The Bangladesh Accountant, October 2003 - March 2004

Performance evaluation of the companies after

Initial Public Offerings*
ABSTRACT
This paper empirically examines the operational performance of companies after
IPO in Bangladesh based on a sample of eight companies taken from 1999 to
2000 IPO’s out of eighteen companies during that period. Most of the companies
made optimistic forecast in their prospectus during the IPO. We made an attempt
to find that whether they are able to reach their desire expectations. We have
studied the post IPO performance of the companies in the respect of project
implementation, fund utilization, IPO expense, holding of Annual General
Meeting, penalization imposed by Securities and Exchange Commission, payment
of dividend etc. The study shows that the performances of most of the companies
were not satisfactory as per above criteria.

INTRODUCTION

If a company needs additional equity capital at some point in time, then it desirable to ‘go public’

by selling stock to a large number of diversified investors. A company usually goes public via an

initial public offering (IPO) of their share to investors.

The main objective of this study is to evaluate operational performance of some selected

companies after IPO. When a company goes for IPO, it generally includes many things in its

prospectus like fund utilization, IPO expense etc. We made an attempt to find out the operational

performance of some selected companies on the basis of the above mentioned criteria that are

committed by them in their prospectus.

Moreover, we also find the performance of the companies after IPO in respect of some other

factors such as holding of Annual General Meeting (AGM) on time, penalization by Securities &

Exchange Commission (SEC) etc.

*
Mohammad Mominul Hoque Bhuiyan, School of Business, Asian University of Bangladesh;
Amirus Salat, Department of Accounting & Information Systems, University of Dhaka;
Muhammad Zahedur Rahman, Faculty of Business Administration, Eastern University

Electronic copy available at: http://ssrn.com/abstract=997747

 The Bangladesh Accountant, October 2003 - March 2004

The performance of companies after IPO is considerable interest to all parties like investors,

policy makers, financial institutions, SEC, and of course to academicians also. The companies

take a lot of money from public through IPO. So it is very important to know whether the

companies are performing efficiently or not. Moreover, we have not found any work related to

evaluation of operational performance of companies which also motivated us to do this work.

Numerous studies were made examining the performance of Initial Public Offerings (IPOs) like

under pricing, market efficiency, market return of IPO etc. both in Bangladesh and in abroad. But

with our best of knowledge there was no study on the operational performance of companies after

IPO.

The study shows that most of the companies made optimistic forecast in their prospectus and they

were not successful to achieve their goals. Moreover their performance regarding holding of

AGM on time, penalization by SEC, payment of dividend were not satisfactory.

DATA & METHODOLOGY

Data

Data are gathered from both primary and secondary sources. But most of the data were collected

from prospectus & annual reports of the companies, Monthly Report of Dhaka Stock Exchange

(DSE) and Quarterly Reports of SEC and through query to the SEC officials.

Population and sample

The population defined for this study was limited to the IPO issues in Bangladesh from January 1,

1999 to December 31, 2000. Total number of IPO issues during the period was 18. The name of

the companies went for IPO during this period are:

Electronic copy available at: http://ssrn.com/abstract=997747

 The Bangladesh Accountant, October 2003 - March 2004

(Insert table 1 here)

The sample consists of 8 companies, provided that the banking companies were excluded

intentionally.

The companies were selected by tossing from each quarter and a single issue was taken from each

quarter. The number of companies is 8 because of time and cost constraints. The companies were

selected from each quarter to cover the whole two years time with equal weight. But as there was

only one bank in April-June, 2000, we omitted that and took two companies from the last quarter

of 2000.The selected companies are - Safko Spinning Mills Limited (SS), Bangladesh Welding

Electrode Limited (BW), Bionic Seafood Export Limited (BS), Legacy Footwear Limited (LF),

Fu-Wang Foods Limited (FW), Raspit Data Management & Telecommunication Limited (RD),

Meghna Pet Industries Limited (MP) and Hakkani Pulp & Paper Mills Limited (HP).

