Market Stabilization Fund: 300 meetings in 3 years is all it had

Infograph; TBS

The Capital Market Stabilization Fund (CMSF), launched in 2021 to inject confidence into Bangladesh's capital markets, was designed to step in during market volatility, buying and selling shares to ensure liquidity and restore faith among investors.

Yet, unlike similar funds in other countries, CMSF's impact has been far from stabilising the market. Members of its board and a dozen other committees were found more active in holding meetings than in making tangible financial interventions.

The fund convened 323 meetings in three years and spent Tk3.32 crore in payouts to those who just attended, according to available records. These gatherings – over 100 times a year on an average – didn't come cheap: each committee member received an honorarium of Tk8,000 per meeting.

In addition to holding meetings and collecting attendance fees, the CMSF board of governors purchased two cars for Tk1.52 crore and spent nearly Tk5 crore on office renovations.

But the outcomes were too minimal to the size and goals of the fund, which grew to about Tk1,545 crore as of 30 July this year. Giving a Tk225 crore loan to the state-owned Investment Corporation of Bangladesh (ICB) and the launch of a Tk50 crore mutual fund – were the two major accomplishments the CMSF has seen since its formation in 2021.

The ICB, for its part, used the funds to invest in the capital market, but the broader impact on market stabilisation has been negligible.

In 2021, the BSEC decided to create the fund to manage to do more than just hold unclaimed dividends, bonuses, and IPO subscriptions. 

One of the fund's key mandates was to allocate up to 40% of its cash for direct buying and selling of listed securities, another 50% for providing loans to market intermediaries as refinancing margin loans, and keeping the remaining 10% in fixed deposits, government securities, and mutual funds. Of the Tk1,545 crore, around Tk632 crore is in cash and the remaining portion consists of bonus shares valued at approximately Tk913 crore.

In addition to the 11-member board, over a dozen committees have been formed for the fund's management and operation, with some having four members and others more than 10. 

According to CMSF data, there have been 63 board meetings and 260 committee meetings over the past three years. With meetings happening almost daily, CMSF board members and other committee members have collectively earned honorariums totalling over Tk1 crore annually.

Notably, not only the board members attended these meetings; close associates of the chairman, who were not part of the board, also received responsibilities and earned Tk8,000 per meeting as honorariums.

When asked about the expenditures on meetings, Md Monowar Hossain FCA, chief of operations of CMSF, said, "Everything has been done according to the board's decisions, as formed by the commission. Since the organisation started from scratch, establishing the institution was necessary in the initial phase, but that is no longer needed now or in the future."

Interim govt to review CMSF

On 26 September, Finance Adviser Salehuddin Ahmed formed a committee to review the CMSF, assess its necessity, and outline future action plans, a senior BSEC official confirmed on Sunday. 

The committee will be chaired by an additional secretary from the finance ministry's treasury and debt management wing, with representatives from the Ministry of Commerce, Registrar of Joint Stock Companies and Firms, Bangladesh Securities and Exchange Commission, and the Financial Institutions Division as members. A report has to be given within 10 days.

"The committee will recommend whether this fund is needed. If so, it will propose proper management and utilisation strategies," the BSEC official told TBS, speaking on condition of anonymity.

However, a senior official from the finance ministry revealed that current BSEC Chairman Rashed Maqsood Khan is not in favour of this fund. He reportedly communicated his stance to the interim government's finance adviser last week. As part of that move, the BSEC did not form the board of governors despite the expiry of the previous board on 22 August.

The fund's rationale, role in question

The CMSF was created to collect unclaimed and undistributed dividends from companies, allowing 40% of the cash funds to be used for buying and selling stocks directly.

Three years have passed, but legal issues surrounding the fund's creation remain unresolved, putting its existence at risk as the new commission has yet to make a decision.

Concerns have been raised about the role of Prof Shibli's commission as a promoter of the fund. 

A head of a brokerage house said, "The regulator's job is to oversee the market, ensure good governance, and legislate. Instead of fulfilling its mandate, the commission is trying to create a fund for liquidity, while also allowing for buying and selling shares. This is not the regulator's role."

