Assignment

Stamford University, Dhanmondi Campus,

Dhaka.
Topic: Share Market Regulation in Bangladesh
Subject: Legal Environment in Business
Subject code:530
Submitted To: Professor Abul Kashem
Course Teacher
Stamford University,
Dhanmondi Campus, Dhaka.
Submitted by: Md. Ahsanul Kabir Sohan & Farhana Khatun
Students of Business Administration Department
Section: MBA (40th Batch)
SID: 04011045&04011086
Submission Date: 29/12/2010

Letter Of transmission
December 29, 2010,
To,
Mr. Professor Abul Kashem
Course Conductor
Legal Environment in Business,
Stamford University,
Dhaka, Bangladesh.
Subject: Submission of Share Market Regulation in
Bangladesh.
Dear Sir,
With respect we would like to submit the report on Share
Market Regulation in Bangladesh which is an assignment for
the requirement of the course (Legal Environment in Business).
It is a great and worthwhile experience for us to work for such a
challenging and interesting subject. The assigned work has
given us an overall idea about the topic.
We are very glad to have this assignment. If you need any
assistance in understanding this report please inform us. We
are always at your service and oblige thereby.
Sincerely yours,
Md. Ahsanul Kabir Sohan & Farhana Khatun
MBA Batch-40
SID: 040 11045&04011086
Stamford University,
Dhaka, Bangladesh

Introduction

Regulations are an absolute necessity in the face of the growing

importance of capital markets throughout the world. The development of a
market economy is dependent on the development of the capital market.
The regulation of a capital market involves the regulation of securities;
these rules enable the capital market to function more efficiently and
impartially.
A well regulated market has the potential to encourage additional
investors to partake, and contribute in, furthering the development of the
economy.

The chief capital market regulatory authorities worldwide are as follows:

U.S. Securities and Exchange Commission
Canadian Securities Administrators, Canada
Australian Securities and Investments Commission
Securities and Exchange Commission, Pakistan
Securities and Exchange Board of India
Securities and Exchange Commission, Bangladesh
Securities and Exchange Surveillance Commission

History:
At first to know about Dhaka Stock Exchange it is important to have a
glimpse at the history of this stock exchange.
The Necessity Of Establishing A Stock Exchange In The Then East Pakistan
Was First Decided By The Government When, Early In 1952.It Was Learnt
That The Calcutta Stock Exchange Had Prohibited The Transactions In
Pakistani Shares And Securities. The Provincial Industrial Advisory Council
Soon Thereafter Set Up An Organizing Committee For The Formation Of A
Stock Exchange In East Pakistan. A Decisive Step Was Taken The Second
Meeting Of The Organizing Committee Held On The 13th March ,1953. In
The Cabinet Room, Eden Building ,Under The Chairmanship Of Mr. A .
Khaleeli, Secretary Government Of East Bengal , Commerce, Labor And
Industries Department At Which Various Aspects Of The Issue Were
Discussed In Detail. The Then Central Governments Proposal Regarding
The Karachi Stock Exchange Opening A Branch At Dhaka. , Did Not Find
Favour With The Meeting Who Felt That East Pakistan Should Have An
Independent Stock Exchange . It Was Suggested That Dhaka Narayanganj
Chamber Of Commerce & Industry Should Approach Its Members For
Purchase Of Membership Cards At RS.2000 Each For The Proposed Stock
Exchange. The Location Of The Exchange It Was Thought Should Be Either
Dhaka Narayanganj Or Chittagong . An Organizing Committee Was
Appointed Consisting Of Leading Commercial And Industrial Personalities
Of The Province With Mr. Mehdi Ispahani As The Convener In Order To
Organize The Exchange. The Chamber Informed Its Members and
Members of Its Affiliated Associations of the Proceedings of the above
Meeting, requesting them to Intimate Whether They Were Interested in
Joining the Proposed Stock Exchange. This Was Followed By A Meeting, At
The Chamber Of About 100 Persons Interested In The Formation Of The
Exchange On 07.07.1953. The Meeting Invited 8 Gentleman To Become

Promoters Of The Exchange With Mr. M Mehdi Ispahani As The Convener

And Authorized Them To Draw Up The Memorandum And Article Of
Association Of The Exchange And Proceed To Obtain Register Under The
Companies Act.1913. The Other 7 Promoters Of The Exchange Were Mr. J
M Addision-Scott, Mr. Mhodammed Hanif, Mr. A C Jain, Mr. A K Khan , Mr M
Shabbir Ahmed And Mr. Sakhawat Hossin.It Was Also Decided That
Membership Fee Was To Be Rs.2000 And Subscription Rate At 15 Per
Month. The Exchange Was To Consist Of Not More Than 150 Members. A
Meeting Of The Promoters Was Held At The Chamber On 03.09.1953 When
It Was Decided To Appoint Orr Dignam & Co., Solicitors To Draw Up The
Memorandum And Articles Of Association Of The Stock Exchange Based
On The Rules Of Stock Exchange Existing In Other Countries And Taking
Into Account Local Conditions. The 8 Promoters Incorporated The
Formation As The East Pakistan Stock Exchange Association Ltd. On
28.04.1954. As Public Company.On 23.06.1962 The Name Aws Revised To
East Pakistan Stock Exchange Ltd. Again On 14.05.1964 The Name Of East
Pakistan Stock Exchange Limited Was Changed To "Dhaka Stock Exchange
Ltd."At The Time Of Incorporation The Authorized Capital Of The Exchange
Was Rs. 300000 Divided Into 150 Shares. Of Rs. 2000 each and by an
extra ordinary general meeting adopted at the extra ordinary general
meeting held on 22.02.1964 the authorised capital of the exchange was
increased to Tk. 500000 divided into 250 shares of Tk. 2000 each. The
paid up capital of the exchange now stoods at Tk.460000 dividend into
230 shares of Tk. 2000 each. However 35 shares out of 230 shares were
issued at TK. 80,00,000 only per share of TK. 2000 with a premium of TK.
79,98,000 .Although incorporated in 1954, the formal trading was started
in 1956 at Narayanganj after obtaining the certificates of commencement
of business. But in 1958 it was shifted to Dhaka and started functioning at
the Narayangonj chamber building in Motijheel C/A. On 1.10.1957 the
stock exchange purchase a land measuring 8.75 Kattah at 9F Motijheel
C/A from the Government and shifted the stock Exchange to its own
location in 1959.
Legal control
The Dhaka Stock Exchange (DSE) is registered as a Public Limited
Company and its activities are regulated by its Articles of Association rules
& regulations and bye-laws along with the Securities and Exchange
Ordinance, 1969, Companies Act 1994 & Securities & Exchange
Commission Act, 1993.
The major functions are:
- Listing of Companies.(As per Listing Regulations).
- Providing the screen based automated trading of listed Securities.
- Settlement of trading.(As per Settlement of Transaction Regulations)
- Gifting of share / granting approval to the transaction/transfer of share
outside the trading
system of the exchange (As per Listing Regulations
42)
- Market Administration & Control.

