Ensuring justice for small investors

A sudden swing from officially reported positive asset values to a declaration of deeply negative net worth is no routine accounting adjustment. Yet the speed with which this emerged during the merger of the five troubled Islamic banks has raised serious concerns about the credibility of financial reporting and regulatory oversight. Only a day before the Dhaka Stock Exchange suspended trading in their shares, Bangladesh Bank disclosed this sharply negative Net Asset Value in direct contradiction to the most recent financial statements of the banks. Until very recently, those statements showed positive asset positions and were formally submitted to the stock exchange where the five banks continued to trade. Small investors had every reason to rely on these officially approved disclosures, since listed companies are required to report according to strict standards and their submissions are vetted by the securities regulator. The abrupt assertion that the real net asset positions were not only weak but entirely eroded means that shareholders were operating in an information environment where critical information was withheld. Suggesting compensation now, as the central bank did for small investors, amounts to a tacit admission that, yes, a catastrophic failure has indeed occurred within the chain of financial governance.

The merger of troubled banks may well have been unavoidable. Years of excessive lending to connected parties, outright plunder through fraudulent transactions and poor recovery performance had hollowed out loan portfolios, with three banks carrying doubtful loan ratios above 90 per cent. The Bank Resolution Ordinance provides a necessary legal framework for such severe distress, and its primary goals of protecting depositors and safeguarding financial stability are entirely reasonable. However, these stability measures cannot override the rights of shareholders who invested legally and in good faith. Majority of these investors are not insiders or controlling families. They are ordinary citizens who saved from salaries or business income and invested through an exchange regulated by the state. To have their investments nullified based on a sudden, contradictory disclosure from the central bank is to penalise the victims rather than the perpetrators.

Clarification on whether shareholders would retain any value from their investments should have been provided well before the trading halt and the formalisation of the merger. If the net asset value was indeed negative, a timely disclosure would have allowed investors to make informed decisions, however difficult, and would have prevented new investors from buying shares on the basis of outdated and overstated figures. A market-driven decline, even a sharp one triggered by such a revelation, would at least have reflected the sober judgment of an informed public. Instead, investors bought and held shares on the strength of information that now appears misleading. This transparency failure demands accountability from all parties responsible for supervision and disclosure, not only from those who mismanaged the banks.

The Bangladesh Bank's statement that the government may consider compensation for small investors is therefore a necessary acknowledgment of duty, not a concession. Such compensation is not intended to eliminate all losses but to address the gap between the banks' true financial position and what investors were led to believe. Small investors do not have access to internal audits or special inspection reports. They must rely on published accounts that are supposed to be reviewed by auditors and examined by regulators. If those accounts did not reflect the real state of the balance sheets, the responsibility does not lie with individual shareholders. As this experience has shown, allowing distorted statements to persist until a crisis struck inflicts demonstrable harm. If the state truly encourages investment in the capital market and oversees the institutions listed there, it must take full responsibility to ensure that investors receive a truthful and complete picture.