Term Paper on

Capital Market of Bangladesh

Course: Portfolio Management (F402)

Submitted to

Tasneema Afrin

Associate Professor

Institute of Business Administration

University of Dhaka

Submitted by

Group 4

Sukarna Saha Angsha (Roll: 10)

Jesmima Jemim (Roll:35)

Tanvir Saad (Roll: 62)

Fabliha Khan Mahima (Roll: 102)

BBA, Batch-29

Institute of Business Administration

University of Dhaka

Date of Submission

7th January, 2025

Executive Summary
7th January, 2025

Tasneema Afrin

Associate Professor

Institute of Business Administration

University of Dhaka

Subject: Letter of transmittal for ‘Portfolio Management’ (F402) term paper titled,

‘Capital Market of Bangladesh’

Dear Ma’am,

With due respect, we present to you the term paper titled ‘Capital Market of Bangladesh’ as per
the course requirement. The term paper is prepared based on secondary data collection and
previous research.

Please note that this term paper has been prepared under your supervision, and under no
circumstances will this report be produced for any other BBA (IBA) course as such. No part of
this term paper will be shared or republished without your authorization.

We are eagerly waiting for your feedback on this term paper.

Sincerely,

Sukarna Saha Angsha (Roll: 10)

Jesmima Jemim (Roll: 35)

Tanvir Saad (Roll: 62)

Fabliha Khan Mahima (Roll: 102)

BBA, Batch-29

Institute of Business Administration

University of Dhaka
 1. Introduction:

1.1 Objectives

1.1.1 Broad objective

1.1.2 Specific objectives

1.2 Scope

1.3 Limitation

2. Methodology

Chapter 1: Introduction to Capital Markets

1.1 Overview of Capital Market in Bangladesh

The capital market mobilizes long-term funds for businesses and governments through trading
financial instruments like stocks and bonds. It channels savings into productive investments,
boosting economic growth. The capital market deals with business organizations and the
government regarding different securities. It engages in the exchange of stocks, bonds, treasury
bills, notes, and other capital instruments.

In Bangladesh, the capital market comprises the primary market, for new securities, and the
secondary market, for trading existing securities. The Dhaka Stock Exchange (DSE) and
Chittagong Stock Exchange (CSE) are its main pillars. In August 2023, the market capitalization
of the DSE was BDT 7748.98 billion (Shaperk & Shaperk, 2023). Though the capital market of
Bangladesh is small compared to the other capital markets in Asia, it is among the largest capital
markets in the South Asian region.

Importance of the Capital Market in Bangladesh

1. Economic Growth: Supports industrialization with long-term financing by enabling

businesses to access substantial resources for expansion. It facilitates infrastructure
projects and industrial ventures, playing a key role in boosting the GDP and employment
levels in the country.
 2. Wealth Creation: Enables investors to earn through capital gains and dividends,
providing a pathway for individual and institutional investors to build wealth. This, in
turn, encourages saving and investment culture among the population.
3. Liquidity: Ensures ease of buying and selling securities, allowing investors to quickly
convert their holdings into cash. This liquidity attracts both local and foreign investors,
enhancing market dynamism.
4. Efficient Allocation: Directs resources to profitable ventures, ensuring that businesses
with strong potential receive necessary funding. This encourages innovation and
competitiveness among companies, contributing to overall economic efficiency.

Historical Background

The Dhaka Stock Exchange, established in 1954, marked the start of Bangladesh's capital
market. The Chittagong Stock Exchange followed in 1995. Milestones include:

In 1969, the Securities and Exchange Ordinance was introduced for regulation. After the
independence, the establishment of the Dhaka Stock Exchange (formerly East Pakistan Stock
Exchange) initiated the pathway of capital market intermediaries in Bangladesh. In 1976,
formation of Investment Corporation of Bangladesh opened the door to professional portfolio
management in institutional form. In 1993, the Bangladesh Securities and Exchange Commission
(BSEC) was formed. In last two decades, capital market has witnessed a number of institutional
and regulatory advancements, which has resulted in diversified capital market intermediaries. In
2013, the stock exchange was demutualized to enhance governance.

