According to the Asian Development Bank's (ADB) 2005 assessment on the "Capital Market Development Program (CMDP) in Bangladesh," Bangladesh's capital market is weak. It lacks the foundation of an efficient capital market. In 1997, the ADB approved the CMDP to reform Bangladesh's capital market. The program was designed to increase market capacity and transform the capital market to be fair, transparent, and efficient, in order to attract more investment capital. The ADB evaluates the completed program as partially effective. While there was some progress in strengthening the regulator and improving surveillance, enforcement of regulations remains weak. However, there is insufficient publicly available information that addresses Bangladesh's adherence to the Objectives and Principles of Securities Regulation promulgated by the International Organization of Securities Commissions (IOSCO).

General Overview

According to the Asian Development Bank's (ADB) 2005 assessment on the "Capital Market Development Program (CMDP) in Bangladesh," Bangladesh's capital market lacks the foundation of an efficient capital market. In 1997, the ADB approved the CMDP to reform Bangladesh's capital market. It sought to restore investor confidence, which had been ruined after the 1996 stock market crash in Bangladesh. The program was designed to increase market capacity and transform the capital market to be fair, transparent, and efficient, in order to attract more investment capital. The ADB evaluates the completed program as "partly efficacious" (p. v). It rated the CMDP's success in achieving the goals of strengthening market regulation and supervision, and developing capital market infrastructure as "partly satisfactory" (p. 17). For modernizing capital market support facilities, the CMDP earned a rating of "satisfactory" (p. 18). However, it was rated "unsatisfactory" (p. 18) in achieving the goals of increasing limited supply of securities in the capital market and developing institutional sources of medium-to-long-term funds to raise demand for securities.

The 2005 ADB assessment of the CMDP notes that the role and legal authority of the Securities and Exchange Commission (SEC) has been successfully strengthened, that it has improved surveillance, and that it has been empowered as an autonomous regulatory agency. However, there has been little progress in making changes to governance, management, and organizational capacity. There is a shortage of qualified staff, insufficient private sector representation on the board, and the Advisory Committee is inactive. It has been successful in increasing the accountability of the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) through introducing independent directors on the board, improving the SEC's audit and inspection, and establishing an investor protection fund. There has been some improvement in the regulation of brokers, dealers, investment banks, and other market participants, but enforcement of newly implemented rules is inconsistent and there has been a lack of coordination among the entities. There has not been much improvement in accounting and auditing standards, aside from adopting International Accounting Standards (IASs) and tightening disclosure requirements. Capital market support facilities were modernized through the implementation of a central depository system and automated trading systems in the DSE and CSE, which has facilitated the adoption of previously outside trading by the exchanges. With respect to increasing the supply of securities, the program did not succeed in reducing the corporate tax rate for listed financial institutions. The transition to regulation based on complete and fair disclosure and the introduction of market-based pricing for initial public offerings (IPOs) was only partially achieved, due to incomplete financial reporting, poor corporate governance, and inadequate capacity of investment banks. There was no success in privatization of SOEs. In its attempt to increase the demand for securities, there was little success in strengthening the insurance industry and pension and provident funds, developing private mutual funds, unbundling the Investment Corporation of Bangladesh (ICB) and, consequently, creating a level playing field. In 2006, the ADB approved the Improvement of Capital Market and Insurance Governance TA Loan, which will be directed at improving governance practices. A 2006 speech by Hua Du of the ADB indicates that the loan will be focused on training the staff of the stock exchanges to increase its management capacity and improving the governance structure of the exchanges.

The 2003 Bangladesh Enterprise Institute (BEI) assessment on corporate governance reports that securities law is founded in the SEC Ordinance of 1969, which governs the issuance of securities, and the SEC Act of 1993. The legislation establishes the SEC and charges it with the licensing and regulation of capital market stakeholders and market intermediaries, including stock exchanges, brokers and dealers, investment banks and portfolio managers. The SEC Ordinance grants the SEC the authority to establish any conditions deemed necessary for the issuance of securities within the Companies Act of 1994 and other existing legislation. According to the 2005 ADB assessment, the Ordinance was amended in 2000 to allow the SEC Rules to override other relevant laws, in order to streamline legislation. Also in 2000, the SEC (Amendment) Act 2000, increased the SEC's regulatory and supervisory authority by allowing it to make rules to carry out the Act without government approval, and giving it power over prospectus content, and over clearing, settlement, and depository systems. Also, the Act removed the power of the SEC to fix IPO prices. In 2001, a consolidated SEC Act draft was forwarded to the necessary ministries for consideration, but has not been adopted as of November 2007.

