When market regulator turns into stock investor

Infographic: TBS

The stock market regulator Bangladesh Securities and Exchange Commission (BSEC) has invested its commission fund in the Investment Corporation of Bangladesh (ICB), one of the major players in the secondary market.

All money of the commission fund, also known as staff fund, has to be kept in any scheduled banks in the name of the commission, according to the Bangladesh Securities and Exchange Commission Act.

If any person violates this act or intends to violate or influence or support breaching the rule will be punished with a five-year jail or a penalty of minimum Tk5 lakh, according to Section 18 of the act.

However, the current commission invested nearly Tk100 crore of its staff fund in the ICB, which is an investment bank.

This is an instance of a conflict of interest as the BSEC is the stock market regulator and the ICB is a listed company, according to several former officials of the commission, some of  whom asked for anonymity.

The BSEC has become an indirect investor of the stock market through its investment in the ICB, which has been established mainly for the capital market development.

However, BSEC Executive Director and Spokesperson Rezaul Karim told The Business Standard that the commission fund is supposed to be deposited in scheduled banks but the law does not mention that the fund cannot be kept in a specialised bank. 

There is no conflict of interest in keeping a deposit in the ICB as the BSEC is getting a fixed return against the fund, he said. 

He claimed that the ICB got the BSEC fund at a low cost, which will help the investment bank bring down its costs and strengthen its capacity to support the capital market. 

Faruq Ahmad Siddiqi, former chairman of the BSEC, said any money from the commission fund cannot be kept in the ICB as it is a clear violation of the law and also leads to a conflict of interest. 

As of June this year, the total commission fund stood at Tk262 crore, nearly 50% of which was kept in various private banks and a foreign bank, and the rest in state-owned banks. 

Salaries and allowances of officers and employees of the securities commission and all other necessary expenditure of it will be borne from the fund, according to the BSEC act.

The ICB's entire investable fund of nearly Tk14,000 crore remained invested in the secondary market, according to its annual report for FY21.

The ICB incurred a loss of Tk1,635 crore from its stock market investment in the fiscal 2020-21.

Such a huge loss put the bank in a provision shortfall of Tk827 crore in the year. 

However, the BSEC favoured the ICB's exemption from maintaining the shortfall till December 2021. 

In a note in the annual report, the ICB said it is expected that if the market condition improves, this shortfall will be eliminated. 

Later, the ICB experienced a provision surplus of Tk1,163 crore in September 2021 as a result of an upward market trend, according to its annual report. 

This is how the ICB avoided a loss by taking an exemption from maintaining the provision in its balance sheet and the regulator itself became its beneficiary. Because provision forbearance helped the ICB make an artificial profit of Tk115 crore in FY21, double the amount in the previous fiscal year. 

If the provision shortfall had to be maintained, the ICB would be in a huge loss as provision, an estimation of potential losses that a company might experience due to credit risk, is maintained from profits. 

The ICB announced an 11% cash dividend for 2021, double the amount from the previous year, thanks to the provision forbearance favour from the BSEC. The favour also contributed to a rise in its share price to above Tk160 in October last year, the highest price in the last two years.

Other banks where the commission fund is invested 

The BSEC also kept money from the commission fund in some private banks, shying away from state-owned banks. During the tenure of Dr M Khairul Hossain as the BSEC chairman, the commission fund was deposited in only state-owned banks.

But after the current commission took charge, nearly 50% of the fund was diverted to seven private banks and a foreign bank. Some of the private banks that were chosen for depositing money are scam-hit and financially weak, and one is a new generation bank.

Among the private banks, Tk83 crore deposited in Community Bank Bangladesh, Tk17 crore in AB Bank, Tk2 crore in Social Islami Bank, Tk3 crore in First Security Islami Bank, Tk10 crore in Global Islami Bank, Tk2 crore in Brac Bank and Tk1 crore in Premier Bank.

The BSEC kept Tk2 crore of the commission fund in Bank Alfalah, according to its fixed deposit statement. 

When contacted, a former member of the BSEC said they kept 50% of the commission fund in Sonali Bank and the rest in Agrani Bank and Janata Bank during their tenure. 

They chose state-owned banks for keeping the fund, considering risk factors in private banks and to avoid a conflict of interest as the private banks are listed on the capital market, he noted. 

Depositing the commission fund in the ICB is violation of the commission act and also a conflict of interest as ICB works for capital market development, he opined wishing not to be named. 

During the previous commission's tenure, any decision over parking the fund in banks used to come from a BSEC meeting. But the current commission does not follow such practice while diverting money from the commission fund, said sources at the commission.