Lending to subsidiaries is global practice, but it must be within rules

That at least 78 of the locally listed companies either issued loans to their private sister concerns and associate companies or became third-party guarantors to loans is very alarming. 

More than 50 listed companies have been blatantly ignoring the relevant BSEC regulations of 2006 in terms of providing loans to sister concerns.  

The 2006 notification of the BSEC allowed listed companies to lend to subsidiary companies if shareholders approve of the plan. But it restricted the loans to associate companies, directors and managers themselves and other companies owned by the directors, popularly called sister concerns.

It is a global practice that when a listed company has surplus profit, the company can finance its subsidiary companies at a fair interest rate (read market rate), for the operation and expansion of subsidiary companies. 

However, when they do this, they have to report the transaction to the regulatory body – in our case the Bangladesh Security and Exchange Commission. Moreover, these loans must be reported and declared at the annual general meeting of listed companies. 

One third of the listed companies in the capital market are not following the existing rules and regulations. As a result, the general shareholders are deprived of their fair share of profits. When the listed company as a result of transferring profits shows lower profits or losses, they are depriving shareholders of their rightful share of dividends.  

In many cases, the regulatory body is not aware of the fund transfer by a listed company. When this kind of practice is going unreported to the regulatory body in violation of the existing rules and regulations of the BSEC, it is a crime. 

In some cases, the listed companies are lending money to their subsidiary companies at a lower interest. These companies are giving unethical benefits to their sister concerns when the sponsor directors are the same for both entities. 

They are not charging the interest rate at a market price. Ultimately, the general shareholders are bearing the brunt as they are the ultimate losers. These decisions are being taken for the benefit of a handful directors, who are supposed to take care of all shareholders. 

As a regulatory body of the capital market, Bangladesh Security and Exchange Commission will have to be more vigilant in stopping these kinds of anomalies to safeguard the rights of the general shareholders.   

The regulatory body will have to hold the specific company responsible for charging lower interest rates. The regulatory body will have to tell the specific company that the company has incurred loss due to charging low interest rates.  

People who are sitting on the board of directors of a listed company have special interest in their private company's benefit. In most cases, these directors influence and make a way for private companies to get loans at a low on or no interest. 

Alongside the BSEC, general shareholders will also have to be more active in keeping a close eye on the activities of the board of directors. The general shareholders also have the scope of monitoring directors' activities. 

The regulatory body has many instruments to take legal action against those listed companies who are involved in providing these kinds of unethical loans. 

Lending to subsidiary companies is a global practice, but the Bangladesh Security and Exchange Commission will have to ensure compliance and make sure that the transaction is happening in a transparent manner.

The regulatory body can also impose fines on the specific company for violating the rules and regulations of the body. If the regulatory body finds that some directors are involved in irregularities, BSEC has the power to remove those directors from the company. There are many actions that the regulatory body can easily take. 

The auditor firms can also be held responsible for any financial irregularities in their financial statements. It is the auditor's responsibility to point out all the anomalies. If any auditor fails to perform well, the regulatory body can suspend the auditor.

In general, the general shareholders get the opportunity of raising their voice against any unwanted activities by the directors at the annual general meetings. However, the general shareholders are not getting the scope in the middle of the pandemic as most of the annual general meetings are being held virtually on Zoom, for a very short duration. The general shareholders get little scope of scrutinising many things. As a result, the regulatory body will have to play a more active role on behalf of the general shareholders. 

What I want to see is transparency - the regulatory body will have to see whether everything is going on in the right way. 

Abu Ahmed is a retired professor of economics at the Dhaka University and also a stock market expert