Merchant bankers urge securities regulator to form Tk 100b special fund

Merchant bankers have urged the securities regulator to form a special fund worth Tk 100 billion to enhance liquidity support for the country's stock market.

Bangladesh Merchant Bankers Association (BMBA) on Monday made the call in a letter to the chairman of the Bangladesh Securities and Exchange Commission (BSEC).

The BMBA said the special fund can be formed by issuing bonds through Capital Market Stabilisation Fund (CMSF).

"The CMSF may raise this fund by issuing bonds and the fund could be distributed among the intermediaries in the form of low-cost and long-term loans," said the BMBA.

The association put forward the proposal to facilitate adequate participation of market intermediaries in the capital market.

The securities regulator on March 8 last reduced the lower limit of the stock exchanges' circuit-breaker to 2.0 per cent from the existing 10 per cent to prevent the market's freefall.

The broad index of Dhaka Stock Exchange (DSE) lost 492 points during the period from February24 to March 8, 2022.

In the letter, the BMBA argued that the special fund, if properly invested in the market, could help solve the liquidity problem and mitigate the current sluggishness in the market.

It said the special fund will also help revitalise the capital market through discouraging panic-driven sales by the general investors.

Asked, BMBA president Md. Sayadur Rahman said they were not getting funds from the banks as such funds are included in the bank's exposure to the stock market.

"In our proposal, we have spoken about a possible way of creating funds which will enhance the investment capacity of the market operators. The market operators will take loans from the special fund," he said.

Previously, the BMBA made another proposal to the government to form a special fund worth Tk 100 billion.

Following the BMBA's proposal, the central bank allowed the banks to form a special fund worth Tk 2.0 billion each and said that the investments made from such funds are not included in the banks' exposure to the stock market.

"We have made our assessment on the market situation and proposed the formation of a special fund. Now the authorities concerned will make a decision," said the BMBA president.

Despite all the efforts and unprecedented initiatives from the regulators, the market has recently been witnessing high volatility and large sales pressure, the BMBA said in its letter.

"In this market condition, adequate liquidity support needs to be provided to stabilise the market," it said.

While speaking on limitations of the market intermediaries, the association said most of the intermediaries do not have the required collateral to borrow from the banks or financial institutions.

"... the lenders have limitations on capital market exposure issues, and also feel discouraged to lend money to market intermediaries because of the extra 1.0 per cent general provisioning requirement imposed by Bangladesh Bank."

The banks and financial institutions also charge higher interest rates to compensate for the inherent risks of the capital market investment.

"One of the major structural problems of the capital market in Bangladesh is that it is still dominated by retail investors," said the BMBA.

Historically, participation from the foreign investors remained insignificant while institutional participation, including dealer investments by market intermediaries, also remains very weak, said the association.

"Since the market continues to fall, margin loan providers have to adjust their margin ratio by selling shares. It may happen again and again," said the BMBA.

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