The Dhaka Stock Exchange (DSE) with market capitalisation of 13.5 billion dollar and with a total 275 of listed firms as of November 2008, still failed to attract both local but giant Bangladeshi firms as well as foreign firms doing business in Bangladesh. Why? Let's take a brief look:
Going public is costly both in terms of money and time. Accounting, legal, printing, travel, manpower devoted to preparing for a public offering can be substantial. There are numerous additional expenses annually, including audited financial reports, preparation and distribution of proxy materials, quarterly and annual reports to shareholders, fees for transfer agents, public relations, and other costs, including the time required by a company officers devoted to these matters. A typical firm may spend more than 5.0% of the money raised on both direct and indirect expenses to get listed in the market. For instance, Summit Alliance Port Limited spent more than 7.0% of total money raised from initial public offering (IPO) as IPO expenses.
In addition to the upfront costs of the IPO, there are also costs of maintaining a quote on stock exchanges. Flotation process is also a time consuming exercise. Because of red-tapism, it might it might take six months to years to publicly list a company on the DSE.
Furthermore, when a company moves from private ownership to public, much information must be disclosed -- for instance, salaries, transactions with management, sales, profits, competitive position, mode of operation and other material information. Companies must comply with certain Financial Reporting Standards and securities laws. They must inform shareholders and the public through its regular filings with the SEC and news releases of business operations, financial condition, changes in management, and any other event which may materially affect the company or the public's investment decision relative to the company's share. This disclosure costs money and provides information to competitors. A much greater amount of information is required at the time of the IPO, and this continues throughout a public company's life. However, research shows that increased disclosure on the part of the company can reduce its cost of equity! By reducing its cost of equity, a company is able to invest in more projects, raise capital more cheaply, and enhance its valuation.
Moreover, management of the company may lose some flexibility in managing the company's affairs, particularly with actions which require shareholders' approval. The company may not have the ability to act quickly if approval is required by shareholders or outside directors. So although control is not lost through the IPO, if the company requires further equity to fuel its growth, existing shareholders will suffer dilution. If the firm is sitting on a highly successful venture like the mobile phone companies in Bangladesh, future profit has to be shared with outsiders!
However, this risk of losing control can be minimised by limiting the number of shares sold to the public, seeking to ensure a broad distribution of shares to the public, creating tiered classes of stock with differential voting rights, entering into voting agreements among pre-IPO shareholders, adopting supermajority provisions or staggering the terms of the directors.
Besides above mentioned factors, the value of the public company will fluctuate with the supply and demand of stocks and this can be dramatically influenced by the changes in market conditions and the ability of the company to maintain an effective public relations programme to communicate its worth to investors. Moreover, there are few restrictions on management action other than statutory and legal regulations and common sense. Immediate cash-out is usually not permitted because of lock-up rule, i.e., restrictions on selling entrepreneur's existing shares. However, depth of DSE is the main reason that failed to attract foreign firms including mobile companies. Surprisingly, even government did not ask them to get listed.
Thus, many reasons contribute to a firm's not being interested in getting listed on the DSE. However, I found it fascinating that the main reason is most businesses are unaware of benefits of getting listed in the stock market. Our entrepreneurs hardly know about the good side of getting listed in the share market. Negative news on stock market in media, and manipulation extravaganza of 1996, mainly influence them not to get listed. But truth is, benefits of getting listed enormously out weigh negative aspects of getting listed on DSE. I would like to write next why a company still needs to get listed on the Dhaka Stock Exchange (DSE).
*This article was published on the daily Financial Express in Bangladesh on January 3, 2009.
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