BSEC Move to Free Half of IPO Shares as Day-one Sale Sparks Manipulation Fears

Bangladesh’s stock market regulator is considering a major relaxation of IPO rules that could allow institutional investors to sell half of their allotted shares from the first day of trading, raising fears of speculative price swings and fresh losses for retail investors.

The Bangladesh Securities and Exchange Commission (BSEC) is weighing sweeping changes to the rules governing institutional share sales in companies going public through initial public offerings (IPOs), including scrapping the existing 90-day lock-in requirement on the first 50 per cent of their allocations.

The proposed changes could inject liquidity into a market struggling to attract investors, but critics warn that allowing large investors to cash out immediately after listing could undermine price discovery, intensify volatility and leave small investors exposed to sudden sell-offs.

Institutional investors play a pivotal role in setting IPO prices under the book-building method, which involves company valuations, roadshows and competitive bidding. Permitting them to sell half their allotted shares on the first trading day could allow them to realise quick gains, potentially placing retail investors at a disadvantage.

Dr Mahmud Osman Imam, a professor of finance at the University of Dhaka and a stock market expert, said institutional investors should not be completely exempted from lock-in restrictions.

Developed markets also impose lock-in arrangements for varying periods, he said, adding that Bangladesh could shorten the restrictions to reflect local market conditions but should retain safeguards on at least part of institutional investors’ allocations.

Removing the lock-in entirely on half the shares could create opportunities for manipulation and ultimately hurt ordinary investors, he warned, recalling past episodes in which retail investors suffered heavy losses.

A further concern is whether newly listed shares will remain subject to circuit breakers under the proposed framework.

Previously, newly listed shares on the Dhaka and Chittagong stock exchanges could trade without price limits during their first two trading days. On June 17, 2021, however, the BSEC introduced circuit breakers limiting price movements to 10 per cent from the previous day’s closing price.

The proposed draft leaves the decision on applying circuit breakers to the stock exchanges, creating uncertainty over whether newly listed shares will continue to enjoy the same protection against sharp price swings.

Mohammad Mahadi Hasan, chief regulatory officer of the Chittagong Stock Exchange (CSE), said the BSEC had left the matter to the exchanges. No decision had been taken because no new company had been listed for a long time, but the exchanges would consider the issue in light of the proposed rules.

The stakes are significant. Newly listed shares in Bangladesh have previously surged to two or three times their offer prices on the first trading day. If circuit breakers are absent, institutional investors could potentially sell half their allocations into a sharp rally, crystallising substantial gains before prices correct.

The draft also proposes substantially shortening the lock-in periods for the remaining institutional holdings.
Under the 2025 rules, 50 per cent of institutional investors’ allotted shares are locked in for 90 days, another 25 per cent for 120 days and the final 25 per cent for 180 days.

Under the proposed framework, the first 50 per cent would carry no lock-in, while the next 25 per cent would be restricted for 60 days and the remaining 25 per cent for 90 days.

Moniruzzaman, chief executive officer of Prime Bank Securities, welcomed the proposed relaxation, saying it could increase the supply of shares, improve market liquidity and allow institutional investors to recycle their funds rather than keep them tied up for extended periods.

Addressing concerns about manipulation, he argued that institutional investors participating in book-building through the Dutch auction mechanism must purchase shares at the prices they bid. In his view, this helps constrain manipulation, while valuations should ultimately reflect the issuing companies’ earnings.

The BSEC draft also proposes reducing the institutional investor allocation under the book-building method from 40 per cent to 35 per cent. The existing 10 per cent allocation for institutional investors under the fixed-price method would remain unchanged, as would the 10 per cent quota for mutual funds under both methods.

The proposed overhaul seeks to balance market liquidity with investor protection, but the outcome will depend on the final rules and their enforcement. Greater flexibility could encourage institutional participation, yet unrestricted day-one selling without adequate safeguards could expose an already fragile market to sharper volatility.

For retail investors, the critical question is whether the reforms will deepen the market�"or give large investors an easier exit at their expense.