Research design issue

In performance measurement of the companies we have focused on some criteria such as fund

utilization, IPO expense, holding of AGM, penalization imposed by SEC and payment of

dividend. In the whole process two major tasks have been performed:

ƒ Analyzing of the performance of the companies on the basis of some selected

criteria by comparing the annual reports of the companies with prospectus (where

there were some assurance for the shareholders of the companies).

ƒ Measuring the performance of the companies regarding compliance with holding

of AGM, penalization imposed by SEC, payment of dividend.

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 The Bangladesh Accountant, October 2003 - March 2004

Profile of Selected Companies

Table: company profile

Name of Incorporation Conversion Date of IPO Capital Commencement Product/service

company as a Private into Public through of operation
Ltd. Ltd. / IPO
established (Figures
as Public in
Ltd. Million
Taka
SS ---- June, 1994 24-03-1999 80 April, 1997 Cotton &
polyester yarn

FW April , 1997 June, 1999 23-03-2000 30 April, 1997 Mini bread,

toast, Fuji roll,
milk bread etc.
BS August, 1995 January, 25-08-1999 20 March 1997 Processed
1999 shrimp
LF ----- July, 1996 26-10-1999 30 June, 1999 Dress Shoe,
Casual Shoe,
Ladies Court
Shoe, Boot
(ladies),
Slippers, Sandal
etc.
RD ----- June, 1999 31-12-2000 10 January, 2000 Software
development,
data entry, IT
solution, Web-
page Designing.
HP ---- December, 31-12-2000 50 Could not start off-set, writing
1996 within June, and printing
2003 paper
BW January, 1983 June 25, 25-06-1999 30 December, 1983 Welding
1997 Electrodes,
Industrial
Oxygen
MP ---- 17th 26-11-2000 10 December, 1997 PET bottle,
September, Drinking
1995 Water, Soybean
Oil

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FINDINGS

Performance was measured through criteria like informing SEC about fund utilization, fund

utilization, IPO expense, holding of Annual General Meeting (AGM) on time, penalization by

Securities & Exchange Commission (SEC), payment of dividend.

Fund utilization and informing SEC about fund utilization

The justification of first two criteria is that the companies usually take a lot of money from

general public through IPO by assuring them to use their fund for specific purposes mentioned in

the prospectus. SEC is the Government’s regulatory body which works for the best interest of the

shareholders. So it is very important from the view point of the investors that the companies

inform the SEC about their fund utilization for the intended purposes and the project

implementation.

Measure of performance Name of company

judgment SS FW BS LF RD HP BW MP
Did the company inform N Y N Y Y Y Y Y
SEC about fund utilization
in regular interval
Source: SEC officials

Measure of performance Name of company

judgment SS FW BS LF RD HP BW MP
Was the fund utilized for its N N N Y N N Y Y
intended purposes?
Source: SEC officials

SS: Safko Spinning Mills Limited went for IPO for repaying bridge loan, repaying other loan and

meeting working capital requirement; not for starting its commercial production. The commercial

production of the company started in 1997 and it went for IPO in 1999. The Company utilized the

IPO fund for the same purpose it was raised for the bridge loan and other loan were repaid. The

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 The Bangladesh Accountant, October 2003 - March 2004

working capital of the company as at September 30, 1998 was Tk. 20,187,437 but the working

capital as at December 31 of the year 1999, 2000 and 2001 were all negative, which were Tk. -

8,145,372; Tk. -9,581,872 and Tk. -1,217,506 respectively. These information reveals that the

company could not utilize the IPO proceed properly which was raised for the working capital

requirement.