- Market Surveillance.
- Publication of Monthly Review.
- Monitoring the activities of listed companies. (As per Listing Regulations).
- Investors grievance Cell (Disposal of complaint bye laws 1997).
- Investors Protection Fund (As per investor protection fund Regulations
1999)
- Announcement of Price sensitive or other information about listed
companies through
online.
The DSE, established in 1954, and CSE, established in 1995, are the stock
exchanges in Bangladesh, but all stocks listed on the CSE are also listed
on the DSE. The 2008 ADB report mentions that the DSE was established
as a public company (then called the East Pakistan Stock Exchange
Association Limited). According to the U.S. Department of Commerce's
2007 Country Commercial Guide, the DSE is one of the smallest share
markets in the world. Both the DSE and the CSE have had automatic
trading systems since 1998. According to a 2007 World Bank report, in
2006, financial institution shares made up 55 percent of market
capitalization, primarily because they are required to list. There are few
incentives for a company to be listed and there are restrictions on the
trading of most stocks. The Investment Corporation of Bangladesh (ICB),
per the website, underwrites issues of securities, provides substantial
bridge financing programs, and maintains investment accounts, floats and
manages closed-end & open-end mutual funds & closed-end unit funds to
ensure supply of securities as well as generate demand for securities. It
was set up in 1976 to promote and broaden the base of industrial
investment in Bangladesh. The country also has specialized banks and
other nationalized commercial banks and some foreign banks financing
long-term industrial investing.
In November 2008, the DSE organized a round table on the Global
Financial Crisis and its impact on Financial markets in Bangladesh in
Dhaka. This was reported in the SEC's October-December 2008 Quarterly
Review. The SEC Chairman remarked therein that the impact of the crisis
could not leave Bangladesh unaffected in the long term due to
consumption and demand of its exports by developed countries slowing
down. However, all speakers at the round table agreed that in the short
term Bangladesh would come out relatively unscathed by the turmoil. The
DSE Senior Vice President opined that the key factor was that Bangladeshi
capital markets did not have the sophisticated products and instruments
that bore the brunt of the market crash. The Quarterly Review further
notes that as of December 2008, there were 276 companies listed on the
DSE and the number of listed securities, including mutual funds,
debentures, treasury bonds and corporate bonds, was 412. For the CSE,
the corresponding numbers were 221 and 238. The CSE does not list
treasury or corporate bonds. Total market capitalization on the DSE
reached USD 15,367 million, whereas that on the CSE totaled USD 11,705
million, the Review adds.

The Principles
II1. The responsibilities of the regulator should be clear and objectively stated.
The 2003 BEI report notes that securities law is founded in the SEC Ordinance of 1969,
which governs the issuance of securities, and the SEC Act of 1993, which establishes the
SEC and charges it with the licensing and regulation of capital market stakeholders and
market intermediaries including stock exchanges, brokers and dealers, investment banks and
portfolio managers. The SEC Ordinance grants the SEC with the authority to establish any
conditions deemed necessary for the issuance of securities within the Companies Act of 1994,
and other existing legislation. According to the 2005 ADB report, the Ordinance was
amended in 2000 to allow the SEC Rules to override other relevant laws, in order to
streamline legislation. Also in 2000, the SEC (Amendment) Act 2000, increased the SEC's
regulatory and supervisory authority by allowing it to make rules to carry out the Act without
government approval, and giving it power over prospectus content, and over clearing,
settlement and depository systems. Also, the Act removed the power of the SEC to fix IPO
prices. In 2001, a consolidated SEC Act draft was forwarded to the necessary ministries for
consideration, but had not been adopted as of November 2007. However, there is insufficient
publicly available information that addresses Bangladesh's compliance with this principle.
The SEC website lists the Commission's responsibilities. They are (1) the regulation of stock
markets and other securities markets; (2) the registration and regulation of stock brokers, sub
brokers, share transfer agents, investment banks and issues managers, trustees of trust deeds,
issues registrars, underwriters, portfolio mangers, investment advisors, and other market
intermediaries; (3) the registration, supervision, and regulations of collective investment
schemes (CIS); (4) the supervision and regulation of self-regulatory organizations (SROs);
(5) the prevention of unfair trading practices in the securities market; (6) the promotion of
investor education and the provision of training for market intermediaries; (7) the prohibition
of insider trading; (8) the regulation of substantial share acquisitions and take-overs, (9) the
investigation and inspection of audits; and (10) research and publications.

II2. The regulator should be operationally independent and accountable in the

exercise of its functions and powers.
The 2003 ADB report on "Technical Assistance to the People's Republic of Bangladesh for
Preparing the Financial Markets Governance Program" indicates that the SEC did not have
financial independence. However, in its 2005 report, the ADB observes that there has been
success in empowering the SEC by strengthening its role and legal authority as an
autonomous regulatory agency. However, there is insufficient publicly available information
that addresses Bangladesh's compliance with this principle.

