IPO Approval Procedure

IPO Approval Procedure

The Securities and Exchange Commission of Bangladesh has been working tirelessly since its inception to fulfill the responsibilities and functions mentioned in the preamble and Section 8(1) of the Securities and Exchange Commission Act, 1993, namely ensuring the proper issuance of securities, protecting the interests of investors, and developing and regulating the capital and securities markets. Furthermore, under Section 8(2)(e) of the said Act, the Commission formulates rules and conducts judicial activities to prevent fraudulent and unfair practices related to securities or the securities market. As a complement to these main functions, the Commission determines and regulates the scope of activities of all stakeholders involved in the capital market.

Following internationally accepted rules in the advanced capital markets of various countries, a Disclosure Based issue system has been introduced in Bangladesh instead of a Merit Based issue, to ensure that the Commission's responsibility is to reflect the overall picture of the issuer in the Offer document. Information regarding the issuer's financial position is reflected in the audited financial statements and the auditor's report verified by the auditor [Rules 3(2), 4(B)(1)(h) and 8(20) of the Securities and Exchange Commission (Public Issue) Rules, 2006], and the responsibility for verifying other matters lies with the Issuer and the appointed Issue Manager [Rules 3(2)(a), 4(B)(1)(h), 18(9) and Annexure-C of the Securities and Exchange Commission (Public Issue) Rules, 2006]. Based on the submitted documents and information, a detailed procedure is described in the Commission's Public Issue Rules and other orders/directives related to the Issue to verify whether the submitted issue and the overall picture of the issuer are reflected in the Offer document through sufficient disclosure. Each application related to the Issue is verified and screened based on a specific Checklist in accordance with the relevant regulations. If sufficient documents and information are not provided or submitted, or if there is any inconsistency in the submitted information, the Commission usually informs the Issuer and the Issue Manager in writing through a Deficiency letter to provide additional documents/information, and an Issue is approved only after the submission of the required documents and the inclusion of sufficient information in the Offer document. Otherwise, the Commission cancels the Issue.

2. The preamble of the Securities and Exchange Ordinance, 1969 states the purpose of enacting the Ordinance as, ".....for protection of investors, regulations of Capital Markets and issue and dealings in Securities and for matters ancillary thereto", which is the responsibility of the Commission to implement.

1

It is stated in Section 2A(4) of the said Ordinance, "While giving consent under sub-section (1) & (2) Commission shall not fix the price of the issue"

Sub-section (1) & (2) states that, (1) No company incorporated in Bangladesh shall, except with the consent of the Commission, make an issue of capital outside Bangladesh.
(2) No company, whether incorporated in Bangladesh or not, shall, except with the consent of the Commission,- (a) make an issue of capital in Bangladesh; (b) make in Bangladesh any public offer of securities for sale; (c) renew or postpone the date of maturity or repayment of any security maturing for payment in Bangladesh.

Section 2B(1) states, "Control over prospectus and other documents.-(1) Every prospectus or other document offering for subscription or publicly offering for sale any securities shall, before its issuance, be submitted to The Commission for its examination, in such form and manner and containing such information as may be prescribed, and such prospectus or other document shall be issued only after the Commission permits its issuance on being satisfied that it has complied with all the requirements of this Ordinance or the rules and of any other law relating thereto:
Provided that the consent of the Commission to the issue or offer of the securities shall not absolve the responsibility of the issuer for the merit and accuracy of the offering.

Therefore, even if the Commission examines all submitted information, data, and documents under existing rules and regulations and grants approval for the issue, the responsibility for determining the price of the issue, verifying the accuracy of information related to the issue, or ensuring such matters does not fall on the Issuer, its auditor, the Issue Manager, the registrar, or the directors of the Issuer.

The following prohibitions have been imposed on the submission of false information under Sections 2F and 18 of the said Ordinance, "2F False information.-No person shall, when complying with any requisition under section 2E or when making any application for consent or recognition to an issue of capital, give any information or make any statement which he knows, or has reasonable cause to believe, to be false or not true in any material particular."

2

"18 Prohibition of false statements, etc.-No person shall, in any document, paper, accounts, information or explanation which he is, by or under this Ordinance, required to furnish, or in any application made under this Ordinance, make any statement or give any information which he knows or has reasonable cause to believe to be false or incorrect in any material particular."

According to the aforementioned sections, it is verified as much as possible whether any Issuer is providing any false information or submitting false documents/papers while raising capital. If it is proven that any Issuer or any of the mentioned parties has provided any false or misleading information or submitted any false document while raising capital, the Commission takes legal action against them. For the aforementioned reasons, Issuer applications have been cancelled, financial fines and operational bans have been imposed, and criminal cases have also been filed. Additionally, the Commission usually imposes necessary conditions under Section 2CC of the Ordinance for post-capital raising approval and subsequent Governance verification.

3. In accordance with the procedure described in the Securities and Exchange Commission (Public Issue) Rules, 2006 for determining the issue price, the Issuer and the Issue Manager provide sufficient justification in favor of the issue price, and approval for each public issue is granted only after thoroughly verifying whether this is the case in light of Rule 8(B)(16)(1)(b) of the said regulations. Approval for the issue is granted only after impartially considering the fundamental basis of the issue and determining the accuracy of the justification submitted in favor of the issue price and whether a premium is received or not, in light of the procedure mentioned in the Ordinance and regulations.

4. In accordance with the binding nature of laws, ordinances, and related regulations, it is thoroughly verified whether the methods used for determining the price of securities are followed appropriately and logically, and the issue is approved only after removing limitations and observing the accuracy of these through the provision of information and documentary evidence mentioned in the deficiency letters issued by the Commission. Verification and ensuring the accuracy of the data used by the Issuer is the responsibility of the Issuer and its auditor. The responsibility for ensuring the accuracy of other documents/papers lies with the Issuer and the Issue Manager. However, if there is any inconsistency in the submitted documents, information, data, and financial reports, approval for the issue is not granted. The Commission has been recommending to the government for a long time to enact the Financial Reporting Act and establish the Financial Reporting Council to ensure the discipline and accountability of auditors.

3

5. Additionally, the Commission has made arrangements for listed issuers to comply with the Corporate Governance Guidelines amended in 2012 and other practices prior to the public issue. Directors of the Issuer, the Issue Manager, and registrars usually provide a Due diligence certificate stating that they have properly fulfilled their responsibilities [Rules 3(1), 18(9) and 18(10), Annexure-A, C & D of the Securities and Exchange Commission (Public Issue) Rules, 2006].

Due to failure to comply with the relevant regulations in the matter of the issue, the Commission rejected a total of 18 IPO applications and 16 Rights Issue applications in 2013 and 2014. Punitive measures have also been taken against many Issuers, Issue Managers, and auditors for providing wrong or misleading information.

4