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The ongoing tension between the Bangladesh Bank and the Bangladesh Securities and Exchange Commission (BSEC) could deepen further following a recent stock market regulator move that curtails banks’ power to cancel payments to bondholders.
The central bank has written to several banks after finding out that the BSEC’s condition on giving approval for issuance of perpetual bonds contradicts a Bangladesh Bank guideline.
The condition affects some banks, including Exim Bank, One Bank, Pubali Bank, Premier Bank, Jamuna Bank, and Mutual Trust Bank, which have received permissions from the BSEC to issue perpetual bonds.
Perpetual bonds are bonds with no maturity date. Although they are not redeemable, they pay a steady stream of interest in forever. Because of the nature of these bonds, they are often viewed as a type of equity and not a debt.
The central bank said the BSEC included a condition in the consent letter in favour of the perpetual bonds. But the provision is at odds with the Bangladesh Bank’s guidelines on risk-based capital adequacy.
Banks must have full discretion at all times to cancel distributions or payments to bond-holders for the bonds to qualify as a tier-1 capital as per the guideline.
However, the BSEC said in the consent letters that banks shall not have full discretion at all times to cancel distributions or payments to bond-holders.
“In this situation, the perpetual bond would not be considered as an additional tier-1 capital as it failed to fulfil the eligibility criteria,” the central bank letter said.
“This type of bond is very new in our country, so regulators should be positive about it. Otherwise, it will not see the light of the day,” said Mirza Elias Uddin Ahmed, managing director of Jamuna Bank.
The private commercial lender issued the bond knowing that it would be treated in the additional tier-1 capital. “If it is not allowed, the instrument will be nipped in the bud.”
“The central bank’s direction is based on international practices,” said Ahmed.
Perpetual bonds act almost like a share, and when a company issues shares, the issuer doesn’t give guarantees that it will pay dividend every year.
“If a company fails to provide any dividends, its price will fall. It’s simple,” said Ahmed.
The two regulators in the financial sector have been embroiled in a tussle for the past few months in some areas, spooking the confidence of stock investors.
Recently, the commission has ordered all listed companies, including banks and non-bank financial institutions, to deposit their undistributed dividend to the stock market stabilisation fund.
It also allowed banks and NBFIs to declare dividend from the current year’s profits despite having cumulative losses. But, the central bank ordered them not to follow the BSEC order.
Both regulators have sat in a couple of meetings in the past one month but no headway was visible, sending the key index of the Dhaka Stock Exchange low.
The tension between the two regulators surfaced at a time when the market was breaking new records sessions after sessions, helped by the ongoing economic recovery from the coronavirus pandemic.
But since October, the DSEX has fallen from as high as 7,367 to as low as 6,700 points.
“Both regulators are working for the betterment of the country and the economy. So, why do they move in opposite direction?” said Abu Ahmed, a former chairman of the economics department at the Dhaka University.
He says the BSEC may be trying to ensure return from bond investments as they are going public.
“Both regulators should sit together to take a harmonised decision considering all the aspects,” he said, urging the regulators to follow international best practices.
“Is there no authority in Bangladesh to resolve the disputes? The disputes are impacting the market so these should be resolved as soon as possible.”
Preferring anonymity, a top official of the BSEC says if investors don’t get a return from their investment in bonds, why should they invest in the instrument?
“More importantly, these are perpetual bonds. Investors will be in big trouble if perpetual bond issuers don’t pay.”
“We look at the interest of investors. We can’t allow banks to issue perpetual bonds without attaching the condition,” the official added.
(TDS)
