INVESTMENT BANKING

Legal & Institutional Framework

M. SADIQUL ISLAM

M. SADIQUL ISLAM

Institutional Framework for the

Securities Market in Bangladesh
In Bangladesh, the Registrar of Joint Stock
Companies (RJSC) is empowered to
provide registration to the joint stock
companies (corporations).
Only a public limited company can public
offering of securities.
M. SADIQUL ISLAM

Institutional Framework
Securities and Exchange Commission (SEC):
The SEC is responsible for monitoring and regulating the
securities market of Bangladesh. Formed in 1993
Major objectives:
- to protect the interest of investors and
- to adopt measures to develop the capital market.
Empowered to promulgate rules and regulations for the
smooth functioning of the market.
Can impose penalty on any party for any unfair practice.
The commission consists of a Chairman and four members.
M. SADIQUL ISLAM

Institutional Framework
Stock Exchanges:
Two stock exchanges in Bangladesh
The DSE was established in 1954 and commenced its
operations in 1956. It resumed its operations in 1976
with only 9 companies.
- It was automated in 2000.
- Presently 437 securities are listed.
- It has presently 230 members.
- Managed by a Board of 24 Directors - 12 elected and
12 nominated.
The CSE was established in 1995. It started automated
trading since the beginning of its operation.
M. SADIQUL ISLAM

Institutional Framework
Central Depository Bangladesh Limited:
Established in 2000.
Facilitates electronic book entry, recording and maintenance of
securities accounts, transfer of securities.
Supports paperless trading of listed stocks, corporate bonds and
government bonds.
Also, facilitates secondary market trading of treasury bills and
government bonds issued by the central bank.
Owned by 80 institutions including commercial banks,
insurance companies, stock exchanges, investment companies,
listed companies, and the ADB.
Managed by a Board of Directors of 13 members.
The operations of CDBL are monitored by the SEC.
M. SADIQUL ISLAM

Institutional Framework
Bangladesh Bank:
Formulates the monetary policy of the country and carries
out other routine functions of central bank.
As a guardian of the money market, it monitors and
controls the activities of banks and non-bank FIs.
Empowered to develop new rules for the operations and
functioning of banks and FIs whenever it deems proper.
All banks and non-bank financial institutions have to make
periodic reporting to the Bangladesh Bank.
Can take action against any bank or FIs failing to comply
with the laws or rules.
M. SADIQUL ISLAM

Institutional Framework
Insurance Development and Regulatory Authority (IDRA):
IDRA was formed under the Insurance Development and
Regulatory Authority Act 2010.
It abolished the office of the Controller of Insurance formed
under the Insurance Act 1938 which is repealed recently.
The major objectives:
- to protect the interest of insurance policyholders and
- to control insurance companies for ensuring good governance.
Headed by a Chairman who is assisted by four members.
Empowered to develop rules and regulations for the insurance
companies, surveyors and institutions relating to the insurance
sector.
Can take actions against the companies and other participants
for any unfair practices.
M. SADIQUL ISLAM

Legal Framework
The Companies Act 1994
Defines the basic legal framework for the formation, capital raising,
financial reporting and management of joint stock companies.
The RJSC is empowered to provide certificate of incorporation and
commencement.
All joint stock companies have to provide periodic information to RJSC.
Only public limited companies are allowed to raise capital by issuing
ordinary shares, preference shares, deferred shares and bonds.
Companies are managed by a board elected by the ordinary shareholders.
The minimum board size is three.
It makes provision for protecting the interest of minority shareholders.
It also provides the broader legal framework for raising capital.
Public limited companies require issuing a prospectus or a statement in
lieu of prospectus to raise capital by public floatation of shares or bonds.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission Act
1993:
- Empowers the SEC to monitor the behavior of
all participants and stakeholders and to take
punitive measures against them.
- Also empowers the SEC to promulgate rules
and regulations to attain its objectives.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Ordinance 1969
Authorizes the SEC to approve issue of capital by the
companies and approve the prospectus and other
documents.
Empowers the SEC to impose any conditions and to
call for information from any company or officer.
Requires the stock exchanges to take registration.
It prohibits short selling and requires the issuers to
submit returns.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Rules 1987
Defines the qualifications for members of
stock exchanges
Defines the manner of transactions of
members business
Maintenance of accounts and audit by the
stock exchanges and their members
Periodic reporting to the SEC.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Mutual Fund) Rules,
2001
Provides the broader framework for the operation, management
and investment of funds for the mutual funds.
Mutual funds require a registration from the SEC.
Mutual funds should be formed under a trustee.
The trustee, asset manager and custodian require registration
from the SEC.
The mutual funds have to declare their scheme by a prospectus.
The funds can be invested only in the listed securities, IPOs, preIPO placements and transferable money market securities.
The funds can not be invested in option trading, short selling and
carry forward investments.
M. SADIQUL ISLAM