The DSE, established in 1954, and CSE, established in 1995, are the stock exchanges in Bangladesh, but all stocks listed on the CSE are also listed on the DSE. According to the U.S. Department of Commerce's 2007 Country Commercial Guide, the DSE is one of the smallest share markets in the world. The DSE has 316 listed companies and a market capitalization of US$5 billion, while the CSE has 213 listed companies and a market capitalization of US$4.3 billion. They both have had automatic trading systems since 1998. According to a 2007 World Bank report, in 2006, financial institution shares made up 55 percent of market capitalization, primarily because they are required to list. There are few incentives for a company to be listed and there are restrictions on the trading of most stocks. The SEC of Bangladesh is an ordinary member of IOSCO.

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

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The 2003 BEI assessment reports that securities law is founded in the SEC Ordinance of 1969, which governs the issuance of securities, and the SEC Act of 1993, which establishes the SEC and charges it with the licensing and regulation of capital market stakeholders and market intermediaries including stock exchanges, brokers and dealers, investment banks and portfolio managers. The SEC Ordinance grants the SEC with the authority to establish any conditions deemed necessary for the issuance of securities within the Companies Act of 1994, and other existing legislation. According to the 2005 ADB assessment, the Ordinance was amended in 2000 to allow the SEC Rules to override other relevant laws, in order to streamline legislation. Also in 2000, the SEC (Amendment) Act 2000, increased the SEC's regulatory and supervisory authority by allowing it to make rules to carry out the Act without government approval, and giving it power over prospectus content, and over clearing, settlement and depository systems. Also, the Act removed the power of the SEC to fix IPO prices. In 2001, a consolidated SEC Act draft was forwarded to the necessary ministries for consideration, but had not been adopted as of November 2007. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

The SEC website lists the Commission's responsibilities. They are (1) the regulation of stock markets and other securities markets; (2) the registration and regulation of stock brokers, sub brokers, share transfer agents, investment banks and issues managers, trustees of trust deeds, issues registrars, underwriters, portfolio mangers, investment advisors, and other market intermediaries; (3) the registration, supervision, and regulations of collective investment schemes (CIS); (4) the supervision and regulation of self-regulatory organizations (SROs); (5) the prevention of unfair trading practices in the securities market; (6) the promotion of investor education and the provision of training for market intermediaries; (7) the prohibition of insider trading; (8) the regulation of substantial share acquisitions and take-overs, (8) the investigation and inspection of audits; and (9) research and publications.

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

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The 2003 ADB assessment on "Technical Assistance to the People's Republic of Bangladesh for Preparing the Financial Markets Governance Program" indicates that the SEC did not have financial independence. However, in its 2005 assessment, the ADB indicates that there has been success in empowering the SEC by strengthening its role and legal authority as an autonomous regulatory agency. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

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According to the 2003 BEI assessment, the SEC Ordinance of 1969 grants the SEC with the authority to establish any conditions deemed necessary for the issuance of securities within the Companies Act of 1994, and other existing legislation. According to the 2005 ADB assessment, the Ordinance was amended in 2000 to allow the SEC Rules to override other relevant laws, in order to streamline legislation. Also in 2000, the SEC (Amendment) Act 2000, increased the SEC's regulatory and supervisory authority by allowing it to make rules to carry out the Act without government approval, and giving it power over prospectus content, and over clearing, settlement and depository systems. Also, the Act removed the power of the SEC to fix IPO prices. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

The 2005 ADB assessment of the CMDP notes, with regard to the SEC's responsibilities of regulation and supervision, that there has been success in empowering the SEC by strengthening its role and legal authority as an autonomous regulatory agency. In addition, the assessment reports that, although there was an increase in the staffing of the SEC, including full time staff. The staff is still insufficient to carry out its responsibilities, there are no private sector representatives, and there is high turnover because of noncompetitive salaries. In addition, there is a shortage of qualified staff including accountants, financial analysts, and legal experts which is detrimental to the SEC's oversight capacity.

4. The regulator should adopt clear and consistent regulatory processes.

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There is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

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There is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

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The SEC website indicates that the DSE and CSE are self-regulated organizations. They are responsible for establishing listing requirements, the listing and delisting of companies, monitoring the compliance of listed companies with regulations, and permitting dual listings. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

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As reported on its website, the SEC is responsible for the supervision and regulation of the stock exchanges and other securities markets, and it must approve the operating rules of the stock exchanges. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

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The ADB 2003 assessment recommended that the SEC's regulation and supervision of the capital market be improved, pointing out that the SEC's enforcement ability is weak, including its ability to conduct thorough investigations, and it lacks the resources to address malpractice. The 2005 ADB assessment considered the CMDP's progress toward achieving the goal of strengthening market regulation and supervision," as "partly satisfactory" (p. 17). The ADB remarks that the SEC has been empowered by strengthening its role and legal authority as an autonomous regulatory agency and improving surveillance. However, there has been little progress in making changes to governance, management, and organizational capacity. There is a shortage of qualified staff, insufficient private sector representation on the board, and the Advisory Committee is inactive. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

The 2005 SEC Quarterly Report indicates that the SEC conducts daily surveillance through an online surveillance system and carries out monthly onsite inspections. The 2003 BEI assessment reports that the SEC's powers include the ability to investigate the activities of market intermediaries and request information. In addition, the SEC does performance evaluations to ensure compliance with regulations.

