Quick approval, listing on main boards will help corporate bond market thrive

Quick approval of corporate bonds and listing on the exchanges' main boards will invigorate the country's corporate bond market, said the head of BRAC EPL Investments.

In a recent interview with The FE, Syed Rashed Hussain, chief executive officer of the merchant bank, also emphasized the need for tax incentives for all types of corporate bonds, as they are given now only for zero coupon bonds, to increase investors' participation in debt securities.

Now it takes around one year to get approval from the securities regulator of a bond proposal. The time should be narrowed to 2-3 months, he said.

Because of inadequate policy support and a lack of awareness the country's bond market still remains at a nascent stage. It has failed to see any reasonable growth in line with the economic growth over the last decade.

According to the securities regulator, bonds issued by the private sector are worth only 0.19 per cent of the country's GDP (gross domestic product), while in India it is 25 per cent of GDP.

The Bangladesh Securities and Exchange Commission (BSEC) approves the proposals of zero coupon and subordinate bonds with a condition attached that the securities have to be listed on the exchanges' alternative trading boards (ATBs).

Mr Hussain said listing on ATB would not make these bonds popular among general investors. "The bourses should pave the way for listing on the main board."

Also, listing fees should be reduced for corporate bonds to be traded on the main boards.

If a debt security worth Tk 5 billion is listed on the ATB, the listing fee is around Tk 0.2 million whereas the fee jumps to Tk 7.5 million if it is listed on the main board.

"The issuer companies will be interested in issuing bonds on a large scale if the exchanges facilitate listing on the main boards at a reduced cost," Mr Hussain said.

Moreover, the guidelines may be revised to let companies submit proposals online.

Tax exemption not for long

Bond holders other than banks, financial institutions, and insurers enjoy a tax exemption against holdings of zero coupon bonds.

According to Mr Hussain, investors will be attracted to all types of corporate bonds if such tax benefit is extended to all debt securities issued by private entities.

He, however, said tax benefits would not be necessary for a long period.

"Many investors show apathy when they consider purchasing bonds for the first time. They will feel confident about investing in corporate bonds if a tax benefit is ensured for at least three years."

The BSEC needs to sit with the revenue board to ensure the tax benefit, said the head of BRAC EPL Investments.

Benefits offered by debt securities

Investors often incur losses even from investments in good stocks but there is no scope of loss in bonds.

Ashugang Power Station Company is one of the few companies that have already satisfied investors through redemption of its coupon bearing bonds.

The company raised Tk 6 billion in 2020 through bonds for the development of a 400MW power plant. BRAC EPL Investments was the co-issue manager of the bonds issued by Ashugang Power Station.

Of Tk 6 billion, Tk 1 billion was raised through IPO. The company paid Tk 250 million to investors by January this year.

Despite the bond being listed on the DSE's main board, the bond holders were reluctant to liquidate holdings as the return (8.5 per cebt-10.5 per cent) was higher than deposit rates.

Financing through corporate bonds is more feasible for issuer companies compared to bank loans for the former offers fixed rates while banks change rates in line with the policy rates set by the central bank.

A company's cost of funds through bonds is fixed until the maturity of the securities.

After the withdrawal of the lending rate cap, many listed companies, including Runner Automobiles and Renata, issued bonds to settle bank loans to avoid extra finance costs.

"Efforts by all stakeholders are required to make corporate bonds familiar and popular among general investors," said Mr Hussain.

Bonds to improve corporate governance

A company issues bonds under a trust deed. From time to time it has to inform the trustee of any kind of developments.

The trustee has scope of taking actions against the issuer over matters of non-compliance.

Moreover, the trustee is required to submit a report to the securities regulator regarding the issuer company's compliance with relevant laws.

On the other hand, bondholders dig into the performance of a company before purchasing bonds issued by it.

Corporate bonds to keep fund flow unaffected

The chief of BRAC EPL Investments also said the weaknesses of the scam-hit banks did not come to the surface until recently.

As many as 10 banks are unable to pay back depositors. Hence, many issuers from the private sector are likely to face fund crisis.

"In this situation, corporate bonds can ease the problem," said Mr Hussain.

A move to increase accessibility

BRAC EPL Investments has worked as arranger of subordinate bonds worth Tk 7 billion issued by BRAC Bank.

The investment bank has also co-arranged a zero coupon bond worth Tk 1.98 billion issued by SAJIDA Foundation.

Usually, the minimum value of a bond is Tk 10 million per unit. Because of the size of investment, only high net worth individuals purchase bonds.

To make the securities more accessible for mid-level investors, the value of one unit of BRAC Bank's bonds has been fixed at Tk 1 million. Moreover, the bonds have been made available at any branch of the bank across the country.

"We are using the bank's branches to expand the distribution channel. Bonds equivalent to Tk 4 billion have already been subscribed."

SAJIDA Foundation's bonds are available at Tk 1 million per unit. Around 35 per cent of this security has already been subscribed.

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