Banking

This ultimately indicates that IFIC is giving a guarantee to the project for the benefit of its two directors and taking risks as it will have to repay the money along with the interest in case STL fails to pay.

As of October 31, owners held only a 6.14 percent stake in IFIC Bank, while the government owns 32.75 percent, institutions 20.83 percent, and retail shareholders 39.16 percent, according to data from the Dhaka Stock Exchange.

Despite knowing all these, the BSEC gave its consent to the bond.

A top banker sees it as a conflict of interest as the bank has extended the guarantee to a relator where its directors’ company has a partnership.

“This is a clear compromise when it comes to corporate governance,” he said.

A corporate lawyer echoed the banker, saying this is a governance issue.

The Bangladesh Bank has, however, kept its responsibility limited to just seeking an explanation from IFIC although the government as well as the depositors’ funds are at stake.

Faruq Ahmad Siddiqi, a former chairman of the BSEC, said STL started its business just a few months ago and is not generating any revenue.

“How will it return people’s funds from the very beginning?”

If an investor buys bonds worth Tk 100,000, he will get Tk 1,000 per month in interest in the following 60 months. At maturity, he will get back the principal amount. “It’s nothing but a complete financial engineering to raise funds,” he said.

Faruq Ahmad termed the venture also risky. “I don’t know how the BSEC has approved the bond that is huge in size.”

According to the Debt Securities Rules of 2021, an issuer can make an application to the commission for the issuance of debt securities if it has a good track record of profitability and liquidity generated from net operating cash flows.

If the issue is to support a new or greenfield project, its forecasted financial position shall indicate significant profitability, liquidity, and ability to pay back by generating sufficient net operating cash flows.

STL has shared a projection, but several financial market stakeholders have expressed doubt over the forecasted revenue stream.

A top official of a merchant bank, who has vast experience in managing the issuance of bonds, said it is clearly a related party transaction as IFIC’s directors’ company has a partnership with STL.

He said it is not difficult to raise funds by issuing bonds because issuers do not have to be profitable companies. Moreover, it is a comparatively new instrument in Bangladesh, so it is easy to attract people by giving a lucrative rate.

After poring over the documents related to the bond, he said the approval for this type of financial instrument is only possible if there is a political pressure.

The BSEC, however, said it went by the book.

DEVIATION IN BONDS’ NATURE

A zero-coupon bond is a debt instrument, which is used by a company to take loans from investors. It does not pay monthly interest. Rather, it offers a deep discount at face value, rendering profit at maturity, when the bond is redeemed.

Generally, an issuer of a zero-coupon bond repays annually or after maturity. By offering the monthly interest or coupon, the issuer is deviating from the zero-coupon bonds’ nature.

THE TOWNSHIP PROJECT

STL said it will establish a township in Chhoto Gobindpur, Gazipur, an industrial district adjacent to Dhaka, on 76 lakh square feet of area.

There will be high-rise commercial spaces and 23 lakh square feet of residential facilities on a 37-acre site. The cost of the project is Tk 6,094 crore, according to STL estimates. It will be built over the next five years.

Of the Tk 6,094 crore, Tk 335 crore will come from equity, Tk 1,000 crore from the bond, Tk 1,185 crore from the land owner, and Tk 3,574 crore from the advance of customers.

The company expects to generate revenues of Tk 6,585 crore from the sale of properties.

Documents show STL received the nod of the bond on July 12 from the BSEC on the basis of a financial report for just 23 days of April 2023.

During the period, the company earned no revenues. Rather, it incurred a loss of Tk 17.9 lakh. Its assets amounted to Tk 334 crore, according to the financial statements.

The approval came in just three months.

A former Bangladesh Bank governor termed the BSEC approval “unusual” given the company’s financial health and the fast-track approval process. 

Md Mashiuzzaman, managing director of STL, and Tilat Shahrin, director of the company, jointly hold a 100 percent stake. The documents gave no further details about the two. No information about them was also available on the website of STL.

STL said its project is located in Gazipur-Savar area, home to hundreds of factories. So, there is a demand for office spaces, hotels, and other amenities.

To hit the sales target for flats and commercial spaces, marketing campaigns have been worked out to create a buzz and attract potential buyers. Partnerships with banks have been planned to facilitate the financing for the potential buyers, STL’s Chief Financial Officer Abdul Jabbar told The Daily Star in an email.

“Being the maiden venture in the planned area, we are not even contemplating that any flats or commercial space will remain unsold.

“Rather, we have envisioned that once we finish the first project, we may go for similar projects for low and middle-income groups in the area,” he said.

A top executive of a real estate company, however, said the real estate sector is passing a challenging period due to current macroeconomic challenges. “The STL project is huge and it may not be easy to reach the sales target in five years.”

Nationwide flat sales stood at 10,000 in 2022-23, down from 12,000 in the previous financial year. Annual sales averaged 14,000 from 2017 to 2020, according to the Real Estate & Housing Association of Bangladesh.

IFIC did not reply to queries despite repeated attempts. Beximco replied and IFIC’s Company Secretary Mokammel Hoque said, “Beximco’s statement is IFIC’s statement.”

In its reply, Beximco said the area is suitable for affordable housing which has a great demand, as the project is adjacent to Dhaka and is accessible.

It said it is completely incorrect to suggest IFIC decided to guarantee STL in order to benefit the directors of the bank.

The company added that STL’s paid-up capital is more than sufficient to cover the equity participation against a non-funded exposure of Tk 1,000 crore.

STL has an authorised capital of Tk 500 crore and a paid-up capital of Tk 335 crore as of April 30, 2023.

“The projected cash flow is adequate to cover the repayment,” Beximco said.

According to Beximco, the non-funded facility is adequately covered by a collateral of 37 acres of land. “This is an additional security to the bank above the equity participation by the borrower.”

After exploring all these, Beximco Group has decided to join this venture and the IFIC board decided to extend the guarantee considering the business potential and benefit to the bank and its depositors, it added.

WHAT REGULATORS SAY

BSEC Spokesperson Mohammad Rezaul Karim said though the issuer company is new, its equity is not small. He said the BSEC approved the bond as the bank had given the guarantee.

“This type of trickery is rare in the banking sector. The central bank should ask IFIC Bank to explain how it allowed its name to be used in such a manner.”