II3. The regulator should have adequate powers, proper resources and the
capacity to perform its functions and exercise its powers.
According to the 2003 BEI report, the SEC Ordinance of 1969 grants the SEC with the
authority to establish any conditions deemed necessary for the issuance of securities within
the Companies Act of 1994, and other existing legislation. According to the 2005 ADB
report, the Ordinance was amended in 2000 to allow the SEC Rules to override other relevant
laws, in order to streamline legislation. Also in 2000, the SEC (Amendment) Act 2000,
increased the SEC's regulatory and supervisory authority by allowing it to make rules to carry
out the Act without government approval, and giving it power over prospectus content, and
over clearing, settlement and depository systems. Also, the Act removed the power of the
SEC to fix IPO prices. However, there is insufficient publicly available information that
addresses Bangladesh's compliance with this principle.
The 2005 ADB report on the CMDP notes, with regard to the SEC's responsibilities of
regulation and supervision, that there has been success in empowering the SEC by

strengthening its role and legal authority as an autonomous regulatory agency. In addition, the
report observes that, although there was an increase in the staffing of the SEC, including full
time staff, the staff is still insufficient to carry out its responsibilities. There are no private
sector representatives, and there is high turnover because of noncompetitive salaries. In
addition, there is a shortage of qualified staff including accountants, financial analysts, and
legal experts which is detrimental to the SEC's oversight capacity.
The 2008 ADB report voices the same opinion about the SEC's capacity, and points out that
despite attempts at capacity building and staff training in recent years, the SEC still lacks the
capacity to "carry out its operational and development mandates" (p. 21). It is still
understaffed and the staff is under trained. Remuneration is still low by industry standards
and promotions are constrained by government policy. Staff turnover is, hence, very high and
it adversely impacts the SEC's capacity to regulate and monitor as also to devote itself to
development functions or to oversee structural changes within as well as at the exchanges.
The ADB recommends more competitive pay scales for the SEC staff, although it does
observe that the government "would prefer to defer consideration of separating the SEC from
civil service pay scale" (p. 21). The market participants also do not have the resource to
support a significant turnover fee, precluding a possibility of salary increases. However, the
ADB suggests that training and promotion incentives could help in staff motivation.

II4. The regulator should adopt clear and consistent regulatory processes.
There is insufficient publicly available information that addresses Bangladesh's compliance
with this principle.

II5. The staff of the regulator should observe the highest professional
standards, including appropriate standards of confidentiality.
There is insufficient publicly available information that addresses Bangladesh's compliance
with this principle.

II6. The regulatory regime should make appropriate use of Self-Regulatory

Organizations (SROs) that exercise some direct oversight responsibility for
their respective areas of competence, to the extent appropriate to the size and
complexity of the markets.
The SEC website indicates that the DSE and CSE are self-regulated organizations. They are
responsible for establishing listing requirements, the listing and delisting of companies,
monitoring the compliance of listed companies with regulations, and permitting dual listings.
The 2008 ADB report notes regarding the exchanges that "the managements of the two
exchanges are weak at the strategic, senior- and mid-management levels. They are unable to
regulate and supervise their members' activities effectively" (p. 21). Since the DSE and the
CSE are owned and dominated by securities intermediaries, they place more importance to
their trading than to the effective governance of the exchanges. The surveillance system and
standards at the exchanges are also found to be inadequate by the ADB. They do not have an
"effective system designed specifically to monitor market abuse or suspected market abuse,
nor do they have adequate automated information control systems to maintain and monitor
progress on suspected cases or companies failure to comply with their disclosure
obligations" (p. 22). It notes that the market operations area at the CSE combines the
responsibility of surveillance, listings, and market operations, and that the DSE is also
considering doing the same. The ADB cautions them in this regard and points out that market
development functions and surveillance functions should not be mixed together, since the
former works towards attracting new members to the exchange, whereas the latter works
towards monitoring their continued compliance with the listing rules and disclosure
requirements. The exchanges are also advised to train their staff in market surveillance,

evidence collection, and data analysis. However, there is insufficient publicly available
information that addresses Bangladesh's compliance with this principle.

II7. SROs should be subject to the oversight of the regulator and should
observe standards of fairness and confidentiality when exercising powers and
delegated responsibilities.
As reported on its website, the SEC is responsible for the supervision and regulation of the
stock exchanges and other securities markets, and it must approve the operating rules of the
stock exchanges. As the 2008 ADB report adds, since the SEC is responsible for the
monitoring of these exchanges, the capacity building exercise that the former will undergo
under the ADB capital reform project should incorporate training of the exchange executives.
However, there is insufficient publicly available information that addresses Bangladesh's
compliance with this principle.

II8. The regulator should have comprehensive inspection, investigation and

surveillance powers.
The ADB 2003 report recommended that the SEC's regulation and supervision of the capital
market be improved, pointing out that the SEC's enforcement ability is weak, including its
ability to conduct thorough investigations, and it lacks the resources to address malpractice.
The 2005 ADB report considered the CMDP's progress toward achieving the goal of
strengthening market regulation and supervision," as "partly satisfactory" (p. 17). The ADB
remarks that the SEC has been empowered by strengthening its role and legal authority as an
autonomous regulatory agency and improving surveillance. However, there has been little
progress in making changes to governance, management, and organizational capacity. There
is a shortage of qualified staff, insufficient private sector representation on the board, and the
Advisory Committee is inactive. However, there is insufficient publicly available information
that addresses Bangladesh's compliance with this principle.
The 2003 BEI report notes that the SEC's powers include the ability to investigate the
activities of market intermediaries and request information. In addition, the SEC does
performance evaluations to ensure compliance with regulations. The 2008 ADB report
mentions the SEC's on-line surveillance system, the Securities and Exchange Commission
Automation System (SECAS), which was installed through the 2001 ADB financial support.
It is a management information system that automatically records and retrieves data, as well
as conducts some analysis. However, the surveillance module does not have the capability of
on-line market surveillance. Overall, the ADB observes that "the trading and surveillance
systems and standards are inadequate. Good governance depends on having a sound technical
infrastructure in place, but neither the SEC nor the exchanges have effective automated
systems of surveillance to help them to detect market abuse" (p. 21). The ADB finds that the
SEC uses a surveillance terminal from the CSE and a remote terminal from the DSE to
conduct surveillance. The ADB, therefore, recommends that the SEC install its own online
market surveillance system to monitor market participants as well as the DSE and the CSE.
Under the ADB project, as the report explains, the staff of SEC, CSE, and DSE will be
trained in modern market surveillance and enforcement techniques to more effectively detect
trading irregularities and market abuses. The 2006-07 annual report of the SEC also mentions
the ADB project which will help improving the surveillance system for Bangladesh's capital
market.

II9. The regulator should have comprehensive enforcement powers.

