Diversion of IPO funds

Dhaka,  Tue,  23 May 2017
Published : 18 Apr 2017, 20:47:19
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Diversion of IPO funds

Deviation from set rules has become more of a norm in this part of the world mainly due to poor governance. Practices resorted to by companies listed with the bourses are no exception. Allegations have been aplenty that a section of those have been using proceeds, mopped up through the initial public offerings (IPOs) and right issues, for purposes other than the ones mentioned in their approved prospectuses. What is more frustrating is that such diversion of funds is done beyond the knowledge of the general shareholders, who, in a good number of listed companies are the majority equity stakeholders. All concerned, including the securities regulator, were certainly not fully unaware of the unauthorised use of IPO and right issue funds. However, no action was taken to deal with such a gross malpractice by a section of the listed companies. 

Against this backdrop, the Bangladesh Securities and Exchange Commission (BSEC) in its meeting, held late last week, set a few conditions for using the IPO/right issue funds for purposes other than the ones originally approved by it. This move, though a belated one, is otherwise welcome. The companies, from now on, will thus require prior approval of, at least, 51 per cent of general shareholders in a general meeting if they want to make any deviation from the approved use of such funds. Prior to holding a general meeting, the proposed changes would have to be approved by their respective board of directors and published as 'price sensitive' information with detailed description and reasons for the deviation. Then, obviously, the proposals would need BSEC approval. 

None would, surely, contest the fact that deviation from approved use of IPO/ right issue funds is improper and deserves punishment. But the securities regulator had so far been not effective enough to prevent such an irregular act. It could not properly monitor the use of funds mobilised by companies from the market through IPOs and issuance of right shares. As the regulator of the capital market, it is rightly expected that it would monitor the end use of funds closely. This is particularly so, because such funds are meant for making the listed companies financially strong and enabling them to expand their operations. Now that the BSEC has set conditions for any deviation, in area of use of proceeds from IPOs and right issues, the onus is on it (BSEC) to see that listed companies do duly comply with the conditions. It is critically important that the listed companies use their funds mobilised from stock market or otherwise, prudently. 

One of the effective ways of looking into the use of funds of companies is proper examination of their financials. However, the financial statements need to be properly audited prior to the BSEC's examinations. That remains a grey area until now. Unscrupulous sponsors of some listed companies can easily get away with their financial irregularities on the backing of undue support coming from the audit firms. The government has in recent years taken a few initiatives and also passed a law called the Financial Reporting Act. But some actions, including formation of the Financial Reporting Council, under it are still lying pending. Those are long overdue. The government does need to complete its tasks on a priority basis to make the provisions of the Financial Reporting Act effective. This is imperative for streamlining the operations of the country's audit firms to enable the BSEC in its work.
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Editor : A.H.M Moazzem Hossain
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