Who protects Bangladesh's bondholders?

Bangladesh's bond market is growing at a record pace – but investors who suffer defaults face an inadequate legal system, passive trustees, absent covenants, and rating agencies that look the other way. Reform cannot wait.

Bangladesh is quietly building a bond market. Banks, non-bank financial institutions, and corporates have issued corporate bonds, zero-coupon debentures, subordinated debt, AT1 perpetual instruments, and Sukuk at volumes never seen before. This is economically necessary – the country cannot finance its infrastructure, manufacturing growth, and green economy ambitions through bank credit alone. But as the market grows, a disturbing truth becomes harder to ignore: when bonds default in Bangladesh, investors are largely on their own.

The regulatory framework that should protect bondholders is riddled with structural gaps. Bonds are issued without covenants. Trustees are frequently passive. Credit rating agencies conduct surveillance ratings once a year when the rules require them quarterly. And when certain categories of investor – insurance companies, mutual funds, and corporate bondholders – suffer a bond default, that default does not appear in the Credit Information Bureau. The defaulting issuer can walk away from those investors' losses without any system-wide credit consequence. That is not a functioning capital market. That is a market that socialises losses onto its least protected participants.

Bonds without a safety net

In every mature fixed income market, bond covenants are the investor's first line of contractual defence. They restrict the issuer's ability to load on more debt, sell core assets, pay excessive dividends, or change ownership without bondholder consent. They convert financial deterioration into legal events – technical defaults that allow investors to intervene before a missed payment becomes a catastrophic loss.

In Bangladesh, virtually none of this protection exists. Bonds are issued without financial maintenance covenants, without cross-default clauses, and without change of control protections. An issuer can double its leverage, sell its principal assets to a related party, and simultaneously stop servicing its bank loans – and the bondholder has no contractual remedy until the next scheduled coupon payment is missed. By that point, the assets may already be gone.

The fix is straightforward: the BSEC should amend its Public Issue Rules to mandate a minimum covenant package in every new public bond issuance – a leverage cap, an interest coverage floor, a negative pledge, a cross-default clause, and a change of control put right requiring the issuer to offer redemption if ownership changes. These are not novel inventions. They are standard provisions in every serious bond market in the world.

The CIB coverage gap

One of the more consequential gaps in Bangladesh's bond market is the incomplete coverage of bond defaults in the Credit Information Bureau. When an insurance company, a mutual fund, a corporate investor, or a retail investor holds a bond that defaults, that default is typically not captured in the CIB. The issuer's credit profile – as far as the banking system is concerned – remains unaffected. It can continue to access fresh bank credit as though the default never happened.

This coverage gap sends a damaging signal. Issuers know that defaulting on bonds held outside the CIB-covered universe carries no system-wide credit consequence. The Bangladesh Bank should extend CIB coverage to capture every bond payment default, regardless of who holds the instrument – banks, NBFIs, insurance companies, mutual funds, or retail investors. The BSEC should complement this by establishing a public Bond Default Registry on its website: a searchable, real-time record of every missed coupon and principal payment in the market. Trustees should immediately report a default to the BSEC and Bangladesh Bank and to be recorded in CIB. Transparency is itself a form of enforcement, and the most effective means available to regulators with limited enforcement capacity.

Rating agencies: Watchdogs that stopped watching

The global financial crisis of 2007-2010 showed the world what happens when credit rating agencies prioritize their relationship with issuers over their duty to investors. Lehman Brothers collapsed. Trillions of dollars of losses materialised. Rating agencies that had blessed subprime mortgage bonds with triple-A grades were found to have been catastrophically conflicted.

Bangladesh has not had a Lehman moment yet. But its credit rating architecture has structural weaknesses that no developing bond market can afford. The BSEC rules require rating agencies to conduct surveillance ratings every quarter. Some do so only annually, and in some cases not at all. There is no meaningful penalty for non-compliance. More troublingly, there are documented instances of bond coupon defaults that were not promptly reported by the surveilling rating agency – leaving investors entirely in the dark about the creditworthiness of securities they held.

The Credit Rating Company Rules 2022 contain no civil or criminal liability provisions for rating negligence or fraud. An agency that fails to downgrade a deteriorating issuer – whether through incompetence or conflict of interest – faces no legal consequence beyond BSEC's administrative discretion. The BSEC must change this: non-reporting of any event resulting in downgrade must be enforced with financial penalties, payment defaults must trigger immediate public reporting, and the rules must be amended to give investors a right of civil action against rating agencies whose failures cause them losses. The BSEC should also license dedicated fixed income rating agencies – entities focused exclusively on bond market instruments, with the analytical depth that specialist coverage requires. In addition, the BSEC should make it compulsory for the issuer and instrument to be rated by an international credit rating agency such as Moody's, S&P or Fitch or through JV with local CRAs for bonds with issue size exceeding Tk1,500 crore.

The trustee problem

The bond trustee is supposed to be the bondholder's permanent institutional guardian – monitoring the issuer, enforcing covenants, reporting defaults, and when necessary, taking legal action on the collective bondholder's behalf. In Bangladesh, the trustee function is systemically failing. One reason is that credible institutions are not interested in the trustee business, as trustee fees are so small.

The BSEC should create a dedicated regulatory category for independent bond trustee companies – entities that are not influenced by the issuer. Trustees must certify independence at appointment and annually. They must monitor covenant compliance every quarter, report payment defaults within 48 hours to the BSEC, to all bondholders, and to the stock exchange, and face civil liability when their failure to act causes investor loss. Bangladesh has no dedicated independent trustee company of scale – India has had them for decades. We are behind.

The insolvency gap – and what India did about it

When all else fails and a bond issuer becomes insolvent, the investor's last resort is the legal framework. Bangladesh's position here is among the weakest in Asia. The Insolvency Act 1997 is effectively inoperative. Winding up under the Companies Act 1994 is slow, value-destructive, and painful for non-bank investors. Even the Artha Rin Adalat, designed for bank loan recovery, takes three to seven years in contested cases.

India faced the same problem and addressed it decisively with the Insolvency and Bankruptcy Code of 2016. The IBC introduced a 330-day time limit for corporate resolution proceedings, replaced conflicted management with independent insolvency professionals, gave financial creditors – including bondholders – a formal vote on resolution plans through a Committee of Creditors, and imposed an automatic moratorium preventing asset stripping during proceedings. The results were clear: creditor recovery rates nearly doubled in the years following enactment.

Bangladesh's Law Commission and Ministry of Finance must make enacting an equivalent framework a legislative priority in this parliamentary term. Every year of delay is a year in which investors price the legal uncertainty into higher risk premiums – a cost borne by every issuer in the market, not just those in distress.

The cost of waiting

Bangladesh's new government has a genuine opportunity to close these gaps, consistent with its manifesto commitments to deregulation and capital market reform. The reforms needed are not novel – they have been implemented successfully in India, Malaysia, Vietnam, and across the region. What they require is legislative will, enforcement resources, and sustained political commitment.

The corporate bonds, Sukuk, and structured instruments being issued in Bangladesh's market today will mature over the next five to fifteen years. Many will face stress. The regulatory architecture that governs what happens when they do needs to be built now – before the next default, not in response to it. The investors who placed their trust in Bangladesh's bond market deserve no less.

Ershad Hossain, Director, Putnam Capital Advisory Pte Ltd, Singapore is a veteran investment banker who pioneered new fixed income instruments in Bangladesh and brings multi-asset experience from American Express Bank, Standard Chartered Bank, and HL Bank in Singapore.