Merchant bank AFC Capital has left the market silently, surrendering its licence, without facing any action against it for bringing controversial IPOs including Ring Shine Textiles, C & A Textiles, and Tung Hai Knitting & Dyeing.

Incorporated in 2010, it had been involved in 12 initial public offerings (IPOs), jointly with other merchant banks in most cases, between 2012 and 2022. The firm also delivered services as a facilitator in disbursing rights issues and underwriting capabilities and provided corporate advisory services to clients.

AFC Capital suddenly showed up at the door of the securities regulator last year for permission to shutter its business operations. It said it was struggling to make profit.

Sources told The FE that the Bangladesh Securities and Exchange Commission (BSEC) at first rejected the plea only to allow AFC Capital to close its business in December.

Several players operating in the sector said investment banking is no longer a profitable business in the country because of the lingering challenges in the stock market.

That, however, is unlikely the case of AFC Capital that handled the highest number of public issues among merchant banks in the decade through 2022.

About half of the IPOs showed a faltering business performance just one or two years after listing despite the fact that they had raised money to expand business and prop up earnings.

It is alleged that financial results of the companies had been falsified before the floating of the IPOs.

The companies have shown uncanny resemblance in their pre- and post-IPO financial indicators.

For example, textile companies Tung Hai Knitting & Dyeing Limited and C & N Textiles demonstrated a growth in profit in the years before going public, but after listing it took only three years for them to run into losses.

AFC Capital worked with Imperial Capital to bring Tung Hai Knitting & Dyeing Limited to the market in 2014.

The Tung Hai is not in operation now. In 2019, an inspection team from the Dhaka Stock Exchange (DSE) could not enter its factory premises for the gate at the entrance being locked.

The same year, C & N Textiles, listed in 2015, was also found shut during a factory visit by the regulatory body.

Meanwhile, investors, who expected good return from the stocks after flipping through IPO prospectus of the textile companies, are counting losses.

Tung Hai Knitting at present trades at Tk 3.90 per share on the DSE whereas its shares were floated at the face value of Tk 10. The current share price of C & N Textiles is Tk 7.30 each.

Both the textile companies have not given a penny in dividends for years to shareholders.

Mahbub H Mazumder, former managing director of AFC Capital, claims that the organisation had done everything in its power before preparing IPO prospectus in every case.

"We don't prepare audit report, corporate governance certificate and other documents. Upon the submission of all documents, BSEC scrutinises those."

Moreover, the Dhaka Stock Exchange and the Chittagong Stock Exchange check the documents, prospectus and then send their recommendations to the securities regulator. When satisfied, the BSEC provides consent for listing, Mr Mazumder added.

However, in a probe into Ring Shine Textiles, which has become a case study of financial crime in the country's capital market, the BSEC found that the issuer, the auditor and the issue manager had worked together to launder money collected through the IPO.

According to the investigation report, the issue managers -- AFC Capital and CAPM Advisory - were involved in the IPO manipulation process.

It said the issue managers were required to examine audited financial statements for five years (June 30, 2015 to June 30, 2019) and verify those against management accounts, books of accounts, register of inventories, fixed assets, export documents, and bank statements but they "completely failed" to do so.

Referring to the management accounts of Ring Shine Textile, says the report, it appears that the net operating cash flow was Tk 27.19 million in the negative for the year ended in June 2018, which determines that the company was not in the position to apply for listing.

"But the issue managers have provided the Due Diligences Certificate to the company," reads the probe report.

Before the licence surrender, AFC Capital underwent an ownership change and was changed into Leeds Capital Services Limited.

Asked why the Lead Capital gave away its licence, Ahsanul Kabir, who was its managing director, said the business was not profitable.

"There was no major change in the ownership. There were 17 to 18 owners. They transferred shares among themselves and some of them resigned from the board."

The Lead Capital had only two functions -- one was issue management and the other underwriting. It did not manage portfolios.

The limited scope of operations posed challenges for profit making, added Mr Kabir.

Mohammad Rezaul Karim, spokesperson of the BSEC, said, "We had laws to punish issue managers. We did it several times and we will also do it in the future."

But AFC Capital was not punished for the failures identified in the investigation report. Now, it does not even exist.

Md. Ashequr Rahman, managing director of Midway Securities, told The FE that the BSEC has more responsibilities than what it can handle.

Before the 2013 demutualisation, brokers had been involved in the IPO approval process. "IPO was the responsibility of brokers. I can bet there were fewer cases of bad IPOs back then than now."

After the demutualisation, the BSEC does not take recommendations from the DSE, said Mr Rahman. "I believe these problems can be solved by taking observations of the DSE seriously."