Legal Framework
The Credit Rating Companies Rules, 1996
All debt securities require a rating by a credit
rating agency.
A company making public issue of shares will
also require a rating if the shares are issued at a
premium (at value higher than the par value).
The rating agencies have to be registered with
the SEC.
M. SADIQUL ISLAM

Legal Framework
The Margin Rules, 1999
Regulates the credit facilities to the investors or
clients by registered stock broker and stock dealer.
The Securities and Exchange Commission (Issue of
Capital) Rules 2001
Requires the companies to take consent of the
SEC before issuing capital in Bangladesh.

M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Public Issue)
Rules, 2006
Provides the legal framework for public issue of
securities.
Designed to protect the interest of investors.
The abridged version of prospectus must be published
in four daily newspapers 2 Bangla newspapers and 2
English newspapers.
Sufficient number of copies of Prospectus must be
available for the investors.
Defines the structure and contents of prospectus to
ensure disclosure of material information to the
investors.
M. SADIQUL ISLAM

Legal Framework
The prospectus must include:
- project / business descriptions,
- financial statements,
- risk factors,
- directors relationships and related transactions,
- due diligence certificates from issue manager & underwriter
- executive compensation and executive options.
- description of property
- Plan of operation and description of financial condition
- options granted to directors, officers and employees.
- tangible assets per share
- Offer price determination
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Public Issue) Rules, 2006
The final offer price has to be declared in the prospectus.
No restriction on the maximum offer price, but requires a
justification for the offer price if the price higher than the par value.
Provides guidelines for justifying the offer price.
It requires that 10 % of non-resident Bangladeshi investors and
10% be reserved for mutual funds.
Underwriting on firm commitment basis.
Shares of the issuer at the time offering will be subject to a lock-in
for a period of 3 years.
Also, the shares privately placed during the immediate preceding
two years shall be subject to a lock-in period of one year.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Rights Issue) Rules,
2006

Defines the conditions to be fulfilled for making right

issues.
The issuing company has to approve the right issue
proposal and the offer price in a general meeting of
shareholders.
Underwriting on firm commitment basis.
Restricts any right issue if the company did not utilize the
proceeds of previous public offering or did not hold the
AGM regularly.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Rights Issue) Rules,
2006

The right offer cannot exceed 5 for each existing share.

The rules - require the appointment of issue manager and
underwriter,
- require due diligence certificates from them,
- defines the contents for right offer documents
- require the public announcement for right issue.
The right shares of directors and other shareholders
holding 5% or more shares shall be subject to a lock-in
for a period of 3 years.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Over-theCounter) Rules, 2001
The unlisted companies can get over-the-counter
facilities through the stock exchange brokers.
An unlisted company can get the OTC facilities
- if it holds AGM regularly, and
- if it has no accumulated losses.
The stock exchange should display a full list of securities
available at OTC and the quantity and price each
security available for sale.
The payment and the delivery of securities should be
settled through the stock exchange.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission
(Prohibition of Insider Trading) Rules, 1995
Restrict the use of insider trading and supply of
insider information to others.
The Securities and Exchange Commission (Issue of
Asset Backed Securities) Rules, 2006
Requires the issuer of asset backed securities to
appoint a trustee, have adequate capital.
Also defines the rights and responsibilities of
trustees.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996
Defines the responsibilities and code of conduct of
merchant bankers and portfolio managers.
Also defines the capital adequacy requirement for
merchant bankers and portfolio managers.
The merchant bankers cannot use the price sensitive
information from any clients.
The rules restrict any officer or employee of merchant
banker to work as an officer or employee of any mutual
fund, stock dealer or stock broker.
The portfolio manager has to separate its own fund from
clients fund.
The rules restrict investment of clients fund in speculative
transactions.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996
Merchant banker means any person who is engaged in the
business of issue management either by making
arrangements regarding selling, buying, underwriting or
subscribing to securities as underwriter, manager,
consultant, adviser or rendering corporate advisory
service in relation to such issue management.
Registration Requirement
According to the SEC regulation, no merchant banker can
function without a registration with the SEC.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996

a. Infrastructure office space, equipments and

manpower
b. Employment of minimum two experienced
persons.
c. Capital adequacy.
d. Professional qualification from any
recognized institutions.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996

