Transforming Bangladesh's capital market: A visionary reform agenda

The Bangladesh Securities and Exchange Commission (BSEC) has embarked on an ambitious and transformative reform agenda to fortify the capital market, aiming to set new standards of excellence on both regional and global stages. With a steadfast focus on transparency, governance, and innovation, BSEC is dedicated to evolving the market into a robust, inclusive platform that plays a pivotal role in driving the country's economic growth.  

Under the dynamic leadership of the new commission, several critical initiatives have already been successfully implemented. Concurrently, ongoing reforms and strategic future plans are being meticulously crafted to address existing challenges and fully unlock the market's potential.  

Key Initiatives in Progress

1. Strengthening Market Oversight and Discipline

One of the foundational pillars of BSEC's reform strategy is the improvement of market oversight. Advanced monitoring systems are being implemented to address market irregularities, prevent manipulation, and ensure fair play. Through real-time surveillance and a robust regulatory framework, BSEC aims to create a market environment that prioritizes transparency and integrity. The new Commission has sought assistance from the World Bank to upgrade the surveillance system of the capital market to international standards. Strict guidelines have also been introduced, mandating improved reporting and operational transparency for stock exchanges and brokerage firms. These measures are designed to uphold the highest standards of market discipline, fostering trust and confidence among investors.

2. Establishing a Policy for Independent Directors

Enhancing corporate governance is a central focus of BSEC's reform efforts, with a key initiative being the development of a comprehensive policy for appointing independent directors. This policy aims to ensure that listed companies, stock exchanges, and market-related institutions uphold the highest standards of governance. By defining clear criteria for selecting independent directors—emphasizing neutrality, expertise, and experience—BSEC seeks to foster leadership that prioritizes the long-term interests of stakeholders. Independent directors are instrumental in maintaining market integrity by ensuring that management decisions align with the best interests of investors and the broader economy.

3. Establishment of a Market Intelligence by following international standards 

A central component of the reform agenda is the establishment of a market intelligence unit. This world-class body will be responsible for monitoring market activities with a keen eye on identifying irregularities and emerging risks. By leveraging technology and data analytics, the market intelligence wing will enhance regulatory efficiency, reduce systemic risks, and ensure that BSEC's actions are proactive rather than reactive. This initiative aligns with global regulatory best practices and will contribute significantly to maintaining market discipline and stability.

4. Digital Transformation of the Market

Technology plays a pivotal role in the modernization of capital markets worldwide, and BSEC is no exception. The commission has prioritized digital transformation through the revamping of the Enterprise Resource Planning (ERP) and Regulatory Information System (RIS) projects. These systems will streamline BSEC's operations, enhance reporting accuracy, and improve regulatory compliance. Moreover, BSEC is introducing electronic Know Your Customer (EKYC) systems and enabling online account opening for investors, making it easier for individuals to access the market. This technological overhaul is crucial for facilitating smoother and more transparent investor experiences, ensuring a wider and more diverse investor base.

The new Commission is actively working on a FinTech initiative aimed at developing a technology-driven capital market. By leveraging cutting-edge financial technology solutions, the Commission seeks to enhance market efficiency, improve transparency, and provide seamless access for investors. This project focuses on integrating digital tools such as blockchain, artificial intelligence, and advanced analytics to streamline operations, modernize trading systems, and strengthen regulatory oversight. The goal is to transform Bangladesh's capital market into a more dynamic, inclusive, and globally competitive platform.

5. Expanding Financial Literacy Nationwide

Financial literacy is a cornerstone of a healthy capital market. BSEC is committed to rolling out comprehensive financial literacy campaigns across Bangladesh, particularly targeting retail investors and rural populations. Through innovative tools such as by creating mobile cinema vans, YouTube channel, page book page, well developed well designed websites, digital platforms, and dedicated media channels, BSEC aims to make financial education more accessible and engaging. These campaigns will focus on educating investors about the capital market's functioning, the risks involved, and how to make informed investment decisions. By improving financial literacy, BSEC seeks to empower citizens to participate in the capital market responsibly and effectively. To take mass awareness programs about safe investment in the capital market is the top priority of BSEC as well.

