Common investors have sent a letter to the Chief Advisor with 25-point demands for capital market reforms. On behalf of the investors, Mushfiqur Rahman Roni and engineer Khorshed Alam Mithu sent the proposal. Copy of Proposal Finance Advisor; Governor of Bangladesh Bank; Also sent to the chairmen of BSEC, NBR, FRC, DSE, CSE, ICB and Capital Market Reforms Task Force. The letter was sent to the chief adviser on Tuesday (November 19).

In the letter, the 25-point demand for capital market reform is stated, the ratio of market capitalization to GDP in the capital market of Bangladesh is the lowest in the developing world. That significantly lags behind neighboring countries such as India, Pakistan and Sri Lanka, and global rivals Vietnam, Nigeria, and the Philippines. Since the 1990s, vested interests have turned Bangladesh’s capital market into a kind of gambling den. Almost 97 percent of the companies that have listed on the capital market since then have entered the market mainly to repay unsustainable bank loans. These companies have engaged in massive fraudulent activities. Notable among these are former BSEC leadership, executive directors, issue managers, DSE board members, audit firms and other key stakeholders to increase profitability.

The letter said that after listing, the companies artificially inflated share prices to ensure maximum profits and passed on overpriced shares to ordinary investors. As a result, ordinary investors suffer with worthless shares, while criminals get away with impunity. This exploitative process has been repeated time and time again, which has continuously undermined public confidence in the capital markets.

In the letter, the investors said, those involved in destroying the capital market over the years must be held accountable. At the same time, the need for urgent and comprehensive reforms for the capital market as a representative of ordinary investors must be emphasized. The capital market needs to be transformed into a dynamic engine of the nation’s economic development, catering both to the interests of the economy and the aspirations of genuine investors.

In addition, the investors demanded 25 points of reforms in the letter. They converted these demands into three parts. The deadline for completion of renovations is fixed within one month for the first phase, six months for the second phase and 12 months for the third phase.

The 25-point reforms demanded by the investors

Step 1: Activities within a month

1. Strict implementation of enrollment criteria:

• Regulatory agencies should strictly implement the listing rules. Only companies that demonstrate strong growth potential, strong customer base, effective risk management and a balanced debt-equity ratio should be eligible to participate in the capital market.
• Fraudulent practices, such as inflated profits through falsified financial reports, must be eliminated. Special audits conducted with the help of professional accountancy firms and the Financial Reporting Council (FRC) will ensure that all financial reports are accurate and compliant. Auditors play an important role in ensuring the accuracy and reliability of a company’s financial statements, which serve as the basis for investor decision-making during an IPO. Their professional endorsement lends credibility to financial publications and influences investor confidence. If auditors fail to detect significant mistakes, fraud or irregularities, they undermine the transparency of the IPO process and put ordinary investors at greater risk. Furthermore, auditors are expected to adhere to strict professional and ethical standards. Neglecting their responsibilities not only undermines market confidence, but also undermines the integrity of the broader financial system. By holding auditors accountable, accountability is ensured, fraud is discouraged, and due diligence processes are able to maintain high standards, which protect the interests of all capital market stakeholders. If an auditor is found guilty of approving false financial statements of an issuer, financial penalties should be levied against them and, if necessary, action should be taken to revoke their license.
• Placement business of shares in the capital market should be banned permanently. Pre-IPO stock placements raise questions about market stability and fairness. First, pre-IPO placements often offer shares at discounted prices to select investors, creating an uneven playing field for retail investors, as they have to buy shares at higher prices during the IPO. Second, such placements can dilute the ownership of primary stakeholders, including founders and employees, reducing their share of the company’s value. Third, pre-IPO placements often encourage speculative behavior, where early investors sell shares purchased at discounted prices post-IPO, causing share price volatility and undermining public confidence. The lack of transparency in such transactions raises questions about governance, which can undermine confidence in the company’s integrity and the overall capital market.

Between 2009 and 2010, 34 companies (26 listed and 8 unlisted) raised significant funds through private placements. The investigation revealed that the share price was artificially inflated by controlling the demand and supply of shares through private placements. It has benefited some influential individuals and organizations.

2. Revision of classification of shares

• The present share classification (A, B, G, N and Z groups) should be restructured.
• Instead of punishing companies by shifting them to Z Group, BSEC should find out the root causes of failure to pay dividends and hold company boards accountable for all mismanagement including misappropriation of funds.
• For recovery, before classifying in Z group, a representative of BSEC should be appointed for at least one year on the board of directors of the underperforming company.

3. Encouraging institutional investment

• Institutional investors should facilitate low-cost funds to increase market participation. To facilitate these investments it is necessary to introduce regimes such as dealer codes.