In 2022, Bangladesh Bank's former governor Abdur Rouf Talukdar and bank officials questioned the legal validity of forming and managing this fund. Legal complexities regarding its formation and management are still unresolved, and no final decision has been made on who will oversee it.

Despite regulatory pressure, listed companies have deposited their undistributed or unclaimed dividends, previously idle in banks, into this fund. 

Faruq Ahmad Siddiqi, former chairman of BSEC, said the purpose of creating this kind of fund to support the market was not right. 

"You can never stabilise the capital market by forming a fund. Artificially supporting the market with a fund might help for a few days, but it's not sustainable in the long run," he told The Business Standard.

Despite not being able to operate according to the fund's mandate, significant expenses were incurred, which is not desirable, he said, adding that since the commission is the initiator of the fund, they need to consider this matter carefully.

ICB Chairman Prof Abu Ahmed said there was controversy regarding the formation of the stabilisation fund from the beginning. The unclaimed dividends are the investors' money; after collecting these dividends, the fund should operate according to its mandate.

"If the fund doesn't function according to its mandate after collecting the money, the commission can investigate the matter. The fund should work as per its mandate, especially since it involves public money."

CMSF has no board now

The CMSF, currently without a board or oversight, officially commenced its operations in August 2021. 

The term of its three-year board expired on 22 August this year, leaving CMSF without any leadership.

According to the rules, the main board or Board of Governors of CMSF consists of ten members. This includes the chairman of the fund, three members and one chartered accountant appointed by the BSEC.

Other board members include representatives appointed by the Dhaka Stock Exchange (DSE), Chittagong Stock Exchange (CSE), Central Depository Bangladesh (CDBL), Central Counterparty Bangladesh (CCBL), Bangladesh Association of Publicly Listed Companies (BPALC), and one professional chartered accountant.

In 2021, a commission led by Shibli Rubayat Ul Islam formed a ten-member board. This board appointed former chief secretary Nojibur Rahman as chairman, executive director of the commission Saifur Rahman as a member, Associate Professor of Finance at Dhaka University Dr Tanzila Depty, and editor of Vorer Kagaj, Shamol Dutta, as board members.

Md Tarique Amin Bhuiyan, then MD of DSE, was a board member. Following his resignation, acting MD Shaifur Rahman Mazumdar took over as a board member of CMSF and later became the MD of CSE. 

Subsequently, Professor Hasan Md Hafiz Babu from DSE became a board member.

As representatives, the following individuals were appointed: Asif Ibrahim for CSE, AKM Nurul Fazal Bulbul for CDBL, Dr Mohammad Tarek for CCBL, Sayed Nasim Manzur and AKM Delwer Hussain for BPALC. 

Later, Sayed Nasim Manzur was replaced by Mohammad Younus of Younus Group as the BPALC representative.

Although the Bangladesh Securities and Exchange Commission (BSEC) was expected to form the board within a month of the term's end, it has yet to do so.

How similar funds worked in other countries

Similar funds have played critical roles during financial crises and volatile market conditions in different countries. For example, after the stock market crash caused by the Harshad Mehta scam in 1992, investor confidence in Indian capital markets plummeted. To restore trust, SEBI enhanced the role of the Investor Protection and Education Fund, designed to compensate small investors who had been defrauded and to improve market awareness and education. This helped stabilise the market by encouraging retail investor participation again.

During the 2008 financial crisis, the Exchange Stabilization Fund (ESF), managed by the US Treasury, was authorised to inject liquidity into the economy. The ESF was used to support financial institutions and ensure market stability, even though its primary role is to stabilise foreign exchange markets.

The Chinese stock market saw a major crash in 2015, where stock prices plunged by over 30% in a short period. The Securities Investor Protection Fund (SIPF), which is normally focused on compensating investors when brokerages fail, was repurposed to buy shares from the market to halt the crash. The SIPF intervened by purchasing shares in key companies, helping to stabilise stock prices.