9. The regulator should have comprehensive enforcement powers.

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The ADB's 2003 assessment recommended that the SEC's regulation and supervision of the capital market be improved; pointing out that the SEC's enforcement ability is weak, including its ability to conduct thorough investigations and its lack of resources to address malpractice. The 2005 ADB assessment indicates that the CMDP introduced new regulations and provided the SEC with the ability to impose fines and other sanctions for noncompliance. However, enforcement has been inconsistent. In a 2005 paper, the International Monetary Fund (IMF) suggests that the SEC's capacity should be expanded so that it can enforce compliance with rules and regulations. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

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There is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

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There is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

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There is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

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There is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

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In Bangladesh, company disclosure to shareholders and the public is the only mechanism that shareholders and investors have to evaluate a company's performance and oversee the activities of the board. The 2003 BEI assessment points out the importance of strict enforcement of regulations pertaining to disclosure. However, disclosure is often inaccurate and incomplete. The law requires that the books recording the company finances be kept at the registered office and be available for inspection by government officials. Sanctions for noncompliance include fines and imprisonment. The assessment finds that company disclosure based on the requirements of the Bangladesh Accounting Standards (BASs) is inadequate and inconsistent, and that the situation is perpetuated by the lack of consequences and weak auditing and regulation. Other relevant information frequently goes unreported.

According to the World Bank's 2003 Report on the Observance of Standards and Codes (ROSC), the Companies Act of 1994 includes the accounting and financial reporting requirements for all companies incorporated in Bangladesh, such as the preparation and publication of financial statements, disclosure requirements, and auditing. However, financial statement disclosure requirements are unclear, and formatting and disclosure requirements are outdated. In addition, there are inconsistencies with the International Accounting Standards (IASs). The ROSC recommends that the committee formed to update the Companies Act of 1994 should consider these problems. The SEC is responsible for the regulation of financial reporting of listed companies. In 2000, the SEC issued a rule that requires companies to verify that their financial reports are consistent with IAS and their audits are carried out in accordance with International Standards on Auditing (ISAs) which were adopted by the ICAB. However, the rule is not fully enforced. The ROSC recommends that the SEC issue a new rule that makes compliance with IASs mandatory.

The BEI website indicates that in February 2006 the SEC introduced guidelines for corporate governance which are enforced on a 'comply-or-explain' basis. The 2007 Organization for Economic Cooperation and Development (OECD) report discloses that the SEC has issued disclosure requirements for substantial shareholdings which translate into progress in the strengthening of the non-financial disclosure framework. In addition, the SEC has imposed procedures for the disclosure of price sensitive information. According to the International Monetary Fund's 2005 Selected Issues paper on Bangladesh, there have been improvements in corporate governance in banks, for example, banks are required to publish their annual financial statements in newspapers.

15. Holders of securities in a company should be treated in a fair and equitable manner.

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The rights of shareholders are included in the Companies Act 1994. The Act grants shareholders certain supervisory responsibilities such as attending meetings, appointing and removing directors, obtaining financial information, and approving the annual balance sheet. Shareholders are also given mechanisms to enforce their rights. In addition, as a protection for shareholders, the directors and management of a company are subject to such penalties as fines and imprisonment for not filing periodic returns. Also, shareholders decide on dividends but they may not exceed the amount recommended by the board. The 2003 BEI assessment reports that shareholders are not involved in the daily management of the company. There are a number of factors that are detrimental to shareholders rights, including insufficient board disclosure, board size and makeup, and a lack of independent directors. It is difficult to exercise minority shareholder rights. Corporate governance in SOEs is poor, because there is little oversight by the government and the majority shareholders rarely play a role in their financial and managerial oversight.

The 2007 OECD report that, because the state is the dominant shareholder in SOEs but fails to always exercise its shareholder rights, non-controlling shareholders may be negatively affected. Shareholder protection is also stunted by poor disclosure of the identities of beneficial owners. It was anticipated that the establishment of the Central Depository would yield improvements in transparency of shareholder identity, but thousands of fictitious accounts have been discovered. However, the SEC is working on upgrading the Central Depository. The monitoring of the board by institutional investors needs to be improved. Institutional investors fail to take advantage of their power as block shareholders, in part because of incomplete proxy legislation. Also, there is no legislation for class actions and the high cost of litigation discourages collective shareholder action.