4. Abolition of Capital Gains Tax

• In Bangladesh’s emerging market context, capital market leverage for ordinary investors needs to be completely eliminated.
• At this stage, capital market profits should be imposed on companies rather than individual investors. When the market matures, this tax can be revised.

5. Extension of negative equity adjustment period

• The period of negative equity adjustment should be extended in view of the recent market decline.
• Brokerage houses should be restrained from lending more to retail investors, to reduce risk and ensure financial stability.
• Double taxation, where company income is taxed at the company level and then re-taxed at the individual level when distributed as dividends, creates various inefficiencies and inequities, which justify the abolition of the system. First, it discourages investment by reducing the net return to shareholders, making equity investment less attractive than other alternatives. Second, it hinders business growth, as it limits the income needed for reinvestment, innovation, and job creation. Also, it puts a disproportionate pressure on corporate income, as other business structures like partnerships are taxed once. The complexity of managing these two levels of taxation increases compliance costs for both businesses and shareholders and diverts resources from productive activities. Also, it affects economic decisions and increases the tendency towards debt-financing, which is exempt from taxation, but discourages equity-financing and increases financial risk. Abolition of double taxation will simplify the tax system, encourage investment and create a fair and growth-friendly economic environment. As a result, more people will be encouraged to invest in the capital market.

6. Encouraging enrollment through tax incentives

• To attract high-quality companies to the stock market, the corporate tax rate for all newly listed companies should be at least 10% lower than for unlisted companies and should be effective for at least 3 years.
• To avail this benefit, companies wishing to be listed must float at least 30% of their shares in the market.

7. Formation of a policy committee for policy simplification

• A special policy committee should be formed with representatives from key regulatory agencies like BSEC, RJSC, NBR, FRC and Bangladesh Bank.
• The committee will work to streamline and simplify regulations, so that listed companies can focus on their core business activities and maximize shareholder value.

8. Formation of a panel of issue managers

• Like the panel of auditors, the BSEC shall constitute a panel of issue managers.
• Companies wishing to list in the capital market must choose an issue manager from this approved panel, to ensure quality and accountability in the IPO process.

9. Mandatory public review for IPO approval

• Before approving the IPO, BSEC has to conduct a public disclosure session with almost all stakeholders.
• This session should detail the cost of campaign activities (eg roadshows), share pricing methods (eg book-building), and campaign results, to ensure transparency and fair share pricing.

10. Interest Payment for Floor Price Period:

• At the end of July 2022, BSEC imposed a floor price on all shares to stabilize market indices due to global economic uncertainty and decline in key economic indicators of Bangladesh. During this time, many investors faced significant losses due to margin loan interest. Also, a significant number of investors lost their hard-earned capital invested in the stock market. Hence, the government should have actively considered interest waivers for private investors at that time.

These proposals are aimed at restoring investor confidence, ensuring accountability, and establishing capital markets as a major driver of economic growth. By implementing these measures, it will be possible to lay the foundation for a transparent, stable and investor-centric market.

Phase II: Actions for implementation within six months

11. Special Forensic Audit of the Companies listed above:

• To conduct forensic audit of 130 listed companies during the tenure of former BSEC chairman Khairul and Shibli, to uncover irregularities, manipulation and abuse of power during their listing.
• Companies found guilty of unethical practices will have their shares repurchased by sponsor directors and issue managers at current market prices within a specified time frame, to be determined by the new BSEC board.
• Sponsor directors, issue managers and BSEC officials involved in unethical activities must be held accountable.

12. Loan waiver and credit reform to retail investors:

• Brokerage firms and merchant banks should stop lending to retail investors, to prevent exploitation and market manipulation.
• Merchant banks will provide loans only to institutional investors and high net worth individuals (HNI) and take full responsibility for these loans. This will stop forced share sales that destabilize the market.
• This approach will limit speculative trading and increase stability in the market.

13. Revised Policy for Share Repurchase:

• Companies should strengthen regulations to prohibit employees from repurchasing shares using provident funds.
• For companies whose share price falls by 50% or more from their IPO price, mandatory share buyback should be introduced, to ensure a fair exit for retail investors.

14. Enhancing Board Governance and Independence:

• BSEC shall constitute a panel of independent directors approved and issuers shall appoint directors from this panel.
• Increase the proportion of independent directors on the board to at least 40%.
• Update the Corporate Governance Code to mandate the formation of four key committees—Audit, Remuneration, Nomination, and Risk Management—and these committees will be headed by independent directors.
• Independent directors are required to submit an annual report to the BSEC every year, detailing the company’s activities and compliance with regulations.

