Seminar on "Capital Market & Book Building Method"
Chittagong Stock Exchange arranged
a seminar on "Capital Market & Book Building Method" for its members based
in Chittagong today in the CSE Conference Hall at 3:30 pm. Ms. Silmat Chisti,
Resident Vice President, Citi Bank N.A., delivered a speech on "Capital Market
& Book Building Method" along with slide presentation. She explained the
Book Building Method and its impact on the capital market in detail.
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Mr. MKM Mohiuddin, CSE President, said in his welcome speech, the primary market
plays an important role in the securities market by forming a link between the
savings and investments. The capital market is the medium through which investment
is allocated among alternative uses in the market economy. Considering the increased
importance of the securities market, the question of efficiency in case of IPO
processes has been the subject of considerable research & importance, especially
on the issue of IPO pricing. It is necessary to address this issue because this
efficiency/ inefficiency has an impact on the economy, the company that floats
an IPO, as well as on the prospective investors. On the macro level, if the
primary market is efficient i.e. going public is inexpensive and easy, more
companies will approach the primary markets, the availability of equity finance
will increase and the costs associated with it will be lowered. An apparent
anomaly, namely under pricing, exists in the case of IPO process, affecting
the issuer and the investor respectively. Underpricing occurs when the shares
of a company that goes public, are offered to investors at a price much below
the price at which they subsequently trade on the stock market. On the other
hand, aggressive pricing or over pricing, may in the short term appear to benefit
the company; however, subsequent underperformance of the scrip tends to depress
market sentiments and leads to long-term disillusionment on the part of investors,
on account of low/ negative returns on their IPO investment, thus making it
difficult for companies to raise funds from the primary market. Hence, pricing
of an IPO needs to achieve the fine balance between the needs of the company
and the investor. In most of the countries, public issue of common shares is
generally carried out in two ways:
- Fixed price method, and
- Book-building method.
Defining the Fixed price method Mr. Mohiuddin added, fixed pricing do not provide
the comfort to the big companies in regard to actual price discovery of their
particular issue and they feel shy to go public for inadequate pricing of their
securities. This feeling lead many companies looking at other avenues for raising
funds instead of equity market. Here comes the need of more scientific method
for IPO pricing. Now, Book-building is more scientific process of price discovery
used in public offers. The issuer in association with the issue manager sets
either a floor price or a price-band, with a lower limit (‘the floor’)
and an upper limit (‘the ceiling’) within which the investors are
allowed to bid for shares. The final price, however, is determined based on
the demands received from the investors. The investors’ demand at a specified
price band, is recorded in an electronic order book and a book is built. Thus
the term 'book-building' emerges.
CSE President said, A team comprising representatives from CSE, DSE & SEC
recently visited the Bombay Stock Exchange and National Stock Exchange of India
to study the Book Building system as practiced in India. We have already prepared
a draft guideline for Book-building process. The consultative committee of the
Securities and Exchange Commission (SEC) is now examining the nitty-gritty of
the draft guideline in floating IPOs through Book-building process. When implemented,
we are confident that, the business enterprises with strong fundamentals would
be encouraged to step into the country’s stock markets and thus a vibrant
capital market with listing of quality scrips could be established.
Mamun Rashid, Managing Director & CEO of Citi Bank N.A., emphasized on
the importance of Book Building in his speech. He announced that Citi Bank N.A.
in collaboration with CSE and DSE, would arrange an international conference
for the local and foreign investors in Dhaka in the next month.
Vote of Thanks was given by Mr. Nasiruddin Ahmed Chowdhury, First Vice President
of CSE.
AKM Shahroze Alam
Deputy Manager
Corporate Development
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