HISTORICAL IMPEDIMENTS IN DEVELOPMENT OF A DEBT SECURITIES MARKET IN BANGLADESH

Presented by : Yawer Sayeed Managing Director & CEO AIMS of Bangladesh Limited <ceo@aims-bangladesh.com>

Relatively short history The issuance of debt securities by corporate bodies is a relatively recent phenomenon in Bangladesh and the experience of the investors has not been quite pleasant. The first public issue of listed corporate debenture in independent Bangladesh happened only in 1987, followed by about another dozen in the following years.

No benchmark rate or yield curve The government was not in the practice of issuing any long-term transferable instruments and the interest rates on the popular government saving instruments were administered. As such, no benchmarking of risk-free rates or the risk-free premium was possible. The proxy bank rate or the fixed deposit rates of commercial banks were not a reflective and reliable substitute. Therefore, a mid or long-term yield curve could not be developed. Lately, during the past two-three years the T-bills have been gradually made marked based where the demand is overwhelmingly from commercial banks to comply with the Statutory Liquidity Requirement (SLR).

High government borrowing at high interest rates The government has traditionally been the major borrower through the various national savings schemes and that too at the highest interest rate bracket and in unlimited (not predetermined) amounts. The government instruments were crowding out corporate borrowers and bank deposits in comparable tenures. Thankfully, the scenario is shifting lately as the government has discontinued some high interest paying instruments and restricted investments on others, accompanied with rate cuts. This has been attributed to the recent surge in stock prices.

Lack of transparency in public sector borrowing Public sector borrowing has been riddled with lack of transparency that failed to eventually proffer any reliable demand-supply scenario in which an efficient debt market can function. Because of the frequent shifts and ad hoc culture and volatility of demand, many of the debt instruments could not be designed to be publicly traded that could fuel a vibrant market. Efforts are now on to issue tradable instruments and bring fiscal discipline.

Entrenched buy & hold culture Since the first love of fixed income investors were the non-transferable high yield government saving certificates, an entrenched buy & hold culture developed over the years. Even premature encashment over the counter at the issuing offices were not a common practice. This culture spilled over to the nascent listed corporate debenture market, testified by the historically low trading volume at the exchanges, which retarded the natural growth of a secondary debt market.

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Low long-term borrowing requirement Owing to a bitter colonial past and lack of resources, historically there was a weaker base for industrialization and related formalized commercial activities. This has kept the demand for long-term capital and credit requirement at the formal market at a lower level.

High bank deposit rates As deposit interest rates of the commercial banks were also quite high until recently in competition with government securities, corporate issues had to offer unsustainable higher rates (14%-18.5% pa with semi-annual rest). High bank interest rates deterred public borrowing by the corporate bodies, thwarting the expected development of a debt market.

Banks feeding project finance appetite Though retail banks necessarily should not be in a position to provide adequate longterm project finance owing to a deposit and credit tenure mismatch, traditionally the commercial banks were (and still) providing such funds largely through annual rollovers, distorting the long-term credit market. Borrowers prefer less disclosure requirement and prudential obligations in bank borrowing to a public issue.

Absence of policy support Until recently there had been no government initiative, policy support or expressed political will to develop the financial and infrastructural base where a debt market could grow. Only recently the government has taken some measures that hint policy shift and discipline, including intended listing of two new sovereign bonds at the bourses for the first time. Outcrowding effect from bad loan situation and fiscal deficit of the government as well as dominance of NCBs also played a damper on viable debt securities market development.

High tax incidence & issue cost Until a couple of years back debenture trust had to pay one-off 2.5% registration fees (now a fixed token amount of Tk2,500) and 2% stamp duty on the total amount raised. With firm commitment underwriting requirement necessitating 2.5% fees, the public issue cost averaged about 8%, topping with a recurring annual 1% trustee fee and related listing fees. In a prevailing high interest regime, a high establishment and issue cost base rendered most public issue of corporate debentures unviable.

Lack of regulations and infrastructure Absence of a dedicated set of regulations and necessary infrastructure that could help a debt market of consequence remained an impediment. However, despite absence of an umbrella law, there could have been notable market activities had there been strong policy support. The historical inheritance of the English Common Law, including the Companies Act 1913, Contract Act 1862, Trust Act 1882 etc. along with the various securities regulations including the SEC Public Issue Rules, all provided a framework which could have a facilitating role had their been application of imagination. The SEC has now framed a guideline for issuance of debt securities.

Lack of expertise & innovation General lack of expertise and innovation and absence of institutions in bringing variations in debt products have kept the market uninteresting. Lawyers, financial advisors and other service providers have not been competent in identifying the rights and obligations of the parties involved in debt securities. Expertise and institutional base for issuing various forms of debt is yet to visibly evolve. There is also absence of pertinent financial research institutions. The Bangladesh Bank have
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now issued Primary Dealer licenses to selected banks and NBFIs and the SEC have also initiated the process of appointing eligible stock brokers for trading of government securities at the bourses. Overlapping parastatal Since Bangladesh Bank and the SEC enjoy some overlapping regulatory powers on the money and bond markets; there remain potentials of confusion among the issuers and market intermediaries. To qualify for tax incentives, zero coupon issue or SVP for asset securitization, require no-objection from the Central Bank, even if the issuer is not a bank or financial institution and it is a long-term instrument (over 1 year). The governance of the debt securities regime was weak and a disincentive along with the absence of arbitration institutions. Default culture erode confidence An overwhelming number of publicly traded debentures issued by reputed corporate houses through IPOs failed to service the interest coupon and principal payment obligations in time. There are instances where the SEC had to intervene after a long and tangled process but there was no visible legal redress for the debenture-holders. Because of these irregularities, there persists a general lack of confidence among investors in listed debentures. With the erosion of public confidence there has been no issue of new listed debentures since 1999. Unaccountable trustees Owing to the absence of a clear regulatory regime, the system failed to hold the Trustees of debenture responsible for failure to defend the rights of the debentureholders in many cases when issuing companies declined to honor obligations. Regulators could not take the Trustees to task those, though received their fees, could or did not take any timely action against recalcitrant issuers. The trusteeship of debentures has in effect become an unaccountable and defunct institution. Absence of institutional investors In Bangladesh the institutional investor community like investment & merchant banks, mutual funds, pension & provident funds, life insurers etc. has unfortunately not developed due to multifarious impediments. The market is essentially retail based and prone to high risk. The newly licensed merchant banks are yet to make any tangible mark, the government pension funds are essentially non-funded and nonaccounted-for liabilities, provident and insurance funds restrained under age old qualitative and quantitative restrictions and growth of private mutual fund retarded under stringent regulatory frame-work and an uneven playing field. None of these ground realities has been conducive to growth of a healthy and vibrant capital market. Cold capital market The capital market is yet to emerge as an effective investment avenue to most of the small savers on one hand and attractive avenue for the corporate bodies in raising fund on the other, especially since the boom and burst of 1996. The negative spillover effect of the grim capital market performance dampened potential public issue of debt securities. However, with recent resurgence of the market the appetite for investment grade securities has again been pronounced that could unleash fresh demand for listed debt securities.

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