Capital Market Stabilisation Fund: Will it work?

Bangladesh Securities and Exchange Commission (BSEC) has finally established the much-discussed Capital Market Stabilisation Fund (CMSF). 

BSEC has already constituted a ten-member governing body to administer this fund with the former principal secretary to the government, Mr Nojibur Rahman as the first chairman of the CMSF and Mr M Saifur Rahman, the executive director of the BSEC as one of the members.  

Illustration: TBS

BSEC has estimated that the initial fund size would be Tk21,000 crore. The fund is believed to consist of the remaining undistributed and unclaimed dividends in the books of listed companies.

These companies are said to have already initiated moves to transfer unpaid or unclaimed dividends as well as non-refunded IPO subscription money to the CMSF. 

It is expected that over the period, this fund size will exponentially grow since more and more unclaimed dividends will be deposited in this fund and investment income will also add value. 

This is of course a very good initiative because any fund which remains unclaimed cannot be kept idle and at the same time, funds already declared to pay, belonging to parties other than companies should not be used by the company itself. 

Therefore, this type of fund should be retained and managed by the public entity so that the fund's protection can be guaranteed in addition to ensuring the utilisation of funds for the greater interest of the people and country. 

In this context, the formation of CMSF consisting of unclaimed and undistributed dividends, as well as, IPO subscription refund warrant does seem to be a praiseworthy move by the BSEC.

Unclaimed dividend and bank deposit 

At the beginning of forming the CMSF, there was controversy and debate over the utilisation of the unclaimed, as well as, the undistributed dividend because Bangladesh Bank was vehemently opposing this move.

In Bangladesh Bank's defence, they were relying on the definition and use of depositor's money as per Bank Company's Act. 

The Central Bank was trying to define unclaimed dividends as bank deposits because this money is technically retained in one bank's account. 

However, there is a technical aspect here which Bangladesh Bank did not take into consideration while determining unclaimed dividends as bank deposits. 

In general, money retained in the bank accounts is defined as depositors' money because the account holder deposits money to his/her account. 

However, there are some exceptions and retaining dividends payable in the bank account is one of those exceptions. 

The unclaimed or undistributed dividend is the part of the company's equity from where the declared dividend amount is transferred to the bank account for the distribution and this bank account here in question, plays the role of a vehicle account. 

Therefore, funds retained in the dividend payable account is not typically depositors' money, rather part of the equity or reserve of the company. 

Later on, Bangladesh Bank realised this situation and backed off from their opposing stance what has expedited BSEC's initiative to establish this fund.    

Scope and purpose of the CMSF

The purpose and scope of utilising this fund have not been elaborated yet. So, we still do not know how and where this fund will be invested. 

From reports in the media, we learnt that the CMSF has planned to use this fund as a safeguard in the capital market and its general investors. 

How the capital market and its general investors will be safeguarded with this fund is not clear to us. However, we assume that this fund may be deliberately used to invest in the capital market to either prevent freefall in the market price or arrest unbridled price hikes and thereby, stabilise the market condition.

If this is the ultimate purpose and objective, then the CMSF Board should move with a very deliberate and careful approach because the unclaimed dividends are not the same as freehold funds as there may be claims of the dividend anytime.

The stock market is speculative, so there is a possibility that fund value may decline and if so, claim of any dividend whenever arisen, cannot be met. 

There may be a general perception that all claims - however unlikely - will arise at the same time. This is true but does not rule out the claim options and any fund bearing possibility of claim should not be directly invested in the speculative market. This is consistent with the fundamental principles of fund utilisation. 

However, this fund can be utilised as a refinancing source with call back guarantee to intermediary institutions engaged in the investment of capital market. Since experienced and highly professionals are given the responsibility to administer this fund, they will albeit consider this negative aspect. 

Easy way to honour claim

We know that listed companies have already started moving unclaimed or undistributed dividends to the CMSF. 

However, this move should not be an easy task because flat transferring of funds in a lump sum will not serve the purpose. 

The unclaimed dividend will be transferred in such a way that any claim whenever lodged by the true beneficiary, can be honoured without any question. 

Therefore, detailed information about each unclaimed or undistributed dividend and IPO subscription refund warrant will have to be provided to the CMSF which will keep this record against receipt of funds from each listed company. 

Each listed company should prepare a spreadsheet report with detailed information of individual claimants of each unclaimed/undistributed dividend which will be reconciled with total fund size and then will be transferred to the CMSF. 

This spreadsheet report must be maintained in the database of CMSF which will verify this information. Whenever any claim is received and if found accurate, that claim should be immediately honoured. 

This exercise cannot be accurately and efficiently carried out manually and therefore, a comprehensive computer-based application is required to manage this fund. 

This application can easily be developed in-house by employing our country's talented computer engineers who will only require proper guidelines and direction.   

Unclaimed dividend versus unclaimed property

Besides, unclaimed or undistributed dividends, there are many forms of unclaimed liquid assets in many companies and establishments which will also be consolidated and brought under unique control. 

Any form of cash and cash equivalent that remains unclaimed up to a certain period is categorised as unclaimed property. 

Deposit remaining in dormant accounts years after years is a good example of unclaimed property. However, there is a BB rule to transfer deposit remains in the dormant account over ten years to Bangladesh Bank. But this exercise seems to be an isolated move. 

There remain many cash and cash equivalents in banks, financial institutions and many other organisations which need to be consolidated. Govt. should establish a nationwide entity with the responsibility of controlling and managing all unclaimed properties which remain in the books of any company or establishment. 

There must be a rule to transfer any unclaimed property to that designated govt. entity if that property remains unclaimed over a certain period preferably five years. 

In the developed world, especially in the USA and Canada, there is a law of transferring unclaimed property to the state treasury if that property remains unclaimed over two years. 

The establishment of CMSF with unclaimed or undistributed dividends is undoubtedly a good start and if found successful, govt may consider establishing a wider entity to administer all sorts of unclaimed property. 

Will CMSF stabilise the capital market?

To what extent CMSF will stabilise the country's capital market will remain to be seen shortly. However, we understand that country's stock market moves in its course commensurate with the movement of the country's economic parameters. 

No third-party intervention can bring any desired result in the market in the long run although there may be some short-term gains. 

Once ICB (Investment Corporate of Bangladesh) was established to play the role of market stabiliser. But to what extent, ICB has been able to stabilise the market is known to the people. 

The stock market is commonly known as sensitive and highly speculative all over the world. Investors invest considering the company's fundamentals and based on many calculations but in reality, fundamentals and calculations do not work in many situations. 

At the beginning of the Covid-19 pandemic, the global stock market drastically plunged but within a few months bounced back and even the share price index has reached a record high, whereas the global economy has remained partially or fully suspended for the last one and half years. Therefore, any intervening measure may not produce the desired result in stabilising the capital market in the long run. 

Nironjan Roy, CPA, CMA is a Banker, Toronto,Canada. He can be reached at [email protected] 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.