Challenges

Investor confidence is affected by market volatility, while a limited investor base and low
financial literacy lead to speculative behavior. Regulatory gaps further hinder consistent
enforcement.

Prospects

With economic growth and institutional investor interest, the market has immense potential.
Main areas for progress include stronger regulations, promoting institutional investment,
advancing infrastructure, and improving financial literacy.

Bangladesh’s capital market is pivotal for economic progress, with reforms and participation
needed for greater impact.

1.2 Historical Performance of DSE Based on Different Variables

TUrnover
Turnover is the total monetary value of all executed transactions in a given time period.

Market Capitalization
Market Capitalization is the total value of all the outstanding shares in the market.
Historical Performance
Based on DSEX Index from January 30,2013 to December 31, 2024

Average annual yield: 0.007%

Standard Deviation: 0.874%
Industry Comparison
The comparison of different industries is shown through the Price-to-Earnings ratios. It is a great
financial metric to compare performances between the different industries in a market.
2. Intermediaries and Participants in the Capital Market

2.1 Regulatory and Operational Bodies

Bangladesh Securities and Exchange Commission (BSEC)

The BSEC is the apex regulatory body overseeing the capital market in Bangladesh. Its primary
mandate is to ensure transparency, development of the security market, make rules on
security-related matters, protect investors, and create a fair marketplace. Established under the
Securities and Exchange Commission Act of 1993, the BSEC performs several critical functions,
including:

1. Market Regulation: The BSEC formulates and enforces laws to maintain orderly trading
and prevent fraudulent practices.
2. Approving IPOs: The BSEC evaluates and approves initial public offerings (IPOs) to
ensure compliance with legal and financial standards.
 3. Corporate Governance: The BSEC promotes ethical practices and accountability among
listed companies.
4. Investor Awareness: The BSEC conducts education programs to enhance financial
literacy and informed investment decisions.

Compiling, analyzing, and publishing information related to the financial performance of the
issuer of the security; prohibiting insider trading; regulating substantial acquisition of shares; and
levying fees are also some of the crucial roles the BSEC plays.

Dhaka Stock Exchange (DSE)

The DSE, established in 1954, is the largest and oldest stock exchange in Bangladesh. It acts as
an intermediary between the buyers and the sellers in terms of trading securities. The business
companies and the government are able to sell different securities to the people through the
capital market and get long-term funds (Emon, 2022). It provides a centralized platform for
trading equities, bonds, and mutual funds.

The DSE’s responsibilities include:

1. Market Surveillance: The DSE monitors transactions to detect and address irregular
activities.
2. Technological Innovation: The DSE introduces systems like automated trading to
improve efficiency and reliability.
3. Compliance: The DSE ensures listed companies meet reporting and governance
standards.

Chittagong Stock Exchange (CSE)

Founded in 1995, the CSE complements the DSE by offering an alternative trading platform. It
focuses on regional investments and innovation, aiming to create a competitive environment. The
CSE is known for:

1. Technology Integration: The CSE adopts advanced trading systems to enhance

transaction speed.
2. Regional Outreach: The CSE encourages investments in underrepresented areas.
3. Support Services: The CSE assists small and medium enterprises (SMEs) in raising
capital.

Other Key Participants

Brokers and Dealers

Brokers act as intermediaries between buyers and sellers, facilitating trades and earning
commissions. Dealers, on the other hand, trade securities on their own accounts, adding liquidity
to the market. Their roles are crucial for:

● Trade Execution: Ensuring smooth and timely transactions.

● Market Stability: Providing liquidity during periods of low trading activity.

