| Managing Director of Investment Corporation of Bangladesh. |
| 1. |
Historical Background |
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1.1 |
Development of a bond market presupposes a vast and strong corporate sector especially private corporate sector because the companies are the principal supplier of debt instruments. It would therefore be worthwhile to trace the history of the corporate sector and industrial sector in Bangladesh. |
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1.2 |
Immediately after the emergence of Bangladesh as an independent country socialistic economic policy was adhered to. Almost all the medium and large-scale industries were nationalised with the result that government control of the industrial assets jumped from over 30% to over 90%. |
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The Stock exchange was closed down and the stock market was non-existent. Banks were
nationalised. In the initial period, private sector's role was limited. The scope of the private sector was defined in the Industrial Investment Policy announced in January 1973. In this policy private investment was allowed only to the extent of
Tk. 25 lakh (US $ 0.13mn). In the New Investment Policy of 1974, the ceiling on private investment was raised to
Tk. 3.0 crore (US$1.44mn) and foreign investment was permitted in collaboration with both government and local entrepreneurs. With the change in Government in mid 1975, there was notable shift in economic policy and the role of the private sector was given due prominence. The intention of the government was clearly spelt out in the Revised Investment Policy announced in December 1975. The policy contained the following significant policies, apart from the others; |
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i) |
Increase of the ceiling on private sector investment to Tk. 10.00 crore (US$ 3.40mn) |
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ii) |
Establishment of the Investment Corporation of Bangladesh to provide equity support. |
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iii) |
Reopening of the Dhaka Stock Exchange. |
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In September 1978, the ceiling on private investment was withdrawn. The new Industrial Policy of 1982 was also positive towards the private sector and indicated a reversal of policy with priority to the private sector instead of public sector. Salient features of the policy were as below; |
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i) |
Expansion of the manufacturing sector with increased participation of private sector. |
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ii) |
Restriction of the role of the public sector to the establishment of basic, heavy and strategic industries. |
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iii) |
Reduction of the Government control on industries by disinvestment of the abandoned industries. |
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iv) |
Public issue of 49% shares of some nationalised industries in order to stimulate the stock market. |
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v) |
Return of the nationalised jute and textile mills to their previous Bangladeshi owners. |
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As the private sector gradually stepped forward industrial financing was provided by the two development banks-The Bangladesh Shilpa Bank and The Bangladesh Shilpa Rin Sangstha and the nationalised commercial banks. As the government put priority to promote industries in the private sector the nationalized commercial banks also geared up their industrial finance activity. At the same time the prospective entrepreneurs were not aware of the scope to obtain finance from the capital market by issuing bonds as the capital market was in incipient stage. Since at that time demand for loans was not very substantial, there also not much urge to develop a corporate bond market. |
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1.3 |
However with the expansion of the private sector and reopening of The Dhaka Stock Exchange Ltd. and establishment of Investment Corporation of Bangladesh capital market began to attract attention of both investors and entrepreneurs as a market for finance and investment. |
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It is against the above background that ICB initiated efforts to establish a corporate debt market in Bangladesh in 1985. But many issues had to be resolved in this regard. Concerted efforts culminated in the public issue of debenture by two companies in 1987. The following guidelines were applicable to public issue of debentures. |
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Nature of Debentures: - The debentures are be registered debentures with coupons. The interest to be payable bi-annually. |
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Serialised Debentures/Sinking Fund: - Both serialised debentures and the sinking fund debentures with a concurrent security were permitted but in the case of debentures maturing on a single date the company was required to set up a sinking fund for the redemption of the debentures. No such sinking fund was necessary in the case of serialsed debentures as such debentures are normally retired out of current profits /retained earnings. |
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Period for which debentures to be issued: -The normal period for redemption of the debentures would be from 5 to 10 years with a minimum grace period of 3 years. On the expiry of the grace period the debentures could be retired on a serialised basis or they could have a concurrent maturity date. |
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Convertible Debenture: - Convertible debentures were permissible. However, while fixing the conversion ratio all relevant factors including dilution were to be carefully considered by the company. |
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Security: -All debentures offered to the general public were to be secured by a first mortgage on the assets of the company. However where there was another charge a pari passu charge could be created. In no case, the debentures are to be offered to the general public on the security of a second charge. |
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1.4 |
A debenture is a document, which creates and acknowledges a debt due from a company. It is an useful device enabling a company to borrow a considerable amount of money for a long period of time. In order to secure the interest of the debenture holders the properties of the company are generally mortgaged to the holders. But such a legal interest can not be vested in a large number of debenture holders nor can the title deeds be spilt up amongst them. As such, it was decided to create a trust in favour of debenture holders by virtue of a trust deed conveying the property of the company to the Trustee. A Trustee holds the title deeds of the properties of the company, which prevents the company from misusing the title deeds for any other purpose. The trustee is charged with the duty of watching the debenture holders and of intervention if the situation demands. |
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| 2. |
Formation/Creation of Trust |
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Trust is created in the following manners: |
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a) |
Firstly, trustee is approved by SEC ; |
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b) |
