The country's stock market experts suggest strengthening stock exchanges for another layer of supervision under the securities regulator so they can take prompt actions against brokers for any fraudulent activities.
At present, the Bangladesh Securities and Exchange Commission (BSEC) is solely responsible for monitoring the operations of the brokerage firms and disciplining them. Stock exchanges play a passive role; they send reports on any financial fraud, if detected, to the securities regulator.
Such an arrangement is not helping to avert money embezzlement or stock price manipulation by brokers.
Between 2019 and 2021, four brokerage firms siphoned an aggregate amount of Tk 4.25 billion from investor funds deposited into their consolidated customers' accounts. By July last year, only Tk 47.60 million had been given back to 423 investors of Banco Securities, Crest Securities, and Tamha Securities following a directive of the BSEC.
The 2013 demutualisation process, through which the management of the bourses was freed from the ownership influence of shareholders, seems to have failed to achieve transparency in the functioning of brokers.
There were cases of undue influence on IPOs (initial public offerings) and misappropriation of investors' money before the demutualisation, which led to the reforming of the system. Top brokers' vote was very important for an IPO proposal to go ahead at the time, and there were instances when they demanded placement shares from IPO issuers in exchange for casting positive votes.
Moreover, data of illegal transactions by brokers was hard to come by as board members of the exchanges, who themselves were owners of brokerage firms, did not let any information to get leaked.
Hence, the Dhaka Stock Exchange (DSE) had failed to detect or chosen not to disclose Don Securities' illegal activities to move away investors' money. Till today, no information is available as to how much money was paid back to investors.
Against the backdrop, Ahsanul Islam Titu, state minister for commerce and also an owner of a brokerage house, at a recent public event organised by the BSEC, said, "I want brokers, merchant banks, and asset management companies to self regulate themselves."
In a conversation with the FE correspondent, he gave the example of Financial Industry Regulatory Authority (FINRA) of the USA, which is a not-for-profit entity, not part of the US government but is authorised by the Congress to protect American investors by making sure the broker-dealer industry operates fairly and honestly.
The role is played by the BSEC in Bangladesh.
The BSEC fails because the pre-demutualisation malpractices are imitated by its officials for undue benefits. On the other hand, a self-regulatory organisation, similar to the fashion of FINRA, is not financially viable in Bangladesh due to the insignificant size of the market, compared to the USA.
Shahidul Islam, chief executive officer of VIPB asset management, said, "The BSEC should empower the DSE."
At present, if a stock exchange as a primary regulator wants to visit any brokerage house, they need to take permission beforehand from the BSEC.
Experts say stock exchanges should be allowed to take action against fraudsters, adding another layer in the defence mechanism.
Had the DSE been empowered, it could have been made accountable for the fund misappropriation by four brokers between 2019 and 2021, they say.
Rizvi Shakil, managing director of Shakil Rizvi Stock Ltd, said, "The DSE should be strengthened and the BSEC should be the highest authority."
Referring to practices in other countries, former BSEC commissioner Arif Khan told The FE that brokers there were self regulated while SECs were meant to work at the macro level.
Before the demutualisation, the DSE was a self-regulatory authority having shareholder-directors (owners of brokers) making up the majority in its board.
"A broker was a member of the DSE. When you are a member of a self regulatory organisation, you are de facto self regulator," said Saiful Islam, president of the DSE Brokers Association (DBA).
Demutualisation was done to make things more transparent. The objective was to make the exchanges more independent.
Mr Islam suggested reviewing the demutualisation process and the composition of the board of the prime bourse. The selection procedure of independent directors should be well defined, he said.
Until then, the securities regulator will remain more focused on the day-to-day monitoring of the market, instead of developing it, according to experts.
"The BSEC should come forward and discuss with the stakeholders; a way out should be identified," said Mohammad A Hafiz, former president of the Bangladesh Merchant Bankers Association (BMBA).
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