A number of fiscal concessions have been sought by the Bangladesh Securities and Exchange Commission (BSEC) from the government in order to help develop the country's moribund bond market. Such concessions include tax waivers.
The BSEC has put forward a set of proposals to the National Board of Revenue (NBR) for consideration. Currently, tax waiver facility is conditionally available in case of zero coupon bonds. The commission wants the facility be made available for all types of corporate bonds and investors concerned.
There is also a suggestion for rationalising tax at source in case of the transaction of corporate bonds. Presently, 0.10 per cent tax at source is applicable to a broker, depending on the transaction price. For all practical purposes, tax needs to be realised on the basis of the number of transactions. Rationalisation of stamp duty on corporate bonds is also needed.
Currently, 2.0 per cent stamp duty is levied on the issuance of corporate bonds. Again, 3.0 per cent stamp duty is realised on 'value of consideration' of bonds. In fact, 'high' stamp duty is a barrier to the growth of bond market. Market analysts say stamp duty on paper-based bonds should be fixed at 0.01 per cent or Tk 0.5 million. The BSEC chief recommended withdrawal of stamp duty on dematerialised corporate bonds.
There is no denying that a weak bond market is intensifying pressure on the country's banking sector. Banks cannot collect funds from any source other than deposits of clients, due to weak bond market. The situation makes the corporate sector completely dependent on the banking sector for funds.
As such, lots of new securities like zero coupon bond and fixed coupon bond need to be introduced in the country's bond market to make it popular among investors. Development of bond market, in fact, has become imperative for the country as both investors and authorities will be benefited from it.
The bond market in the country is still at a very primary stage. The Bangladesh Bank (BB), BSEC and NBR will have to work together to expand and popularise the market. Bank officials will have to work carefully on the issue. Amendment to the existing Repo law is needed to strengthen the bond market.
The government should take initiatives to strengthen the bond market as the country needs long-term investment to achieve its development goals. Dependency only on the banking sector should be overcome for financing its investment needs.
On the other hand, the bond market should get importance for financing in order to achieve the sustainable development goals (SDGs). It will not be possible to achieve the development goals depending only on bank financing. There should a reduction in tax rate for expansion of the bond market to reduce pressure on the banking sector.
Banking sector analysts emphasise assimilation of bond market, banking sector and capital market for improvement of the liquidity situation in the country.
In the meantime, a finance ministry committee has made 18-point recommendations to develop the country's bond market, including rationalisaiton of taxation and process simplification.
The inter-ministerial committee has recently submitted its recommendations to the finance ministry on how to develop the country's long-term financing and the capital market. Several government agencies were asked to take necessary steps on an emergency basis to implement the recommendations.
The committee was formed with representation from the finance ministry, Bangladesh Bank, NBR, BSEC, Insurance Development and Regulatory Authority (IDRA), Dhaka Stock Exchange (DSE), Federation of Bangladesh Chambers of Commerce and Industry and Industry (FBCCI) etc.
The recommendations include imposition of a lump sum stamp duty instead of existing rates on paper-based bonds and exemption of duty for dematerialised bonds and other securities, collection of advance income tax on final stage of income from investment in bonds, providing tax benefits, which is now applicable only on zero coupon bond, to all kinds of bond and all types of investors and imposition of transaction fee as a reasonable lump sum amount on trade of bonds instead of rates on volume of transactions made - now in vogue for shares.
The recommendations said that stamp duties at higher rates on bonds would discourage investors resulting in hindrance in development of the bond market. Other recommendations are related to rationalisation of taxation to help developm the bond market.
The central bank should also rationalise the interest rates for long-, medium- and short-term bonds based on their demand and supply in the market instead of the existing system. Currently, the BB determines the rate for seven-year-long bonds based on three-month fixed deposit rate.
The committee also recommended excluding the capital market exposure calculation for banks in case of investment in bonds and simplifying the bond approval process by avoiding delay caused by dual scrutiny by the BSEC and the central bank.
According to the existing procedures, the BESC approval of bond issuance is sent to the central bank for no-objection certificate causing delay in the approval process due to the dual scrutiny of the same activities, the committee mentioned.
The BB should also treat a bond defaulter as a loan defaulter in its database of the credit information bureau so that the bond defaulters do not get loans from the banks.
The committee also recommended that the Finance Division should issue Taka-denominated sovereign bonds to demonstrate Bangladesh's financial capacity abroad. Steps should also be taken to encourage institutional investors to invest their pension fund in the bond market, the letter said.
The committee further recommended that the BSEC ought to expedite the automation process, establish a specialised rating agency and introduce direct transactions between issuers and investors for the bond market
There should be specific directives for introducing secondary bond market where government-sponsored bonds can be traded. This will encourage the private sector to issue more number of bonds for raising capital for long-term investment.
Indeed, a vibrant domestic bond market can reduce a country's dependency on short-term foreign currency borrowing and also help the country accelerate its economic activities. A proper domestic bond market can speed up financial development of the country.