Securities regulator wins legal battle against foreign investor

The High Court on Wednesday discharged all the previous rules issued against securities regulator regarding allowing closed-end mutual funds' extension without bypassing unit holders' opinion.

The discharging order yesterday, came after a hearing from the High Court (HC) bench of Justice J B M Hassan and Md Khairul Alam.

Through the order, the writ petition by City of London Investment Management (CLIM), a foreign investment firm, was dismissed effectively.  

The United Kingdom-based institutional investor, as a unitholder of the EBL First Mutual Fund, had filed a writ petition against the Bangladesh Securities and Exchange Commission (BSEC) in last October.

It challenged the BSEC's role as a regulator for allowing the listed fund to run for an additional 10 years, without the opinion of unitholders as suggested in the mutual fund rules and the fund's prospectus. 

Following the lawsuit, the HC bench of Justice Moyeenul Islam Chowdhury and Justice Khandaker Diliruzzaman issued a rule calling upon the respondents to show cause on why the decision should not be declared unlawful. 

The show-cause notice also asked why the respondents will not be ordered to liquidate the closed-end fund and distribute all the proceeds among unitholders. 

The HC also ordered another respondent, the asset manager, Race Management Private Company Ltd not to take any asset management fee until the ruling is disposed of.

Later in December, the asset manager won a stay order from the Appellate Division that cleared the way to collect its fees. The Appellate Division then ordered the HC bench to hear the matter within next 12 weeks.

The Investment Corporation of Bangladesh (ICB), as the trustee of the fund was also a respondent in the writ petition.

The writ petition had said that the securities regulator failed to ensure compliance with the relevant securities law and the prospectus of the fund while allowing the fund to extend its tenure. 

It mentioned that, rule 50B of the BSEC (Mutual Fund) Rules 2001 dictates that the life extension of the fund is subject to a consent from owners of three-fourths of the units. 

On the other hand, the prospectus of the fund declared a tenure of 10 years before its units were to be offered to the public. 

Investors put their money into mutual funds with a hope to get their money back in time.

However, in September 2018, following a finance ministry recommendation to allow tenure extension of closed-end mutual funds scheduled to go off or convert into open-end ones within 2023, the BSEC said the funds may extend for another term for the same period, and the total tenure of any fund cannot exceed an aggregated life of 20 years. 

But as it did not mention anything regarding unitholders' opinion before that, asset managers took the opportunity for extension just before their funds' approached maturity. 

Prior to the September 2018 order, the BSEC had fought and won a legal battle in the Supreme Court to uphold its strong regulatory stance for timely liquidation or conversion of closed-end mutual funds. 

But the unexpected U-turn, for the sake of retaining the funds' money in the market, damaged the confidence of mutual fund investors, as they are forced to wait for another term to get their money back. 

If investors are not ready to wait until the deferred maturity of the funds, they have to sell the units at a significantly lower price compared to the assets within the mutual funds. 

Listed mutual funds are already trading at prices around 40 percent lower than the average present value of their portfolio assets.