High cost of listing, trading hinders bond market development

Despite a delayed start, moves to popularise bonds as a financing instrument are gaining momentum as more and more lenders, corporates, a few municipalities and non-governmental organisations are issuing bonds and the listing of many is widening capital market investors' scope to diversify their portfolios.

However, the secondary bond market is miles behind its needed status to be called popular or vibrant, experts observe, due to several reasons.

The very high cost of listing and trading bonds here is at the top end of the barriers list and investment bankers now are pushing the Dhaka Stock Exchange (DSE) to rationalise the costs, while the securities regulator is discussing the need for supportive tax policies and other issues with the National Board of Revenue.   

On behalf of the market intermediaries, merchant bank City Bank Capital Resources, an industry champion in managing and arranging bond issuance, has recently written to the premier bourse to address the high costs that are hindering the development of the bond market.

The most expensive listing

A comparison of initial listing fees in the regional bourses such as the National Stock Exchange (NSE) in India, Sri Lanka's Colombo  Stock Exchange, Singapore's SGX, or Bursa Malaysia, reveals that making a corporate bond publicly tradable costs its issuer unusually high in Bangladesh.

The Dhaka Stock Exchange (DSE) charges 0.25% of the total size of a corporate bond until the bond size exceeds Tk10 crore, and for bonds bigger than that it charges 0.15% of the total as an initial listing fee.

The minimum initial listing fee of Tk50,000 is equivalent to $589 while the maximum of Tk1 crore is above $1,17,000 in the DSE and, as bonds tend to be much bigger than equity issues in terms of size, bond issuers have to pay the maximum fee during the listing.

The maximum initial listing fees are around $404 in NSE, $11,000 in SGX, $5,900 in Bursa Malaysia, and $499 in Sri Lanka, according to the City Bank Capital study based on the exchange rates earlier this year.

The stock exchanges in Singapore and Malaysia charge higher than India and Sri Lanka, but issuers do not mind paying that as the two mature bourses do not charge any annual listing fee for bonds.

Again, Bangladesh charges more annual fees than India and Sri Lanka.

A high cost of issuance and listing will deter issuers from coming into the capital market to raise funds through listed debt securities, City said in its letter to the DSE.

Since the current listing fees of equity and debt securities are fixed at the same rate and the size of bonds is much larger than equity, the rate of listing fees for debt securities should be significantly lower than the listing of equities, the letter reads.

DSE Managing Director Tarique Amin Bhuiyan told The Business Standard, "Alongside all other issues, we are working on the bond listing fees as well so that the bond market becomes popular in the country."  

Trading also expensive

Listed bonds are barely traded at the DSE.

A low appetite for bonds among retail investors is one reason, but even institutional investors do not find trading of bonds cost-effective enough in Bangladesh.

In India, the NSE charges 5 rupees against trading of listed bonds worth 1 crore rupees, which is at least ten times higher in Bangladesh as the DSE has fixed Tk50 per trade as the minimum charge.

For bulk trades that might be overlooked, but for small investors who want to trade a Tk5,000 lot of bonds in the DSE, the brokerage cost of buying goes as high as 1%, and the total cost of trading may stand at 2% if the cost of selling the same in the bourse is included.

Bonds are not instruments that offer a lot of capital gains like that in shares, said Bangladesh Merchant Bankers Association (BMBA) President Md Sayadur Rahman.

"High cost of trading pushes investors away from bond trading, but it is not the only reason behind poor transactions in the secondary market of corporate bonds," said DSE Brokers Association President Richard D Rozario.

"From the industry, we discussed the matters with the regulators and they are working on solutions," he added.

"We need to incentivise bond issuance and investments to popularise the long term debt instruments as an alternative to bank loans," Sayadur said.

Long-term project financing out of short-term deposit funds is putting the banking system under pressure in Bangladesh.

In recent years, Bangladesh has come through some significant progress regarding the development of the bond market, and that should continue to remove the remaining barriers, said Rahman.

Just like zero-coupon bonds, the income from all sorts of bonds should be tax waived for individual investors and that would help increase individuals' appetite for bonds.

Trust deed registration costs came down to a rational level, cost of trading also came down a lot, especially for large transactions, following the tax rationalisation on bond transactions.

No exchange trading of treasury bonds in the DSE is another reason behind not developing the bond market in the country, according to experts, as treasury bonds dictate the pricing of corporate bonds.

The DSE has made Treasury bond listing free alongside bringing down their trading costs to a lower level and the bourse is getting ready to begin treasury bonds trading soon.

Currently, treasury bonds are traded within the market infrastructure module of the Bangladesh Bank and only banks participate in buying and selling the government securities, mostly in their accounts, while exchange trading would open the treasury instruments to all local and foreign investors.  

City Bank Capital foresees a lot of corporate issuers will raise much more funds through various bonds, of course, if they find it cost-effective.