Share Offloading & Its Valuation

Md. Mostafizur Rahman, FCMA*

Abstract: Bangladesh is one of the pioneers in the privatization of public enterprises. The question of
privatization of public enterprises arises because of their poor financial and operating performance. Public
enterprises in Bangladesh incur chronic losses, require state-financed equity injections, and credit from the
banking system. Privatization, which is used to mean the transfer of both ownership and control of the firm
from the public sector to the private sector, has been viewed as a possibly remedy to overcome the malaise of
the public sector. It is believed that privatization will reduce the role of the state, lessen the state’s fiscal deficit
by decreasing the demand for continued financing of firms from the Govt. exchequer.
According to the Privatization Policy Statement, one or both of the following methods are at present being
followed for privatization in Bangladesh:
Sale by international Tender: local and foreign buyers may participate in all such tenders. Association of
workers, employees and officers of the tendered enterprise may also offer bid for purchase of the enterprise.
Sale by public offer of shares: government-owned shares in different companies and shares of the SOEs
converted into public limited companies may be sold to the general public either directly or through the stock
exchange. Prior to offloading the shares of the state owned enterprises valuation of assets and liabilities
becomes essential. This paper attempts to highlight the essence of share offloading, methods of share
offloading, share valuation methods, pricing mechanism, procedure of listing with the stock exchange, direct
listing method and incentive provided by GOB to encourage the enterprises towards offloading the shares as
well.
Keyword: Share offloading, Share Valuations Business Planning, Economic Implication.

* Mr. Md. Mostafizur Rahman, FCMA, DGM (Audit), Bakhrabad Gas Systems Ltd., Comilla.

Introduction
Business Valuation has become an intrinsic part of the corporate landscape. The corporate environment has
witnessed dynamic changes in the recent years as mergers and acquisitions, corporate restructurings, and share
repurchases, share offloading of state owned enterprises are happening in record numbers, both in the United
States and other countries of the world. In Bangladesh for strengthening the capital market the govt. has
decided to offload the shares of different state owned enterprises. The govt. of Bangladesh also encourages
multinational companies operating business in Bangladesh to offload its shares to the public through the Dhaka
Stock Exchange and Chittagong Stock Exchange by offering some tax and other financial incentives. At the core
of the dynamics of all these activities stands some concept of valuation. The valuation methods are not only
necessary for accounting purposes but they also serve as roadmaps for the angel investors, venture capitalists
and corporate acquirers in order to know the true value of a company’s asset and its shares.
It is not only the share of private companies and the unquoted shares of public company that need valuation.
Sometimes, as in the case of a proposed merger, it becomes necessary to value even the quoted shares of
public companies. The stock exchange price of a share may stand at a figure not justified by the financial
position of the
company, because stock exchange prices are affected by external factors such as supply and demand, the bank
rate, taxation and political influences which are beyond the control of the company. In most cases shares are
quoted on the stock exchange and for ordinary transactions in shares the price prevailing on the stock exchange
may be taken as proper value. Shares of private companies, in any case, will not be quoted. If, therefore,
shares of such a company have to change hands, the value of such shares will have to be ascertained. In
addition, in the following circumstances, need arises for valuation of shares of a company:
a) For estate duty purposes
b) For formulating amalgamation and absorption schemes.
c) For purchase or sale of controlling shares (stock exchange quotations are valid only for small lots.)
d) For the valuation of the assets of a finance or an investment trust company.
e) For security purposes, e.g., where loans are raised on the security of shares (or debentures) of a
company.
f) Where a company is reconstructed under the companies Act and there are dissentient shareholders.
g) Where a company acquires the shares in a company under provisions of the Act that is when 9/10 of
shareholders in a company agree to transfer shares of dissentient shareholders also
h) Where shares of one class are to be converted into share of another class, e.g., deferred share have to
be converted into other shares.
The factors that affect the value of shares of a company are similar to those that affect the value of goodwill of
the company. In fact, valuation of goodwill and valuation of shares are interrelated. General expectation has to
be determined in the same manner as in case of goodwill and it plays a vital role in determining the value of
shares.

