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 SEC to introduce rules on preference shares 'Price manipulation' prompts action

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PostSubject: SEC to introduce rules on preference shares 'Price manipulation' prompts action   Tue May 25, 2010 6:02 pm

Kayes M Sohel

The securities regulator plans to introduce rules on preference shares, in a move to bring transparency to launching of the new product by the listed companies.

The move came amid widespread allegations that a handful of listed companies raised funds by artificially jacking up share prices during conversion of preference shares into ordinary shares at a certain discount rate.

In the absence of these rules, more companies are on the way to announce issuance of preference shares.

"The alleged manipulation has prompted the Securities and Exchange Commission (SEC) to mull introducing rules on preference shares," said a high official at the commission.

Preference share is a product, which provides a specific dividend that is paid before any dividends are paid to ordinary shareholders, and which takes precedence over ordinary stock in the event of a liquidation.

So far seven companies have announced raising funds from the market by offering preference shares.

"As preference shares are a new product, so the SEC should gather experiences from the neighbouring countries' securities regulators, what guidelines they follow in allowing issuance of preference shares," said Mirza Azizul Islam, former SEC chairman.

The regulator should make rules in such a way that the investors' interest is protected, said Islam, also the ex-finance adviser to the caretaker government.

He said, SEC should issue a directive immediately to the listed companies willing to launch the product to refrain from announcing preference shares issuance until a complete guideline is introduced for the betterment of the market and investors as well.

Summit Power and Peoples Leasing and Financial Services Limited are the latest companies that announced issuing preference shares to raise Tk 2.0 billion and Tk 1.20 billion respectively from the market.

By issuing preference shares, Beximco Pharmaceuticals raised Tk 4.10 billion. Aftab Automobiles will raise Tk 1.80 billion, S Alam Cold Rolled Steel Mills Tk 530 million, BD Thai Aluminum Tk 200 million and Agni System Tk 200 million as they already got green signal from the SEC.

"It might be the biggest share scam centring issuance of preference shares if this type of mechanism continues," said Abu Ahmed, professor of finance at Dhaka University.

"I think, entrepreneurs have been scrambling for turning the investors pauper taking opportunity of the absence of proper rules on preference shares," he said. They can raise funds by issuing rights or bonus shares instead of preference shares, he added.

In November, Aftab Automobiles announced that the company would issue 1,80,00,000 preference shares of Tk 10.00 each to raise Tk 1.80 billion.

Preference shares will be converted into ordinary shares on 31 May 2010 at 35 per cent discount to the weighted average price of the Dhaka Stock Exchange between the period from 1 February to 30 May 2010.

On Tuesday, share prices of the Aftab Automobiles closed nearly at Tk 3000. The investors have to pay around Tk 2000 if the company issues shares at 35 per cent discount now.

Five years back, the company raised three times the capital issuing rights shares with offer price at Tk 300, including premium of Tk 200. Under the new mechanism, it can raise funds at least 14-15 times higher.

"That's why, the companies prefer to issue preference shares instead of rights or bonus shares to raise funds from the market," said a merchant banker. As higher share prices mean, shareholders will get smaller numbers of ordinary shares, he added.
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