Regulatory unpredictability adds to listed mutual funds’ woes

Rules and regulations for Initial public offerings (IPOs) or mutual funds – which do you think has gone through more changes in Bangladesh?

Given the regulatory unpredictability in the case of mutual funds at present, you may be tempted to pick the latter.

For instance, regulations and their implementation related to the dividend mode, tenure of a mutual fund and conversion of closed-end funds to open-ended funds, have kept investors in a dilemma while making investment decisions.

Sometimes, the regulator – Bangladesh Securities and Exchange Commission (BSEC) – is responsible for making the task more difficult for investors. However, some industry people were no less responsible for that matter.

Through a series of litigations, lobbying and, in some cases, misconduct, malpractice and serious deviations from global norms, they added to the uncertainty over the regulations.

Investors are still looking for a reason to be confident before making investment decisions based on given regulations.

The cloudy decade of uncertainties

Until the 2010 market crash, mutual funds had been trading at higher prices than they deserved. Listed funds were then more a tool for speculation than one for stable investment.

A decade ago, the BSEC had addressed the regulations and practices within the mutual fund industry, which proved a bane for investors' interest and the market as well.

At first, the BSEC in 2008 prohibited the issuance of bonus units by mutual funds, instead of cash dividends. Mutual fund investors too were in love with bonus shares rather than cash dividends because fund units were overpriced at that time.

But a legal challenge by three investors, who were believed to be backed by influential industry players, did not let the BSEC go ahead with its decision. In 2010, the High Court cleared the way for issuing bonus units by mutual funds, thus keeping the speculation alive until the crash.

After over a decade of unwanted back and forth regarding modes of dividend disbursal, the problem on bonus unit issuance was solved through a bold regulatory prohibition in mid-2019.

In 2010, under a comprehensive reform attempt for the mutual fund sector, the BSEC ordered all the closed-end funds that had crossed their pre-declared life to shut down.

In line with the decision, the regulator in 2015 came up with a constructive solution that directed the expired funds either to close down or to transform into open-end ones, which have a perpetual life.

According to existing regulations, open-end mutual funds are not tradable at the stock exchange. Yet, it offers a better exit route to unitholders as asset managers are bound to liquidate the investments against any surrendered unit and pay the proceeds back immediately.

Since then, the regulator has been inspiring open-end funds instead of closed-end listed funds.

But legal challenges from asset manager-backed investors created hurdles on the desired exit route to closed-end fund investors.

After a series of legal battles at different levels of the judiciary, the BSEC managed to secure court verdicts for the expected practice of timely closure or transformation of closed-end funds.

In 2016, four listed mutual funds were liquidated and 10 turned into open-end ones, based on the will of unitholders.

The market was counting on timely redemption of over a dozen listed funds. Many competent institutional investors, including international funds, bought closed-end funds to capitalise on the discount.

Surprisingly, in 2018, the BSEC backtracked on its previous stance and allowed the funds to run for another decade.

As the exit route was shut for another 10 years, unit price of the funds nosedived at the stock exchange, contributing to an unmanageable overall discount of over 40 percent.

City of London Investment Management, an international mutual fund investor from the United Kingdom, a few weeks ago blamed the regulatory U-turn for their loss in listed mutual funds in Bangladesh.

It said that the regulator failed to protect investors' interest. It also expressed grievances over regulatory unpredictability.

The complaint of the foreign investor is now a lawsuit under the High Court's consideration.

Who owns the Tk30 crore?

In 2016, Aims First Guaranteed Mutual Fund and Grameen One Scheme One Mutual Fund were among the four mutual funds liquidated as per the direction of the BSEC.

But unitholders of the two funds are yet to find out who actually owns the Tk30 crore deducted by the National Board of Revenue (NBR) as tax from their proceeds.

The asset manager sold all the securities held by both funds and deducted nominal liquidation processing fees and costs. The remaining amount was supposed to be paid to investors.

However, the NBR in May 2016, directed the concerned trustees to deduct a 20 percent tax on investors' receivables in excess to paid-up capital as dividend tax. Rest of the cash proceeds were returned to investors. 

Bangladesh General Insurance Company (BGIC), the trustee of Aims First Guaranteed Mutual Fund deducted over Tk21 crore and Grameen Fund Limited, the trustee of Grameen One Scheme One, deducted more than Tk8.5 crore at source.

However, investors argued that the liquidation value of the funds is just capital gains added to its paid-up capital over a decade. Despite cash receipts, the liquidation value in excess of the face value is not a dividend by nature.

For individual investors, capital gain is tax free in Bangladesh, and for institutional investors it is applicable on actual capital gains.

But the NBR ordered to deduct a flat 20 percent tax from all, declaring the liquidation proceeds as dividend.

Later, responding to investors plea, the BSEC ordered the trustees not to hand over the deducted amount to any of the parties.

Three and half years on, investors still do not know who owns the money.

Ahmed Saifuddin Chowdhury, the managing director of BGIC, said, "NBR repeatedly asks for the money to be transferred to their account. Many unitholders of the winded-up mutual funds also knocked us for an update. On the other hand, our primary regulator BSEC has ordered us to hold to keep deducted cash under our custody until the dispute ends."

Kazi Sultan Ahmed, head of Trustee Services at Grameen Fund, said this needs to end as a long time has passed since the money was initially deducted.

The NBR, following a legal preparation by some of the investors, has recently told the trustees to determine actual capital gains of each investors and submit a report so that the dispute can be resolved.

Till then, nobody has access to the Tk30 crore.