Objective of the study

 To highlight the essence and benefit of share offloading of state owned companies/enterprises.
 To emphasize the need for valuation of shares under different circumstances in general and prior to the
share offloading by the state owned enterprises in particular.
 To reflect the core concepts of the term value and the conceptual framework of different valuation
methods.
 To highlight the procedures for offloading of Govt. shares and its
pricing mechanism.
Methodology
The Study is mainly based on the secondary data. The secondary information and data were collected from
published books, journals, research papers, and official documents.
Core Concepts of value
The term value is used to connote different meanings. The different concepts of value are significant for different
purposes. Therefore, it is useful to discuss the various meanings of value to provide contrasts with each other
and to understand the appropriateness of each of them.
Book Value
Book value is an accounting concept. Assets are recorded at historical cost, and they are depreciated over years.
Book value may include intangible assets at acquisition cost minus amortized value. The book
value of debt is stated at the outstanding amount. The difference between the book values of assets and
liabilities is equal to shareholders funds or net worth. Book value per share is determined as net worth divided
by the number of shares outstanding. Book value reflects historical cost, rather than value. Value is what an
asset is worth today in terms of its potential benefits
Replacement Value
The book value of assets depends upon historical costs which may not be relevant in present and future
periods. This difficulty can be overcome if we determine the replacement value of the assets. Replacement
value is the amount that the firm would have to spend if it were to replace its assets in the current condition.
There are certain limitations in using the replacement concept. Firstly, the firm must ascertain the cost of those
types of assets being used by the firm currently. It is practically difficult to find out exactly the type of assets the
firm is using presently. Such assets may no longer be produced now. If the assets being used by the firm are
not manufactured now, there is no way to ascertain the replacement value of the assets. Secondly it is not
necessary that a particular asset or business would be worth its replacement value. The replacement value is
likely to ignore the value of the intangibles. It also does not depend on the usefulness of the assets currently
used by the firm. Thus, though replacement concept is an improvement over the book value concept, yet it is
not a complete and very useful concept in all situations.
Liquidation Value.
Liquidation value is the amount that a company could realize if it sold its assets, after having terminated its
business. It would not include the value of intangibles since the operations of the company are assumed to
cease. Liquidation value is generally a minimum value which a company might accept if it sold its business.
Going concern value
Going concern value is the amount that a company could realize if it sold its business as an operating business.
Going concern value would always be higher than the liquidating value. The difference between the two values
arises due to the usefulness of assists and value of intangibles. That is goodwill may command a positive value
when it is sold as a going concern.
Market value
Market value of an asset or security is the current price at which the asset or the security is being sold or
bought in the market. Market value per share is expected to be higher than the book value per
share for profitable growing firms. A number of factors influence the market value trend in the market value per
share. In ideal situation, where the capital markets are efficient and in equilibrium, market
should be equal to present or intrinsic value of a share. Primary reasons for Business valuation:
Business valuations are usually undertaken for primary reasons which are outlined below:
a) Establishing a price for a transaction
b) Business planning
c) Attract capital
d) Aid in estate and gift planning
e) Meet regulatory requirements

Establishing a price for a transaction

Valuation assists business owner in determining the reasonable asking price prior to the sale of an existing
business entity. It is also useful in connection with the merger/ acquisition transaction as a due diligence
consideration.

Business planning
A fair valuation constitutes the fundamental base of the actual buy/sells agreement. This is also conducive to
business owners in respect of negotiating buy/sell agreement. A sound valuation which is prepared prior to the
occurrence of a liquidation event and off loading of unquoted shares of public companies as well as state
owned enterprises governed by the companies Act can save both time and money. Business owners can be
highly benefited from the business valuation as it provides a valuable guideline for formulating the long term
business plan and strategies to enhance the profit and thereby maximizing the share holder’s wealth e.g. the
value of their business. In doing so, business owners often use management consultant to improve strategies
and tactics through a particular function e.g. marketing operation. The professional business valuation
consultant focuses on how strategies and tactics create value for business owners.

Attract capital
Valuations often form an important base for raising funds through debt or equity financing. The core
components of business valuation
a) The nature and history of the business
b) The general economic outlook and the conditions of the specific industry
c) The book value of the stock
d) The financial condition of the company
e) The earning capacity of the company
f) The dividend paying capacity of the company
g) Whether the company has goodwill or other intangible value
h) Previous sales of stock
i) The market price of publicly traded companies who are engaged in the same or similar lines of
business.

