Why restricting use of IPO proceeds misses the real problem

The Bangladesh Securities and Exchange Commission (BSEC) recently released its draft rules for initial public offerings (IPOs), which propose a strict prohibition on using IPO proceeds to repay loans. The draft also introduces several other controls over how companies may deploy funds raised from the public. These rules raise a key question about the appropriate level of flexibility companies should have when allocating capital raised from shareholders.

At its core, the issue revolves around ownership. IPO proceeds and corporate profits alike belong to shareholders. If a company can use retained earnings for any legitimate purpose, including reducing debt, treating freshly raised capital differently introduces an unnecessary – and arguably counterproductive – distinction between two forms of shareholder funds.

Capital allocation should be guided by efficiency and value creation. In some cases, expansion may be the most prudent choice; in others, strengthening the balance sheet through debt reduction may offer greater long-term benefit. A blanket prohibition on loan repayment implies that reducing liabilities is a lesser or suspicious use of funds. In reality, a healthier balance sheet may be precisely what positions a company for long-term growth.

Supporters of the restrictions frequently cite past abuses, noting that some controlling shareholders have diverted IPO funds for personal benefit. This concern is legitimate. Bangladesh's capital markets have seen numerous instances where controlling shareholders have profited at the expense of minority investors. Protecting minority shareholders is essential for maintaining market integrity.

However, this argument points to a deeper governance issue. If controlling shareholders cannot be trusted to act in the company's interest, the suitability of such firms for listing must be questioned. A firm whose sponsors treat it as an extension of their personal finances is failing the most basic test of corporate legitimacy. The "business entity concept," a foundational principle of accounting, makes a clear distinction between the company and its owners. A company is an autonomous economic unit, separate and independent from those who hold its shares.

When controlling shareholders misuse IPO proceeds for personal benefit, they reveal weaknesses in governance, not gaps in rules on capital deployment.

In such cases, the problem is not insufficient restrictions on how proceeds may be used but inadequate scrutiny during the listing process. Strengthening listing standards, improving governance assessments, and enforcing accountability would more effectively address the root cause than micromanaging capital allocation for all companies.

Blanket prohibitions penalise all companies for the misconduct of a few. They constrain responsible firms, distort financial decision-making, and discourage healthy companies from entering the public markets. Worse, they create a false sense of investor protection. The real risk lies not in allowing companies flexibility, but in permitting poorly governed firms to raise public funds in the first place.

Effective regulation builds trust, supports efficiency, and contributes to a vibrant market. Overregulation, however well-intentioned, risks stifling the very markets it aims to protect. Deepening Bangladesh's capital markets requires trusting companies and investors to make rational decisions while ensuring that only credible, well-governed firms have access to public capital.

Let the market assess whether a company's use of capital is prudent. The regulatory framework should focus on ensuring that only suitable companies earn the privilege of listing and raising money from the public.

The writer is the CEO of VIPB Asset Management Company. The views and opinions expressed in this column are those of the author and do not necessarily reflect the opinions and views of The Daily Star