Disqualifications:
a. Bank defaulters
b. Direct or indirect connection with any person
who has been granted a registration.
c. Conviction involving moral turpitude.
d. Involvement in any litigation connected with
the securities market (having adverse effect)
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996

Minimum capital
For issue management Taka 5 Lac
For underwriting Taka 1 Crore
For portfolio management, Underwriting
& issue management Taka 2 Crore
But the total volume of issue at any time
cannot exceed 5 times its capital.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996

Lead Manager
All issues should be managed by at least one
merchant banker functioning as the lead
manager.
The responsibilities of lead managers
(particularly with respect to disclosures,
allotment and refund) should be clearly defined
and should be filed with the SEC.
The lead manager shall submit a due diligence
certificate to the SEC in Form C.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996

Lead manager shall furnish to the SEC:

a. Particulars of the issue;
b. Draft prospectus of offer for sale;
c. Any other information to be circulated to investors;
d. Any other documents relating to the prospectus or offer
for sale.
No merchant bankers or its insiders are allowed to trade
shares based on price sensitive information.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996

Responsibilities of a Portfolio Manager

a. Manage funds of each customers
individually and independently;
b. Act in a fiduciary capacity with the client;
c. Transact in securities within limitation
placed by customers;
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996

d. Not to get any direct or indirect benefit out

of customers fund account;
e. Not to pledge securities without permission
of the customer;
f. Proper and timely handling of complaints of
customers.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996

Investment of Customers Money

Shall not accept money or securities for a
period less than one year.
Shall invest in money market instruments.
Shall not indulge in speculative transactions.
Shall generally trade securities separately
for each customer.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Merchant
Bankers and Portfolio Managers) Rules, 1996

Any transaction between customers account

and portfolio managers own account shall be
at the market price.
Shall segregate each customers funds and
portfolio of securities and keep them separate
from his own account.

M. SADIQUL ISLAM

Legal Framework
The Securities & Exchange Commission (Stock Dealers,
Stock Brokers & Authorized Representatives) Rules, 2000
Defines the code of conduct of stock dealers, brokers and
authorized representatives.
Dealers, brokers and authorized representatives have to
take registration from the SEC.
Also, they have to renew their registration every year.
Defines their capital adequacy requirement.
The brokers, dealers and authorized representatives
cannot be merchant banker, portfolio manager, trustee of
mutual fund, fund manager or custodian.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Major
Shareholding, Acquisition and Takeover) Rules, 2002
Any person acquiring 10 percent or more shares of a
company will have to inform the stock exchange and
the respective company.
The stock exchange will publish the information
through on-line news.
The company will also inform the name of
shareholders having 10 percent or more shares of the
company to the SEC and stock exchange.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Market
Makers) Rules, 2000
A market maker is a broker-dealer firm that accepts the risk of holding
a certain number of shares of a particular security in order to facilitate
trading in that security.

Defines the qualifications of market makers who

have to take registration from the SEC.
Defines the functions of market makers and impose
a boundary of their functions.
Also the market makers require appointing a
qualified compliance officer for operation.
They have to settle their transactions within one
day after transaction.
M. SADIQUL ISLAM

Legal Framework
The Securities and Exchange Commission (Securities
Custodial Service) Rules, 2006
Defines the qualifications and infrastructure
facilities needed for registration with the SEC as
security custodial service firm.
Also defines the code of conduct of the custodial
service firms.
The rules require the firms to have their own system
of internal audit and evaluation to ensure security
and proper service to their clients.
Restricts delegation of their functions to any other
person or body.
M. SADIQUL ISLAM

Legal Framework
The Depository Act 1999
Allows the formation and functioning of
depository companies.
Defines the responsibilities of depository
companies to protect the interest of its clients.
Empowers the SEC to promulgate necessary rules
and regulations for monitoring and controlling the
behavior of depository companies.
The Depository Regulations 2000
Defines the qualifications of depository companies
for registration with the SEC and conditions for
the commencement of business.
M. SADIQUL ISLAM

Legal Framework
The Depository (User) Regulations, 2003
Requires the depository companies to have adequate
infrastructure for the safety and security of records
and securities.
Defines
- the types of securities eligible for depository,
- the accounts for providing depository service,
- the eligibility for depository participant,
- the procedure for dematerization,
- transfer of ownership and settlement of transaction
- other services that a depository can provide.
M. SADIQUL ISLAM

Legal Framework
The Banking Companies Act 1991
Requires the banks to maintain a minimum capital
requirement.
- Presently the minimum capital and reserve is Taka 4
billion.
Restricts the payment of dividend by a banking
company.
- Have to satisfy that all expenses, bad debt losses and
amortization expenses have been charged properly.