In order to create a Trust, a Trust Deed is essential under Trust Act, 1882 and Registration Act, 1908. All the terms, conditions, rights, duties, obligations etc. are contained in the Trust Deed. The Trust Deed is signed by the
person(s) on behalf of Trustee and the Issuer Company. |
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c) |
For the creation of a valid Trust, the Trust Deed has to be registered with relevant authorities. |
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A trust deed is executed between the company and the trustee spelling out the rights, obligations and privilege of the issuer and the trustee. Of special significance has been the enforceability of the assets mortgaged with the trustee. The Trust Deed also requires the issuer to install a proper accounting system with appropriate professional staff and submission of annual and other periodical statements of accounts to the trustee. |
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| 3. |
Responsibilities of Trustee: |
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The trustee is entrusted with many responsibilities including the following: |
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To register a trust deed signed by trustee and Issuer Company. |
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To register mortgaged properly as a security. |
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To ensure and protect the benefits of the debenture holders. |
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To be in constant touch with the issuer company regularly and frequently asking them to pay the interests and installment of the debenture holders. |
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To convene meeting(s) of the debenture holders if the situation demands. |
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To visit the office of the Issuer Company and to inspect their books of accounts and persue the claim of the debenture holders. |
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To file money suit or take any other appropriate legal proceedings in the Court of Law to enforce payment of debenture principal and interest by the company. |
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Between 1987-1989 five companies offered debentures to the public to raise fund from the market. The main features of the debentures were as follows: |
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Maturity Period: - Maturity period of the debentures varied from 5 years to 10 years. |
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Rate of Interest:- The debentures issued before 2002 carried interest rates varying from 14% to 18.5%. |
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Convertibility: - Majority of the debentures offered sweetener in that the debentures holders had the option to convert a part of the debentureholdings into ordinary shares at face value. |
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Participative: - The debenture holders could participate in the profits of the company @ Ό of the difference between interest paid on the debentures and the rate of dividend declared to the shareholders in any particular year. |
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Cumulation: - Interest payable semi annually were cumulative that is to say if a company was unable to pay interest installments on due date, the installments could be deferred till the maturity of the debentures. |
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Till date ICB had been acting as a Trustee to following 12 debentures offered to the public: |
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Apex Tannery Ltd. |
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Bengal Food Ltd. |
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Quasem Silk Mills Ltd. |
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Beximco Pharma Ltd. |
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BEXIMCO Ltd. |
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Magura Paper Mills Ltd. |
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BCIL |
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Beximco Textiles Ltd. |
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Beximco Denims Ltd. |
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Beximco Synthetics Ltd. |
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Aramit Cement Ltd. |
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Bangladesh Welding Electrodes Ltd. |
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Out of the aforesaid issues seven issues have been redeemed successfully. |
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| 4. |
Reasons for retardation of the debt market: |
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The debt market did not achieve the desired momentum despite the earlier initiatives. Several factors were responsible for this situation |
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4.1 |
The cost of public issue of debenture was initially very high. An issuing company required to pay the following duty /charges: |
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Stamp Duty: - 2% on the total issue of debentures. |
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Registration Cost: - 2.5% on the total issue of debentures. |
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This was in addition to the expenses incurred in publishing prospectus in newspaper, printing allotment letters and debenture certificates etc. To these was added trustee fee (Generally at the rate of 1%) which is paid yearly on the amount of outstanding debentures. As a result the cost of public issue of debentures was very much on the high side being almost 6% to 7% of total amount of debentures issued. This tended to discourage companies from issuing debentures to the public since obtaining debt from commercial banks and DFIs were cheap and procedurally simpler with lesser compliance obligations. |
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4.2 |
Performance of a few debentures have been disappointing and frustrating. These companies have failed to pay the interest on debentures not only on schedule but even after the expiry of redemption time. These have eroded investor confidence and hurt market sentiment. |
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4.3 |
The trustee was empowered to enforce the mortgaged properties in the event of default. However these were very critical decisions because. |
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Firstly, these companies also had common stocks listed with Stock Exchange making up a notable proportion of total market capitalisation. These necessitated a careful evaluation of implication of such actions. |
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Secondly, the legal procedures involved too much time to produce meaningful result. |
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Thirdly, Asset sale was not considered a practical option because of the absence of buyers as experienced from similar other sale efforts by certain other financial institutions. |
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Fourthly, some of the companies had approached the trustee to take steps for rescheduling of payment on the plea of various financial problems which, in their opinion, rendered them unable to make payments. |
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4.4 |
Another important limiting factor was the absence of rating agencies. As a result there was no scope for initial rating to evaluate eligibility to make public issue of debentures. Further, surveillance or continuous rating could not be carried out to get early signals on a company's financial condition. |
