The securities regulator has brought about changes in the method of determining offer price of a company's shares while allowing floatation of its IPO (initial public offering). The Securities and Exchange Commission (SEC) from now on will follow its own method in determining the offer price of a company willing to go public. The offer price should match the company fundamentals. As per the SEC's new method, the offer price of each share of a company, including premium, will not be more than the multiple of its weighted EPS (earning per share) and market P/E (price earning) ratio or industry P/E ratio, whichever is lower. The SEC will follow this method for determining offer price by relating the company's performance with the market and industry P/E ratios.
For example, they said if the market P/E and industry P/E of a company, are 14 and 12 respectively, then the industry P/E - 12 - will be treated as the reference to determine the offer price.
If the company's weighted EPS is 2, then the industry P/E - 12 - will be multiplied by 2, and the value will be 24. In that case, offer price of the company's each share, including premium, will not be more than Tk 24. This method of determining the offer price will be maintained so that a company cannot demand irrational premium. The securities regulator so far allowed IPOs considering a company's EPS and market P/E ratio following the existing rules.
As per the new method, the offer price will be determined in a justified way by evaluating the market P/E ratio, industry P/E ratio and the company's weighted EPS. As a result, the tendency of demanding irrational offer price will decline. From now on the regulator will follow this method, while allowing the IPO proposals.
