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Future profitability will play a central role in determining IPO share prices under the revised public issue rules for 2025, marking a major shift in how primary shares are valued in Bangladesh’s capital market.

The new framework was introduced after issuers and issue managers complained that rigid valuation methods under the previous rules had discouraged companies from going public, contributing to a prolonged slowdown in IPO activity. Regulators say the updated rules aim to strike a balance between flexibility and safeguards against price manipulation.

Under the revised rules, companies with strong growth potential can justify a premium over book value by factoring in future earnings. Market participants say this is crucial for attracting high-quality issuers that were previously reluctant to list due to restrictive pricing caps.

“The new rules allow a company’s future performance to be taken into account under the book-building method,” said Tanzim Alamgir, founding managing director and CEO of UCB Investment Limited.

Indicative prices will now be set by issue managers in consultation with issuers, based on demand and valuation opinions collected during roadshows. At least 40 eligible investors must provide valuation inputs, including a minimum of 10 each from portfolio managers, stock dealers and asset managers.

The indicative price must be justified using four internationally accepted valuation methods that incorporate future income streams. These include models such as discounted cash flow, which values a company based on its projected free cash flows, and the dividend discount model, which estimates value from expected future dividends.

“The current rules have incorporated valuation methods widely used around the world. These should help discover the real price,” said finance academic Dr. Mahmood Osman Imam.

By contrast, the 2015 rules imposed tight ceilings on IPO prices, linking them closely to net asset value and earnings per share. Bids could not exceed 1.2 times the calculated fair value, a structure designed to curb manipulation but one that many argue stifled genuine price discovery.

The securities regulator says the 2025 rules are more market-oriented, allowing broader institutional participation while strengthening oversight. However, some issue managers warn that collecting valuation opinions from 40 eligible investors could be challenging, given capacity constraints at many institutions.

To curb excessive speculation, the new rules introduce lock-in periods for eligible investors—an element missing in the earlier framework. Half of the shares allocated to eligible investors will be locked in for 90 days, with the rest released in phases over 120 to 180 days.

“The lock-in periods will prevent eligible investors from quoting distorted prices,” Dr. Imam said.

The rules also set out strict penalties for price manipulation, including coordinated or tacit collusion among issuers, investors or intermediaries. If such conduct is detected, the regulator can cancel bids, bar investors from future IPOs, revoke eligible investor status, or suspend licences of issue managers. Individuals involved may also be banned from capital market activities for up to five years.

Overall, the shift from the 2015 framework to the 2025 rules marks a significant change in IPO pricing. By emphasising future profitability, multi-method valuation and stronger institutional oversight, the new regime aims to revive IPO flows while ensuring fair and credible price discovery.