Tk10,000cr equity fund, tax breaks proposed for capital market boost

Highlights:

• Committee proposes Tk10,000 crore equity fund to boost liquidity
• Tk3,000 crore low-interest loans planned for small investors
• Institutional investors' share targeted to reach 60% long-term
• Tax incentives proposed, including lower capital gains tax
• Floor prices removal and borrowing caps recommended
• Experts warn political stability essential for lasting market recovery

A finance ministry-formed committee has recommended creating a Tk10,000 crore fund to boost liquidity in the capital market, alongside a Tk3,000 crore fund offering loans to small investors at a 4% interest rate.

The committee in its report also proposed raising institutional investors' share to 60% and encouraging participation through tax incentives, including tax-free dividend income up to Tk1 lakh.

It further proposed cutting capital gains tax to 5%, offering a 20% tax rebate on asset-backed securities, and extending tax exemptions for mutual funds.

The report calls for broader capital market development, strengthening the Bangladesh Securities and Exchange Commission (BSEC), reinforcing the state-owned Investment Corporation of Bangladesh (ICB), and improving stock exchange governance.

The proposals were recently submitted to the finance ministry. "We have submitted the report outlining measures needed to develop the market and strengthen the commission," M Sadiqul Islam, finance professor at Dhaka University and a committee member, told The Business Standard.

Infograph: TBS

The four-member committee was formed in March this year, led by Anisuzzaman Chowdhury, special assistant to the chief adviser. Other members include Farzana Lalarukh, BSEC commissioner, and an additional secretary of the Financial Institutions Division.

Faruq Ahmad Siddiqi, former BSEC chairman, said the capital market is depressed due to the country's "economic uncertainty" and the lack of new investment over the past two years.

"In this situation, no matter how many funds the government creates or how much money it injects, it will not help the capital market," he said. "For the market to improve, a stable, elected government is essential. Confidence will return only with an elected government, and the impact will be long-term."

Tk10,000 crore fund

The committee proposed that the Tk10,000 crore fund be used exclusively for equity investment and managed by the ICB. Investment decisions would be taken by a professional portfolio management team, while a seven-member committee would monitor performance.

The oversight body would include two representatives from the finance ministry, two from the ICB, and three independent portfolio experts or financial analysts. To strengthen the equity base, the committee recommended increasing ICB's paid-up capital through a rights share issue.

It also proposed expanding the special fund for small investors by an additional Tk2,000 crore, allowing access to margin loans at a subsidised rate of 4%. Currently, the fund stands at Tk1,000 crore.

Regarding entrusting fund management to the ICB, Siddiqi said the corporation itself is in debt. "Instead of creating a new fund, the government should first form a committee to review ICB's past activities – how it operates and where it invests," he said.

Expanding institutional investors

The committee recommended increasing the number of institutional investors in the market, particularly stock dealers, market makers, portfolio managers, asset managers, and fund managers. 

Institutional investors currently account for about 20% of the market. The committee proposed raising the share to 30% within three years, 40% within six years, 50% within nine years, and 60% within 12 years.

It also advised listing brokerage firms on stock exchanges. To facilitate this, the committee recommended amending capital-raising rules under the commission.

The body also suggested rationalising or lowering interest rates on national savings certificates and postal savings instruments, adding that rates should not exceed the average yield on five-year treasury bills.

It also recommended increasing insurance companies' participation in the capital market and expanding nationwide financial literacy programmes through the commission, Bangladesh Institute of Capital Market (BICM), and Bangladesh Academy for Securities Markets (BASM).

On increasing institutional investors, Siddiqi said, "This can't simply be done at will. Investors will put their money where they see profit. Ignoring the returns from treasury bills or bonds, no institutional investor will come to the secondary market."

Removal of floor price

The committee recommended abolishing floor prices and removing all trading restrictions from the first day of listing after an IPO.

During the COVID-19 pandemic and at the start of the Russia-Ukraine war, the commission imposed floor prices to curb market declines. Currently, floor prices remain on shares of Beximco Limited and Islami Bank, while those of other companies have been gradually removed.

Currently, companies can borrow without restriction. The committee proposed capping borrowing at 250% of a company's equity capital. It said such limits would encourage firms to raise capital through the stock market.

To ensure market stability and sustainable development, the committee recommended forming a regulatory coordination committee chaired by the finance minister or adviser. 

It would include representatives from the Financial Institutions Division, Bangladesh Bank, BSEC, NBR, Insurance Development and Regulatory Authority (IDRA), and Financial Reporting Council (FRC). The body would meet at least twice a year.

30% independent directors in 'Z' companies

The committee recommended revising the corporate governance code to require at least 30% independent directors on boards of Z-category companies. It added that if a company does not move to a higher category within two years, one independent director must be appointed as chairman.

To empower the BSEC, the committee suggested forming an advisory body to review policies and rules, monitor supervision, enforcement, market development, investor education, and human capital development.

It also proposed creating a five-member search committee for appointing the chairman and commissioners. Misconduct, incompetence, bankruptcy, or ethical lapses would be grounds for removal, including through judicial inquiry.

The committee recommended raising the BSEC chairman's status to that of an Appellate Division judge and commissioners to High Court rank. It also suggested hiring skilled contractual officers and promoting at least 20% of executive directors to Grade 1.

On these proposals, Siddiqi said, "Appointing the chairman and commissioners through a search committee alone will not transform the market. Impartial individuals are needed – those who prioritise investors' interests over government decisions."

He added that appointing competent, impartial regulators depends on the government's political will.

8 reasons that keep the market depressed

The committee identified eight reasons for the depressed capital market: weak intermediaries, high bank deposit rates, withdrawal of incentives, high returns on national savings instruments, inflation, lack of trust, bank-based financing, and low fund mobilisation through mutual funds and collective investment schemes.

It noted that a developed market is typically supported by institutional investors contributing 70-80%, while in Bangladesh their share remains around 20%, said the report.

High interest rates in recent years have prompted investors to favour fixed deposits or other fixed-income securities. The committee said this makes attracting capital market investors very difficult.

Over the past few years, most incentives for investors have been withdrawn or reduced, including the imposition of capital gains tax on retail investors, cuts in investment allowances, removal of tax-free dividend limits, and reduced tax benefits for companies and mutual funds.

The report highlighted a lack of trust. Despite BSEC and exchange surveillance systems, collusion and herding behaviour have been observed, indicating possible stock manipulation. Governance failures and corruption in institutions, including asset management companies, have further eroded confidence.

The committee also noted that unrestricted bank-based financing has weakened the market. Companies with low equity capital can borrow billions or trillions of taka from banks, reducing the need to raise capital through the stock market.