The names of top brokers are Lankabangla Securities, Be Rich, Multi Securities & Services,
Kabir Securities, EBL Securities, ICB Securities Trading Company, Meenhar Securities, Eastern
Shares & Securities, Island Securities, and BRAC EPL Stock Brokerage. (Issue-I, 2022b)

Merchant Banks

Merchant banks play a multifaceted role in the capital market. They assist companies in raising
capital, managing IPOs, and providing advisory services. Key activities include:

● Underwriting: Guaranteeing the sale of securities in case of insufficient demand.

● Portfolio Management: Offering investment strategies tailored to client needs.
● Corporate Restructuring: Advising on mergers, acquisitions, and divestitures.

AAA Finance & Investment Ltd., AB Investment Ltd., Abaci Investments Limited, Agrani Equity and
Investment Ltd., AIBL Capital Management Ltd., and Alliance Financial Services Ltd. are some of the
merchant banks in Bangladesh. (Bangladesh Securities and Exchange Commission, n.d.-d)

Hedge Funds and Institutional Investors

Hedge funds employ advanced strategies to generate high returns, often involving leverage and
derivatives. Institutional investors, such as pension funds and insurance companies, stabilize
markets with large, long-term investments. Their contributions include:

● Market Depth: Increasing trading volume and liquidity.

● Strategic Investments: Supporting infrastructure and development projects.

Startup Bangladesh Limited, Ventura Asset Management Company Ltd., Shanta Asset Management
Limited, Stockmate Asset Management Limited, Abdul Monem Equity Management Limited, and EDGE
Ventures Limited are some of the fund managers. (Bangladesh Securities and Exchange Commission,
n.d.-c)

2.2 Specialized Intermediaries

Asset Management Companies (AMCs)

AMCs manage collective investment schemes, including mutual funds, to pool resources from
multiple investors. Their expertise benefits both retail and institutional investors through:
 ● Risk Diversification: Spreading investments across various asset classes.
● Professional Management: Ensuring disciplined and research-backed decisions.
● Accessibility: Providing small investors with exposure to broader markets.

IDLC Asset Management Limited, LR Global Bangladesh Asset Management Company, Shanta
Asset Management, and and UCB Asset Management are some of the top asset management
companies in Bangladesh. (Top Asset Management Companies in Bangladesh – a
Comprehensive Guide, n.d.-b)

Investment Bankers

Investment bankers are vital to the capital market ecosystem. They bridge the gap between
issuers and investors by facilitating fundraising and ensuring proper valuations. Their services
include:

● IPO Management: Structuring offerings, pricing shares, and marketing to potential

investors.
● Mergers and Acquisitions: Assisting in deal negotiations and financial structuring.
● Financial Advisory: Providing strategic advice on market entry, expansion, and
regulatory compliance.

AAA Finance & Investment Limited, CAPM Advisory Limited, Constellation Asset Management
Company Limited, Green Delta Capital Limited, etc., are some of the investment banks in
Bangladesh. (Lusha, 2024)

The capital market in Bangladesh works with a coordinated network of regulators, operational
bodies, and specialized intermediaries. From brokers facilitating trades to regulators ensuring fair
practices, each participant plays a role in sustaining market integrity, efficiency, and growth.
Together, they contribute to a financial ecosystem that supports economic development and
investor confidence.

3. Different stock categories A-Z, different indices - DSEX, DSES, BSBO,

Primary, Secondary, Spot, OTC market; Alternative Trading Board, block market, Circuit
Breaker, floor price

Chapter 3: How Securities Are Traded

3.1 Different Stock Categories in Bangladesh

According to Midway Securities (n.d.), the Dhaka Stock Exchange (DSE) employs a structured
system to categorize listed companies based on their performance and compliance:

1. Category A: Companies which are regular in holding the Annual General Meetings and
have declared dividends at the rate of 10 percent or more in the last English calendar
year.
2. Category B: Companies which are regular in holding the Annual General Meetings but
have failed to declare dividends at least at the rate of 10 percent in the last English
calendar year.
3. Category N: Newly listed companies except green-field companies, which shall be
transferred to other categories in accordance with their first dividend declaration and
respective compliance after listing of their shares.
4. Category Z: Companies which have failed to hold the Annual General Meeting when
due or have failed to declare any dividend based on annual performance or which are not
in operation continuously for more than six months or whose accumulated loss after
adjustment of revenue reserve, if any, exceeds its paid up capital.
5. Category G: Greenfield companies, often associated with newly established projects or
startups in their growth phase.This category offers insights into emerging industries or
innovations within the stock market but might carry higher risks due to unproven track
records.

3.2 Different Stock Market Indices in Bangladesh

Bangladesh’s stock market employs a variety of indices to track the performance of its listed
companies. These indices, managed by the Dhaka Stock Exchange (DSE) and Chittagong
Stock Exchange (CSE), serve as vital tools for investors, analysts, and regulators. Below is an
overview of the key indices and their roles.

1. Dhaka Stock Exchange (DSE) Indices

a. DSEX (The Broad Market Index): The DSEX is the primary benchmark index
of the Dhaka Stock Exchange, designed to reflect the overall market’s
 performance. It includes a wide array of companies, chosen based on their
free-float market capitalization, and is periodically updated to stay relevant. This
index is comparable to global benchmarks like the S&P 500, providing insights
into market trends and investor sentiment.
b. DSES (Shariah-Compliant Stocks): The DSES tracks companies that adhere to
Islamic finance principles. These companies are screened to ensure their
operations align with Sharia law, making this index ideal for halal-conscious
investors. It serves a role similar to Malaysia’s FTSE Bursa Malaysia Hijrah
Shariah Index.
c. DSBO (DSE Blue-Chip Index): The DSBO tracks blue-chip companies, known
for their financial stability and consistent performance, providing a benchmark for
institutional and retail investors.
d. DS30 (Top 30 Companies): The DS30 represents the performance of the 30
largest and most liquid companies listed on the DSE. This index provides a
focused look at market leaders, akin to the Dow Jones Industrial Average in the
U.S.
e. DSMG (SME Index): The DSMG tracks small and medium enterprises (SMEs)
listed on the DSE’s SME platform. It is essential for monitoring the growth and
development of this crucial sector (DSE, 2023).
f. DSE Bond Index (Proposed) - The DSE is planning to introduce a bond index to
track the performance of bonds and other fixed-income securities. This would
provide better insights into the debt market (DSE, 2023).
2. Chittagong Stock Exchange (CSE) Indices
a. CASPI (All-Share Index) - The CASPI tracks all shares listed on the CSE,
providing a comprehensive measure of the market’s performance (CSE, 2023).
b. CSE 30 Index (Top 30 Companies): The CSE 30 highlights the top 30
companies by market capitalization and liquidity. It offers a narrower focus but
provides valuable insights into the market's top performers (CSE, 2023).
c. CSE Shariah Index: This index focuses on Shariah-compliant companies listed
on the CSE, catering to Islamic investors and aligning with ethical investment
principles (CSE, 2023).
 d. CSI (SME Index): The CSI tracks the performance of SMEs listed on the CSE,
emphasizing the growth of this important segment (CSE, 2023).

These indices are important for:

● Investors as these indices provide insights into different segments of the market,
such as large-cap stocks (DS30, CSE 30), Shariah-compliant companies (DSES,
CSE Shariah), and niche sectors like SMEs (DSMG, CSI).
● Analysts as these indices act as tools to study market behavior, identify trends,
and design strategies.
● Regulators as these indices also help monitor market health and stability while
identifying areas of growth or risk (Bodie et al., 2014, p. 44).

