Bangladesh Capital Market Development Master Plan

2012-2022

October 2012
Securities and Exchange Commission
Jiban Bima Tower (14, 15, 16 & 20 Floor)
10 Dilkusha C/A, Dhaka-1000, Bangladesh
BANGLADESH CAPITAL MARKET DEVELOPMENT MASTER PLAN

TABLE OF CONTENTS

CHAPTER 1: BACKGROUND INFORMATION PAGE NO.

1.1 Introduction 1
1.2 Overarching Objective 1
1.3 Five Strategic Objectives 2
1.4 Seven Categories of Initiatives 2

CHAPTER 2: CAPITAL MARKET DEVELOPMENT INITIATIVES

2.1 Implementation Arrangements 3
2.2 Legal & Regulatory Initiatives 4
2.2.1 Independence of SEC 4
2.2.2 SEC Staffing 5
2.2.3 Making Rules and Developing Legislation 6
2.2.4 Authorization of Participants and Practices 7
2.2.5 Demutualization of Exchanges 7
2.2.6 Monitoring and Investigating Market Participants 8
2.2.7 SEC Information System 8
2.2.8 Enforcing Laws and Regulations 10
2.2.9 Market Development and Promoting Education & Understanding 11
2.2.10 Organizational Challenges 11
2.3 Bond Market Initiatives
2.3.1 Government Bond Market Initiatives 12
2.3.2 Corporate Bond Market Initiatives 13
2.4 Financial Market Infrastructure Initiatives
2.4.1 Duplication of clearing and settlement functions 14
2.4.2 Lack of delivery-versus-payment (DVP) for indirect market participants 14
2.4.3 The need for brokers to provide cash and securities two days ahead of
settlement date 15
 2.4.4 Lack of centralized cash dividend payments 15
2.4.5 Lack of straight-through processing (STP) 15
2.5 Initiatives to Expand the Institutional Investor Base 16
2.6 Initiatives to Promote Derivatives and Securitization 17
2.7 Taxation Initiatives 19

APPENDIX 1: CAPITAL MARKET DEVELOPMENT MASTER PLAN MATRICES

Matrix 1: Implementation Arrangements

Matrix 2: Legal and Regulatory Initiatives
Matrix 3: Bond Market Initiatives
Matrix 4: Financial Market Infrastructure Initiatives
Matrix 5: Institutional Investors Initiatives
Matrix 6: Derivatives and Securitization Initiatives
 CHAPTER 1: BACKGROUND INFORMATION

1.1 Introduction
The capital market of Bangladesh is considered to be one of the emerging markets in the context of the
global financial system. The market has immense potentials for country’s industrialization, development of
infrastructure in particular and economic growth in general. The extent of volatility in the capital market is
more pronounced in Bangladesh than elsewhere in the world. The government and the Securities and Ex-
change Commission (SEC) have undertaken a good number of initiatives to meet Bangladesh's develop-
ment financing requirements with a particular focus on developing long term infrastructure financing and
strengthening financial stability through promotion of capital market. In this regard formulation of a Master
Plan is of crucial importance.

Besides Planning, it is also of utmost significance to establish appropriate arrangements to ensure the suc-
cessful implementation of the Master Plan for the development of Bangladesh capital market. A large num-
ber of reforms are necessary to put the capital market on a trail of sustainable growth. The implementation
arrangements have to be robust so that timely and consistent implementations of policy actions can take
place. It is also required to guard against policy reversal, where the implementation arrangements will come
in action once more.

The arrangements must be flexible so that any unforeseen events can be properly addressed. In order to
engage highly skilled knowledgeable human resources, adequate resources must be allocated. A monitor-
ing and evaluation framework, with a feedback loop, must be at work to make the process accountable.
This will allow the changes to be made to the plan when the situation demands. Trans-partisan commitment
from the highest level of the government and all stakeholders is also necessary in this regard. This is a pre-
requisite for the successful implementation of the Master plan. Adequate technical assistance is required
from time to time to support implementation and ensure consistency with international standards of best
practices.

The master plan aims to achieve transparency, accountability and efficiency in the market and strengthen
the Securities and Exchange Commission as a regulatory body. In this backdrop and having recognized
the need for vibrant capital markets to meet the national growth targets, the Securities and Exchange
Commission hereby adopts this Master Plan for Bangladesh capital market development.

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1.2 Overarching Objective
To develop a balanced, stable and resilient capital markets in Bangladesh.

