Bangladesh scrapped IPO lottery. What are the benefits?

  • Farhan Fardaus,
    Published: 2021-01-20 10:39:24 BdST

The Bangladesh Securities and Exchange Commission has changed the IPO rules to scrap the lottery system. That means the shares will be distributed among all applicants in a proportionate rate from April under the new rules.

Why has the SEC chosen this system? Market analysts say the new system will augur well for the stock market by preventing irrational share price hikes.

The regulator announced the decision to launch the new system on Dec 31 last year, saying it aims to encourage long-term investments in the capital market.

The new rules stipulate a new condition that an investor must have a minimum of Tk 20,000 investment in the secondary market to apply for IPO shares.

It will infuse fresh money into the market because the investors must put their funds first in the secondary market to get IPO, said SEC spokesman Mohammad Rezaul Karim.

A general investor must also apply for shares worth a minimum of Tk 10,000 from the IPO. They can also apply for investment of multiplications of Tk 10,000.

Mahmood Osman Imam, a professor at the Dhaka University’s finance department, said everyone will get shares under the new rules. “The share price will not rise irrationally during the IPO since there will be no auction,” he added.

Md Moniruzzaman, managing director of IDL Investments Ltd, agrees. “Ending the lottery system is a good decision. Everyone will get shares and the flow of issues will increase. Huge amounts of shares won’t end up in the hands of a few people. Share price will not increase unreasonably during IPO either.”

The market regulator says the new system aims to encourage long-term investment.

The market regulator says the new system aims to encourage long-term investment.

Moniruzzaman believes the new rules will create a new class of investors who want to make long-term investments.

Many investors wait for new IPOs and apply through the lottery by creating several BO accounts with ID cards of people close to them. After they succeed in the lottery, these investors sell off the shares and leave the market when the prices are at a high.

Such investors are called “IPO hunters”. General investors sometimes lose in the lottery as they are crowded out by such “IPO hunters”.

M Sadiqul Islam, another professor at Dhaka University’s finance department, thinks the abolishment of the lottery system will also put an end to the dominance of these “IPO hunters”.

Mostaque Ahmed Sadeque, managing director of brokerage house Investment Promotion Services Ltd, said, “Those who invest only in IPOs do not belong to the market. Many of them never invest in the secondary market.”

“Now everyone must invest at least Tk 20,000 in the secondary market first to invest in IPO. It will impact the stock market positively as everyone will try to make long-term investments.”