Union Capital shares surge 44% as Prime Bank expected to sit on board

Union Capital Ltd, a listed non-bank financial institution (NBFI) failing to pay back its depositors, saw a 44% rise in its stock prices in the first half of August amid expectations that Prime Bank Ltd, a private sector lender, is going to enter its board of directors.

Prime Bank Deputy Managing Director and Chief Financial Officer (CFO) Mohammad Habibur Rahman Chowdhury declined to comment on his bank's actions in this regard.

Union Capital's Company Secretary Md Abdul Hannan also declined to comment.

However, Prime Bank's Director Azam J Chowdhury, also the founder chairman of East Coast Group, the brokerage arm of which is the second largest shareholder of Union Capital, confirmed the development.

"We, the directors, have asked Prime Bank to accumulate the NBFI shares so that it qualifies for a board seat sooner," he told The Business Standard on Monday.

Securities law made it mandatory for any shareholder to hold at least 2% shares to be a director of a listed company.  

"Union capital, unlike a few scam-hit NBFIs, is a case of mere business failure. I believe it will not be a tough job to bring it back on track through an injection of Tk200-300 crore liquid fund," said Azam J Chowdhury.

The needed fund to pay back depositors would not be a problem if confidence in the NBFI is restored, he said adding "If the Prime Bank becomes a corporate director, that would help restore confidence."

Prime Bank may also help provide Union Capital with liquidity.

"We are continuously discussing with the securities regulator and the Bangladesh Bank regarding how to help Union Capital overcome the crisis and expect the regulators' maximum support."

Also, equity injection might be an option later, said Chowdhury, adding that it would add further strength.

A senior official of the Bangladesh Securities and Exchange Commission (BSEC) confirmed that the regulator received a letter in this regard and is ready to support the turnaround efforts.

However, a number of analysts are sceptical about the soaring stock prices considering Union Capital's devastating financial health and the uncertainty in its turnaround.

On 1 August, Union Capital shares, having a face value of Tk10 each, were trading at Tk7.3 on the Dhaka Stock Exchange (DSE). It soared to Tk10.5 on 17 August.

The fall of Union Capital

Taking over the equity market operations from Hong Kong-based Peregrine Capital, and securing an NBFI licence from the Bangladesh Bank, a group of local entrepreneurs began Union Capital in the late 1990s.

It entered the merchant banking business in the early 2000s and remained more focused on capital market operations than on leasing or lending businesses.

Its 2007 initial public offering was a great success as the capital market was a profitable business in the then bull market that continued till the end of 2010.

But the 2010-11 market crash made it all sour as the margin loans it disbursed among stock investors to let them buy more shares for leveraged gains turned bad.

Later, the brokerage and merchant banking operations were split, and the core NBFI increased traditional lending in the mid-2010s.

But it did not help at all as the fresh term loans were mostly given to large corporations who later defaulted.

A former Union Capital executive who spoke on the condition of anonymity told TBS that the collapse was a consequence of poor management amid a lack of supervision and intervention by the board members who represent some of the reputed business houses of the country such as apparel giant Palmal Group, energy, tea and services conglomerate East Coast Group, and insurance giant Green Delta.

In 2019, Union Capital incurred losses for the first time because of soaring provisions against bad assets and it still continues with even bigger losses amid non-recovery of bad loans, and inability to pay back depositors even after maturity.

The Bangladesh Bank and the Financial Reporting Council last year found that the company hid its financial holes to some extent in the 2020 financial reports and forced it to correct the rosy accounting that unveiled even bigger losses.

Meanwhile, British American Tobacco Bangladesh kept complaining to the central bank asking for recovery of its over Tk100 crore deposits from Union Capital and the central bank ordered the NBFI to pay back the sum as soon as possible, but it is yet to happen as Union Capital has no money to use for paying back.

Due to the failure, the Bangladesh Bank in late 2021, barred Union Capital from collecting deposits over Tk1 crore without the central bank's prior approval, while fresh lending has been automatically stopped.

Amid the standstill business, financial health is set to continuously deteriorate unless it recovers defaulted loans as costs of operations still continue.   

The statutory auditor in its 2021 report expressed its concern regarding the firm's ability to survive in business in the coming days, while the net asset value against each share shrunk to negative Tk8.54 at the end of last June as the company's annual losses mounted to near its paid up capital.  

"It is only confidence restoration that can bring Union Capital back in business. And I stepped in for that," said Azam J Chowdhury.

"Alongside changes in the board, we will also look for a strong management team for the business recovery," he added.