1.3 Five Strategic Objectives

We recognize that it is important to take an approach to the development of capital markets that ad‐
dresses the problems that have surfaced during the last market cycle, accompanied by a broader plan to
strengthen incentives for good behavior and against bad behavior, broaden and deepen the markets
and strengthen market institutions.

This plan will have the following Five Strategic Objectives:

• To rehabilitate the SEC in terms of:

o Securing crucial (operational and financial) independence for the SEC;
o Strengthening its organizational structure;
o Enhancing (the quality, quantity and skills of) its staff; and
o Strengthening its (information and internal control) systems
• To strengthen the rules and regulations pertaining to the capital markets;
• To upgrade financial market infrastructure;
• To create a fertile environment to enable the orderly and sustainable emergence of new prod‐
ucts (e.g. corporate bonds, asset‐backed securities and derivatives);
• To ensure a fertile environment to enable the orderly and sustainable expansion of institutional
investors’ (e.g. mutual funds, insurance companies, pension funds) participation in the capital
markets;

1.4 Seven Categories of Initiatives

Bangladesh Capital Market Development Master Plan (CMDPMP), summarized in Appendix 1 consists of
70 principal initiatives, organized in the following seven categories:

• Implementation arrangements ;
• Legal and Regulatory Initiatives ;
• Bond Market Initiatives;
• Financial Market Infrastructure Initiatives;
• Institutional Investor Initiatives;
• Derivatives and Securitization Initiatives;
• Taxation Initiatives

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 CHAPTER 2: CAPITAL MARKET DEVELOPMENT INITIATIVES

2.1 Implementation Arrangements

The Securities and Exchange Commission will be the principal implementing agency for the Capital Mar‐
kets Development Master Plan (CMDP). Initiatives 1 through 7 recognize the importance of establishing
robust implementation arrangements to ensure the successful implementation of the Master Plan.

Table 1 – Implementation Initiatives

Responsi‐
I# Initiative Time Frame
ble Party
I1 Agree on implementation structure to include authorization, organizational structure, Immediate – SEC
accountability , pay structure, staffing and resource allocations Short Term
I2 Agree on implementation processes to include monitoring, evaluation (M&E), reporting Immediate – SEC
of progress, and amending implementation plan to account for evolving circumstances Short Term
I3 Appoint/engage and authorize Implementation Leader and Team Short Term SEC
I4 Appoint Specialized/Expert Working Committees with considerable private sec‐ Short Term SEC
tor/industry participation
I5 Develop and launch implementation (public accountability) website Short Term SEC
I6 Monitor, evaluate and report on progress Short Term – SEC
Long Term
I7 Re‐evaluate master plan/road map and modify based on lessons learned from M&E Short Term – SEC
Long Term

We recognize that there will be a multitude of reforms necessary to put the capital markets on a sus‐
tainable growth/development path. This is a large task to undertake and finance. The costs of imple‐
menting these reforms are likely to be significant. Implementation is likely to be a complex process re‐
quiring political will, persistence, patience, adequate resources, flexibility and significant skill in manag‐
ing the competing interests of all of stakeholders in the process. The implementation arrangements will
be robust to ensure the timely and consistent implementation of policy actions, and to guard against
policy reversal. These implementation arrangements will include:

• Built‐in Flexibility – to account for unforeseen events/circumstances;

• Adequate funding/resource allocation – to allow engagement of highly skilled and knowledge‐
able local and international resources required to achieve successful implementation.
• A monitoring and evaluation framework with a feedback loop – to make the process account‐
able and allow for changes to be made to the plan in recognition of the evolving situation;
• “Trans‐partisan” commitment from highest level of government and all stakeholders to hold
(the present and subsequent) governments accountable
• Adequate technical assistance – to support implementation and ensure consistency with inter‐
national standards of best practice.

Leading the implementation effort will be a complex task. The people in the leadership positions will
need to be well‐experienced in Bangladesh’s capital markets and well‐respected by the industry. We
recognize that it is unlikely that it would be possible to attract qualified persons to undertake such a

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challenging task under the government pay scale, so arrangements need to be made to provide ade‐
quate compensation in order to attract and retain qualified leadership.

2.2 Legal & Regulatory Initiatives

The preponderance (57%) of the initiatives comprising the CMDMP is in the category of Legal and Regu‐
latory Initiatives, indicating the severity of the challenges in this area and the importance of squarely
addressing them. Initiatives 8 through 47 listed below recognize the importance of implementing legal
and regulatory reforms.

