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“All Citizens are Equal before Law and are Entitled to Equal Protection of Law”-Article 27 of the Constitution of the People’s Republic of Bangladesh

Issue No: 261
November 11, 2006

This week's issue:
Star Law Analysis
Financial Market Regulation
Human Rights Monitor
Law Opinion
Rights Corner
Law Watch
Law Week
State Scan

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Financial Market Regulation

SEC facing internal incapacity

Barrister Tureen Afroz

Securities market in Bangladesh suffers from various setbacks. The market is yet to recover from the 1996 shock. Domestic investors continue to exhibit lack of confidence in the market, especially in the secondary securities market. Only a limited number of foreign investors are showing interest to venture the capital market of Bangladesh. It is estimated that from 1997 to July 2003 the total foreign investment in the initial public offerings in Bangladesh stood at very poor level - on an average less than $1 million a year. Many even claims that shares of a large number of listed companies are currently being traded far below face values at the two stock exchanges. It has also been reported (in 2004) that almost 50% of the brokerage houses at Dhaka Stock Exchange are currently remaining dormant.

From regulatory perspective, the reasons for such poor performance of the securities market are various. However, the central regulator of the securities market the SEC is beset with a number of internal problems. These problems effectively incapacitate the SEC to perform its role as an efficient regulator of the securities market. Some of the most obvious internal problems currently faced by the SEC are discussed below.

Autonomy of the SEC
The SEC consists of 5 member commissioners, including one designated as Chairman and the rest as full time members. The Government appoints all commission members. The SEC (Amendment) Act 2000 stipulates that one member of the SEC should be from the private sector. Even though the SEC is operationally autonomous, the Government still controls the SEC funding. To work as an independent entity and to have more regulatory freedom, it is imperative that the SEC becomes a self-financing organization.

Resource constraint of the SEC
The SEC is currently headquartered in Dhaka. It does not have any other regional or district offices in other parts of Bangladesh. The shortage of officials at the SEC has become a major impediment to strengthen its regulatory role in Bangladesh. Apart from the position of the Chairman and the 3 full time members, the SEC is currently running with 23 senior and junior level officers. Nevertheless, the SEC has un-proportionately large supervisory responsibilities. Due to budget constraints the SEC does not have many principal organizational divisions to carry out its objectives more efficiently. Besides, the SEC's salary scale for its officers is substantially below that of the private sector and as such, fails to attract efficient staffs to work under it.

Absence of qualified personnel at the SEC
Bangladesh is yet to staff its SEC with qualified people who would possess necessary knowledge and experience in securities market regulation. It has been alleged that neither the past chairmen nor the members of the SEC had any operational work experience in the financial sector. It is true that over the past years various training programs have been organized to enhance the knowledge and skills of the SEC staffs so that they could perform their supervisory functions more effectively. It is equally beneficial for the regulatory staffs to go for overseas training programs and workshops/seminars so that they could acquire an international exposure of securities market regulation. However, it is unfortunate to notice that several staffs that have undergone training have left the SEC. This should be considered as waste of resources. The SEC should enhance more commitment of its staff. In this regard, recruiting and training of promising and committed young professionals should be encouraged.

Poor internal governance
Governance in the regulatory bodies is a pre-condition to establish governance in those to be regulated. Therefore, it is essential that the SEC, as a regulator, practices its 'internal good governance' to ensure good governance in the corporate sector under its regulatory control. However, it has been alleged from different corners of the society that the SEC had performed poorly in ensuring its internal governance. For example, there were allegations to the effect that a high official of the SEC was awarded 5 undue increments in a single year; an officer of the SEC got his appointment by submitting forged educational certificates; an official who earlier retired from a stateowned enterprise under golden handshake was appointed at the SEC violating rules and regulations and later found to be involved in a series of corrupt practices; legal advisor and a foreign consultant to the SEC was paid large amount of fees without valid grounds and many more.

Image crisis of the SEC
The SEC's poor performance also attracts negative media criticism. It is argued that negative media reports very often erode common people's trust on the SEC as an efficient and reliable regulatory body of the securities market. For example, quite regularly the SEC is found negligent in its routine examination of the prospectus before granting approval to the issuing capital. Questions were also raised as to the SEC's regulatory sanity when the SEC imposed a penalty of Tk. 1.8 million on Orion Infusion Ltd for defaulting in holding AGM two days after the AGM notice was already published in the newspapers. Such publications cast doubt on the SEC's capacity as an efficient regulator and as a result, the SEC faces tremendous image crisis.

The author is an Assistant Professor of Law at BRAC University School of Law.


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