BSEC smells irregularities in Beximco Sukuk

The Bangladesh Securities and Exchange Commission (BSEC) has observed irregularities, including the failure to adhere to International Financial Reporting Standards (IFRS), in Beximco's first-ever asset-backed Green Sukuk.

Additionally, the market regulator raised concerns over various violations involving the conglomerate owned by Salman F Rahman, a former private sector adviser to the ousted prime minister Sheikh Hasina.

After reviewing the company's audited financials, quarterly reports, and published price-sensitive information (PSI), the BSEC noted several anomalies.

The commission directed the Dhaka Stock Exchange (DSE) to address these issues, ensure compliance with securities regulations, and submit documents clarifying its findings.

Highlighting significant violations of international auditing standards and BSEC directives, the commission sent letters in the first week of December to the DSE, instructing the country's prime bourse to provide supporting documents and clarify its positions.

The Business Standard obtained a copy of the letter sent to the DSE. According to BSEC sources, the same letter was also served to the company.

In 2021, Beximco floated a Tk3,000 crore Sukuk bond – the first-ever asset-backed security issued by a private sector entity in Bangladesh – to finance two solar power plants and expand its textile division.

One auditor for 15 years

Beximco had appointed MJ Abedin & Co Chartered Accountants to audit its financial statements for 15 consecutive years, from 2009 to 2023, according to the BSEC letter.

As per BSEC orders and notifications, an issuer company is not permitted to appoint the same firm of chartered accountants as statutory auditors for a consecutive period exceeding three years.

The BSEC letter also noted that the company raised Tk3,000 crore by issuing asset-backed convertible Sukuk but failed to comply with IFRS 9.

Under this standard, any changes in the credit risk of a financial liability must be reflected through fair value adjustments. However, Beximco's financial statements did not incorporate these changes, resulting in non-compliance.

Beximco Limited, the flagship firm of the Beximco Group, primarily engaged in the textile business, has reported questionable fluctuations in sales and profits. These irregularities are widely suspected to align with stock price manipulation and fundraising motives, leaving average investors in dire straits following the subsequent declines.

Tk2,487cr interest-free loans to subsidiaries 

Beximco provided Tk2,138.85 crore and Tk348.39 crore interest-free loans to its subsidiaries, Teesta Solar and Korotoa Solar, respectively.

The commission letter said the fair value of these loans was not measured or disclosed, which is required under IFRS 9.

So, the commission seems to think Beximco has violated IFRS 9, and the loan to subsidiaries is the clear violation of its order issued in 2006.

No reflection of rental income

According to the company's statement, Teesta Solar and Korotoa Solar are required to pay monthly rents of Tk14.13 crore and Tk2.29 crore, respectively, to Beximco for a period of 60 months. However, this rental income has not been recorded in the company's audited financial statements, as noted in the BSEC letter.

Beximco also provided a corporate guarantee for the payment obligations of the beneficiaries under the Green Sukuk, covering both the final redemption and investment payments.

The bond guarantees investors a 9% secured annual return in addition to a profit margin. However, the BSEC raised concerns about the company's ability to fulfil the covenant guaranteeing the 9% return and profit margin, particularly after Beximco declared no dividend for fiscal 2023-24.

As per the convertible option, 25%, or Tk750 crore, of the Sukuk was offered to existing shareholders, another 25% to the public through an IPO, and the remaining 50% through private placement.

A key concern raised in the BSEC letter is whether Beximco Green Sukuk unit holders have exercised their conversion option, how many shares were issued against this conversion, and whether the diluted earnings per share (EPS) was disclosed as required.

Direction for DSE

The BSEC has instructed the DSE to provide correspondence letters and supporting documents sent to the issuer company regarding these issues. The DSE must also explain its position and submit any relevant documents.

Additionally, the exchange is required to disclose any actions taken against the company for violating securities laws. Documents related to coupon/interest payments, submitted by the trustee or originator, must also be provided to confirm compliance with Sukuk terms.

On 10 December, the securities regulator decided to conduct a special audit to examine the past five years' financials of Beximco Limited, Beximco Pharmaceuticals, and Shinepukur Ceramics – the three listed companies of the Beximco Group.

BSEC officials said the decision was prompted by serious investor scepticism regarding the authenticity of the financial disclosures of Beximco Group companies, including their income, expenditures, assets, and liabilities.

The special audit aims not only to uncover potential misreporting but also to provide a transparent financial overview of the three publicly traded companies.

This initiative aligns with the interim government's efforts to address the ongoing workers' unrest at Beximco Industrial Park over unpaid wages, with the sale of sponsors' stakes being considered as a long-term solution to the crisis.

Beximco Group currently owes over Tk23,400 crore to state-owned Janata Bank, of which Tk19,507 crore is classified as bad loans.