Big fillip to bond as stamp duty drastically cut

High stamp duty, which had kept the bond market moribund for years, has been reduced to 0.1 percent from 2 percent on the size of a bond.

The National Board of Revenue (NBR) in January reduced stamp duty on trust deed registration for corporate bonds and debentures to 0.1 percent on the issue size, and capped the total stamp duty for a bond at Tk10 lakh.   

Earlier, a Tk500 crore bond used to cost the issuer Tk10 crore for stamp duty alone.

The stamp duty is applicable for corporate bonds and not for government ones.  

"It is a great development. The bond market was demanding it for long. A growing number of companies are looking to secure a stable funding through bonds instead of loans from banks," said Mominul Islam, managing director of IPDC Finance Ltd.

In the last three years, his company has issued two corporate bonds to fuel its growth in lending business.

But none of them was listed in the stock exchange like almost all other corporate bonds and thus investors could not exercise their freedom to buy or sale instantly without compromising the fair price.

Why do corporate bond issuers avoid listing?

There are only two corporate bonds and decades-old eight debentures listed in the Dhaka Stock Exchange (DSE), against a total of 321 companies listed in the country's prime bourse.

However, the primary market for corporate bonds and debentures is not that small.

The Bangladesh Securities and Exchange Commission (BSEC), since fiscal year 2012-13, has given permission to issue 94 corporate bonds with a total size of over Tk37,000 crore and 16 corporate debentures worth over Tk1,100 crore as of June 30, 2019.

The total approved debt securities was ten times higher than the combined size of initial public offerings.

However, each of the bonds and debentures was privately placed. That is why units of those are not tradable in stock exchanges.

According to insiders, many companies had been avoiding the hefty 2 percent stamp duty through leaving their first bond's trust deed unregistered.

The stamp duty payment against deed registration is mandatory only when companies go for the second bond or listing the first bond in the stock exchange.  

To avoid the stamp duty, most corporate bond issuers prefer private placement instead of floating the debt securities in public, believe experts.

Low appetite for fixed income securities and the cost structure in stock exchanges are also blamed for non-listing of corporate bonds. Delay in issuance and listing process is another reason.

Long processing time has also kept away investors in bonds. On average BSEC's approval for private placement of bonds take more than four months and if it is from any bank or non-banking financial institution, it takes additional two months for approval from the Bangladesh Bank, the primary regulator.

If bonds were offered publicly with an intention for listing in stock exchange, the entire process takes longer, as much as a year.

"An issuer needs money quicker. So the issuance process time should be reduced and the cost of secondary market trading as well, said Mominul Islam of IPDC Finance. 

Why are bonds important?

Bonds are important both as a long-term financing tool to businesses and as an asset class to capital market investors, said market professionals.

Banking industry is under pressure to finance long-term projects with money borrowed for much shorter terms. Volatility in banking sector liquidity, on the other hand, creates uncertainty for businesses to secure a long-term stable funding.  

An effective secondary market with ease in buy-sale will attract more investors and that should inspire corporate entities to issue more bonds, said Abdul Matin Patwary, chief financial officer of the DSE.

The relationship between primary and secondary market is always reciprocal, he added.

If sufficient bonds are tradable in secondary market, capital market investors, mainly institutional portfolio managers from home and abroad, will get an alternative asset class, said IDLC Investment Limited's Managing Director Md Moniruzzaman, also a vice-president of the Bangladesh Merchant Bankers Association.

"Portfolio managers often need to switch to fixed income securities from shares in uncertain and volatile times but in Bangladesh the opportunity is not sufficient. Appetite for bonds has been on the rise with increased numbers of professional investment teams in our market," said Hasan Rahman, Chairman of Capitec Asset Management Limited.

Treasury bills and bonds

In 2005, the Dhaka Stock Exchange opened its debt board for exchange trading of government bonds. The debut was the end of the market as no trade took place later.

Till now 221 treasury bills and bonds with less than a total size of around Tk55,000 crore is listed in the DSE. Of which, a large number has expired already.

Instead of public market trading, the secondary market for treasury instruments worth around Tk2 lakh crore is concentrated into the Bangladesh Bank's market infrastructure module. Only dealer banks participate in buying and selling there.

A tripartite committee of the DSE, BSEC and the Bangladesh Bank in December last year recommended making the listing of all upcoming treasury bills and bonds mandatory with a special waiver from listing and delisting fees.

Besides, to make the instruments attractive to a wider class of investors they proposed to split the face value of bond units from Tk1lakh each to up to Tk50,000.

Most importantly, the committee recommended reducing the cost of trading treasury bills and bonds – Tk100 for each trade or howla, which is five to ten times higher now in case of trading a single unit of the securities. To trade more than one unit, the cost is proportionately higher.  

Currently there is no difference in cost of trading a bond and a share. Both, on average, costs investors 1 percent of the price of the instruments to buy and later sell in the exchange.

Shares, with a higher return potential, attracts investors to trading. But due to the inherent nature of low capital gain potential of bonds and way higher ticket size, there is a need for reducing cost of trading bonds, said Ershad Hossain, a bond expert serving as managing director of City Bank Capital Resources Ltd.

"Sukuk, as an Islamic asset based securities, has a very high potential to gain momentum here. But existing cost structure there needs to be rationalised if we want to utilise the potentials," he added.

Ershad Hossain also thinks that the legal environment needs a lot of improvement for bond investors' right protection.

Mostly the central bank regulated corporate entities are issuing corporate bonds here. Non financial corporate also should be inspired to collect capital through bonds, he said.

Of course the planned exchange trading of treasuries must be a reality soon, as it will offer secondary yield curve of government bonds – a benchmark for corporate bonds.