Ongoing and Future Reform Initiatives

1. Introducing New Financial Instruments

To diversify investment opportunities and attract sophisticated investors, BSEC is working to introduce a wide array of modern financial instruments. The development of frameworks for derivatives, exchange-traded funds (ETFs), and green bonds will not only enhance market liquidity but also align Bangladesh's capital market with global trends. This visionary move is expected to transform Bangladesh's capital market by diversifying investment options, mitigating risks, and creating new opportunities for both domestic and international investors.

2. Boosting Institutional Investment 

Institutional investors such as mutual funds, pension funds, and insurance companies are key to the growth and stability of capital markets. BSEC is actively working on policies that will encourage greater institutional participation. This includes offering incentives and creating an environment conducive to institutional investments. Increased institutional participation will bring in substantial capital, thereby improving market liquidity and ensuring long-term market stability.

3. Aligning Tax and Policy Frameworks 

To foster a more transparent and investor-friendly market, BSEC is collaborating with the National Board of Revenue (NBR) to integrate tax certificates into dividend payments. This move will enhance compliance and ensure a more transparent taxation system for investors. Additionally, BSEC is working towards simplifying tax procedures to reduce the burden on investors, thereby encouraging greater market participation. These policy shifts are integral to creating a more favorable environment for both domestic and international investors.

4. Strengthening Stakeholder Engagement

Effective reform requires the active participation of all market stakeholders. BSEC is committed to fostering strong relationships with all intermediaries stakeholders, including merchant banks, asset management companies, brokerage firms, and professional bodies such as ICAB ICMAB ICSB ,  association of CFA / CPA Regular dialogues and joint action plans will be pursued to tackle operational and governance challenges. By ensuring that stakeholders have a voice in the reform process, BSEC aims to create a collaborative environment for market growth and development.

5. Enhancing Enforcement Mechanisms 

BSEC is focused on improving the effectiveness of its Enforcement Division. A zero-tolerance approach towards violations will be enforced to ensure that the market remains disciplined and transparent. Swift actions against market misconduct will signal to investors that BSEC is committed to maintaining the integrity of the market. Strengthening enforcement mechanisms will help build investor confidence and protect the interests of all stakeholders.

6. Five-Member Task Force and Focus Group Initiatives

BSEC has established a five-member task force dedicated to spearheading the capital market reforms. The task force's work is structured around 11 focus groups that have been formed to tackle key areas including regulatory improvements, governance, investor protection, and market innovation. Each focus group has its own Terms of Reference (ToR) which outlines specific responsibilities for research, policy formulation, and recommendations in line with the overall reform agenda. This collaborative approach ensures a holistic and thorough transformation of the capital market, addressing both macro and micro-level challenges.

7. Creating Digital Platforms for Investor Education

To promote financial literacy and create awareness about safe investment practices, BSEC is launching a series of digital platforms. These include:

A dedicated website and YouTube channel, page book page for capital market updates, educational videos, and resources.

Online channels for engaging the public with real-time information, FAQs, and expert interviews on capital market operations.

A dedicated TV channel for broadcasting financial literacy programs for at least 2-3 hours daily. These broadcasts will include tips on safe investing, understanding market risks, and financial planning. Creating awareness about overall capital market. This initiative will broaden outreach, particularly to individuals with limited access to online platforms.

8. Efficient Pool for Independent Directors

A key element of BSEC's corporate governance reform is the creation of an efficient pool of independent directors. This initiative aims to attract personnel from diverse professional groups, including industry experts, civil servants, academics, and other relevant sectors. The goal is to ensure that independent directors bring a wide range of perspectives and experiences to listed companies, contributing to more balanced and effective decision-making. The process will focus on selecting individuals based on their expertise, neutrality, and commitment to the long-term success of the companies they serve.

9. Encourage entry of companies with sound fundamentals

The Bangladesh Securities and Exchange Commission (BSEC) has been initiating several strategic steps to encourage the entry of companies with sound fundamentals into the capital market. Strengthening listing criteria to prioritize financial stability, governance, and transparency is key to ensuring high-quality issuers. Incentives like reduced fees, tax benefits, and public recognition could motivate companies to list. Streamlining the listing process by simplifying regulations and digitizing applications would make it more accessible.

BSEC has been planning to conduct awareness campaigns, workshops, and advisory programs to educate businesses on the benefits of listing while collaborating with industry associations to identify promising companies. 