The ADB's 2003 report recommended that the SEC's regulation and supervision of the capital
market be improved; pointing out that the SEC's enforcement ability is weak, including its
ability to conduct thorough investigations and its lack of resources to address malpractice.
The 2005 ADB report indicates that the CMDP introduced new regulations and provided the

SEC with the ability to impose fines and other sanctions for noncompliance. However,
enforcement has been inconsistent. In a 2005 paper, the International Monetary Fund (IMF)
suggests that the SEC's capacity should be expanded so that it can enforce compliance with
rules and regulations. Per the 2006-07 annual report of the SEC, enforcement powers of the
SEC include administrative sanctions and monetary penalties. However, there is insufficient
publicly available information that addresses Bangladesh's compliance with this principle.

II10. The regulatory system should ensure an effective and credible use of
inspection, investigation, surveillance and enforcement powers and
implementation of an effective compliance program.
There is insufficient publicly available information that addresses Bangladesh's compliance
with this principle.

II11. The regulator should have authority to share both public and non-public
information with domestic and foreign counterparts.
There is insufficient publicly available information that addresses Bangladesh's compliance
with this principle.

II12. Regulators should establish information sharing mechanisms that set out
when and how they will share both public and non-public information with
their domestic and foreign counterparts.
There is insufficient publicly available information that addresses Bangladesh's compliance
with this principle.

II13. The regulatory system should allow for assistance to be provided to

foreign regulators who need to make inquiries in the discharge of their
functions and exercise of their powers.
There is insufficient publicly available information that addresses Bangladesh's compliance
with this principle.

ID14. There should be full, timely and accurate disclosure of financial results
and other information that is material to investors' decisions.
In Bangladesh, company disclosure to shareholders and the public is the only mechanism that
shareholders and investors have to evaluate a company's performance and oversee the
activities of the board. The 2003 BEI report points out the importance of strict enforcement of
regulations pertaining to disclosure. However, disclosure is often inaccurate and incomplete.
The law requires that the books recording the company finances be kept at the registered
office and be available for inspection by government officials. Sanctions for noncompliance
include fines and imprisonment. The report finds that company disclosure based on the
requirements of the Bangladesh Accounting Standards (BASs) is inadequate and inconsistent,
and that the situation is perpetuated by the lack of consequences and weak auditing and
regulation. Other relevant information frequently goes unreported.
According to the World Bank's 2003 Report on the Observance of Standards and Codes
(ROSC), the Companies Act of 1994 includes the accounting and financial reporting
requirements for all companies incorporated in Bangladesh, such as the preparation and
publication of financial statements, disclosure requirements, and auditing. However, financial
statement disclosure requirements are unclear, and formatting and disclosure requirements are
outdated. In addition, there are inconsistencies with the International Accounting Standards
(IASs). The ROSC recommends that the committee formed to update the Companies Act of
1994 should consider these problems. The SEC is responsible for the regulation of financial
reporting of listed companies. In 2000, the SEC issued a rule that requires companies to
verify that their financial reports are consistent with IAS and their audits are carried out in
accordance with International Standards on Auditing (ISAs) which were adopted by the

ICAB. However, the rule is not fully enforced. The ROSC recommends that the SEC issue a
new rule that makes compliance with IASs mandatory.
The BEI website indicates that in February 2006 the SEC introduced guidelines for corporate
governance which are enforced on a 'comply-or-explain' basis. The 2006 Organization for
Economic Cooperation and Development (OECD) report discloses that the SEC has issued
disclosure requirements for substantial shareholdings which translate into progress in the
strengthening of the non-financial disclosure framework. In addition, the SEC has imposed
procedures for the disclosure of price sensitive information. According to the International
Monetary Fund's 2005 Selected Issues paper on Bangladesh, there have been improvements
in corporate governance in banks, for example, banks are required to publish their annual
financial statements in newspapers.

ID15. Holders of securities in a company should be treated in a fair and

equitable manner.
The rights of shareholders are included in the Companies Act of 1994. The Act grants
shareholders certain supervisory responsibilities such as attending meetings, appointing and
removing directors, obtaining financial information, and approving the annual balance sheet.
Shareholders are also given mechanisms to enforce their rights. In addition, as a protection
for shareholders, the directors and management of a company are subject to such penalties as
fines and imprisonment for not filing periodic returns with the Office of the Registrar of Joint
Stock Companies (RJSC). Also, shareholders decide on dividends but they may not exceed
the amount recommended by the board. The 2003 BEI report notes that shareholders are not
involved in the daily management of the company. There are a number of factors that are
detrimental to shareholders rights, including insufficient board disclosure, board size and
makeup, and a lack of independent directors. It is difficult to exercise minority shareholder
rights. Corporate governance in SOEs is poor, because there is little oversight by the
government and the majority shareholders rarely play a role in their financial and managerial
oversight.
The 2006 OECD report observes that, because the state is the dominant shareholder in SOEs
but fails to always exercise its shareholder rights, non-controlling shareholders may be
negatively affected. Shareholder protection is also stunted by poor disclosure of the identities
of beneficial owners. It was anticipated that the establishment of the Central Depository
Bangladesh Limited (CDBL) would yield improvements in transparency of shareholder
identity, but thousands of fictitious accounts have been discovered. However, the SEC is
working on upgrading the CDBL. The monitoring of the board by institutional investors
needs to be improved. Institutional investors fail to take advantage of their power as block
shareholders, in part because of incomplete proxy legislation. Also, there is no legislation for
class actions and the high cost of litigation discourages collective shareholder action.
The Code of Corporate Governance includes mandates for the protection of shareholders'
interests, including provisions for transparency and accountability for the protection of
minority shareholders. The Code recommends that companies empower their shareholders
beyond the legal and regulatory requirements. Regulators are required to uphold the rights of
shareholders. The Code also recommends that companies ensure that their shareholders are
informed of their rights, particularly voting rights, so that they may fully assert their power.
According to the 2003 BEI report, the Companies Act of 1994 provides adequate protection
for minority shareholders, especially Section 233. However, most shareholders do not know
about Section 233 and other minority shareholders rights. The report recommends increased
minority shareholder participation. There are a number of provisions for the protection of
minority shareholders. Minority shareholders with at least 10 percent of shares may take
court action against the company. However, exercising minority shareholder rights may be
costly, and proving that a director is at fault is difficult. The SEC protects minority

shareholders, sometimes overzealously, at the expense of the majority shareholders in listed

companies. The Code of Corporate Governance expands upon the existing legislation and
suggests that minority shareholders be able to elect a director.
According to the International Monetary Fund's 2005 Selected Issues paper on Bangladesh,
there have been improvements in corporate governance in banks. There is a requirement that
independent directors represent the interests of minority shareholders.

