BF and money whitening opportunity
Shamsul Huq Zahid | Monday, 4 April 2011
Shamsul Huq Zahid
Extraordinary problems demand extraordinary solutions. This argument might have prompted the government to float a Tk.50 billion open-ended mutual fund, named, the Bangladesh Fund (BF), to help rescue a plunging stock market. The state-owned Investment Corporation of Bangladesh (ICB), four commercial banks and two insurance companies will be contributing partially to the formation of the BF the half of which would be invested in stocks of the listed issues and the rest in approved money market instruments. The ICB has already announced that it would make investment equivalent to 10 per cent of the fund. The state-owned commercial banks and insurance companies are yet to disclose their share of investment. However, these institutions, the ICB included, together are unlikely to mobilize more than 20 per cent of such a large fund. The participation of private institutional and individual investors would be also welcomed. There is no denying that the stock market after a free-fall for nearly three months has somewhat stabilized in recent weeks. It is difficult to say whether the announcement relating to the formation of the BF has played any role or not. But mobilizing 80 per cent of the fund valued at Tk. 40 billion from institutional and individual investors would not be an easy task. And the sponsors of the fund do know it very well. So, with a view to luring private institutional and individual investors, the fund manager of the BF, the ICB Asset Management Company Limited (ICB AMCL), according to its managing director, would seek some extra benefits for the proposed fund, including tax exemption, 5.0 per cent quota in the upcoming initial public offerings and 30 per cent of the shares of the state-owned enterprises, which would be offloading their stakes in the market, at face value. Something more attractive might also be offered to lure investors to the fund. A report published in The Financial Express recently, quoting unnamed finance ministry officials, said the government is planning to allow the investment of undisclosed money in the fund and a declaration to this effect is likely to be made soon. Similar news reports have also been published in other dailies. Since no official protest has come as yet there is reason to believe that the opportunity might be offered when the BF is floated. However, the floatation of the fund is unlikely to happen within this financial year. But if the government really decides to offer the money whitening facility for the sake of buoying up the stock market, it might trigger controversies afresh. Similar opportunity was offered in the past to help boost the market sentiment but whether it had worked or not is very difficult to say since the country's tax administration does not have any mechanism to know the colour of money invested in stock market. But since the opportunity of investing undisclosed money would be specifically for the BF fund, it would be easy for the NBR to know who is investing how much. Yet some more sectors would come up with demand for similar money whitening opportunity claiming that they are also in distress situation. Moreover, even the money whitening opportunity through the payment of, say, 10 per cent tax at source, could prove unattractive to the holders of undisclosed money. A number of factors are bound to influence the decisions of both institutional and individual investors. The factors include the prevailing stock market condition, lock-in period, rate of return on investment and deposit rates offered by banks and other financial institutions. The people who own large sum of black or grey money in this country have the propensity to earn quick profit. They tend to avoid long-term investment in formal sectors and like investing in areas that fetch attractive profit within a short time. So, the government does need to consider seriously whether the opportunity to whiten undisclosed funds would be worth the risks it would be taking. If the move fails to deliver results then why should the government expose itself to unnecessary criticism? Rather, if needed be, the government might consider downsizing the proposed BF and make available stocks of its profitable entities in large volume to the fund. The fund will be in good hand, no doubt. But prior to its floatation, the government must examine the pros and cons. Retail investors in Bangladesh, for reasons best known to them, are not attracted to mutual funds which are considered 'safe' investment opportunities worldwide. The reason for not liking the mutual finds could be that mutual funds do not promise skyrocketing of their prices overnight. What they guarantee is an ensured return on investment at the end of the year. Lots of mutual funds have come to the market in recent months. But there is a strong need to make the investors aware of the benefits of making investment in mutual funds. If that is done, the mutual funds might attract the investors who long for safe investment with a guarantee of ensured and relatively attractive return at the end of the year.
Extraordinary problems demand extraordinary solutions. This argument might have prompted the government to float a Tk.50 billion open-ended mutual fund, named, the Bangladesh Fund (BF), to help rescue a plunging stock market. The state-owned Investment Corporation of Bangladesh (ICB), four commercial banks and two insurance companies will be contributing partially to the formation of the BF the half of which would be invested in stocks of the listed issues and the rest in approved money market instruments. The ICB has already announced that it would make investment equivalent to 10 per cent of the fund. The state-owned commercial banks and insurance companies are yet to disclose their share of investment. However, these institutions, the ICB included, together are unlikely to mobilize more than 20 per cent of such a large fund. The participation of private institutional and individual investors would be also welcomed. There is no denying that the stock market after a free-fall for nearly three months has somewhat stabilized in recent weeks. It is difficult to say whether the announcement relating to the formation of the BF has played any role or not. But mobilizing 80 per cent of the fund valued at Tk. 40 billion from institutional and individual investors would not be an easy task. And the sponsors of the fund do know it very well. So, with a view to luring private institutional and individual investors, the fund manager of the BF, the ICB Asset Management Company Limited (ICB AMCL), according to its managing director, would seek some extra benefits for the proposed fund, including tax exemption, 5.0 per cent quota in the upcoming initial public offerings and 30 per cent of the shares of the state-owned enterprises, which would be offloading their stakes in the market, at face value. Something more attractive might also be offered to lure investors to the fund. A report published in The Financial Express recently, quoting unnamed finance ministry officials, said the government is planning to allow the investment of undisclosed money in the fund and a declaration to this effect is likely to be made soon. Similar news reports have also been published in other dailies. Since no official protest has come as yet there is reason to believe that the opportunity might be offered when the BF is floated. However, the floatation of the fund is unlikely to happen within this financial year. But if the government really decides to offer the money whitening facility for the sake of buoying up the stock market, it might trigger controversies afresh. Similar opportunity was offered in the past to help boost the market sentiment but whether it had worked or not is very difficult to say since the country's tax administration does not have any mechanism to know the colour of money invested in stock market. But since the opportunity of investing undisclosed money would be specifically for the BF fund, it would be easy for the NBR to know who is investing how much. Yet some more sectors would come up with demand for similar money whitening opportunity claiming that they are also in distress situation. Moreover, even the money whitening opportunity through the payment of, say, 10 per cent tax at source, could prove unattractive to the holders of undisclosed money. A number of factors are bound to influence the decisions of both institutional and individual investors. The factors include the prevailing stock market condition, lock-in period, rate of return on investment and deposit rates offered by banks and other financial institutions. The people who own large sum of black or grey money in this country have the propensity to earn quick profit. They tend to avoid long-term investment in formal sectors and like investing in areas that fetch attractive profit within a short time. So, the government does need to consider seriously whether the opportunity to whiten undisclosed funds would be worth the risks it would be taking. If the move fails to deliver results then why should the government expose itself to unnecessary criticism? Rather, if needed be, the government might consider downsizing the proposed BF and make available stocks of its profitable entities in large volume to the fund. The fund will be in good hand, no doubt. But prior to its floatation, the government must examine the pros and cons. Retail investors in Bangladesh, for reasons best known to them, are not attracted to mutual funds which are considered 'safe' investment opportunities worldwide. The reason for not liking the mutual finds could be that mutual funds do not promise skyrocketing of their prices overnight. What they guarantee is an ensured return on investment at the end of the year. Lots of mutual funds have come to the market in recent months. But there is a strong need to make the investors aware of the benefits of making investment in mutual funds. If that is done, the mutual funds might attract the investors who long for safe investment with a guarantee of ensured and relatively attractive return at the end of the year.