Methods of Valuation
There are two principal methods of valuing shares, namely:
(a) The asset Backing Method (The net asset/ Net worth value or intrinsic value)
(b) The yield valuation Method (Yield Basis or the Market Value)
The trend of judicial decisions seems to be that the assessment of the value of shares must be based primarily
upon the income yield but regard must also be had to the asset backing e.g. the net asset/net worth basis. The
result obtained by the former method may have to be modified in the light of the asset backing. The buyers and
sellers in an open market are directly influenced by the earnings power of the shares than by their asset
backing, but the assets would be considered for assurance that returns would be maintained. In practice there
are many technical points and market factors which affect the valuation of shares. Some of these are:
a) The nature of the company’s business
b) General economic condition, e.g. possibilities of new competition, scarcity of raw materials, labour,
supply, and transport bottlenecks, etc.
c) Political, financial, and other factors, e.g. imposition of excise duties, threat of nationalization, war,
devaluation, etc.
d) The demand and supply of shares
e) The effect of the death of shareholder or of sale of shares by a member with large holding particularly
as regards continuity of management.
f) The fact that there is no free market for unquoted shares.
Recognized concurrent methods of computing share value
a) Book value method
b) Revaluation method
c) Earning capacity method
d) Dividend yield method
e) Fair value method

Steps to be taken for offloading

First step
Taking decision in a meeting of the company on the following points:
a) Date of the share offloading of each company
b) Selection of the issue manager (ICB may be given preference)
c) Required changes of the Articles & Memorandum of Association etc.
Second step
An extra ordinary General Meeting (EGM) shall be called on for taking decision concerning the determination of
the face value of the shares not exceeding taka 100 as well as the ascertainment of the lot size (5/10/50/100
shares in each lot) of the shares that will be offloaded. The special resolution of the EGM shall be submitted to
the SEC, DSE & CSE.
Third step
The concerned enterprise shall have to apply to the Securities and Exchange Commission (SEC) for permission
for offloading the shares.
Fourth step
The concerned enterprise shall have to apply to the Dhaka Stock Exchange and Chittagong Stock Exchange with
the required application fee as fixed by both the DSE & CSE as per the requirements of their regulations. The
enterprise shall have to submit some documents as embodied in clause no. 3(II) of the Stock Exchange (Direct
Listing) Regulation, 2006.
Fifth Step
One Credit Rating Company shall have to be appointed for rating the company’s financial position and
soundness. The credit rating company reflects an independent, professional and impartial opinion on the basis
of assessment of credit risk associated with an instrument or a corporate entity. The rating services provide a
guideline to the investors as to the degree of certainty of payment of principal and interest in respect of debt
instrument and on the degree of acceptability of the net worth and earning from the shares
and stocks or for disposing or holding.
Sixth Step
Information document shall have to be prepared in accordance with direct listing regulations, 2006 and
submitted to DSE & CSE for approval. After having approval DSE & CSE will publish it in their website for
investors’ information. The concerned enterprise shall also publish the information document in at least two
widely circulated national dailies minimum 7 days before commercial trade upon listing by the Exchange along
with an electronic copy for posting in the web page of the Exchange.
Seventh Step
The concerned enterprise shall have to apply to the Central depository Bangladesh Ltd. for listing upon payment
of listing fee. All share certificates of the offloaded shares shall be deposited to CDBL for trading in the
secondary market. All the transfer of the offloaded shares that will be traded in the secondary market will be
made by the CDBL.

Economic implication of share offloading

Share offloading paves the way to raise capital from stock market. Stock market is ideally a place to raise capital
for industrial development. But the stock markets of Bangladesh have not yet reached up to that stage. Ninety
five percent of our industries are built based on bank loans. Capital market not only establishes accountability
in the state run organization but also ensure direct public participation in the company’s management. Thus
potential public shareholders can create pressure on the company’s management so that it can improve its
efficiency. After offloading the shares by the state owned companies the number of shares will be enhanced
substantially which ultimately strengthen the capital market. Institutional investors, general investors as well as
foreign investors will be induced to invest in these shares for higher earnings and capital gain. The govt. may
utilize this amount of money for the development of priority sectors of the country.

Tax incentive provided by the Government to encourage share offloading.

