Stock brokers oppose the proposed minimum paid-up capital that they would have to maintain to continue operations if the rule is finalised.
The new provision is meant to minimize risk that clients face when it comes to realising investment after fund misappropriation.
Brokers made their opinions clear and loud at a meeting convened by the Dhaka Stock Exchange (DSE) Brokers Association on Wednesday to discuss some draft rules, including the one meant to shore up protection against financial frauds by the intermediaries.
The minimum paid-up capital is set at Tk 50 million for a local entrepreneur to get a broker licence. For the same licence, the minimum capital requirement is Tk 80 million if a joint venture firm is opened with foreign entrepreneurs, and Tk 100 million for a fully foreign entity.
The paid-up capital has to be at least Tk 100 million if a local entrepreneur seeks a stock dealer licence, according to draft regulations. If an entity wants to operate as both stock broker and stock dealer, it must have a paid-up capital of at least Tk 150 million, which is Tk 200 million for a joint venture firm or a fully foreign entity.
Stock brokers at the meeting organised at the DSE office said increasing paid-up capital was “unrealistic” now against the backdrop of a mostly-stagnant market and ahead of upcoming national polls.
At present, paid-up capital of 91 TREC (trading right entitlement certificate) holders of the Dhaka Stock Exchange (DSE) is below Tk 50 million.
The brokerage firms with low paid-up capital will face difficulties at the time of licence renewal, said Md. Ashequr Rahman, managing director of Midway Securities and a participant of the meeting.
Moreover, the capital requirement will be doubled for brokerage firms having dual licenses to execute trading on both the bourses, he added.
The intermediaries expand paid-up capital with retained earnings and by injecting fresh funds. But earnings of these firms have dried up, thanks to floor price and gloomy economic outlook.
As per the draft regulations, the existing firms will have to fulfill the gaps within two years after the issuance of a gazette notification.
Describing the draft rules irrational in the context of the current market situation, brokers’ association President Richard D’ Rozario said they would appeal for more time from the securities regulator to give opinions on the draft regulations.
Meanwhile, the association in a press statement requested the regulator to delay the implementation of the new regulations until June 30, 2024, considering the ongoing political tension.
The draft rules prepared by the Bangladesh Securities and Exchange Commission (BSEC) also make regulatory approval mandatory prior to the appointment or termination of chief executive officer (CEO) by brokerage firms. The stock brokers will also have to appoint a board representative on behalf of clients if the rules are brought into effect.
Meeting participants said many brokers were running their operations with board members playing the role of CEO. For them, hiring a CEO will involve additional cost burden.
DBA President Mr. Rozario said appointment of a client representative was an “absurd” proposition, given that the brokerage firms were not public limited companies.
Secondly, the brokerage firms are skeptical about the benefits of it. The banks that deal with thousands of crores of depositors’ money do not need any representative from clients as board members, Mr. Rozario added.
The BSEC came up with the draft regulations while scrambling to pay back investors, who fell victim to fund embezzlement by Tamha Securities, Crest Securities, Banco Securities and Shah Mohammad Sagir & Company.
Due to low paid-up capital of the four firms, the authorities are yet to settle claims of their clients.
Executive director of Policy Research Institute of Bangladesh (PRI) Ahsan H Mansur spoke in favour of strong capital base of stock brokers.
Running business as a stock broker with an insignificant paid-up capital is not rational. “The stock brokers should be given time to meet the regulatory obligations. But they must comply with the provision of required capital,” he said.
The stock brokers that deal with high amounts of clients’ funds should appoint CEOs for “the sake of professionalism”, added Mr Mansur.
In May 2019, the BSEC set risk-based capital adequacy ratio at 1.20 times total risk requirements to reduce the vulnerability of investors.
Regulatory capital is the minimum total capital that a broker should maintain in continuing its operation. Total capital includes retained earnings, capital reserve, provision, unrealized fair value gain, paid-up capital and share premium.
But negative equity and repeated time extensions to meet provisioning requirement against unrealized losses in the brokers’ own portfolios make it imperative for the regulators to set a minimum paid-up capital that they must have for the sake of safety of stock investors.
When stock brokers themselves have nothing much to lose in the regulatory action against them for mishandling clients’ money, they are more likely to commit financial crimes.
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