ICB seeks relaxation of provisioning for the sake of investors’ interest

Business Report :

For the past two years, Bangladesh’s capital market has been on a downward trajectory.

Certain market-unfriendly decisions taken by the former chairman, Shibli Rubayat’s commission, led to the fall in prices and the subsequent liquidity crisis.

Under the current commission, efforts have been made to overcome this situation, but success has not yet been achieved. The prolonged decline has severely damaged the mutual fund sector.

Since more than 80per cent of mutual funds are invested in the stock market, the fall in share prices has forced them to bear heavy provisioning burdens.

Because of this excessive provisioning, most mutual funds, despite having actual income, are unable to distribute dividends to investors, as trustees and asset managers are restricted from doing so.

Recently, in a letter to the Bangladesh Securities and Exchange Commission (BSEC), the Investment Corporation of Bangladesh (ICB) raised this issue and appealed for relaxation of the strict provisioning directives in the interest of investors.

Similarly, in a letter to the Financial Adviser, the Mutual Fund Biniyogkari Oikko Front demanded that mutual funds that are crippled under the burden of artificial, temporary, and unrealized losses must be freed from the trap of negative equity.

In its letter to BSEC, ICB stated that in the financial year ending June 30, 2024, only 2 out of the 39 mutual funds under its trusteeship declared dividends.

Under the international accounting standard IFRS-9, the obligation to set aside 100per cent provisioning against unrealized losses due to market value declines caused the remaining 37 funds to fail in declaring expected dividends.

As a result, frustration and loss of confidence among investors have been steadily increasing.

ICB also noted in the letter that the economic fallout following the COVID-19 pandemic of 2019 negatively affected Bangladesh’s economy, which in turn impacted the capital market.

Under Shibli Rubayat’s leadership, BSEC imposed floor prices at various times starting from 2020, which created liquidity shortages and reduced trading.

From 2024 onward, as the floor prices were withdrawn, the market experienced abnormal price crashes.

Investors lost huge amounts of capital, while mutual fund portfolios suffered irreparable deficits.

At present, contractionary monetary policies have been adopted to control high inflation.

In addition, high interest rates and comparatively higher returns from treasury bills and bonds are driving investors toward risk-free assets in search of safe and reliable income.

Such behavior is creating liquidity shortages in the capital market and narrowing opportunities to attract institutional and long-term investments.

In such a situation, the rigidity of provisioning requirements and the inability to pay dividends are increasing the tendency of mutual fund unitholders to withdraw.

As a result, fund managers are being forced into undesirable force selling of devalued shares.

Consequently, both the capital market and the mutual fund sector are passing through a difficult time that poses a major threat to stability and long-term sustainable development.

ICB Deputy General Manager Mr. Sharikul Anam commented on the matter: “A mutual fund is a pass-through vehicle whose primary purpose is to distribute earned income to investors.

On the other hand, unrealized loss is essentially a temporary accounting adjustment caused by market value declines, which does not turn into an actual loss until the asset is sold.

Therefore, the policy of mandating 100per cent provisioning solely on the basis of such unrealized losses is depriving unitholders of expected income during the present market crisis.

In reality, many mutual funds have the financial capacity to generate cash profits, yet cannot distribute them to unitholders because of this provisioning requirement.”

To resolve this, ICB requested that, based on auditor opinion, mutual funds should be allowed to set aside at least 25per cent of annual profit as provisioning and distribute the remaining 75per cent as dividends to unitholders.

ICB strongly believes that adopting this proposal would restore investor confidence, revive dynamism in the mutual fund industry, and send a positive signal to the country’s capital market.

A managing director of an asset management company, speaking anonymously, said, “It’s very difficult to make profits in this market, yet we are managing.

But the huge provisioning is eating up those profits, and trustees are putting pressure in the name of policymakers. We welcome ICB’s initiative to reduce the provisioning burden.”

In its demand to the Financial Institutions Division (FID) responsible for the capital market, the Mutual Fund Biniyogkari Oikko Front stated that through discussions with investors, asset managers, trustees, and brokers, they had learned that in many cases policymakers and trustees themselves were forcing auditors to impose excessive provisioning.

“This is unjustified and undesirable. We want dividends from annual income, as provided under the Mutual Fund Rules.

By creating this kind of pressure, whose interests are the trustees and the commission serving? Who is really the friend of investors?”