BSEC orders conversion or liquidation of closed-end funds

The securities regulator has instructed all trustees of closed-end mutual funds to strictly comply with the newly enacted mutual fund rules regarding the liquidation or conversion of closed-end schemes into open-end funds. 

In a letter issued on Tuesday (June 9), the Bangladesh Securities and Exchange Commission (BSEC) mandated immediate compliance with Rule 62 (2) of the BSEC Mutual Fund Rules, 2025.

Under the revised mutual fund rules that came into effect in November last year, any closed-end mutual fund trading at a discount of more than 24 percent to its Net Asset Value (NAV)-calculated on a six-month rolling average-is legally required to either convert into an open-ended structure or wind up.

The regulatory order has been sent to the top executives of the trustees that manage closed-end mutual funds. They are Investment Corporation of Bangladesh (ICB), Bangladesh General Insurance Company Limited (BGIC) and Grameen Fund.

Because the six-month grace and calculation timeframe expired on May 12, asset managers and trustees are now legally bound to take immediate corrective action.

The BSEC has provided guidelines for the execution of the transition. However, it is heavily favouring conversion over liquidation to shield both individual investors and the broader capital market from systemic shocks.

BSEC spokesperson Abul Kalam warned that liquidation would set off a mass sell-off of underlying securities, triggering massive selling pressure that would depress share prices across the market. Consequently, unitholders would recover far less than the actual NAV and would also face additional tax burdens on the liquidated proceeds.

Conversely, conversion offers distinct advantages. It offers an opportunity to realise fair value. For example, if a fund's units have a NAV of Tk 15 but are heavily discounted on the secondary market, conversion ensures unitholders receive 1.5 units at true fair value.

Conversion also gives scope for redeeming units of the newly formed open-ended fund at will, directly through the fund manager, eliminating the need for the secondary market to absorb a massive forced sale of shares.

The road ahead

The BSEC has laid out a strict, step-by-step administrative timeline that trustees must now follow.

Within 30 days from the end of the six-month period, trustees must declare a record date. This must be published as Price Sensitive Information (PSI) across two national dailies (Bangla and English), an online portal, and the stock exchange website. The notice period must be between 14 and 30 working days.

Trading of a fund's units will be suspended on the stock exchange from the record date onward to ensure voting integrity.

A special general meeting must be held within 21 days of the record date. To approve the conversion, a three-fourths (3/4) majority by number of units is required from registered unitholders.

If the unitholders vote in favour of conversion, the trustee must fully execute the conversion within 90 days.

If a fund falls under the NAV-discount clause and unitholders fail to approve the conversion at the special general meeting, mandatory liquidation will be triggered automatically. For other standard closed-end funds not bound by the discount clause, a failed vote means trading will simply resume in the next trading session under the existing asset manager.

To manage the financial impact of this transition, the BSEC has capped total conversion and unit issuance expenses at 1 percent of the fund size, with asset manager fees capped at 0.5 percent.

Notably, registration fees for the newly converted open-ended schemes will be entirely exempted by the regulator to smooth out the transition.

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