3.3 Types of Share Markets in Bangladesh

The Bangladeshi share market consists of 2 kinds of markets:

1. Primary Market: Companies can register with a stock exchange to issue and sell shares
to the public, a process known as "going public" or an "Initial Public Offering" (IPO) if
it's their first time. This allows them to raise capital from investors (Midway Securities,
n.d.).
2. Secondary Market: After a company sells its securities (like stocks) in the primary
market (like an IPO), these securities can be bought and sold between investors in the
secondary market. This allows investors to sell their shares and get their money back,
providing liquidity. In the secondary market, investors trade shares with each other at the
current market price or at a price they both agree on (Midway Securities, n.d.).
3. Spot Market: In a spot market, transactions are settled almost immediately, typically
within a few business days (T+2 in the DSE). Most trading on the DSE is considered spot
trading (Midway Securities, n.d.).
4. Over-the-Counter (OTC) Market: OTC markets are decentralized platforms where
trading occurs directly between buyers and sellers, often through dealers or brokers. The
OTC market in Bangladesh is less developed compared to the organized exchange
(Midway Securities, n.d.).
3.4 Other Trading Mechanisms and Market Regulations

The Bangladesh stock market consists of specialized platforms that play an increasingly vital
role in Bangladesh’s financial ecosystem:

1. Main Board: This board lists larger, more established companies that meet stringent
listing requirements, including minimum paid-up capital, profitability thresholds, and a
track record of operational history. Examples include Grameenphone, Beximco
Pharmaceuticals, and Square Pharmaceuticals (DSE, 2024).
2. SME Board: Introduced to provide access to capital for small and medium-sized
enterprises (SMEs), this board has less stringent listing requirements compared to the
Main Board, making it easier for smaller companies to raise funds (DSE, n.d.).
3. Alternative Trading Board (ATB): This board caters to companies that do not meet the
listing requirements of the Main Board or SME Board. It offers a platform for trading
securities of companies with unique characteristics or those undergoing restructuring
(Midway Securities, n.d.)).
4. Block Market: This market facilitates large-volume trades between institutional
investors. These trades are executed separately from the regular trading session (DSE,
n.d.).
5. Margin Trading: Margin trading enables investors to leverage their investments by
borrowing funds from brokerage firms. This practice is regulated by the BSEC, which
sets rules regarding margin requirements, eligible securities, and risk management
procedures for brokerage firms (BSEC, n.d.).
6. Odd Lot Trading: Odd lot trading involves transactions of shares in quantities smaller
than the standard trading unit (board lot). While less common than standard lot trading, it
allows smaller investors to participate in the market (DSE, n.d.).
7. Auction Market for Debt Securities: The Bangladeshi market also includes a
mechanism for trading debt securities, often using auctions for the primary issuance of
government bonds and other debt instruments. These auctions allow investors to bid on
the securities, determining the yield and price (DSE, n.d.).
Regulatory mechanisms ensure stability and investor protection within the Bangladeshi stock
market:

1. Circuit Breaker: Circuit breakers are regulatory tools used in the Bangladeshi stock
market to prevent excessive price volatility within a single trading session. These
mechanisms set specific limits on price fluctuations for individual stocks and indices,
ensuring orderly market behavior and protecting investors from drastic price movements.
The key rates and functions of circuit breakers in Bangladesh include:
● Daily Price Limit: For most securities, the DSE enforces a price fluctuation limit
of ±10% from the previous day’s closing price. This restricts the extent to which a
stock’s price can increase or decrease within a single trading day.
● Index-Based Circuit Breakers: These are applied when there are extreme
movements in the overall market index, such as the DSEX. If the index moves by
a predefined percentage (e.g., ±5%), trading may be paused temporarily to allow
the market to stabilize and give investors time to reassess their decisions (BSEC,
2024).
● Stabilizing Function: Circuit breakers help mitigate panic selling or irrational
exuberance, promoting a more stable and predictable market environment.
2. Floor Price: A floor price is a minimum price introduced by the Bangladesh Securities
and Exchange Commission (BSEC) during periods of extreme market instability, such as
the COVID-19 pandemic, to protect investors from sharp declines and stabilize trading
activity (BSEC, n.d.).