FW: IPO was issued for expansion of two new product lines namely – Puffing Snack and Mineral

Water. And in the prospectus it was mentioned that the company would start the commercial

operation of both the product line within July 2000. The company could start the operation for the

puffing snack within due time but could not do so for the mineral water project. We were unable

to verify whether the company could implement the tasks like opening of L/C for import of

machinery, arrival of imported machinery at site, commencement of creation of machinery,

completion of machinery creation as mentioned in the implementation schedule in prospectus.

BS: The project was fully completed during the year 1997. The company started its commercial

production on March, 1997. The company went for IPO not to start the project; rather it went for

IPO to finance its additional working capital requirements. But they didn’t submit quarterly fund

utilization report to the SEC. So it is not possible to know whether the BS utilized the IPO fund

for its intended purpose.

LF: The company raised their fund for purpose of construction of a building and civil work,

repayment of bridge loan and to meet up the IPO expenses. They successfully repaid the bridge

loan. But there is slight unfavorable variance in the construction of building and civil work and

IPO expenses.

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 The Bangladesh Accountant, October 2003 - March 2004

RD: The annual report of RD disclosed that the project was implemented on time. The company

went for IPO for collecting fund with a view to purchase the V-SAT Server Equipment, for

installation of Telephone & Cable and to meet IPO expenses. But the fund could not be utilized

for the same purpose it was raised for. The SEC gave a directive to RD for transferring fund in

other companies.

HP: The Company raised fund for the purpose of land and land development, building and civil

works, erection and installation of machinery, office equipment, security deposit and guarantee,

IPO expenses, initial working capital (partial). The prospectus disclosed that before the IPO, 83%

of the land and land development works was completed. The analysis of annual report indicated

that land and land development was completed fully. Construction of building and civil works

was completed 22% before IPO. The Balance sheet as at June 30, 2001 indicated that up to that

date 54.56% of the work was completed (on the basis of expenditure incurred up to that date

compared to total estimated cost of construction of building and civil works). Whether erection

and installation of machinery was completed or not could not be verified. The company could not

start its trial operation, let alone commercial operation. The analysis of IPO fund utilization

indicated that the company could finish the land and development with a favorable variance.

Fund utilization for Building and Civil Works Erection and installation of machinery could not be

verified as the annual report neither disclosed nor provided any such information regarding it.

BW: The Company went for IPO for construction of building and civil work, purchase of local

machinery, purchase of vehicles, and to meet up the IPO expenses and raise the working capital.

The company estimated that it would complete the building and civil works within December

1999 to January 2000. But the analysis of Balance Sheet as at December 31, 1999 and 2000

indicated that the company could not finish the task yet. The same thing is applicable for the

Vehicles also. The working capital of BW at the end of December 1999 was Tk. 40,339,285 and

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 The Bangladesh Accountant, October 2003 - March 2004

at the end of 1999 and 2000 this amount was Tk. 73,438,917 and Tk. 61,876,237 respectively. So

the analyses of working capital indicate that the fund raised for working capital was utilized

properly after IPO.

MP: The project was fully completed during the year 1997-1998. The company started its

commercial production on December 21, 1997. The company did not issue IPO to start the

project; rather it went for IPO to pay off underwriting advance from SABINCO. The company

paid off underwriting advance from SABINCO properly.

IPO expense

The companies use their IPO proceeds for various purposes among which meeting the expenses

during IPO is a common one. They disclose the forecasted amount of IPO expenses in the

prospectus according to Public Issue Rules, 1998. So it is very important to know whether the

companies efficiently forecasted their IPO expenses

Measure of performance Name of company

judgment SS FW BS LF RD HP BW MP
Was the IPO expenses were N N Y N N N N N/A
paid according to the amount
prescribed in the prospectus?

SS: The Company disclosed the forecasted amounts of IPO expenses of Tk. 6,800,000. But it was

Tk. 3,766,794 at an actual; not near of budgeted as the company was undersubscribed. The

company did not show break up the IPO expenses in the annual report.