We recognize that the principal challenge of the supervisory regime is related to the enforcement of the
laws and regulations that are already on the books. The present situation can be characterized as one of
“under‐enforcement”. This is the result of two principal factors: First, weaknesses at the SEC have pre‐
vented effective supervision of the markets and intermediaries and have hampered effective enforce‐
ment actions. A decade‐long “brain drain” coupled with the inability to recruit and train new talent has
sapped the SEC’s ability to effectively regulate the securities industry.

Second, the prevailing court system, in terms of time required to dispose the cases, has allowed offend‐
ers to tie up cases for lengthy periods – sometimes years, or even decades – frustrating the SEC’s en‐
forcement efforts. We are, therefore, committed to rebuilding the SEC’s capacity to supervise the capi‐
tal markets and to finding a solution to the challenge posed by the lengthy legal process.

2.2.1 Independence of SEC:

The independence of the SEC is crucial to its ability to fulfill its public policy mandate. We recognize that
the SEC must be free from political influence from a policy‐making perspective, and it must be able to
manage its own affairs from an administrative perspective. It is important that the Chairman of the SEC
and its Members are able to carry out their duties and responsibilities in the best interest of the inves‐
tors and market. It is also important for the SEC to have financial independence, i.e. control its own op‐
erating budget.

Initiatives no. 9‐12 are intended to ensure the SEC’s operational and financial independence. This is an
IOSCO requirement, and is also widely recognized to be a sine qua non for effectively‐regulated capital
markets – a most crucial foundational building block in the absence of which an effective le‐
gal/regulatory framework cannot be established.

While recognizing the importance of independence, we note that it must be counterbalanced with ac‐
countability. A number of arrangements are already in place to ensure the SEC’s accountability to the
Government as well as the public at large. In summary, the SEC is accountable as a result of a require‐
ment to produce (pursuant to Section 15 of the SEC Act) an Annual Report (to the Government and,
through it, to the National Assembly) and other reports that the Government may require from time to
time, and because it is subject to a statutory audit by the Auditor General of Accounts under Section 128
of the Constitution.

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2.2.2 SEC Staffing:
The SEC is understaffed, underpaid and undertrained. Staffing levels at the SEC are lower than in com‐
parable regulatory agencies. We recognize that a weak and demoralized SEC is unable to effectively
oversee the capital markets and that this may be one of the most important deficiencies inhibiting the
orderly and sustainable development of Bangladesh’s capital markets. To attract and retain qualified
personnel, the SEC must be able to offer compensation packages to its employees that are comparable
to the private sector it regulates. With compensation levels at the regulated entities oftentimes multi‐
ple times higher, the SEC faces an uphill battle in recruiting experienced, well‐qualified, knowledgeable
and effective staff. To be sure, raising SEC salaries will be difficult, but a way must be found to compen‐
sate well‐qualified and well‐performing personnel at competitive rates.

Table 2 – Legal & Regulatory Initiatives

Responsi‐
I# Initiative Time Frame
ble Party
I8 Develop and implement an awareness‐raising program to sensitize key MOF officials to Immediate – SEC
the crucial importance of SEC independence Short Term
I9 Amend (Parliament) section 3 of the SEC Act to enhance SEC independence* Immediate Parlia‐
ment
I10 Amend (Parliament) section 5 of the SEC Act to enhance SEC independence* Immediate Parlia‐
ment
I11 Amend (Parliament) section 9 of the SEC Act to empower SEC to appoint requisite num‐ immediate Parlia‐
ber of staffs ment
I12 Institute a program and establish a forum for high level coordination of the SEC and BB* Immediate SEC & BB
I13 Execute MOU between SEC and BB on the collection and sharing of supervisory informa‐ Short Term SEC & BB
tion
I14 Authorize SEC to enter MOUs with foreign regulators within parameters Short Term MoF/MoF
A
I15 Activate “Joint Inspection Team” and conduct joint inspections of jointly‐regulated insti‐ Immediate – SEC & BB
tutions (e.g. merchant banks, etc.) Long Term
I16 Develop uniform margin standards applicable to entire financial sector* Immediate SEC & BB
I17 Codify the securities laws Short Term SEC