15. Strengthening Mutual Fund Regulations:

• In order to deprive investors who are misusing the rules and mutual fund managers who fail to deliver expected returns, they should be investigated and necessary action should be taken.
• Necessary regulatory changes should be implemented by studying the successful mutual fund practices of neighboring countries and increasing the confidence of retail investors.
• Mandatory appointment of independent directors on mutual fund boards, who will submit an annual report to BSEC every year.
• Fund managers who have failed to declare dividend for two consecutive years should be changed.
• Mutual fund managers have to seek approval from BSEC to buy unlisted shares or invest funds in completely irrelevant industries. Compulsory audits are conducted by panel-approved auditors for such companies.

16. Encouraging retail investment through fund managers:

• Provide tax and investment incentives (eg, higher tax rebates) to retail investors investing through professional fund management companies.
• Fund managers should ensure returns of at least 15% or higher than the current risk free rate to increase participation of retail investors through risk management.

17. Abolition of 10% shareholding limit for market participants:

• The 10% shareholding limit that prevents market participants from exerting influence on the board should be abolished.
• Global best practices should be introduced to enable proactive acquisitions and better corporate governance (eg Elon Musk’s acquisition of Twitter).
• Facilitate opportunities for sponsors to sell businesses to more skilled investors and reinvest in their preferred industries.

18. Ensuring Accountability of Board of Directors and Auditors:

• If a company fails to declare dividend for two consecutive years, a special auditor should be appointed.
• The report of the special auditor should be compared with the report of the independent directors. Incorrect reporting by any party or statutory auditors shall be made punishable under law.
• Strict penalties should be introduced for financial misrepresentation or false representation by company directors and auditors.

19. Prevention of data manipulation through brokerage houses:

• All back-office software used by sharebrokers and merchant banks should be made mandatory subject to BSEC approval.
• Back-office software should be integrated with BSEC system to increase transparency.
• BSEC shall provide read-only access to consolidated customer accounts, to verify cash balances and detect any discrepancies.

20. Strengthening audit oversight through professional accountants:

• Listed companies, mutual funds, sharebrokers and merchant banks should appoint professional accountants for regular review of financial statements.
• BSEC should provide access to platforms like DVS (Document Verification System) to verify the authenticity of financial statements filed by existing and prospective listed companies.

These steps will help restore honesty, accountability and transparency in capital markets, which will protect investors’ interests and ensure long-term market growth.

Phase III: Actions for implementation within one year

21. Raising the Minimum Limit of Sponsor/Director Holdings:

• For all prospective listed companies the sponsor board must ensure a minimum 51% shareholding, and the remaining 49% shares must be allocated for initial public offering (IPO).
• This move will increase accountability of sponsors and align the interests of management with the interests of public investors.
• If public investors collectively hold the majority of shares, eligible stakeholders should have the right to take over company management under the proposed policy.

22. Attracting reputable and profitable companies to the market:

• Many profitable multinational and local private limited companies are reluctant to list in the stock market due to lack of adequate incentives.
• BSEC should directly interact with these companies to identify their concerns and provide suitable incentives to encourage market participation.

23. Raising public awareness:

• Marketing campaigns should be launched to promote the stock market as a credible investment option and remove existing negative perceptions. These initiatives will include: conducting public education campaigns, incorporating financial literacy into the education system, using media and influencers, popularizing simple investment methods, establishing trust and transparency, and using technology (eg mobile apps, artificial intelligence, chatbots), Community investment groups should be formed to educate the public about the capital market and present it as a credible investment option. This initiative will help to remove existing negative perceptions and increase awareness and confidence among investors.
• School curriculum should include basic concepts of capital markets, investment principles, and product knowledge, so that awareness and participation is created in the new generation from the beginning.

24. Restoring investor confidence:

• Restoring investor confidence should be given top priority. Where government bonds and banks are offering annual returns of around 12%, the stock market should offer more attractive incentives for investors.
• Actions of BSEC:
• Strict reforms should be implemented to eliminate speculative manipulation from the market.
• Only companies whose business fundamentals are strong should be allowed to list in the market.
• Annual compounded returns from the stock market should be targeted at more than 15%, to ensure risk-adjusted attractive returns for investors.

25. Evaluation and reform of demutualization process:

• The current demutualization process has failed to deliver significant benefits to investors and increase technological capacity. Rather, it has protected the interests of vested interest groups, which have exacerbated market chaos.
• Reform proposals:
• Reduce the number of irrelevant independent directors on the board, who contribute virtually nothing and are often involved in market manipulation.
• Member representation should be increased on the stock market board, where the ratio of members and independent directors will be kept at 2:1.
• A comprehensive review of the demutualization process should be undertaken, prioritizing transparency, efficiency and the greater interest of the common investor.

Investors have proposed to form a joint committee in addition to making 25-point demands. Where BSEC officials will be housed along with representatives of general investors. Investors hope this will strengthen market transparency and accountability as well as public confidence in the reform process.