Stabilisation Fund: A new financing window for stock market

The Capital Market Stabilization Fund (CMSF), which has been created by collecting investors' unclaimed dividends, is turning into a new funding window for the stock market.

Last year, the Fund provided the Investment Corporation of Bangladesh (ICB) with Tk225 crore in several phases for investing in the secondary market.

Now, the CMSF will provide market intermediaries with loans at low interest rates to increase liquidity in the capital market. The tenure of this loan will be 180 days, but it is renewable.

According to the Bangladesh Securities and Exchange Commission (BSEC), the CMSF board will decide the interest rate, which will be at the higher end of the three-month average of fixed deposit receipt (FDR) rates.

That means, the CMSF loan will be cheaper for brokers and merchant banks, as they have to pay 9% or more against the loans they take from commercial banks and non-bank financial institutions.

Currently, the average interest rate on FDR is 6-7%.

The CMSF has started the process of disbursement after the decision of the capital market regulator to provide loans to market intermediaries.

Considering the liquidity crisis, this loan will be given to increase the supply of new funds in the capital market. The CMSF will start disbursements soon after making the policy framework and credit risk assessment.

The BSEC has set some criteria for disbursement of loans, but the commission has also directed the CMSF to formulate a policy to keep the money in this fund safe.

CMSF's 50% will be loaned to market intermediaries. Currently, the size of the fund is Tk1,160 crore, of which Tk510 crore is cash and Tk650 crore is the value of shares.

Md Monowar Hossain, chief of operations (COO) of CMSF, told The Business Standard, "The CMSF is trying its best to support the capital market. A large part of the cash received from the listed companies has already been invested in the capital market."

"Investors applying for undistributed dividends are being refunded after verification when money follows into the fund. Till now, about Tk4.5 crore has been paid to around 750 investors," he added.

Regarding when the loan disbursement can start, he said, "The commission has given some instructions for the loan disbursement. It is the investors' money, so a guideline will be drawn up with the utmost caution to keep it safe. Only then will the disbursement begin as soon as possible."

Brokers and merchant banks will borrow and invest

By taking loans from the CMSF, brokerage firms and merchant banks will be able to invest in the capital market and can also provide margin loans to their clients.

For investing CMSF loans in their own portfolios, brokerage firms and merchant banks should only invest in "A" category shares for five consecutive years.

The BSEC said, in this regard, that CMSF will collect utilisation reports from borrowers on a fortnightly basis and will submit a comprehensive report to the commission on a monthly basis (within the 7th day of each month).

Brokerage firms and merchant banks can also provide margin loans to their clients as per their margin loan policies.

Currently, the interest rate on a margin loan is 14-15%. Because brokerage firms and merchant banks disburse these margin loans after getting high interest loans from banks or non-bank financial institutions,

Although the BSEC fixed the maximum interest rate at 12% on margin loans, it was not implemented practically.

Ineligibility to get credit

The BSEC has set some criteria for disbursement of loans. It is said that the market intermediaries will ensure the deposit of the equivalent of the loan amount to the dealer account or their own portfolio account, and a 100% collateral will be ensured.

In a letter to CMSF, the BSEC directed that the loan will not be allowed to any stock broker that has a deficit in consolidated customer accounts (CCA) or is not compliant with risk-based capital adequacy, or has received any punishment in the last five years.

The BSEC has directed CMSF to take immediate steps to develop IT modules such as a loan application module, a loan status module (amount, expiry, interest, repayment, etc.), a documentation module, and so on.

The CMSF will ensure that it approves or rejects loans for eligible borrowers within 21 working days of receiving an application. The total loan amount shall not be more than Tk20 crore or less than Tk5 crore at a time.

About the CMSF

The CMSF was established by the Capital Market Stabilization Fund Rules, 2021 (CMSF Rule 2021) of the BSEC.

CMSF acts as a custodian of undistributed cash and stock dividends, non-refunded public subscription money, and unallotted rights shares from the issuer of listed securities.

Cash and stocks in the fund will be returned to due claimants by the shareholders or investors at any time in the indefinite future.

According to rules, a maximum of 40% of the cash balance of the CMSF may be used for direct buying and selling of listed securities, at least 50% of the cash balance of the fund shall be used for providing loan to market intermediaries for refinancing as margin loan, and a maximum of 10% of the cash balance of the fund may be used for investment in other securities such as fixed deposits, government securities, fixed income securities, mutual funds, and so on.

CMSF has Tk230.5 crore in its bank account now, and the figure may vary from time to time.