Draft TREC rules worry stockbrokers

The securities regulator has recently published a draft rule for awarding fresh brokerage licence to the new entrants, causing much worry for the already struggling brokerage industry.

Some members of the two stock exchanges, talking to The Business Standard, have criticised the set criteria for availing a brokerage licence saying that "it (criteria) will invite new entrants with maximised ease."

Currently, members of the two bourses are serving as stock brokers and dealers under their Trading Right Entitlement Certificate (TREC) licence obtained by default as shareholders of demutualised stock exchanges.

The BSEC under Bangladesh Securities and Exchange Commission (BSEC) Demutualization Act 2013 is going to open TREC licences to non-member entrants after the fifth year of demutualisation.

As per the new move, the new entrants will merely avail the business licences as stock brokers and dealers. They, however, will have no membership or share of the stock exchanges.

The draft rules

The BSEC published the draft of TREC Rules, 2020 on March 25 and asked for stakeholders' opinion within April 15, 2020.

Any company having paid-up capital of Tk3 crore alongside maintaining audited net assets not less than 75 percent of that, and a Tk2 core security deposit can avail a TREC Licence from stock exchanges, it says.

For that, interested companies only have to pay only Tk6 lakh to the respective stock exchanges — Tk1 lakh application fee and Tk5 lakh TREC registration fee.

Besides, the draft says, the applicant company must have the technical, financial and management capacities set by the exchanges time to time and approved by the BSEC.

No director of the applicant company can be a convict in criminal cases, or a loan defaulter, or a director of any other TREC holder company, it proposes.  
Also, if any shareholder of the interested company is a collective investment scheme, it will not be eligible for a TREC licence.

Exchange members' concern

Over two-thirds of around 250 members of the Dhaka Stock Exchange (DSE) and 150 at the Chittagong Stock Exchange (CSE) are struggling to meet their operational expenses with what they earn as commissions against trade executions, and fees to maintain investment accounts.

Now, the average turnover in Bangladesh capital market has remained stuck at 70-80 percent lower than that in the bull market of 2010.

"The proposed rule is inviting new entrants in the already crowded and struggling brokerage industry, which will further weaken the exchange members," said a senior DSE member.

Even, some top brokerage firms are either firing employees or imposing pay cuts for survival these days.  

"The demutualisation act dictated the rule, but there should be some tougher entry criteria for non-members to be in brokerage business," he said.

The rule is offering exchange companies to receive only Tk6 lakh against issuance of each brokerage licence, which is too little compared to the previous price of each DSE membership sold in auction.

The DSE previously had sold 12 memberships at a price of over Tk32 crore in auction, while these used to be priced even three times higher a decade ago.

"A huge investment would be required for a membership, and stockbroker and stock dealer licence. Now if new entrants can avail the same licence with an investment 90 percent lower, that will be injustice to the members,'' said another senior DSE member seeking anonymity.  

"We fear that a group of influential people is going to enter the brokerage business with a poor investment compared to our historically aggregated inputs and the draft is paving the way for that,'' he added.  

The divided DSE board

According to the DSE members, the draft TREC Rules has been in formulation for more than a year and the previous board of DSE had opined that the mandatory capital base be fixed at Tk10 crore while the regulator was trying to fix it at Tk5 crore.

Surprisingly, the recently formed DSE board, dominated by independent directors, agreed to recommend it even lower – Tk3 crore. This time, the BSEC added the Tk2 crore security deposit requirement.

Some recent documents, obtained by The Business Standard, reveal that three of the four member directors of DSE had given opinion for setting the paid-up capital requirement for new TREC licence at Tk15 crore. They also had prescribed setting the price of TREC through an auction process, instead of the set Tk6 lakh.

But one of the shareholder directors and the independent directors was in favour of lowering the requirements.

A DSE member director said: "We are being marginalised through the proposed rule. It is a conspiracy against us."

He also criticised the BSEC's selection of time for publishing and seeking opinion on the draft as the country was in a shutdown.  

BSEC denies any conspiracy

The BSEC authorities, however, refuted the allegations.

Its executive director and spokesperson Md Saifur Rahman said opening TREC licences for non-members after five years of demutualisation was a must according to the 2013 Act by the country's parliament.  

The draft was approved in a commission meeting before the nationwide public holiday was declared, he informed.

"And, opinion sending online is not impossible during the ongoing period of social distancing," he said.  

However, the commission might extend time for opinion if it was necessary, he hinted.