BSEC's new rules put 31 closed-end mutual funds at risk of liquidation, conversion

Around 34 listed closed-end mutual funds are at the risk of liquidation or conversion into open-end, following the new rules by the Bangladesh Securities and Exchange Commission (BSEC). 

The rules, published in the government gazette on 12 November, stipulate that if the average trading price per unit of any existing closed-end fund falls more than 25% below the higher of its issue price or fair-value-based Net Asset Value (NAV) within six months, the trustee must convene an extraordinary general meeting (EGM) to seek unit holders' approval.

Decisions at the EGM must be taken through a secret ballot, requiring at least a three-fourths majority of units to vote. 

Subject to BSEC approval, the scheme may then either be converted into an open-end mutual fund or be liquidated. Essentially, any closed-end fund failing to maintain the prescribed price threshold will have no other options.

The regulation also requires trustees to declare a record date within 30 days after the six-month period expires. At least 21 days' notice must then be given before holding the EGM. Failure to follow these procedures could create uncertainty about the fund's future.

The same EGM will decide whether the existing trustee, fund manager, and related parties remain in place or are replaced, opening the door to significant changes in fund management and governance.

Dhaka Stock Exchange data released today (23 December) shows 31 of the 34 funds are trading well below the levels implied by the new BSEC rules. 

Only three funds – Prime Finance First Mutual Fund, CAPM BDBL Mutual Fund 01, and Reliance One – were in relatively stronger positions.

If the funds want to comply with the new BSEC rules, they must demonstrate strong performance and ensure that their market price aligns with their NAV. 

In other words, the funds need to perform efficiently and maintain a market price that reflects the true value of their assets.

Market insiders said unit holders of closed-end mutual funds have long complained about failing to receive expected returns. Many funds have traded at substantial discounts to their NAVs for years, eroding investor confidence. 

They also note that trustees and fund managers of several funds failed to exercise proper oversight, contributing to poor performance and losses.

BSEC wants closed-end funds to improve performance

Commenting on the matter, BSEC Director and Spokesperson Abul Kalam told The Business Standard that investors have been deprived of fair returns for too long. 

"A mutual fund trading far below its reported asset value or NAV is neither normal nor fair to investors," he said, adding that the commission wants closed-end mutual funds to improve performance and ensure fair value for investors. 

"If a fund consistently fails to deliver results, restructuring it into an open-end mutual fund is a logical step," he said. He also noted that the regulation clearly states no new closed-end funds will be approved in the future. 

"Globally, closed-end funds are gradually disappearing. Investors prefer open-end funds for better transparency and liquidity, and BSEC is aligning with this global best practice," he said.

The main objective, Abul Kalam said, is to restore investor confidence, bring discipline to the mutual fund sector, and build a transparent, efficient, and sustainable investment framework. 

He expressed hope that the regulation's effective implementation would allow investors to recover the true value of their investments.

Moving away from closed-end fund

Md Moniruzzaman, managing director of Prime Bank Securities, said the BSEC is gradually moving away from the closed-end fund model due to longstanding concerns over asset valuation. 

"Some funds invest in sectors where determining the real asset value is extremely difficult, leaving investors without accurate information," he said.

Mohammad Emran Hasan, managing director of Investit Asset Management, said many funds currently trade far below their reported NAV for two main reasons. 

"There is a lack of trust in the market and the closed-end sector. Some funds inflate their NAV by investing in risky non-listed companies or banks that may not be able to repay them," he said.

He warned that forcing all funds to liquidate or convert simultaneously could trigger a massive sell-off, hurting the entire stock market. "It would also unfairly punish honest fund managers whose funds trade at low prices because the sector appears weak, not because of mismanagement."

Instead, Hasan suggested the regulator focus on three key areas: ensuring honest and transparent reporting of asset values, preventing investments in illiquid non-listed companies, and enforcing fund maturity commitments. 

"If a fund is launched for 10 years, it must end after 10 years – no repeated extensions that trap investors' money indefinitely," he said.