SEC slaps caps on private placement of mutual funds

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Mohammad Mufazzal
The securities regulator has slapped curbs on private sale of mutual funds to individuals and companies in a bold move to boost small investors' stake in the capital market and rein in 'placement gangs' who made millions out this skewed system.
The Securities and Exchange Commission (SEC) made the decision last week, under which an individual can buy a maximum of one million taka worth of units in the private placement of a mutual fund, a member of the SEC said.
A listed company would be able to buy 10 million taka worth of units and a non-listed company five million taka worth of units - under the revised placement rules.
"We took the decision as we have found that some individuals and gangs have been using private placements as money making machines," the SEC member told the FE.
"There was no transparency in the system. Fund sponsors used to pick their own men and then grab millions of profits once the placement shares hit the capital market," he said.
Earlier, there have been no ceilings as to how much an individual or a company could buy into a mutual fund's private placement.
Under the existing securities laws, a mutual fund could sell 40 per cent of its stakes through private placements.
"We have earmarked the maximum chunk for listed companies because their gains would eventually benefit small investors. The curbs have been imposed to spread the benefits of private placement to wider number of investors," the SEC member said.
Officials said there have been instances such as the recent sale of EBL First Mutual Fund and DBH First Mutual Fund in which only a handful of individuals pocketed "huge windfall gains" once the funds hit the market, trading at around three times more than the face value.
"There are some suggestions that we abolish the private placement system for mutual funds altogether. But it would have impacted the market negatively," another official said.
Experts also hailed the SEC move, saying that the ceilings would broaden the benefits of mutual funds to retail investors and cut a "malignant tumour" off the market.
"For years rogues have been the main beneficiaries of private placements. I think this system should be abolished," said Abu Ahmed, an economics professor of Dhaka University.
"No doubt, it's a good move by the SEC. The regulator should have completely annulled individual's stake in the private placement of mutual fund," said a mutual fund operator.
He said some individuals cashed in on the system, "minting money out of almost nothing".
Former financed advisor Mirza Azizul Islam welcomed the move, but suggested the regulator frame specific rules in line with the fund size.
Since March this year four mutual funds including the biggest in the history -- LR Global -- have received approval from the SEC. But it's not clear whether the latest rules would be applicable for these funds.
About 50 MFs are awaiting approval of the regulator.