The Code of Corporate Governance includes mandates for the protection of shareholders' interests, including provisions for transparency and accountability for the protection of minority shareholders. The Code recommends that companies empower their shareholders beyond the legal and regulatory requirements. Regulators are required to uphold the rights of shareholders. The Code also recommends that companies ensure that their shareholders are informed of their rights, particularly voting rights, so that they may fully assert their power. According to the 2003 BEI assessment, the Companies Act of 1994 provides adequate protection for minority shareholders, especially Section 233. However, most shareholders do not know about Section 233 and other minority shareholders rights. The assessment recommends increased minority shareholder participation. There are a number of provisions for the protection of minority shareholders. Minority shareholders with at least 10 percent of shares may take court action against the company. However, exercising minority shareholder rights may be costly, and proving that a director is at fault is difficult. The SEC protects minority shareholders, sometimes overzealously, at the expense of the majority shareholders in listed companies. The Code of Corporate Governance expands upon the existing legislation and suggests that minority shareholders be able to elect a director.

According to the International Monetary Fund's 2005 Selected Issues paper on Bangladesh, there have been improvements in corporate governance in banks. There is a requirement that independent directors represent the interests of minority shareholders.

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

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Listed companies comply with SEC accounting and disclosure requirements. Per the SEC rules, all listed companies are legally required to follow BASs and Bangladesh Standards on Auditing (BSAs). The ICAB, in a March 2007 self-assessment, confirmed that "the Securities and Exchange Rules 1987 require that the financial statements of an issuer of a listed security shall be prepared in accordance with the applicable IASs" (pp. 72-73). It also stated that "ICAB adopts International Standards on Auditing (ISAs) and Practice Statements as applicable in Bangladesh, as Bangladesh Standards on Auditing (BASs) and Practice Statements" (p. 38). Furthermore, the ICAB self-assessment explained that although the International Auditing and Assurance Standards Board (IAASB) pronouncements were adopted as national standards, they were amended to reflect local legal and regulatory requirements. Furthermore, the 2003 World Bank ROSC noted that new rules were issued in 2000 mandating that auditors must make certain that financial statements are prepared according to International Accounting Standards and that the audit was conducted according to the International Standards on Auditing. However, the World Bank assessment pointed out that even though the SEC was working towards improving the quality of financial reporting, it lacked trained staff to monitor compliance. For non-listed companies, financial reporting requirements are set by the Companies Act. The World Bank noted these requirements are inconsistent with international standards. According to the IAS Plus website, as of July 2007, Bangladesh had adopted 31 International Financial Reporting Standards as their own BASs. At the time of the World Bank assessment only 16 BASs existed. However, the IAS Plus website pointed out that some of these BASs are based on the older accounting standards issued by the International Accounting Standards Committee, instead of the new and revised standards issued by its successor body, the International Accounting Standards Board. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

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The SEC website reports that it is responsible for the supervision and regulation of CIS. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

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See Principle 17.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

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See Principle 17.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

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See Principle 17.

21. Regulation should provide for minimum entry standards for market intermediaries.

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The 2005 ADB assessment indicates that the SEC complies with its recommendations to increase the requirements for membership at the stock exchange, such as minimum services that a broker must provide. The SEC also complies with the ADB's recommendations for the implementation of minimal capital requirements. To be a member of both exchanges, a broker must meet double the minimum capital requirement. Hua Du's 2006 speech mentioned that there had been significant increases in minimum capital requirements for banks and nonbank financial institutions. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

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The SEC complied with the ADB's recommendations for the implementation of minimal capital requirements, according to the 2005 ADB assessment. To be a member of both exchanges, a broker must meet double the minimum capital requirement. Hua Du's 2006 speech mentioned that there had been significant increases in minimum capital requirements for banks and nonbank financial institutions. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

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There is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

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There is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

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On its website, the SEC discloses that it is responsible for the regulation of the stock exchanges and other securities markets. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

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See principle 25.

27. Regulation should promote transparency of trading.

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There is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

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The SEC is charged with the prohibition of fraudulent and unfair trading practices and insider trading. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

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There is insufficient publicly available information that addresses Bangladesh's compliance with this principle.

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

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The 2005 ADB assessment reports that the Depositories Act of 1999 was passed and existing legislation was amended to grant the SEC with "specific and direct authority over clearing, settlement, and depository functions". The Central Depository of Bangladesh Limited began operating in 2004, and the 2005 ADB assessment predicted that all listed companies would join the system in the following two years. However, there is insufficient publicly available information that addresses Bangladesh's compliance with this principle.