The exchanges do not have the legal right to sell stakes of brokers in their custody when it comes to settling claims of investors who have fallen victim to financial frauds committed by the intermediaries.
That is one major factor as to why clients of Tamha Securities, Crest Securities, Shah Mohammad Sagir & Company, and Banco Securities - could not be compensated in years after the brokerage firms had siphoned off money from their consolidated customer's accounts (CCAs).
Market stakeholders suggest amending the demutualisation act to ensure investors' protection from malpractices by stock brokers.
Clients of the four firms made claims worth Tk 4.25 billion as of October 2023.
The Dhaka Stock Exchange (DSE) has so far paid only Tk 250 million from the Investors' Protection Fund to the victims of fund embezzlement on a pro-rata basis. Moreover, Tk 172.38 million was collected from Tamha, Crest and Banco securities for refunds.
The brokerage firms misappropriated funds from the CCAs between October 2019 and June 2022.
Experts say the claims could be settled if the DSE had the authority to sell assets of the brokers and repay their clients.
After the 2013 demutualisation, the primary shareholders (stock brokers) of the premier bourse were given 40 per cent shares of their stake in the exchange. These shares are to remain intact until the brokers are in business.
The shareholders received money from selling of another 25 per cent shares sold to a Chinese strategic partner and the remaining 35 per cent shares are kept with the bourse in a block account.
The 35 per cent stake could be offloaded only by issuing shares to the public through an initial public offering (IPO).
No IPO has been floated yet.
The demutualisation act had a timeframe of selling 25 per cent stake to strategic partners but no deadline has been set yet for offloading 35 per cent shares through a public offer.
However, money from the transfer of the 35 per cent shares must be given to stock brokers because of a legal obligation, said M Shaifur Rahman Mazudar, a former managing director of the DSE.
Managing Director of Midway Securities Md. Ashequr Rahman said the demutualisation act should be amended enabling the exchanges to utilize funds from the sale of brokers' 35 per cent stakes in settling claims.
"Apart from creating that scope, there should be some instruments to ensure investors' protection," he added.
Regulations for the self listing of the bourses are yet to be framed. The exchanges' profitability is yet to be up to the mark because of persistent poor performance of stocks. A good IPO pricing is not possible if a company is not that profitable.
These factors played a role behind the delay in offloading shares of the exchanges.
Even if an IPO is not floated, stock brokers should be allowed to transfer a portion of their 35 per cent stakes kept in the block account. Then the exchanges' valuation will get a boost through trading between local and foreign institutional investors.
The settlement of the clients' claims would be eased at this.
Before the demutualisation, the exchanges could settle clients' claims in an informal way, such as by selling a stock broker's membership.
Whenever a stock broker faced a fund crisis, the relevant bourse would sit with the broker to resolve the problem. There were cases when the exchange searched for buyers of the membership of the defaulter broker.
It has been 10 years since the passing of the Exchanges Demutualization Act.
"It's time to review the act. The ambiguities in many provisions of the act should be removed. That would help secure investors' protection too," said Mr Rahman.
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