Anxious over Beximco's future, Sukuk investors decide against bond conversion

Most of the unit holders of Beximco Green Sukuk have shown reluctance in converting bonds into shares in the third year, fearing losses.
In a stock exchange filing on Monday, the Investment Corporation of Bangladesh (ICB), the trustee of the debt securities, said only 27 unit holders with bonds worth Tk 2.37 million had applied for converting sukuk into Beximco shares this year.
The trustee said applicants had a total holding of 81,700 sukuk bonds, of which 28,340 were converted into 33,820 ordinary shares of Beximco at Tk 83.75 each.
Sukuk bonds worth Tk 30 billion were issued in 2021. In the first and second years, bonds equivalent to Tk 3.49 billion were converted. This year sees the lowest conversion of the bonds, with the floor price still effective on Beximco shares in the secondary market.

A majority of sukuk holders preferred to hold onto the bonds despite the decline in the annual return to 9 per cent.
A 9 percent base rate against the sukuk's face value of Tk 100 is guaranteed each year. If Beximco's cash dividend for a year exceeds 9 per cent, sukuk offers additional payments, according to the bond's prospectus.
One-tenth of the percentage point excess that Beximco shareholders receive as cash dividends over the sukuk base rate is added to the sukuk's return.
Hence, the higher dividends Beximco shareholders receive, the higher return sukuk investors get.
But Beximco suffered a loss of Tk 368 million in FY24 and decided not to provide any cash dividend this year. So, sukuk holders will receive a 9 per cent guaranteed return when the annual yields of Treasury bonds and other debt securities have crossed 12 per cent.
Sukuk investors are allowed to convert 20 percent of their investments into Beximco shares each year. They are entitled to get a 25 per cent discount on the 20-day average trading price of Beximco shares.
However, the share price has remained stagnant at the floor price - Tk 110.10 each. With the discount, sukuk holders will get Beximco shares at Tk 83.75 each, but investors fear a higher erosion of share price once the price restriction is removed.
"The conversion appears not profitable right now as Beximco shares have already run out of buyers and are stuck at an inflated price," said Akramul Alam, head of research at Royal Capital.
After the latest conversion, a total of 280.09 million units of sukuk remain in the market out of 300 million units.
Unexecuted conversion rights can be exercised in the subsequent years. Those possessing bonds at the end of the fifth year should get the principal back on the bonds' maturity. The current market situation makes exit from sukuk difficult. Presently, the bonds are traded at Tk 46 each against the face value of Tk 100.
Sukuk's forced subscription
Three years back when Beximco sukuk bonds were floated, most of the institutional investors were reluctant to invest in the instrument, given their bitter experience with debentures issued by the same company in the 1990s.
Talking to the FE, several asset managers, merchant bankers, and bankers said they had been forced to buy the Shariah-compliant bonds.

Salman F. Rahman, vice-chairman of Beximco Group, leveraged his political clout while being the industry advisor to former Prime Minister Sheikh Hasina when the company raised money in breach of the securities rules.
Mr Rahman at the time bent the law in his favour and pressured institutional investors into investing in the sukuk bonds.
With Sheikh Hasina gone from the political landscape of Bangladesh since August 5, Mr Rahman finds himself behind bars. He was arrested in the capital city on August 13.
This is the backdrop against which sukuk investors are worried about the payback of the principal amount after bonds' maturity in December 2026.
In September this year, the Bangladesh Securities and Exchange Commission (BSEC) formed a committee to investigate the alleged irregularities linked to the issuance of two bonds by the company: Beximco Green Sukuk and IFIC Guaranteed Sreepur Township Green Zero Coupon Bond.
The regulator has already sought all documents related to Sukuk and zero coupon bonds from the company.
[email protected]