Improving corporate governance through training programs and ensuring a liquid secondary market would further attract issuers. Lastly, maintaining a stable regulatory environment and enforcing compliance would uphold market integrity, fostering investor confidence and long-term growth. These measures would strengthen the capital market and support Bangladesh's economic development.

10. Coordination Committee to formulate comprehensive financial/capital market framework to augment long-term strategies

To ensure the sustainable growth and development of the financial and capital markets in Bangladesh, it is essential to formulate a comprehensive framework that aligns with long-term strategies. The establishment of a dedicated Coordination Committee, would be a strategic step toward achieving this goal.

The Coordination Committee would act as a bridge between various stakeholders, including regulatory bodies, market participants, and policymakers, to identify gaps and opportunities within the current market structure. By leveraging the expertise of the stakeholders, the committee can conduct in-depth analyses, identify global best practices, and propose innovative solutions tailored to the unique needs of the Bangladesh capital market.

This collaborative effort would focus on key areas such as improving market governance, enhancing investor protection, introducing diversified financial instruments, and fostering market depth and liquidity. The resulting framework would serve as a roadmap for long-term market development, ensuring alignment with the country's economic priorities and global market trends.

Additionally, the committee would prioritize regular reviews and updates to the framework, ensuring its adaptability to changing market dynamics. This proactive approach would help the Bangladesh capital market remain competitive and resilient, contributing to the broader goal of establishing it as a reliable platform for economic growth and investment.

11. Addressing the Challenges of Negative Equity in the Capital Market

The issue of negative equity in the capital market arises primarily from imprudent and aggressive disbursement of margin loans with unrealistic margin ratios, the absence of clear rules and policies for margin loans, informal directives discouraging forced sales of securities, and prolonged imposition of floor prices. These factors have compounded the problem, creating instability and undermining investor confidence.

Efforts to adjust negative equity and provision against unrealized losses have faced challenges, including resistance from stockbrokers and merchant bankers, unauthorized transactions in clients' margin accounts, and management's ambitions to showcase higher income at the expense of compliance. Such practices have further deepened the crisis.

To address these issues, the Bangladesh Securities and Exchange Commission (BSEC) has taken several steps, including waiving interest on margin loans, granting exemptions from specific margin rules, allowing optional provisioning against unrealized losses, and holding one-to-one meetings with stakeholders to set self-imposed deadlines for adjusting negative equity.

Moving forward, solutions must focus on recognizing operational losses in margin loan accounts, injecting fresh capital into market intermediaries, and ensuring stockbrokers and merchant bankers with negative equity cease offering margin loans until adjustments are made. Enhanced monitoring of margin loan accounts is essential to prevent unauthorized activities and promote transparency. These measures aim to restore market stability, safeguard investor interests, and build a resilient financial ecosystem.

12. Improving Human Capital at BSEC 

To attract top - tier professionals, BSEC is advocating for a review of the rank, status, and remuneration of its Chairman and Commissioners. A separate competitive pay scale is being considered to ensure the recruitment of highly skilled individuals capable of effectively overseeing and transforming the capital market.

Vision for a Sustainable Capital Market

Looking ahead, BSEC is committed to adopting international best practices across various regulatory and operational areas. This will enhance market stability, attract foreign investments, and align the market with global standards. The commission is also focused on ensuring that rural and grassroots investors are not left behind. Financial literacy programs will be extended to these areas, with educational materials in local languages to empower investors at the community level. BSEC is thinking about to involve Division/ district/ upazila administration in this process with the help of Government 

In addition, BSEC is exploring new avenues for sustainable investments. The promotion of green bonds and the integration of Environmental, Social, and Governance (ESG) principles into corporate practices will be key areas of focus. By fostering sustainable financial practices, BSEC aims to align the capital market with global sustainability goals, ensuring that the market thrives in the long run.

BSEC's reform agenda represents a bold vision for the future of Bangladesh's capital market. By focusing on governance, technology, investor protection, and financial literacy, creating awareness about the capital market BSEC is laying the foundation for a market that is transparent, efficient, and globally competitive. The success of these reforms will not only improve investor confidence but       also contribute significantly to the broader economic growth of Bangladesh. With a clear roadmap and collaborative efforts from all stakeholders, BSEC is poised to lead the transformation of the capital market into a dynamic and resilient platform, positioning Bangladesh as a leading market in the region and beyond.

Mohsin Chowdhury. Sketch: TBS