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The possibility of the country's first-ever ETF (exchange traded fund) vanished into thin air for incomplete subscriptions even after the second-time time extension.
LankaBangla Asset Management, which had proposed LB Multi Asset Income ETF, had the subscription time extended to September this year for the second time. Still, it could not attract enough eligible investors.
In October, the company urged the regulator to give six more months, but the plea was rejected.
Mohammad Rezaul Karim, spokesperson of the Bangladesh Securities and Exchange Commission (BSEC), said the rules did not allow further time extension.
"A fund shall collect commitments from the EIs up to a period of six months from the date of registration or any other period set by the commission, and shall declare to the commission the figure of final commitments collected, which shall not be increased after the said period," reads the relevant rule.
Hence, the asset management company (AMC) sent a letter at the end of last month to the securities regulator, seeking its permission to announce official closure of the fund nearly two years after it had been approved.
It will make an announcement in this regard soon, said an official of LankaBangla Asset Management.
An ETF is an open-ended Collective Investment Scheme (CIS) that continuously issues and redeems its shares of stock in the creation of units representing a basket of securities or an index.
ETFs are in many ways similar to mutual funds. However, they are listed on exchanges and ETF shares are traded throughout the day just like ordinary stocks.
The ETF proposed by LankaBangla Asset Management was supposed to be floated with an initial size of Tk 1 billion.
Investors' money refunded
As per the prospectus, the AMC was supposed to raise Tk 700 million from eligible investors (EIs) through private placements while the sponsor would contribute Tk 100 million, the AMC Tk 20 million, and the remaining Tk 180 million was set to be pooled through an IPO.
The subscription period set for the first time for private placements ended on March 3 this year. It was then extended by three months to June 3.
Later, the time frame was extended to September. But the company was able to collect Tk 270 million only. Of this fund, Tk 150 million came from eligible investors through private placements while the sponsor -- LankaBangla Investments and the AMC provided Tk 100 million and Tk 20 million respectively.
As the latest decision went in favour of closing the ETF, the AMC refunded the money to EIs and the sponsor.
Equity market blamed for the ETF to fail
ETF is a new product with which local investors are not familiar, said Arif Khan, vice chairman of Shanta Asset Management.
Both ETFs and mutual funds generate returns mostly from equity markets.
The country's exchanges experienced huge erosion of market value of equity-based securities in the last two years.
"In a situation like this, it would be difficult to attract investors to a new product such as an ETF," said Mr Khan.
Currently, prudent investors see good returns from Treasury bonds compared to the equity market.
"The volatility in the equity market is the main reason behind investors' lukewarm response to the ETF," said Mr. Khan, adding that investors' investment priorities would change if the interest rates offered by Treasury bonds decline.
He said Shanta Asset Management had deferred its move to float an ETF because of the current market situation.
However, a senior official of the Dhaka Stock Exchange (DSE), requesting anonymity, said huge marketing was necessary to create awareness about ETF.
Flashback to the introduction of ETF
The country's secondary market only had equity-based securities for decades.
To diversify the market, the securities regulator finalised the rules of ETF in May 2017. A gazette on the rules was published in June of the same year.
An ETF can be managed actively or passively.
In actively managed funds, portfolio managers decide which securities to invest in, while a passive ETF mirrors an index, with investments in all companies on the index in accordance with the weight of the companies on the index.
The rules approved by the securities regulator had the provision of managing ETFs passively.
But LankaBangla Asset Management received consent to manage its fund actively.
Preferring anonymity, an official of the AMC said the passive format allows a fund manager to invest money into stocks listed on a specific index.
If the ETF were DS30 based, the AMC would have had to invest in securities of the index. But the performance of all securities in the DS30 index is not up to the mark.
BSEC spokesperson Mr Karim said ETFs usually are managed passively in other countries. But in the context of Bangladesh it is difficult to manage an ETF passively, which was why the regulator allowed LankaBangla Asset Management to manage the ETF actively.