BSEC calls for wider tax gap to revive dormant IPO market

Infographic: TBS

The Bangladesh Securities and Exchange Commission (BSEC) has urged the finance ministry to widen the tax gap between listed and non-listed firms to at least 10%, aiming to revive the IPO (initial public offering) market, which has experienced a prolonged dry spell with no new approvals since March of last year.

BSEC Chairman Khondoker Rashed Maqsood on 24 April wrote a letter to finance ministry's Financial Institutions Division Secretary Nazma Mobarek in this regard.

In the letter, the BSEC chairman pointed out that the capital market has long been suffering from a shortage of fundamentally strong, profitable, and transparent companies. As a result, the market's depth remains extremely limited, posing a major obstacle to building an effective and stable capital market in the long term. In this situation, the country's capital market has failed to attract investors, particularly institutional and foreign investors.

The letter further noted that Bangladesh is home to many profitable local and multinational companies. However, most of these companies remain outside the stock market. The primary reason for this is the lack of a significant difference in tax rates between listed and non-listed companies.

Under the current Finance Act, the corporate tax rate for listed companies is 22.5%, compared to 27.5% for non-listed companies — a gap of just 5%. This minimal difference has discouraged good companies from seeking listing on the stock exchange.

In the letter, the BSEC chairman emphasised that providing meaningful tax incentives is essential to encourage local, foreign, and multinational companies to raise capital from the market. He argued that tax benefits would serve as a strong incentive, especially since listed companies must maintain corporate governance and bear additional compliance costs. Therefore, he requested that the tax gap between listed and non-listed companies be widened to a minimum of 10%, as it was in the past.

The urgency for widening the tax gap is underscored by stark numbers: the Dhaka Stock Exchange (DSE) saw just four new listings in 2024, repeating the subdued performance of the previous year. The two years marked the lowest tally since 2009, reflecting a waning appetite for IPOs amid challenging market dynamics.

The stock market is not providing even 1% of the business capital, according to the Bangladesh Merchant Bankers Association. 

In an economy where BRAC Bank's loan book is growing by more than Tk10,000 crore a year, the stock market in the past 16 years provided only Tk11,614 crore equity in some 150 IPOs.

On the other hand, due to the deserted IPO market, the value of the entire stock market dropped to 7.2% of the country's GDP, from around 40% in 2010. Sri Lanka took it to 22% while the Indian stock market surpassed the size of its GDP.

The BSEC said in the letter that many developing and middle-income countries such as Malaysia, Vietnam and India have successfully marketed good companies by providing tax benefits for listing on the capital market.

In Bangladesh, most corporate institutions are currently dependent on bank loans. Creating an opportunity to raise capital through listing on the capital market will reduce pressure on the banking sector and reduce economic risk. On the other hand, if a large number and variety of companies are listed, the dependence on the price fluctuations of a few companies in the market will decrease. This reduces the volatility in the index fluctuations, which gives a positive message to investors, wrote the BSEC.

The letter continued that companies that are listed on the capital market generally publish audited financial statements, adhere to good governance, and protect the interests of investors. It will be possible to reward this responsible behaviour by providing tax concessions and encouraging other good companies to get listed. 

When good companies are listed, investor confidence in the market increases, as they are assured of sustainable income and good governance. This stabilises the market in the long term and increases investor participation. In addition, when good companies are listed, the amount of foreign investment in the capital market also increases significantly.

Although tax exemptions seem to mean a revenue deficit, increasing the number of listed companies increases both the scope of business and tax dependence. Greater transparency in tax collection leads to increased overall revenue in the long term.

In November last year, the BSEC requested the finance ministry and the National Board of Revenue (NBR) for a five-year tax holiday for companies floating 30% or more of their shares in IPOs.