FW: There was a significant variance in the budgeted and actual IPO expenses. The IPO

expenses were disclosed in the prospectus amounted to Tk. 3,540,000 but the actual IPO expenses

amounted to Tk. 4,800,000. The company disclosed the issue management fees to be Tk. 300,000

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 The Bangladesh Accountant, October 2003 - March 2004

but it amounted to Tk. 600,000. The under writing commission has an unfavorable variance of

Tk. 150,000 and the printing and postage fee had an unfavorable variance of Tk. 776,000.

BS: The underwriting commission was too high (4% of IPO fund). In the Annual Report of 1999

it was found the actual IPO expenses were Tk. 3,535,000 where the forecasted IPO expenses were

Tk. 4,000,000 and IPO expenses were not broken down item wise.

LF: The analysis of IPO expenses that was disclosed in the prospectus and the actual IPO

expenses (disclosed in the annual reports of the year 2000) revealed an unfavorable variance of

Tk. 273,438. Moreover, the company disclosed that a post issue expenses amounted to Tk.

370,000 would take place but the annual report did not show any expenses under this particular

title. And there was a significant unfavorable variance under the ‘others’ title. The company

should have disclosed the breakdown of this particular expense.

RD: The analysis of estimated and actual IPO expenses indicate that forecasted amount was Tk.

2,000,000 and actual expenses were Tk. 2,370,442 i.e. there was an unfavorable variance of Tk.

370,442. The main reason of such variance is the payment made to the bankers to issue Tk.

235,912 which was excess than estimated.

HP: the amount disclosed in prospectus was Tk. 5,450,000 and actual IPO expenses amounted to

Tk. 4,445,509 having a favorable balance of Tk. 1,004,491. The company paid an excess payment

to the issue manager of Tk. 188,000 than it estimated.

BW: In prospectus IPO expenses are estimated as Tk. 922,000 and no head wise details of such

expenditure were provided. But in Annual Report 1999 it was found that the actual IPO expenses

were Tk. 9,026,686.

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MP: The actual IPO expenses could not be verified as the Meghna PET industries limited,

because it did not submit its financial statement for the year ended June 30, 2001 until the end of

June 30, 2000.

Holding of AGM

According to companies Act 1994, the companies must hold their AGM on specified times. The

performance of the companies usually comes in front of the shareholders on the date of AGM.

The shareholders can exercise their voting power on the AGM date. So it is very important for the

companies to hold their AGM regularly.

Measure of performance Name of company

judgment SS FW BS LF RD HP BW MP
Did the company hold its Y Y N N N Y N N
AGM on time?

(Insert Table 2 here)

Penalization imposed by SEC

SEC is the government regulatory body to monitor the performance of companies. They are also

empowered to penalize the companies on various grounds like manipulating fund utilization,

failure to pay dividend, failure to hold AGM and on any other grounds where the companies

violate the shareholders rights.

Basis of performance judgment Name of company

SS FW BS LF RD HP BW MP
Did SEC penalize/ warn the N N N Y Y N Y N
company for any reason?
Source: SEC officials

SEC gave directive to LF for not providing information to the auditor. SEC also gave directive to

RD for transferring fund in other companies and for not paying dividend even though they

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declare dividend. SEC filed a review petition against BD welding for not paying interest on

debenture. However SEC did not penalize to SS, FW, BS, HP, and MP for any reason.

Payment of dividend

According to Walter, Gordon, and others, the Dividend Payout (D/P) ratio is relevant, and it

certainly affects the market prices of shares. The empirical evidence, though, not conclusive and

only suggestive, reveals that investors seem to prefer current dividend over retained earnings. The

investors who invest in the stock market want to get their return in both short and long run. They

usually do not want to sacrifice their short-term return for their long run return. They want to get

dividend.

Basis of performance judgment Name of company

SS FW BS LF RD HP BW MP
Did the company pay dividend Y N Y N N N/A N N
regularly after IPO?