Chapter 4: IPO Market

An Initial Public Offering (IPO) is the process by which a company offers its shares to the public
for the first time. In Bangladesh, the Securities and Exchange Commission (BSEC) and the
Dhaka Stock Exchange (DSE) or Chittagong Stock Exchange (CSE) regulate the IPO process.
The IPO process in Bangladesh generally follows specific guidelines and regulatory
requirements, which ensure transparency, fairness, and investor protection.
4.1 General requirements for IPO in Bangladesh

According to Bizcope (2023), companies must meet specific requirements outlined by regulatory
bodies to qualify for an IPO listing in Bangladesh. These requirements include:

1. Minimum Public Offering: Companies must offer at least 10% of their paid-up capital
or a minimum amount of 15 crore taka (approximately $1.8 million USD) at par value
(face value) (Bizcope, 2023).
2. Financial Transparency: The company's financial statements submitted with the draft
prospectus must be free of significant changes and audited by approved auditors in
accordance with the Bangladesh Auditing Standards and the Companies Act of 1994
(Bizcope, 2023). Additionally, these statements must be prepared following the
guidelines set forth by the SEC Rules of 1987 and adhere to International Financial
Reporting Standards (IFRS) or International Accounting Standards (IAS) as implemented
in Bangladesh (Bizcope, 2023).
3. Corporate Governance Compliance: The company must demonstrate participation in
Bangladesh's annual general meeting and adherence to the Dhaka Stock Exchange (DSE)
board's guidelines, particularly concerning the preparation of the draft prospectus
(Bizcope, 2023).
4. Financial Stability: Companies cannot be operating at a loss at the time of applying for
an IPO listing (Bizcope, 2023).
5. Asset Valuation: The company must comply with asset valuation guidelines established
by the Bangladesh Securities and Exchange Commission (BSEC) (Bizcope, 2023).

4.2 IPO Issuance Guidelines in Bangladesh

4.2.1. IPO Issuance Process in Bangladesh

According to Bizcope (2023), the IPO issuance process in Bangladesh involves the
following steps:

a. Pre-IPO Preparations: To be eligible for an IPO, the company must meet the
general requirements as stated above. The company must appoint an issue
 manager, underwriter, and legal advisors. These professionals help in preparing
the prospectus and navigating the legal and regulatory aspects of the IPO process
(BSEC, 2020).
b. Preparing and Submitting the Draft Prospectus: After appointing the Issue
Manager, the next step involves preparing the draft prospectus. This document
contains essential information, such as the company’s financial statements, risk
factors, intended use of proceeds, and future plans. The Issue Manager, in
collaboration with the company, prepares this draft and submits it to both the DSE
and the SEC for approval (DSE, 2015).
c. Drafting an Agreement: Alongside the prospectus, the Issue Manager and the
company must draft an agreement letter with the investment bank hired for the
IPO process. This agreement specifies the roles and responsibilities of the parties
involved, along with the purpose of the IPO (BSEC, 2020).
d. DSE Analysis of the Draft Prospectus: Upon receiving the draft prospectus, the
DSE conducts an analysis of the company’s performance ratios and financial
aspects. This analysis helps assess the company’s long-term and short-term
market impact. The DSE evaluates whether the company meets the listing criteria
and its potential effect on the market (DSE, 2015).
e. SEC Review and Approval: Once the DSE completes its review, the draft
prospectus is forwarded to the Securities and Exchange Commission (SEC) for
further analysis. The SEC takes into account the DSE’s views and evaluates
additional aspects of the company. After a thorough study, the SEC approves the
IPO application in accordance with the Public Issue Rule (BSEC, 2020).
f. Filing the Application for Listing: After receiving SEC approval, the company,
through the Issue Manager, must submit an application to the DSE for listing its
securities. This application must be filed within five days of SEC approval (DSE,
2015).
g. Opening Subscription: Upon DSE’s acceptance of the listing application, the
company opens its subscription for the general public. The subscription period is
a specified time frame during which investors can apply for shares. Once the
 subscription period closes, the company is required to allocate its shares or issue
refunds within 42 days after the closing (DSE, 2015).
h. DSE Decision on Listing Application: The DSE Board members meet to
evaluate the application for listing. The application is processed only after the
company has fully allocated 100% of its offered shares. The DSE must make its
final decision within 75 days of the subscription's closing date (DSE, 2015).
i. IPO Data Transmission: Once the IPO process is complete, the company’s IPO
data is successfully transferred using the IPO data transmission software. This
step ensures that all IPO-related information is properly recorded and accessible
for regulatory purposes (DSE, 2015).

