Banks, investors suffer due to regulators’ disagreement over interest on perpetual bonds

BB, BSEC meet regarding perpetual bonds' interest policy

• BSEC made payment of interests mandatory

• But BB requires it to be optional instead in order to treat perpetual bonds as additional Tier-I capital

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• BB wrote to at least 6 banks disallowing their perpetual bonds as additional Tier-I capital

• Banks met BSEC on Tuesday for a solution

• BSEC asked for proposal from the banks

As per the securities regulator's direction, several commercial banks have to pay interest on the perpetual bonds every year regardless of their financial situation.

But the central bank's 2014 guideline on Risk-Based Capital Adequacy stated: "a bank must have full discretion at all times to cancel distributions or payments to the bondholders" to make the perpetual bond proceeds qualify as Additional Tier-I capital, which is crucial for complying with the Basel III accord.

The contradiction between the Bangladesh Bank and the Bangladesh Securities and Exchange Commission (BSEC) regarding the payment of interest on the perpetual bonds has been creating problems for the investors as well as the banks.

Representatives of the banks suffering from the contradiction met with the securities regulator to resolve the matter on Tuesday.

Sources at the meeting said, the BSEC has asked the banks to make proposals that might solve the issue and the BSEC is likely to remain open to any modification if needed.

One of the bank representatives who went for the meeting with the BSEC officials on Tuesday told The Business Standard, "It is really painful for us when we are instructed with contradictory points by the two major regulators."

"They should have resolved the contradictions between them before instructing us," he said, requesting anonymity.

The banks issue perpetual bonds, which do not have tenure, to strengthen their Additional Tier-I capital base to comply with the Basel-III requirements. The Bangladesh Bank is implementing the Basel-III regulatory accord in the banking industry in line with the international standards to sufficiently capitalise the banks so that they can absorb unwanted shocks in business for an extended extent.

The central bank in its recent letters to at least six of the banks that issue perpetual bonds said a clause of the securities regulator's consent letters for the bonds does not allow the central bank to treat the bonds as Additional Tier-I components.

"Investors responded to the bond offerings as they knew that the issuer would give them an interest in any circumstance as a part of their regulatory obligation and if it changes they would find their interest hurt," said an analyst who is working for a capital market subsidiary of one of the suffering banks.

"On the other hand, if the banks' discretion on whether to pay interest or not in a particular year is not allowed and the central bank does not treat the bond proceeds as its Additional Tier-I capital the purpose of the bond would remain unserved and under capitalisation might hurt the banks' dividend payment ability," he added.

Ariful Islam, an investor in the stock market, was planning to buy some perpetual bonds to diversify his investment portfolio but opted out of his plan amid the contradiction which resulted in uncertainty over the payment of interest.

Ariful told TBS, "It seems, none of the regulators cares what the other's rules and regulations demand."

"The suffering banks had BSEC's consent a year ago. The central bank should have addressed the issue much earlier, while the BSEC should have studied the central bank rule well or at least have discussed the issue with the central bank in time," Ariful added.

The series of contradictions

Before the latest contradiction, commercial banks were suffering in terms of forming a nomination and remuneration committee in their board of directors as the Corporate Governance Code by the BSEC made it mandatory, while the Bangladesh Bank did not allow it since that is not permitted by the Bank Companies Act.

The Bangladesh Association of Publicly Listed Companies have been repeatedly knocking at the doors of both the regulators for a solution, but it is yet to get any.

Also, dividend payments by banks are on the table of disputed issues as the Bangladesh Bank does not allow a bank to pay dividends out of a particular year's profits if it has cumulative losses.

The International Financial Reporting Standard allows such dividend payments, and the capital market groups want the Bangladesh Bank to accept the same, while the central bank used to believe that a bank risks its depositors when it keeps posting cumulative losses and that should not be an ideal situation to pay dividends to its shareholders.

The BSEC wants perpetual bonds to be excluded from banks' capital market exposure calculation, such as in India and other countries. Capital market groups also urge for it and they are frustrated not to see any positive outcome in this regard following several meetings between the two regulators.

The issue of banks' capital market exposure calculation basis has emerged as one of the biggest causes of stock market volatility in recent months.