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4.5 |
The rate of interest on the debentures was fixed at 14% -18.5% to woo investors since the prevailing rate of interest on risk free Govt. savings instruments was also comparably high. The commercial banks in bid to attract deposits also had to pay high interest rates. Under such regime issuers of debt instruments had to offer high rates. Many companies found it unviable to borrow money for longer period at such high rates. |
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4.6 |
Availability of long-term finance from commercial banks, leasing companies and other sources tended to dissuade companies from accessing the debt market for finance. |
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4.7 |
Some companies were not willing to make increased disclosure and transparency as well as to subjected to strict compliance of rules and regulations associated with public issue of debt instruments. |
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| 5. |
Prospects of a bond market in Bangladesh |
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Despite the earlier setbacks the bond markets in Bangladesh is ready to take off. The need for a bond market in Bangladesh deserves attention because of the following: |
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Foreign aid flow is diminishing and the trend is expected to continue |
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Specialized banks are not in a position to supply desired level of long term fund. |
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Commercial banks have strategically cut down their long term lending. |
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The concept of prudent asset mix is most likely to generate demand for investment grade bonds. |
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The Provident Funds and Insurance Companies Funds are not generally allowed to invest their funds in stock market instruments. There is a bright possibility that these funds may be permitted to invest a part of their funds in marketable instruments subject to prudential guidelines, which may necessitate supply of lucrative debt instruments. |
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Reduction in the interest on Govt. savings instruments and withdrawal of certain savings instruments is expected to boost demand for debt instruments. |
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The registration fee for trust deed has been reduced from 2.5% (on the amount of debentures) to
Tk. 2500.00 providing a very significant incentive. |
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There are now credit rating agencies to provide rating prospective issuer. |
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Any interest paid by investor on money borrowed for investment in debentures is deducted from total income. |
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Interest income not exceeding
Tk. 20000 received by an individual investor on debentures approved by SEC is excluded from total income.. |
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The interest on Zero coupon bond approved by SEC at the hand of the recipient is tax exempt upto
Tk. 25000.00. Such interest exceeding Tk. 25000.00 is subjected to tax @ 10% deducted at source. Banks and other financial institutions and insurance companies which are the mainstay of demand for bonds will now pay 10% tax on interest on such bonds instead of 45% tax payable on other
income |
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| 6. |
Things to be done: |
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Recent developments and events have already created an environment conducive to fosterage of the debt market. A number of financial institutions have sold bonds or debentures to institutions. Further, an Islami Bank has decided to issue perpetual bond subject to approval of relevant authorities. It is also expected that quite a number of institutions will float bonds through securitisation in the near further. |
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A sustainable bond market needs enabling policies. The following actions and policy measures are seen important to promote a bond market in Bangladesh. |
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All issues of debentures be rated by independent rating agency prior to issue. Companies issuing bonds/debentures to public may be rated periodically to keep track of issuing company's financial position. |
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Public utilities and infrastructure projects be asked to raise a part of debt through issue of marketable bonds. |
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Industrial companies with good track record be advised to issue marketable bonds instead of relying on bank financing. |
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Existing public utilities and infrastructure projects be advised to securitise debts by issuing marketable bonds. |
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Existing industrial companies be encouraged to replace a portion of
bank/DFI loans with marketable bonds. |
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To facilitate liquidity of marketable bonds, discounting facilities may be provided by financial institutions. |
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Systems of market makers (specialists) may be evolved to facilitate market for marketable bonds. |
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Bond maturities be diversified between one year and seven years as to give investors with different maturity profiles the option of purchasing debentures with different maturities. |
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The methods of revolving underwriting facility
(RUF) may be introduced so that companies can issue short-term debentures whenever necessity arises. RUF is a system in which a consortium of underwriters make commitment to the issuing company to purchase all the unsold portions of the short-term debentures which may be issued from time to time during a certain period (e.g. five years) up to certain maximum amount. |
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Coupon rates and all other issuing conditions of debentures be determined by market forces. |
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Coupon rates may differ according to the rating of the issuer accorded by independent rating agency. |
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In order to make long-term investment more attractive, issuers may find it useful to increase the coupon rate as years go by, e.g. 9 percent in the first year, 10 percent in the second year, 11 percent in the third year and so on. Such increasing coupon rate methods will be useful, especially if the investor is given the right to call for redemption of the bonds at the
end of each year so that he may choose to hold them to enjoy a
higher coupon rate. |
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Interest received by
individual investors on bonds/debentures approved by SEC may be
fully exempted from tax. |
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Investment in
bonds/debentures approved by SEC may be given tax-exempt status up
to a certain limit. |
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The tax rates/relief available
to investors on Zero coupon bonds may be extended to all other
bonds/debentures approved by SEC. |
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