Financial Market Regulations
Securities Markets In Bangladesh
Regulatory development after 1971
Barrister Tureen Afroz
After the independence, Bangladesh adopted most of the laws, which were in operation in the region before the independence. In the securities market, the government adopted Securities Act 1920, Capital Issues (Continuance of Control) Act 1947 and the Securities and Exchange Ordinance 1969. I have already discussed these laws in earlier articles published in the DS. This article therefore explores the regulatory development in the post-independence securities market of Bangladesh.
History accords that transactions in the Dhaka Stock Exchange and thus, in the overall securities market in Bangladesh were closed during the 1971 liberation war. Dhaka Stock Exchange was reopened in 1976. There were only 9 companies listed in Dhaka Stock Exchange in 1976. The Investment Corporation of Bangladesh, which remained the single-most institutional investor in Bangladesh for long, was established in 1976 to broaden the investment base and to develop the capital market in the emerging Bangladesh. After independence, the Bangladesh securities market came to be regulated jointly by the Controller of Capital Issues, the Registrar of Joint Stock Companies, the Bangladesh Bank and the Chief Controller of Insurance.
It is interesting to note that Bangladesh formulated its own Securities and Exchange Rules 1987 almost after 16 years of independence. These rules essentially deals with qualification of becoming and remaining as a member of a stock exchange (Rule 3), the manner of transaction of such member's business (Rule 4), the requirement of maintaining books of audited account and other documents by both the stock exchange and the members (Rules 5, 7 and 8); requirement of submission of annual and half-yearly report by the issuers (Rules 12 and 13) etc.
According to the Securities and Exchange Rules 1987 the annual report to be submitted by the issuer should include 'financial statements' consisting of (i) an audited balance sheet; (ii) an audited profit and loss account; (iii) an audited cash flow statement; and (iv) notes to the accounts (Rule 12(1)(1)). Moreover, the financial statements of the issuer must be in conformity with the International Accounting Standards and the International Standards of Auditing as issued by the International Accounting Standards Committee and the International Auditing Practices Committee of the International Federation of Accountants respectively and as the same adopted by the Institute of Chartered Accountants of Bangladesh (Rules 12(1)(2) and 12(1)(3)).
In 1993, the Government of Bangladesh enacted the Securities and Exchange Commission Act 1993. With a view to efficiently regulating the securities market of Bangladesh, on 8 June 1993, this Act established a statutory organization known as the Securities and Exchange Commission (henceforth, SEC) and entrusted it with a number of regulatory powers, including market surveillance, monitoring and adjudicatory powers.
SEC is a body corporate, having perpetual succession and a common seal with power to acquire, hold and dispose of properties, both movable and immovable, and by the said name can sue and be sued (Section 3 of the SEC Act). SEC is consists of (a) the Chairman (appointed by the government); (b) four full time members (all appointed by the government); (c) a government nominated representative from the Ministry of Finance; and (d) a Deputy Governor of the Bangladesh Bank.
SEC is expected to perform all such functions and duties as may be prescribed for fulfilling the objectives of the Securities and Exchange Commission Act 1993. These include: regulating the business of the stock exchanges or any other securities market, registering and regulating the working of market intermediaries, registering, regulating and monitoring the working of collective investment schemes, promoting, monitoring and regulating authorized self-regulatory organizations, prohibiting fraudulent and unfair trade practices, promoting investors education and training of all market intermediaries, prohibiting insider trading, regulating substantial acquisition of share or stock and take-over of companies, investigating and doing inspection, monitoring financial performance of issuers, levying fees or other charges, and conducting research and publications. The SEC is also to hold meetings, furnish annual budget statement to the Government; maintain audited accounts and furnish reports to the Government, as and when required. The SEC can act as a civil court, impose penalty, hear appeal, prosecute offences, exempt the compliance requirements of securities regulation and can delegate power.
In 1994, to regulate the working of stock-dealers, stock-brokers and the authorized representatives, the SEC made the Securities and Exchange Commission (Stock-Dealer, Stock-Broker & Authorised Representative) Regulations 1994. Similarly, in 1995, to regulate the working of the merchant bankers and the portfolio managers, the SEC made Securities and Exchange Commission (Merchant Banker & Portfolio Manager) Regulations 1996. The said regulations prohibited the concerned category of people to carry on their respective activities in Bangladesh without duly registered with or holding the prescribed certificate from the SEC. Also, in 1995, the SEC made Securities and Exchange Commission (Prohibition of Insider Trading) Regulations 1995.
Bangladesh securities market was opened to the non-resident/foreign investors during 1991-1992. According to Bangladesh Bank sources, flow of capital into the stock markets by non-residents shot up to a record of Tk. 3101.80 million by the end of 1994 which stood only at Tk. 50.80 million in June 1992. Also, during 1993 1994, significant steps were taken to ease the process of repatriation of capital gains and dividends by foreigners.
However, on 11 February 1995, the government of Bangladesh introduced a restriction, which was known as 'lock-in'. Such lock-in provisions required foreign investors to hold stocks purchased in new public offerings for a minimum of one year. In other words, the foreign investors would not be permitted to transfer such shares and repatriate the sale proceeds within one year of purchase in initial public offerings. It may be mentioned that after imposition of lock-in provisions, foreign investment in Bangladesh stocks dropped significantly.
It is argued that by mid 1990s Bangladesh securities market had adopted all necessary regulatory techniques of the developed markets. The 1969 Ordinance and the establishment of the SEC, both followed the regulatory models of the developed Anglo-American jurisdiction. Very particularly, the Bangladesh SEC was set up after the institutional framework of the US Securities and Exchange Commission. It is well known that the US SEC played a dominant role in the development of the US securities market and the overall growth of the US economy. On the contrary, Bangladesh securities market experienced its worst turmoil in 1996 even after having necessary regulatory provisions and institutions. The index crash of 1996 also casts doubt on the efficiency of the SEC as a regulatory body. In the next article therefore I will discuss in detail the 1996 securities market crash and some relevant regulatory issues that it gives rise to.
The author is an Assistant Professor of Law at BRAC University School of Law.