4.2.2. Determining IPO Price and Cut-off Price

IPO price: Investment banks set the IPO price by considering a company's growth
potential, market demand, and how it compares to similar companies. The IPO price
should align with the company's fundamentals.
Cut-off price: The cut-off price is the final price of an IPO, which is determined by the
weighted average of all bids received. The cut-off price is calculated by comparing the
total demand for shares to the number of available shares. The total demand is the sum of
shares bid for at each price level, while the available shares are the total number of shares
being offered in the IPO.
In Bangladesh, companies raising capital through an Initial Public Offering (IPO)
generally use one of two methods to determine the price of their shares: the Fixed Price
(FP) Method or the Book Building (BB) Method. Both methods have different
procedures for determining the IPO price and the cut-off price, which is the price at
which shares are finally allotted to investors.

1. Fixed Price (FP) Method: In the FP method, the company determines a fixed
price for its shares before opening the subscription process. The price is set based
on the company’s financial performance, net asset value (NAV), earnings per
share (EPS), and other factors. This price remains constant throughout the
subscription period, and it is disclosed in the IPO prospectus. Investors can apply
for shares at this predetermined price. Shares are allotted to investors based on
 applications submitted at the fixed price. This method is commonly used by
companies that are smaller or have less market visibility, as it is a simpler and
more straightforward process (Rahman, 2016). Besides, this method is
advantageous for its:
● Simplicity: It is straightforward and easy for companies and investors to
understand.
● Predictability: The price is predetermined, providing certainty to
investors.
● Suitability for Small Companies: This method works well for smaller
companies or those with limited market visibility.

However, there are a few negative aspects:

● Risk of Underpricing/Overpricing: Since the price is fixed without

investor input, there is a higher risk of setting the price too low
(underpricing) or too high (overpricing).
● Limited Demand Assessment: This method does not reflect
market-driven demand, which can lead to inefficiencies in pricing
(Rahman, 2016).
2. Book Building (BB) Method: The BB method, on the other hand, involves
setting a price band (a range between a minimum and maximum price) for the
shares. Investors can submit bids within this price range, specifying the number of
shares they wish to buy and the price they are willing to pay. Once the
subscription period ends, the company and its issue manager analyze the bids to
determine the cut-off price, which is the highest price at which the total number
of offered shares can be fully subscribed. This method is more market-driven, as it
reflects the actual demand and investor sentiment, and is typically used for larger
IPOs where the company is seeking to raise a substantial amount of capital
(Rahman, 2016). This method is beneficial for its:
● Market-Driven Pricing: It reflects actual market demand, leading to a
more accurate valuation of the company.
 ● Reduced Underpricing: By involving investors in price discovery, this
method minimizes the chances of underpricing (Rahman, 2016).
● Attracts Larger Investors: Institutional investors are more likely to
participate due to the transparency and flexibility of this method.