II16. Accounting and auditing standards should be of a high and

internationally acceptable quality.
The SEC regulates financial reporting by listed companies and requires compliance with
International Accounting Standards/International Financial Reporting Standards
(IASs/IFRSs) as adopted in Bangladesh i.e. Bangladesh Accounting Standards (BASs).
However, the World Bank assessment pointed out that even though the SEC was working
towards improving the quality of financial reporting, it lacked trained staff to monitor
compliance with the specified requirements. In terms of Bangladeshs adoption of
international accounting standards, a 2003 World Bank review of the accounting and auditing
environment in Bangladesh noted that national practices were not in line with internationally
acceptable standards and suffered from "institutional weaknesses in regulation, compliance,
and enforcement of standards and rules." The World Bank therefore recommended improving
the accounting and auditing framework by adopting IFRSs without any modifications and
setting up an independent oversight body for enforcing international standards. As part of its
efforts towards convergence, per Deloitte IAS Plus website, as of 2007 the Institute of
Chartered Accountants of Bangladesh (ICAB) adopted 31 IFRSs as Bangladesh Accounting
Standards. These standards, however, are based on an older version of IFRSs. In 2008,
according to the ICAB website, Bangladesh adopted additional four new IFRSs. The national
standards are mandatory for all listed companies, including banks. In a 2009 Action Plan, the
ICAB reiterates its commitment to convergence and makes clear that it will be adopting
international standards on an ongoing basis.
The legal framework for Bangladeshi accounting and reporting requirements as described in
the World Bank assessment of 2003 is primarily governed by the Companies Act of 1994.
The Companies Act mandates that all companies registered under the Act must prepare
annual audited financial statements. The enforcement of the provisions of the Companies Act
is conducted by the RJSC. However, the World Bank noted that "RJSC has no technical
capacity to identify accounting and auditing violations; in most cases it does not even enforce
timely filing of annual audited financial statements" (p. 6). Per the SEC rules, all listed
companies are legally required to follow Bangladesh Standards on Auditing (BSAs). The
ICAB 2007 self-assessment confirmed that "the Securities and Exchange Rules of 1987 make
it mandatory for the listed company auditors to follow ISAs [International Standards on
Auditing] as applicable in Bangladesh" (p. 37). Furthermore, the World Bank noted that new
rules were issued in 2000, mandating that "auditors [of listed companies] will verify that the
financial statements have been prepared in accordance with IAS and the audit has been
carried out in accordance with ISA" (p. 2). The World Bank again noted the SEC's lack of
staff capacity to monitor compliance with its requirements. It also pointed out that although
the BSAs were based on ISAs, the national standards had not been updated in line with the
international standards. The ICAB, nevertheless, has made efforts to maintain international
harmonization, and in December 2008, the ICAB converged local standards with the new and
updated Handbook of Standards on Auditing, Assurance and Ethics pronouncements Volume
1 issued by the IAASB, under its 2009 Action Plan. Furthermore, in November 2008, the
ICAB adopted its own clarity project to redraft national standards in line with the clarified
ISAs. The ICAB expects completion of its clarity project by December 2009.

II17. The regulatory system should set standards for the eligibility and the
regulation of those who wish to market or operate a collective investment
scheme.
The SEC website reports that it is responsible for the supervision and regulation of CIS.
However, there is insufficient publicly available information that addresses Bangladesh's
compliance with this principle.

II18. The regulatory system should provide for rules governing the legal form
and structure of collective investment schemes and the segregation and
protection of client assets.
See Principle 17.

II19. Regulation should require disclosure, as set forth under the principles
for issuers, which is necessary to evaluate the suitability of a collective
investment scheme for a particular investor and the value of the investors
interest in the scheme.
See Principle 17.

II20. Regulation should ensure that there is a proper and disclosed basis for
asset valuation and the pricing and the redemption of units in a collective
investment scheme.
See Principle 17.

II21. Regulation should provide for minimum entry standards for market
intermediaries.
The Supervision and Regulation of Markets and Intermediaries Department (SRMID) of the
SEC regulates market intermediaries. It also receives complaints lodged against the latter.
The 2005 ADB report indicates that the SEC complies with its recommendations to increase
the requirements for membership at the stock exchange, such as minimum services that a
broker must provide. The SEC also complies with the ADB's recommendations for the
implementation of minimal capital requirements. To be a member of both exchanges, a broker
must meet double the minimum capital requirement. Hua Du's 2006 speech mentioned that
there had been significant increases in minimum capital requirements for banks and nonbank
financial institutions. The 2008 ADB report, however, observes that the SEC imposes no
professional standards or minimal qualification requirements for intermediaries, and they are
required to undergo no examinations, courses, or continuous professional training to continue
their operations as market intermediaries. Also, there are no training institutes providing
continuing education with regards to the duties and regulation of intermediaries.
The ADB mentions that there are five categories of market intermediaries subject to SEC
licensing for operation. They are "(i) brokers, who provide trading services to clients; (ii)
dealers, who are permitted to trade for their own account; (iii) merchant bankers, who provide
underwriting, issuing manager, and portfolio investment services; (iv) investment advisors,
who provide investment advice to clients (there are none currently licensed); and (v)
authorized representatives, who are engaged in a brokers office to trade on the exchange on
behalf of a broker or dealer" (p. 23). The ADB notes that brokers are not permitted to be
advisors, most likely due to fears of conflict of interest; however, it advises that this system
be changed while taking steps to manage such conflicts. It also recommends the streamlining
of the licensing system and the introduction of test requirements that intermediaries need to
meet to gain registration. To help the SEC reform its licensing regime, the ADB Project will
review the existing regime, its codes of conduct, capital requirements, fit and proper criteria,
and categories of licensed entities. It will then make recommendations to help the SEC
develop new licensing rules in line with international best practices taking into account

Bangladeshi business practices. However, there is insufficient publicly available information

that addresses Bangladesh's compliance with this principle.