M. SADIQUL ISLAM

Legal Framework
The Banking Companies Act 1991
Imposes restrictions on the loans to the
directors and their relatives.
Any loan to a director must be sanctioned
by the board of directors and approved in
the AGM.
Such loan should also be specifically
mentioned the balance sheet of the
company.
M. SADIQUL ISLAM

Legal Framework
The Banking Companies Act 1991 (Contd)
The ownership of a bank cannot be concentrated. No
single person, company or members of joint family
(includes near relatives) can hold more than 10
percent of shares of the bank.
Empowers the Bangladesh bank to remove any
director or dismiss the board of directors of a bank
when their conduct is detrimental to the interest of
depositors or of the bank.

M. SADIQUL ISLAM

Legal Framework
The Banking Companies Act 1991 (Contd)
The office of a bank director will become
vacated when the directors becomes a loan
defaulter.
The central bank with permission from the
government can acquire a bank in the
interest of depositors and can transfer it to
others.
M. SADIQUL ISLAM

Legal Framework
Financial Institutions Act 1993
Provides the legal framework for the operations of
non-bank financial institutions in Bangladesh.
Designed to ensure a very controlled behavior of
non-bank financial institutions.
BB will issue license to the financial institutions if
the Bank is satisfied with respect to their financial
condition, capital adequacy, management, profit
potential, objectives and public interest.

M. SADIQUL ISLAM

Legal Framework
Financial Institutions Act 1993
Minimum capital is determined by BB (Taka
25 Crore).
Have to take permission from BB to open
branches inside or outside the country.
Cannot take demand deposit from the public
and conduct foreign transactions.
M. SADIQUL ISLAM

Legal Framework
Financial Institutions Act 1993
Restrictions with respect to their loans and
investments.
- cannot provide loans to a single person, firm or
company more than 30% of its capital.
- unsecured loans to firms where any director or near
relatives have interest are restricted.
- cannot invest more than 25 percent of their capital and
reserves in the shares of other companies.

M. SADIQUL ISLAM

Legal Framework
Financial Institutions Act 1993
Have to maintain minimum liquidity as
prescribed by BB.
Empowers BB to remove the chairman,
CEO or any director of FI.
BB can suspend the operation or can order
restructuring or merger in the interest of
depositors and investors.
M. SADIQUL ISLAM

Legal Framework
Insurance Development and Regulatory Authority Act 2010.
The Insurance Development and Regulatory Authority
(IDRA) to be formed.
IDRA will be governed by a chairman and four members.
Major functions of IDRA will be to
- control the insurance, reinsurance and other institutions,
- issue license to insurers, reinsurers, surveyors and other professional
institutions related with insurance and
- protect the interest of policyholders.

Authority to adopt rules and regulations.

Authority to monitor the insurance sector and to take
actions against them.
M. SADIQUL ISLAM

Legal Framework
The Insurance Act 2010
Every insurance company has to be registered with
IDRA.
Minimum capital requirement for the insurance
companies.
- Taka 300 million for a life insurance company
- Taka 400 million for non-life insurance companies
In both cases, 60% of capital should be held by sponsors
and 40% should be publicly floated.
M. SADIQUL ISLAM

Legal Framework
The Insurance Act 2010
Board composition: Maximum 20 board
members.
- 12 Sponsors / promoters
- 6 Shareholder directors
- 2 Independent directors
Board members cannot be directors of other
insurance companies or Banks or FI
M. SADIQUL ISLAM

Legal Framework
The Insurance Act 2010

Insurance companies can invest according to their own

investment regulations.
But they cannot invest in the initial capital issue of any
company where any director of the company or family
members thereof have interest.
Redefines the minimum requirement of security deposit.
- Taka 15 million for the life insurance companies and
- Taka 25 million for the non-life insurance companies.
These deposits can be kept in cash or in the form of
investment in approved government securities.
M. SADIQUL ISLAM

Legal Framework
The Insurance Act 2010
Each life insurance company has to value its liabilities
and evaluate the financial condition by an actuary at
least once a year.
Life insurance companies cannot provide the
commission more than:
- 35% of first year premium
- 10% of second year premium
- 5% of subsequent year premiums
For the first 10 years, the commissions are 45%, 12% and
6% respectively
M. SADIQUL ISLAM

Legal Framework
The Insurance Act 2010
Separation of Life and Non-life insurance
business
Separation of Islamic insurance and
traditional insurance business.

M. SADIQUL ISLAM