The disadvantages of this method include:

● Complexity: It is more complicated and time-consuming compared to the

Fixed Price Method.
● Costs: The process involves higher costs for the company due to the need
for extensive marketing and investor education.
● Access Issues for Small Investors: Retail investors may find it
challenging to participate effectively, as institutional investors often
dominate the bidding process (Rahman, 2016).

3. Underwriting Process of an IPO in Bangladesh

Underwriting is the process by which underwriters commit to subscribing to any unsubscribed

portion of an IPO, thereby ensuring the company raising capital receives the required funds.
Underwriters act as intermediaries between the issuing company and the investors, providing
assurance to both parties (Rahman, 2016).

Steps in the Underwriting Process include:

a. Appointment of Underwriters: The issuing company appoints one or more underwriters

to guarantee the subscription of shares. These underwriters must be approved by the
Bangladesh Securities and Exchange Commission (BSEC).
b. Agreement Signing: The underwriters and the issuing company sign an underwriting
agreement specifying the following:
● The total number of shares to be underwritten.
● The underwriting fee, typically calculated as a percentage of the underwritten
amount.
● The terms and conditions for subscribing to any unsubscribed shares.
 c. Submission of Documents to the BSEC: The underwriting agreement, along with other
documents, is submitted to the BSEC for review and approval as part of the IPO
application process.
d. Marketing and Subscription Period: During the subscription period, underwriters assist in
promoting the IPO through roadshows, advertisements, and investor meetings to attract
investors. This helps in increasing the likelihood of full subscription.
e. Responsibility for Unsubscribed Shares: If the IPO is not fully subscribed during the
public offering, the underwriters are obligated to purchase the remaining shares at the
offering price. This ensures that the company raising capital receives the targeted amount.
f. Settlement of Funds: After the IPO closes, the underwriters transfer the funds for any
unsubscribed shares to the issuing company. This guarantees the company receives the
full amount it sought to raise through the IPO.

4. Distribution Mechanism of IPO Shares

a. Allotment Process: Once the final price or cut-off price is determined, the allotment
process follows. Shares are typically allotted to investors based on the following
methods:
● Public Category: Shares are offered to the general public through a public
subscription process. Investors bid for the shares, and the shares are allotted based
on the demand, the number of shares subscribed, and the subscription amount
(DSE, 2021).
● Institutional Investors: In case of the book building method, institutional investors
(banks, insurance companies, and other financial institutions) may get priority in
allocation, which is usually a percentage of the total offering (BSEC, 2020).
● Retail Investors: For retail investors, the shares are often allocated on a pro-rata
basis based on the number of shares applied for (DSE, 2021).
● Large Investors (e.g., Employees or Shareholders): Certain categories of
investors, such as employees or existing shareholders, may be allotted shares at
discounted prices or through preferential allotment (BSEC, 2020).
 b. Refund Process: In the case of oversubscription, the unallotted money is refunded to
investors. This can be done via electronic or physical means. Refunds must be completed
within a set period following the closure of the offer (DSE, 2021).

5. Valuation Process for IPOs

Valuation is one of the critical steps in determining the IPO price. Commonly used methods for
IPO valuation include:

a. Net Asset Value (NAV) per Share: NAV at cost is the value of assets minus liabilities,
calculated at historical cost (book value). NAV at market price is the market value of
assets, which could be significantly different from the cost-based valuation.
b. Price-to-Earnings (P/E) Ratio: This is a commonly used method for valuing IPOs,
especially for companies in growth sectors. The P/E ratio is calculated by dividing the
market price per share by the earnings per share (EPS). The market compares the
company’s P/E with the industry average to determine the IPO price.
c. Discounted Cash Flow (DCF) Method: The DCF method involves projecting future
cash flows and discounting them back to present value. This method is typically used for
companies with stable and predictable cash flows.
d. Earnings Multiplier: This method is similar to the P/E ratio but focuses on multiplying
the company’s expected earnings by a suitable industry multiple to determine the offering
price.

3. Conclusion
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