II22. There should be initial and ongoing capital and other prudential
requirements for market intermediaries that reflect the risks that the
intermediaries undertake.
The SEC complied with the ADB's recommendations for the implementation of minimal
capital requirements, according to the 2005 ADB report. To be a member of both exchanges,
a broker must meet double the minimum capital requirement. Hua Du's 2006 speech
mentioned that there had been significant increases in minimum capital requirements for
banks and nonbank financial institutions. As the 2008 ADB report notes, the capital reforms
project that it is sponsoring will establish a licensing system in line with international best
practices taking into account Bangladeshi business practices. It will also establish a testing
system with courses and examinations that need to be passed to gain accreditation. Further, a
national capital market training institute will be set up to train all market intermediaries and
professionals. It will provide training, establish training syllabi, and conduct and evaluate
examinations. To benchmark such an institute to international standards, other best practices
institutions will be studied and, where proper, replicated. The institute will be continually
developed to provide a wider range of courses for professionals and investors alike, and is
expected to develop an awareness program for women investors and women-led
organizations. However, there is insufficient publicly available information that addresses
Bangladesh's compliance with this principle.

II23. Market intermediaries should be required to comply with standards for

internal organization and operational conduct that aim to protect the interests
of clients, ensure proper management of risk, and under which management
of the intermediary accepts primary responsibility for these matters.
As the 2006-07 annual report of the SEC mentions, the securities laws in the country require
every intermediary to appoint a compliance officer who will be in charge of ensuring the
firm's compliance with all applicable laws. Non-compliance will be reported to the firm's
chief officer and, if the violation continues, to the SEC. There is insufficient publicly
available information that addresses Bangladesh's compliance with this principle.

II24. There should be procedures for dealing with the failure of a market
intermediary in order to minimize damage and loss to investors and to contain
systemic risk.
There is insufficient publicly available information that addresses Bangladesh's compliance
with this principle.

II25. The establishment of trading systems including securities exchanges

should be subject to regulatory authorization and oversight.
On its website, the SEC discloses that it is responsible for the regulation of the stock
exchanges and other securities markets. However, there is insufficient publicly available
information that addresses Bangladesh's compliance with this principle.

II26. There should be ongoing regulatory supervision of exchanges and

trading systems which should aim to ensure that the integrity of trading is
maintained through fair and equitable rules that strike an appropriate
balance between the demands of different market participants.
See principle 25.

II27. Regulation should promote transparency of trading.

There is insufficient publicly available information that addresses Bangladesh's compliance

with this principle. Per the 2008 ADB report, the securities sector suffers from low levels of
transparency in trading and listing of securities by their issuers.

II28. Regulation should be designed to detect and deter manipulation and

other unfair trading practices.
The SEC is charged with the prohibition of fraudulent and unfair trading practices and insider
trading. Per its 2006-07 annual report, the SEC has promulgated the SEC (Prohibition of
Insider Trading) Regulations in 1995. It requires issuers of securities to report to the SEC and
the exchanges any price sensitive information within 30 minutes of such information or
decision. They are also obliged to publish such information in a daily newspaper. As the 2008
ADB report elaborates, the surveillance function of the SEC emphasizes monitoring market
manipulation and insider dealing and ensuring regulatory disclosure by issuers. However, its
surveillance system is "relatively basic in design" (p. 22). Also, the exchanges do not have
effective mechanisms to detect pr prevent real or suspected market abuse. They also lack
automated information control systems to record and monitor progress made by the regulated
entities in their compliance with regulations after an enforcement action. The ADB, therefore,
reports instances of fraudulent acts and insider trading as brought to light by sharp price
fluctuations. The ADB project will help to draft regulations and reporting requirements for
regulated entities buying and dealing in securities so as to prevent conflicts of interest and
insider trading. It will also help the SEC to install and operate an automated, online
surveillance system to automatically detect market abuse and trading irregularities. It will
further train the SEC staff in surveillance and enforcement techniques to effectively uncover
and handle such abuse. However, there is insufficient publicly available information that
addresses Bangladesh's compliance with this principle.

II29. Regulation should aim to ensure the proper management of large

exposures, default risk and market disruption.
There is insufficient publicly available information that addresses Bangladesh's compliance
with this principle.

II30. Systems for clearing and settlement of securities transactions should be

subject to regulatory oversight, and designed to ensure that they are fair,
effective and efficient and that they reduce systemic risk.
The 2005 ADB report reports that the Depositories Act of 1999 was passed and existing
legislation was amended to grant the SEC with "specific and direct authority over clearing,
settlement, and depository functions". Per the 2006-07 annual report of the SEC, the Act has
also made electronic registry of securities legal in Bangladesh. Further, the SEC now has the
authority to monitor the administration of the Central Depository Bangladesh Limited
(CDBL), and pass regulations to fix the fees to be charged by the CDBL. The CDBL began
operating in 2004, and the 2005 ADB report predicted that all listed companies would join the
system in the following two years. As of 2007, the 2006-07 annual report of the SEC records,
there were 118 companies and mutual funds under the CDBL. The CDBL maintains records
of all issued securities in the country. The 2008 ADB report remarks that the CDBL and the
automated trading system have helped develop the capital markets in Bangladesh. As the
2006 OECD report adds, the SEC is working on upgrading the CDBL. However, there is
insufficient publicly available information that addresses Bangladesh's compliance with this
principle.
7.1 CURRENT REGULATIONS
7.1.1 Investments

