Bangladesh plans insurance guarantee to bond investors

Bangladesh is planning to attract bond investors through an insurance guarantee and the securities regulator is working with the state-owned Shadharan Bima Corporation (SBC) to develop a product for this, said Professor Shibli Rubayat Ul Islam, the chairman of Bangladesh Securities and Exchange Commission (BSEC).

In a webinar organised by investment bank City Bank Capital Resources Ltd on Saturday, the BSEC Chairman also said his office is working to attract some capital in flight from other parts of the world, like Hong Kong and the Middle East region.

He expects that Sukuk – shariah-compliant bonds – would attract funds from the Middle East that can be utilised in infrastructure projects.

Professor Islam, also the former chairman of SBC, explained the guarantee plan, "against a nominal premium insurer would cover as high as 80-90 percent of the bonds' principal amount and it also will be able to share the undertaken risk with large reinsurers."

The innovative product would be a win-win for all, he added.

He said he is hopeful about approving municipal bonds in coming days that would finance the local government's planned projects after meeting two mayors of Dhaka.

In the webinar titled "Impact of budget on capital market and other market development initiatives", BSEC Chairman said that some proposals in the budget made the securities regulator anxious and they have communicated the issues with the National Board of Revenue (NBR) boss so that these are addressed in the final budget.

The BSEC a few weeks earlier had written to the government for some fiscal incentives for bond investors that include tax waiver on income from all types of bonds like prevailing in zero-coupon bonds if the investor is not a bank or financial institute.

But the government did the opposite- cancelling the existing incentive even for zero-coupon bonds.

City Bank Capital Resources' Managing Director Ershad Hossain said developing a vibrant bond market in Bangladesh is a long pending task and it needs fiscal incentives to jumpstart.

In Sri Lanka, the government declared income of first five years from bonds tax-free, he said. 

Bangladesh should pick the low-hanging fruits very soon, like exchange trading of treasury bonds and gradually introducing other types of debt securities, said Hossain.

To reduce excessive load on the banking sector to finance long term projects with short term deposits BSEC also had a request to reduce corporate tax by 5 percentage points if a company has at least half of its long term liability in bonds.

And that remains unaddressed. 

The proposed budget only addressed the cost of secondary trading of bonds through reducing the tax burden on the brokerage fee.

The BSEC has proposed some fiscal benefits to attract more investments not only in bonds but also in projects and companies including listed ones.

It requested the NBR to reduce corporate tax for listed companies too- like government declared 2.5 percentage points for non-listed companies only.

The BSEC Chairman also agrees to market experts that the proposed narrowed gap between listed and non-listed companies would discourage stock market listing.

Trust Bank's Managing Director Faruq Mainuddin has proposed a law for a mandatory listing of companies after they cross a certain threshold in annual turnover. 

A vibrant secondary market is a must if perpetual bonds to help banks fulfil their tier-one capital requirement.

The BSEC Chairman said that applications for nine such bonds would be approved this month.

Ershad Hossain, a bond expert, emphasised on proper credit rating and due diligence to earn investors' confidence.

Professor Islam informed that in coming days companies have to submit statements to the Financial Reporting Council (FRC) and all the regulators would use the same statement from the accounting regulator's website.

That would bring transparency in reporting and end the ways for accounting jugglery, he said.