It is believed that privatization will reduce the role of the state, lessen the state’s fiscal deficit by decreasing the
demand for continued financing of firms from the Govt. exchequer. With a view to overcoming this difficulty the
Govt. provided some extra tax benefit to the publicly traded companies so that the state owned enterprises
are encouraged to offload its shares to capital Market. Publicly traded companies (listed companies) enjoy some
extra tax benefit compared to the non- publicly traded companies which are typically illustrated below:-

Type of company Tax Conditions

Publicly traded companies (Listed
companies) other than Banks,
Insurances, Financial Institutions and
mobile phone operator
Unlisted companies including private
Ltd.
Rate
27.5% Provided that:-
a) When such companies pay
dividend at a rate more than 20%(
Provided that such dividend must not include bonus share),
it will get 10% tax rebate on applicable tax amount.
b) If such companies declare
dividend at a rate lower than 10% or don’t pay dividend
within the time frame as specified by the Securities and
Exchange Commission, the applicable tax rate of that
publicly traded company will be 37.5%.
37.5%
Companies, Banks, Insurance
Companies, Financial Institutions.
Dividend Income earned by the
companies
42.5%
45% When a mobile phone operating company converts it into a
listed company by issuing at least 10% shares Which do
not include more than 5% Pre Initial Public Offering
Placement to the public through Stock Exchanges, It will get
10% corporate tax exemption and thus its tax rate will
be reduced from 45% to 35%.
20%

Procedure for offloading of govt. shares :

State owned enterprise’s shares may be offloaded on the capital
market in the following ways:-
1) Through initial public offering under the securities and exchange commission (public issue) Rules,
2006.
2) Through Direct listing under the Dhaka and/ or Chittagong Stock Exchange (Direct Listing) Regulation,
2006.
For both the methods, legal status of the organization must be a public limited company. If the company
decides to Increase its paid up capital through issuance of new shares, it should go for IPO and if the company
decides to offload its existing shares to the public, it should get listed with the stock exchanges through direct
listing.

Revaluation of assets prior to share offloading and recognition of revaluation surplus in the balance sheet.
Paragraph 29 of IAS 16 stipulates that subsequent to initial recognition as asset, an item of property, plant and
equipment should be carried at a revalued amount, being its fair value at the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses. Revaluation should be
made with sufficient regularity such that carrying amount doesn’t differ materially from that which would be
determined using fair value at the balance sheet date.
Para 37 of IAS-16 prescribes that when an asset’s carrying amount is increased as a, the increase should be
credited directly to equity under the heading of revaluation surplus.
In line with the above provisions and based on the opinions made by some renowned chartered account’s firm
it can be concluded that the impact of the revaluation of assets and liabilities should be credited directly to
equity under the head either Capital reserve or revaluation surplus.
Para 39 of IAS-16 advocates that the revaluation surplus included in equity may be transferred directly to
retained earnings when the surplus is realized.
Tax effect on the income, if any, resulting from the revaluation of assets:
As per the provision incorporated in Para 40 of IAS-16 the effects of taxes on income, if any, resulting from the
revaluation of assets are dealt with in IAS-12 Income taxes.

Evaluation of valuation methodologies and conclusion

Shares of a company are generally quoted in the stock exchange or they may remain unquoted for some
reasons. So long as shares quoted, the market quotations are often taken as representing the valuation of the
shares on particular dates. But the stock exchange price of a share may not always be justified by the financial
position of the company, because stock exchange prices are influenced by the demand and supply, bank rate,
taxation political influence and many other external factors. Hence not only shares of private companies and the
unquoted shares of public companies need valuation, the quoted shares of public companies may have to be
valued. The methods of valuation may vary according to the purpose for which such valuation is sought.
Various methods are generally applied in the valuation of shares. The results of different valuation methods as
enumerated above don’t yield identical outcome. The variability in the results of varieties of valuation
methodologies leads the company management to apply their judgment in arriving at the best method and
thereby choosing the realistic value of shares from amongst the different results derived from the different
methods.

References:
1. Business valuation of Bakhrabad Gas Systems Ltd. As on June 30, 2006 - Evaluation and Report there of
Submitted by K.M. Hasan & Co. Chartered Accountants.
2. Momen Md. Nurul - “Implementation of privation Policy: Lessons from Bangladesh” - The Public Sector Innovation
Journal, Volume 12(2), 2007 Article - 4.
3. http://w.w.w.secondventure.com/businessvaluation-methods.asp.
4. Paripatra No. 1(Income Tax)/2008, Published in the Journal - Kar adalot - Aug, 2008.
5. Pandey I M (Eighth Edition), Financial Management.
6. Pandey I M (1987 Edition), Financial Management.
7. Khan Md. Muinuddin (1995-Reprint), Advanced Accounting - Vol-II.
8. Dhaka Stock Exchange (Direct listing) Regulation, 2006.