Foreign investors are free to make investment in Bangladesh in the industrial enterprises
excepting a few reserved sectors e.g. defence equipment. Permission is not required to set up
an industrial venture in collaboration with local investors or wholly owned by the foreign
investors.
To avail the facilities & institutional support provided by the government, entrepreneurs
should apply to the Board of Investment for registration.
7.1.2 Repatriation of investment funds, dividends and profits
There is no restriction on the repatriation of capital invested in Bangladesh.
Foreign companies including banks, insurance companies and other financial institutions are
free to remit their post tax profits to their country of origin without prior approval of
Bangladesh Bank (the central bank).
No permission is needed for remittances of dividend income to non-residents on their
investment in Bangladesh.
7.2 SECURITIES IMPORT/EXPORT REGULATIONS
There is no restriction under the Foreign Exchange Regulation Act on the import of securities
into Bangladesh.
Securities can be exported or taken out of Bangladesh without general or special permission
of the Bangladesh Bank. Residents in Bangladesh who are holders of foreign securities and
who wish to send the securities to banks, brokers or agents abroad for the purpose of sale,
transfer etc. should apply to the Bangladesh Bank through an Authorised Foreign Exchange
Dealer for necessary export permit. Permission for transfer of such securities will be granted
provided the Authorised Dealer gives an undertaking that the securities will be received back
in Bangladesh within a specified period, or in the case of sale, the foreign currency proceeds
of the sale will be repatriated to Bangladesh. Bangladesh Bank also considers applications for
the exchange of foreign shares and/or securities held by residents abroad. Applications for
this purpose should be made through an Authorised Dealer or Stock and Share Broker. Such
applications will be considered favourably provided the Bangladeshi shares/securities to be
imported from abroad are approximately of the same market value as foreign shares and/or
securities that are desired to be exported.
7.3 INVESTMENT RESTRICTIONS
7.3.1 Direct Investment
By non Residents
A non-resident can invest in the primary market. At present a quota of 10% of the total
amount of IPO are reserved for Non-Resident Bangladeshis (NRBs). Non-resident
Bangladeshi may apply either directly by enclosing a foreign demand draft drawn on a bank
payable at Dhaka, or through a nominee by paying through a foreign currency deposit
account maintained in Bangladesh.
Investment in the secondary market can be made through a licensed stock broker and
custodian bank.
See also 7.1 and 7.2
7.3.2 Indirect Investment
By non-residents
Non-residents may buy Bangladeshi Securities in Bangladesh against freely convertible
foreign currency remitted from abroad through the banking channel. Transaction related to
such investment including repatriation of dividend, interest earning and sales proceed are
made through a Non-resident Investors BDT Account (NITA).
Indirect Investment abroad by domestic investors
See 7.2

7.4 INSIDER LEGISLATION

7.4.1 Legal Basis
The legal basis of insider legislation is covered by the Securities and Exchange Commission
(Prohibition of Insider Trading) Regulations, 1995. The authority of these regulations is
conferred by section 25 of the SRO No 149-Law /95-Securities and Exchange Commission
law, 1993,
7.4.2 Definitions

Insider

An insider is such a person who:

- is a director, controlling shareholder, managing agent, banker, auditor, consultant, officers
and employee of a Company
-by virtue of his relationship with the above persons or with the company or by the dint of his
position, his come into the possession of unpublished price sensitive information or who may
reasonably expected to have access to such information.

Insider dealing

Insider dealing means the purchase or sale or otherwise transfers of a company securities
made on the basis of unpublished price sensitive information.
7.4.3 Penalties for Insider offences
An insider trading offence is punishable with imprisonment for a term of maximum 5 years
or a fine of upto BDT 0.5 million, or both.
7.4.4 Reporting requirements for insiders
A company must report to the Securities and Exchange Commission, Registrar of Joint Stock
Companies and the Stock Exchanges the following:
- Any change in its Board of Directors.
A report on each director, officer and/or other shareholder of the company who is or has been
the beneficial owner of any class of the companys listed security of five percent (5%) or
above at any point of time. The report should be submitted within the first week of every
month.
- All companies listed on the stock exchanges shall submit to the Commission a report in
case of every transfer of share by the companys sponsors (which include every director,
promoter and officer) within seven days of such transfer.
7.5 TAKE-OVER RULES
In Bangladesh there are no explicit rules governing take over. In an implicit form they are
regulated by Companies Act 1994 and other Regulatory Act
7.6 Reporting requirements
7.6.1 Insider holdings
See 7.4.4
7.7 Transfer of ownership in securities
Each Security Certificate has an attached transfer deed, popularly known as Form 117. The
form details the name of the holder and the scrip and contains the verified signature of the
current holder. No stamp duty is payable on the transfer deed. Application for transfer may be
made either by the transferor or the transferee.
No fees may be charged for transfer.
The company may give 7 days previous notice by advertisement in some newspaper prior to
closure of share transfer books for any time or times not excluding in the whole forty five
days in each year but not exceeding thirty days at a time. The companies listed in Chittagong

Stock Exchange shall give a minimum of 14 days notice to the Exchange prior to closure of
share transfer books for any purpose.
7.8 Pledging securities as collateral
Shareholder has to apply to the financial institution along with the Certificate with the
signature verified transfer deed. The bank seeks a No- Objection -Certificate for the proposed
lien.
The central banks regulations allow commercial bank to advance 60% of the average market
value of the pledged stocks during the last 6 months. Maximum amount a bank can advance
to one investor is 0.25 million BDT.
A Stock Broker can receive maximum of 0.75 million BDT. While pledging, a Stock
Dealer/Broker has to submit to the bank the original license received from the Securities &
Exchange Commission.
7.9 Lost & Stolen Securities
7.9.1 Register
In case of a certificate is lost or stolen, the owner has to lodge complaint to the police station,
notify the company and Stock Exchanges.
Stock Exchanges maintain register of the lost and stolen certificates.
7.9.2 Cancellation and replacement procedures
The company issues duplicate share with or without any fees.
7.10 Chittagong Stock Exchange (Short - Sale) Regulations, 2005
In exercise of the powers conferred by section 34 of the Securities and Exchange Ordinance,
1969 (Ordinance No. XVII of 1969), the Chittagong Stock Exchange Ltd. makes, with the
prior approval of the Securities and Exchange Commission the following regulations,
namely: 1. Short title: - These regulations may be called the Chittagong Stock Exchange (Short-Sale)
Regulations, 2005.
2. Definition :- (1) In these regulations, unless the context otherwise requires
a) ledger means a record containing the details of all short-selling activities by a stock
dealer or stock broker for its own account or for the account of its clients as required under
these regulations;
b) stock exchange means the Chittagong Stock Exchange Ltd.
c) short-selling means the sale of a security which
i) the seller does not own, or
ii) is consummated by the delivery of a security borrowed by or for the account of the seller;
(2) Words and expressions used herein and not defined, but defined in the Securities and
Exchange Ordinance, 1969 (XVII of 1969), the Securities and Exchange Commission Act,
1993 (XV of 1993), the Rules and Regulations made thereunder shall have the same
meanings respectively assigned to them in the said Ordinance, Act, Rules and Regulations.
3. Owning security :- A person shall be deemed to own a security only if
a) he has title to the security; or
b) he has purchased the security; or
c) he has entered into an unconditional contract, as prescribed by the SEC legally binding on
him to buy the security, even if the buyer does not yet have title to them; or
d) he has unconditional right or interest to or in the security; or
e) he owns a security convertible into or exchangeable for the relevant security and has
tendered such security for conversion or exchange or has issued irrevocable instructions to
convert or exchange such security; or
f) he has an option to acquire the security and has exercised such option; or

