In light of the sudden capital markets boom in Bangladesh in 2010 and the subsequent crash, which wiped out $27 billion from the market in market capitalisation (equivalent to 22% of the GDP), the Bangladesh Securities and Exchange Commission (BSEC) implemented major reforms during the first two quarters of 2018.
One significant change was the Dhaka Stock Exchange (DSE) finding a strategic investor for itself. Pursuant to the Demutualization Act 2013 and the demutualization scheme approved by BSEC, DSE was required to take on board strategic investor(s), which would eventually hold 25% of the paid up capital of DSE. In response to the offer of DSE, two proposals were submitted by two consortiums.
The successful bidder, a Chinese consortium consisting of Shanghai Stock Exchange and Shenzhen Stock Exchange, proposed to buy 450 million shares (25%) of the DSE at a rate of BDT. 22.00 for each share, even though at later stage, the offer was revised at BDT21.00 per share. It also offered technical support of BDT3.07 Billion and asked for a seat on the board, adding that it would not seek any return on its investment for an initial period of 10 years.
The market capitalisation of the Chinese Consortium is about $8 trillion. In 2017, the combined revenue and profit of the members of the Chinese Consortium were around$3billion and $1.6 billion respectively. These figures emphasise the knowledge and experience the Chinese consortium is likely to bring toBangladesh’s capital markets, in addition to the financial support. While it is too early to make any comment on the impact of thestrategic partnership between DSE and the Chinese consortium, it is expected to have positive implications for the development of the capital market in Bangladesh.
A new corporate governance code
The second quarter of 2018 has also seen three significant legislative reforms introduced by the BSEC. Firstly, the previous Corporate Governance Code of 2012 has been replaced by the new Corporate Governance Code 2018. While the new code is substantially similar to its predecessor, it incorporates more comprehensive requirements with specific criteria as to independent directors and their qualifications. The terms, such as business leader, corporate leader, professionals etc, have been described with added clarity by particularising designations and experience. Under the new code, committees of the board of each listed company must include a Nomination and Remuneration Committee (NRC) in addition to an Audit Committee. The NRC shall assist the board in formulating the nomination criteria or policy for determining qualifications, positive attributes, experiences and independence of directors and top-level executive as well as a policy for formal process of considering remuneration of directors and top level executives. The key roles, among others, of the NRC of each listed company will include:
Another important legislative reform has been introduced by the BSEC through a notification dated June 20, 2018, which regulates, inter-alia, the declaration of dividends by a listed company. According to the notification, stock dividends cannot be declared as interim dividends. Whimsical issuance of stock dividends are no longer permissible; from now on, in case of declaration of stock dividends for a financial year, the company is required to explain the reason for declaring stock dividends. The notification also prohibits the declaration of dividends out of the capital reserves or the revaluation reserves or any unrealised gain,andoutof the profit earnings prior to the incorporation of the company. Dividends can also not be provided by reducing paid-up capital, or through doing anything that would mean the post-dividend retained earnings become a negative or a debit balance.
Substantial share acquisitions
The previous rules relating to acquisitions of substantial shares of a listed company, which date back to 2002, have been replaced by the new BSEC (Acquisition of Substantial Shares) Rules 2018.
There are some inconsistencies in the new rules as to the applicable considerations. For example, according to Rules 4 and 5, cash will be the only consideration in cases of acquisitions through the trading system of exchange; whereas, in cases of acquisitions outside the trading system, pursuant to Rule 6, consideration will be in-kind only. In contrast, Rule 8, like its precursor under the previous rules of 2002, Rule 13, permits both cash and in-kind as a consideration under any of the Rules 4, 5, and 6. Rule 8 appears to offer a more coherent, reasonable and practicable proposition, as the mode of consideration should be left to the parties to decide.
Negotiated deals (acquisitions at a price other than that set by themarket) arepermissible under the new rules 5 and 6. However, beforeeven consideringbuying or selling securities, in pursuant to the Listing Regulations 2015 a director, sponsor or placement holder must declare in a prescribed form whetherthey will undertake to sell or purchase securities at the market price. These inconsistencies could have been avoided very easily.