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Staking luck on Book Building stocks: investors count 60% loss

Update: 2010-07-13 22:29:18
Staking luck on Book Building stocks: investors count 60% loss

DHAKA: The common investors who staked their luck on stocks that are introduced and operated under book-building system on the stock market became unlucky, as they have to count out most of their capital.
When the companies are making profit, common investors of three companies under the system are making the opposite. Many of them incurred a loss of around 60 percent after purchasing shares of these three companies -- Ocean Container Ltd (OCL), Khulna Power Company Ltd (KPCL) and RAK Ceramics (Bangladesh)--while the companies made the most out of the stock-market brouhaha.

Dhaka Stock Exchange (DSE) and the Securities and Exchange Commission (SEC) had propagated the virtues of the book-building system saying that it would benefit both the companies and the investors in a win-win trade. But the reality was different.

The profits per share of the enlisted OCL and KPCL were Tk 2.40 and Tk 2.79 respectively before their arrival under the system. When they were brought under the book-building system, the face value for both was Tk 10 while the share prices were fixed at Tk 145 and Tk 194 respectively.   

As a result, the PE (price earning) ratio of the companies became 60 and 69, 2.5 times higher than the average price on the market.
The OCL started trading on March 4 and its price fluctuated from Tk 300 to Tk 400 during the first few days. On July 13, its price plummeted to Tk 145.
On the other hand, the KPCL started trading on April 18. During the first few days, its price swung between Tk 260 and Tk 350. On July 13, the share price showed Tk 138. During the last four months, the price of each share of OCL and KPCL dropped 65% and 60% respectively.

RAK ceramics, another company that entered the capital market on June 14 under the book-building system, saw its price range between Tk 200 and Tk 235 while on July 12 it came down crashing to Tk 170. In less than a month, the price fell by 25%.
Since the companies did not come through IPO, common investors could purchase but were not allowed to sell in the first three days. After the lock-in time, the investors had to sell out their shares at a loss.

“Even after enlistment of the companies with the share market, their prices continued to fall,” said a source close to the bourse operators.

Book-building system is a widely accepted share-trading method in many other stock markets of the world. However, it has become controversial here at the initial stage.

Why it happens?

Allegations are rife that the participating institutions fix the initial price and call for higher rate, which is much higher compared to the fundamentals of a company.
According to SEC rules for book-building system, enlistment is mandatory for participation of at least five companies while fixing indicative price. The five participants will fix indicative price at the initial stage. There is no clear direction in the law as to who will select those companies.

As a result, the newly enlisted companies used to select companies according to their sweet will who manipulate the whole process in their favour by overpricing the share value.

“The companies in such a cartel that fixes price have no accountability, and they may jack up the price,” says one who knows the tricks of the trade.

Such anomalies gave rise to several controversies that compelled SEC to bring certain amendments. In the meantime, the three companies had made their fortune from the stock market, throwing the common investors into miseries.
Talking to, SEC member Md. Mansur Alam said that there were certain problems initially for which indicative prices of some companies were not logical.

“But, recently, certain amendments have been made for ensuring transparency,” he said.

On the other hand, president of Chittagong Stock Exchange Fakhruddin Ali Ahmed told that though book-building system is good, but its initial application in Bangladesh “created confusion”.

The amendments would help remove the controversy, he added.  

BDST 1930 HRS, JULY 14, 2010.

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