g) he has rights or warrants to subscribe to the security and has exercised such rights or
warrants.
4. Prohibition of short-selling :- (1) No stock dealer/stock broker can be engaged in short
selling unless authorised by CSE.
No stock dealer or stock broker shall be allowed to engage in short-selling a security of a
company that is not an eligible security for short sale as per the Guidelines for Securities
Borrowing and Lending for Short-Selling of Securities Listed on the Chittagong Stock
Exchange, and the said security which it does not own either for its own account or for the
account of its client except as prescribed in these regulations.
Provided that a stock dealer or stock broker shall not short sell for its own account or the
account of its clients unless the stock dealer or stock broker or the client, as the case may be,
has a valid contract conforming the aspects/form that are included in the said Guidelines for
Securities Borrowing and Lending to ensure delivery within the time stipulated by the
clearing house of the stock exchange in terms of its Settlement of Stock Exchange
Transactions Regulations, 2005:
Provided further that in the case of short-selling for the clients account, the relevant contract
to borrow the security shall be countersigned by the stock dealer or stock broker dealing on
behalf of the selling client to stand as guarantor for its client to ensure timely delivery of the
security sold short:
Provided further that no person shall make a short-sale of a security on the stock exchange
below the price of the last sale of the security in the stock exchange.
(2) The Chief Executive Officer of the stock exchange or any officer of the stock exchange
authorised by him for the purpose may, by notice in writing, restrict or prohibit a stock dealer
or stock broker from short-selling any security, if the circumstances so warrant.
(3) The notice of such restriction or prohibition to the stock dealer or stock broker as
mentioned in sub-regulation (2) above shall take effect immediately upon communication to
or service on such stock dealer or stock broker and shall remain effective and in force until it
is revoked or modified by the chief executive officer or by the officer of the stock exchange
authorised by him for the purpose.
5. Manner of short-selling : - (1) Subject to the provisions of regulations 3 and 4, a
stock dealer or stock broker may short-sell a security
(a) for its own account; or
(b) for the account of its clients provided it knows or is informed in writing that an order to
sell is a short-sale, and shall, when placing a short-selling order, indicate in such manner as
the stock exchange concerned shall, from time to time, determine that the order is a shortselling order.
(2) On receipt of an order for the sale of a security, a stock dealer or stock broker shall
enquire of the client whether at the time of placing the order such client owns the security
offered for sale.
(3) A stock dealer or stock broker shall take all reasonable steps to ensure that the clients
disclosures pursuant to these regulations are accurate.
6. Maintenance of records, etc :- (1) A stock dealer or stock broker engaged in short-selling
shall maintain a ledger as specified in Form-A, which shall be kept upto-date in respect of
short selling activities carried out by it on its own account or for the account of its clients.
(2) No stock dealer or stock broker shall cause or allow an entry to be made in a ledger
maintained under sub-regulation (1) which it knows or has reasonable grounds to believe to
be false or misleading in any material respect.
(3) A stock dealer or stock broker shall make the ledger maintained under sub-regulation (1)
available for inspection to the stock exchange and the Commission upon the request of any of
them and shall provide copies of such ledger, if requested by either of them.

(4) A stock dealer or stock broker is required to preserve the ledger maintained under subregulation (1) for a period of not less than five years after the date of execution of the short
selling transactions to which they relate.
7. Contravention: - Contravention of any of the provisions of these regulations shall be
punishable under the provision of the Securities and Exchange Ordinance, 1969 (XVII of
1969), Securities and Exchange Commission Act, 1993 (XV of 1993), the Rules and
Regulations made thereunder, and the bye-laws of the stock exchange as well.
8. Power to impose restriction or grant exemption: - The Commission may, from time to time
restrict or exempt any order or trade of any stock dealer or stock broker in respect of all or
any of the provisions of these regulations.
9. Supersession of existing regulations:- These regulations supersede any other regulations
relating to trading, clearance and settlement of transactions in force in the stock exchange, so
far it relates to the short-sale of any listed security pursuant to these regulations:
Provided, however, that in case of short-sale of security which is under depository system,
relevant provisions of the depository related laws, regulations and bye-laws shall be
applicable.

Conclusion
In the Indian sub-continent, there was a steady growth of stock exchanges from
the late 19th century through the mid-20th century. By 1830, business on
corporate securities in bank, cotton textile, jute, tea and coal industries took
place in many of the major cities of Indian sub-continent. It may be mentioned
that Mumbai, Ahmedabad and Kolkata became the major centres for such
securities trading. In 1830, 6 persons in Mumbai, involved exclusively in
securities trading, called themselves as 'share brokers'. The 1850s witnesses a
rapid development of commercial enterprise and brokerage business attracted
many men into the field. As a result, by 1860, the number of brokers increased to
60. Now, what can regulation do to control speculation in the securities market?
Or more specifically, can regulation at all do something to control securities
market speculation? History accords that the initial securities market regulation
in England was inspired by a regulatory objective of suppressing securities
trading activities in the society. The aim of such regulatory measures was
essentially to avoid any kind of speculation in the financial markets. For example,
the first statute to regulate the securities market in England was named: Act to
Restrain the Number and Ill Practice of Brokers and Stock-Jobbers 1697. Another
example could be the promulgation of Bubble Act 1720, which was tended
towards prohibiting the creation of the companies and prohibiting the issuance of
securities. Also during the early years of American securities markets (which
began to operate in 1790s) suppression of securities trading remained a strong
regulatory objective is the US securities regulation. Like them BD has also
invented the regulation in the stock market for the safety of the investers.

Sources of Assessment
Asian Development Bank, "Capital Market Development Program (Loan 1580 BAN[SF]) in
Bangladesh," Program Performance Audit Report, May 2005. Available from Asian
Development Bank website. Accessed on June 3, 2009. (ADB 2005)
Link
Asian Development Bank, "Technical Assistance Loan: Improvement of Capital Market and
Insurance Governance Project (Bangladesh)," Project No. BAN 36197, March 2008.

Available from Asian Development Bank website. Accessed on June 3, 2009. (ADB 2008)
Link