During IPO issue SS estimated that it would give the shareholders a dividend of 13%, 15% and

18% for the year 1999, 2000 and 2001 respectively. But after IPO, SS paid a dividend of 8%,

10% and 8% in the year 1999, 2000 and 2001 respectively. So the company is declaring dividend

consistently much lower than they estimated over the last three years. In the first 3 year FW did

not declared or pay any dividend. But in the fourth year they declared 10% dividend. BS declared

and paid dividend 8% and 10% in the year of 1999 and 2000 respectively. LF suffered a huge

loss in both the year 1999 and 2000 hence no dividend was declared in both the years. RD started

its commercial operation in 1999. It did not declare dividend for the year ended June 30, 2000.

The declaration of no dividend in the first year was an acceptable one. It declared a dividend of

12% for the year ended June 30, 2001. This amount is also satisfactory as it had an operation of

only two years. HP did not start its commercial operation yet. So this criterion is not a suitable

one for performance judgment. BW & MP did not declare any dividend yet.

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CONCLUSION

The above discussion clearly reveals that all the performance of the companies after IPO was not

satisfactory. The reasons are explained according to individual company.

The actual income of SS was no where near to the forecasted income in all the last three years.

The company disclosed a highly inflated forecasted income which is virtually impossible to

achieve. Profit is the main indicator of performance judgment. Earning before taxes ratio for the

year 2001, 2000 and 1999 was 6.26%, 7.75%, 4.36% respectively which were insignificant. The

company should increase its turnover and liquidity position and should retire debt as financial

expense occupied a large part of turnover from the last three years.

FW was incorporated under the condition imposed that they would export at least 30% of its

sales. But it did not comply with this condition. The company could start the operation for the

puffing snack within due time but could not do so for the mineral water project. The overall

performance of the company for the last three year was not satisfactory.

The overall performance of BS was not satisfactory from 1998 to 2000. The Earning Per Share

(EPS) in 2000 was the lowest and the liquidity position was also very poor. Moreover, the

company has huge long term debt for which they has to pay a significant amount of fixed charges

for interest purpose. In this respect the company should try to increase turnover by way of proper

negotiation, rectify the policies where required and also try to reduce the fixed charge expenses.

The analysis of annual reports of the LF indicated that the company is in a horrible position. The

audit report for the year ended concludes a qualified opinion. According to the auditors “We

further draw attention to the facts that low capital turnover ratio, negative gross profit and

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together with the failure to pay installments of long term loan, as well as accumulated loss of Tk.

30,672,728 raised a question of continuing the company as a going concern.” So the company is

really struggling to survive.

The overall performance of RD is appreciable so far. The concept of IT (Information

Technology) has not get into a glorious shape yet in our country. As a result, any IT related

company in our country will get special emphasis and also privileges from government. From

ratio analysis it is found that the company earned 51.15% profit margin in 2000-2001. If we

consider from the long term perspective, there is a grate possibility to decline such a high profit

margin, because new competitors will come with new views and ideas day by day. But the

company received a directive from the SEC for not utilizing its fund properly.

HP did not start commercial operation up to December 2001 and therefore there is no scope to

make a conclusion about there performance.

In ratio analysis we tried to focus the overall features of BW from the period of 1998 to 2000 and

we found the company’s position is not well enough. BW was in Z group category according to

SEC.

MP did not hold any AGM after IPO and that’s why no Annual Report was published. For this

reason some important aspects could not verified. Up to June 2000, the company had receivables

of TK. 36.4 million but no provision for bed-debts were maintained and this is very much

significant loophole of the company. In prospectus of the company it was clearly stated that “The

Board of Directors as well as key stuff of the company is not adequately qualified. Standard of

corporate governance is poor. Accordingly, there may be lack of proper policy and performance

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may not be at desired/expected level”. Since the company is doing business with other people’s

money, such a statement is not indicator of good governance.

