Financial Market Regulation
Securities markets in Bangladesh
Regulatory development between 1947 and 1971
Barrister Tureen Afroz
In the previous article (DS 5 August 2006) securities regulation up until 1947 was discussed. In 1947, the end of British colonialism brought a different dimension to the political and legal trajectory of the region. The Capital Issues (Continuance of Control) Act of the undivided Indian sub-continent continued in the new state of Pakistan after its birth in 1947.
It is noticed that even after independence, the East Pakistanis continued their trading at Kolkata (earlier Calcutta) Stock Exchange of the independent India. In 1952, the Government of Pakistan stopped the trading of Pakistani companies in the Kolkata Stock Exchange. As a result, there emerged a need for establishing a separate stock exchange in the East Pakistan region. Therefore, on April 28, 1954 the 'East Pakistan Stock Exchange Association Limited' was incorporated. However, the formal trading in securities in the East Pakistan Stock Exchange began in 1956.
On May 14, 1964 the East Pakistan Stock Exchange was renamed as the Dhaka (earlier Dacca) Stock Exchange Limited. The Dhaka Stock Exchange is registered as a public limited company and its activities are regulated by its Articles of Association and its own rules, regulations and by-laws along with other regulations the government would enact time to time to regulate the market.
It was only in 1969, for the first time in Pakistan, that a comprehensive securities market legislation came into force when the Securities and Exchange Ordinance of Pakistan 1969 was enacted. The Ordinance was published on June 28, 1969 and came into force on November 1, 1970. Securities and Exchange Ordinance 1969 was enacted for the purposes of (a) providing protection to the investors of both East and West Pakistan; (b) regulating the capital markets; and (c) regulating the issues and dealings in securities.
In the legal history of securities market regulation in Bangladesh (the then East Pakistan), Securities and Exchange Ordinance 1969 is an important landmark. This Ordinance for the first time emphasised the need for 'investor protection' in the securities market regulatory regime of the region. This Ordinance also introduces a comprehensive and comparatively modern method of securities regulation in the region. In addition, it provided for the first time a comprehensive definition of the term 'securities', including both governmental and non-governmental instruments.
After Securities and Exchange Ordinance 1969, no stock exchange in Pakistan was allowed to operate or to carry on its functions without registration. The Ordinance specified certain conditions or requirements for stock exchanges as eligibility for registration. This was mainly to ensure fair dealings and to protect investors. However, the stock exchanges continued to remain as self-regulatory bodies and with prior approval of the Central Government of Pakistan, could frame their own regulations not being inconsistent with Securities and Exchange Ordinance 1969. The stock exchanges were required to maintain such book of accounts and documents, which could be made subject to the inspection by the Central Government of Pakistan as and when necessary. If satisfied, the Central Government of Pakistan could also enjoy a variety of power over the stock exchanges such as, cancellation of registration, suspension of transaction, superseding the stock exchange governing body and/or removal of key personnel from the stock exchange.
After the 1969 Ordinance, the business of investment advisers and the investment companies were also brought under the Central Government regulation. However, Order 32 of the Securities and Exchange Ordinance 1969 was silent about any further directions in this regard. Later, the Central Government of Pakistan framed the Investment Companies and Investment Advisers' Rules 1971. These Rules made it compulsory for any company to commence business as an 'investment company' (Rule 3) and for any person to commence business as an 'investment adviser' (Rule 18), to be duly registered beforehand.
Under the 1969 Ordinance, the companies were required to fill up a standard application form for initial listing of securities and to submit the same to the stock exchanges, where the listing was intended, as well as to the Central Government of Pakistan. However, the reference to the standard form of application can only be found at Rule 11 of the Securities and Exchange Rules 1971 which reads: “An application for listing a security on a stock exchange shall be made to the stock exchange in Form III.”
Order 10 of the 1969 Ordinance created a provision whereby compulsory listing of securities could take place, even if the issuer does not make an application for listing. There was a specific regulatory reason to do so. It was found that in Pakistan there were some large public companies whose controlling shares were held in a few hands and were making huge profits. It was feared that if the securities of these large companies remained unlisted, regulation of the overall capital market might be prone to danger. Therefore, in the public interest such securities could be compelled for listing. However, the Central Government of Pakistan was required to consult the stock exchange and gave the issuer of such security an opportunity of being heard, before directing such security to be listed.
Also the 1969 Ordinance, for the first time, imposed a mandatory 'periodic disclosure' mechanism upon the corporate issuers. The issuers were made subject to submission of “annual returns”, “half-yearly accounts” and “monthly returns”. In addition, the 1969 Ordinance for the first time explicitly prohibited certain activities in the securities markets, such as, short selling (short selling is the selling of securities without having them and delivery of which effected at a later date in the hope of future decline in price when the same can be acquired and delivered.), fraudulent acts, making of false statements etc.
1969 Ordinance for the first time empowered the regulatory body to make a “prohibitory order” against any possibility of potential contravention of securities market regulation. However, this power could only be exercised by the Central Government of Pakistan and not by the stock exchanges. Refusal or failure to comply with “prohibitory order” would of course entail penalty under Order 22 of the Securities and Exchange Ordinance 1969. It is stated that the ultimate purpose of such regulatory provision for the securities market was to enhance market confidence.
In summary, Securities and Exchange Ordinance 1969 empowered the Central Government of Pakistan with more power than the powers exercised by the Office of the Controller of Capital Issues under the Capital Issues (Continuance of Control) Act 1947. Securities and Exchange Ordinance 1969 elaborated the enquiries and the penalty provisions under the ordinance in quite details (Orders 21-24). The Ordinance also gave the Central Government adjudicatory power regarding any mischief in the securities markets, which could be subject to a further revision and review by the Central Government itself. It is to be noted that the rights and remedies provided by Securities and Exchange Ordinance 1969 were in addition to any other rights and remedies available under any other law of the land.
The author is an Assistant Professor of Law at BRAC University School of Law.