The SEC should monitor the project implementation of the companies continuously. The HP

could not start its commercial operation yet and the Fu-Wang Foods limited could not start its

mineral water project after IPO within specified time. But the SEC did not take any legal action

against these two companies.

Table 1: List of Public Issues during the period 1999-2000

Year Quarter Name of company Date of

publication of
prospectus
1999 January-March Sinobangla Industries Limited 25-02-1999
Safko Spinning Mills Limited 24-03-1999
Rangpur Foundry Limited 25-03-1999
April-June Bangladesh Welding Electrodes 25-06-1999
July-September Bionic Seafood Export limited 25-08-1999
Prime Bank limited 29-08-1999
October-December Legacy Footwear limited 26-10-1999
South East Bank limited 15-11-1999
Dhaka bank limited 25-11-1999
National Credit & Commerce Bank limited 30-11-1999
Miracle Industries limited 27-12-1999
January-March Fu-Wang Foods limited 23-03-2000
April-June Social Investment Bank limited 27-06-2000
2000 July-September Raspit Data Management & 28-08-2000
Telecommunication limited
October-December Prime insurance Company limited 27-10-2000
Meghna Pet Industries limited 26-11-2000
Dutch Bangla Bank limited 24-12-2000
and Hakkani Pulp & Paper Mills limited 31-12-2000

Source: Developed from SEC Quarterly Reviews in 1999-2000

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TABLE: 2 Compliance with holding of AGM

Name of AGM Accounting Time limit to hold AGM AGM held on

company (after year according to Companies
IPO) Act, 1994
First 1999 On or before June June 25, 2000
30,2000
Second 2000 On or before June June 25, 2000
SS
30,2001
third 2001 On or before June June 24, 2000
30,2002
First 2000-2001 On or before December, December 24, 2001
FW
2001
First 1999 On or before June August 17, 2000
30,2000
Second 2000 On or before June December 24, 2000
BS
30,2001
Third 2001 On or before June Was not held up to June,
30,2002 2000
First 1999 On or before June May 27, 2002
30,2000
Second 2000 On or before June August 26, 2002
LF
30,2001
third 2001 On or before June Was not held up to June
30,2002 30, 2002
First 1999-2000 December 31, 2000 December 27, 2001
RD Second 2000-2001 December 31, 2001 Was not held up to July 31,
2002
First 2000-2001 On or before December December 11, 2001
31, 2001
HP
Second 2001-2002 On or before December Was not held before June
31, 2002 30, 2002
First 1999 On or before June September 12, 2000
30,2000
Second 2000 On or before June December 11, 2001
BW
30,2001
third 2001 On or before June Was not held before June
30,2002 30, 2002
First 2000-2001 On or before December Was not held before June
MP
31, 2001 30,2001

Source: developed by analyzing companies Act, 1994 and Quarterly Reviews of SEC and Annual

Reports of Companies

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REFERENCES

1. Public Issue Rules, 1998 (Published in SEC Quarterly Reviews, January-March ‘1999)
2. SEC Quarterly Reviews, January-March ,1999; page-7,19,20
3. SEC Quarterly Reviews, April-June ,1999; page 10-14
4. SEC Quarterly Reviews, July-September, 1999; page 10-12
5. SEC Quarterly Reviews, October December , 1999; page 11-14
6. SEC Quarterly Reviews, January-March , 2000; page 10-14
7. SEC Quarterly Reviews, April-June , 2000; page 11-13
8. SEC Quarterly Reviews, July-September, 2000; page 13-14
9. SEC Quarterly Reviews, , October December , 2000; 11-13
10. Monthly Reviews of DSE January,1999 - June,2002
11. Annual reports of companies
12. Companies Act, 1994
13. Prospectus of the Companies.
14. M Y Khan, P K Jain, Financial Management: Text and problems; second edition, page-
566-567.
15. Tim Jenkinson, Alexander Ljungvist; “Going Public: the theory and evidence on how
companies raise equity finance, second edition.

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