I18 Present laws, rules, regulations and notifications in English as well as Bengali Medium Term SEC
I19 Establish an office of Chief Counsel and recruit attorneys Short Term SEC
I20 Undertake intensive training in stock exchange oversight Short Term SRMIC/SE
C
I21 Begin testing Authorized Representatives’ proficiency and Principals’ knowledge of re‐ Short Term SEC/BICM
sponsibilities as a basis for licensing
I22 Adopt rule to hold senior management of intermediaries responsible for failure to super‐ Short Term SEC
vise
I23 Publish guidance/guidelines for IPO Applications Short Term SEC
I24 Acquire and implement an electronic data gathering and retrieval (EDGAR) system Short ‐ Me‐ SEC
dium Term
I25 Conduct comprehensive inspections of the exchanges Short Term SEC
I26 Submit plans to SEC for protecting investors given new incentive structure created by Short Term Exchanges
demutualization
I27 Authorize SEC direct access to banking records Medium Term BB/MoF
I28 Increase number of non‐broker inspections (e.g. merchant banks, portfolio managers, Short –Long SEC
etc.) Term

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 Responsi‐
I# Initiative Time Frame
ble Party
I29 Adopt market conduct rule for intermediaries addressing account statement, internal Short Term SEC
controls, KYC, and compliance monitoring by third parties
I30 Begin strict enforcement of laws against insider “short swing” profits Short Term SEC
I31 Revisethe Takeover Rules Medium Term SEC
*
I32 Develop better‐calibrated risk‐based capital requirements Short – Me‐ SEC
dium Term
I33 Begin the transition to risk‐based supervision and utilizationof early warning systems to Short – Long SEC
minimize risk of failure of an intermediary Term
I34 Discontinue practice of disclosing investigations Immediate SEC
I35 Enhance investigation and enforcement capacity by recruiting and training lawyers and Short Term SEC
investigators
I36 Establish a specialized “Capital Market Tribunal” (CMT)* Immediate – Parlia‐
Short Term ment
I37 Adopt a Financial Reporting Act (FRA)* Immediate – Parlia‐
Short Term ment
I38 Develop and implement a comprehensive, coordinated public information and education Short Term SEC
program
I39 Simplify organizational structure and combine related functions into one of four depart‐ Short Term SEC
ments
I40 Transition Members/Commissioners from operational to policy focus Medium Term SEC
I41 Establish the Office of Chief Accountant and recruit & train accountants* Short Term SEC
I42 Conduct a vulnerability assessment Short Term SEC

It is recognized that the SEC’s ability to perform the five essential functions of a regulator must be
strengthened, and we are committed to undertaking a number of initiatives to enhance the SECs abili‐
ties in these five areas, namely:

• Making rules and developing legislation;

• Authorizing participants and practices;
• Monitoring and investigating market participants;
• Enforcing laws and regulations; and
• Developing the market, informing and educating

2.2.3 Making Rules and Developing Legislation

Few initiatives are intended to strengthen the SEC’s ability to make rules and develop legislation.

One of the factors contributing to the market volatility of 2010/11 was the lack of coordination between
the SEC and Bangladesh Bank. Several initiatives in the attached Plan of Action are designed to help im‐
prove this interagency coordination. It is expected that implementing these recommendations will re‐
sult in better coordination among the financial sector regulators that will remove the scope for regula‐
tory arbitrage and improve the supervision of jointly regulated institutions such as merchant bank sub‐
sidiaries of commercial banks and the securities market activities of non‐bank financial institutions regu‐
lated under the Financial Institutions Act, 1993.

Presently, laws and regulations governing the securities industry are widely dispersed and fragmented,
making it difficult for regulated entities (and just as importantly those potentially wanting to enter the
various regulated businesses) other market participants, and those evaluating Bangladesh’s capital mar‐

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kets (e.g. potential international institutional investors) to assess/evaluate compliance with the various
laws and regulations (this is especially the case with respect to rules, regulations, orders and directives).
Some Initiatives are intended to address this problem.

We recognize that the SEC is, at its core, a law enforcement agency, yet it does not have a General
Counsel, and has very few lawyers on its staff. This is a serious deficiency which significantly reduces the
SEC’s effectiveness, not only in making rules and developing legislation, but in conducting investigations
and in enforcement. Initiative 23 is intended to rectify this problem.

2.2.4 Authorization of Participants and Practices

Given the preponderance of individual, relatively unsophisticated investors in the capital markets (indi‐
cating a low capacity to gather and analyze information), and the general lack of transparency (indicat‐
ing a high cost of obtaining information), it can be argued that one of the most important functions of
the SEC is to act in its capacity to authorize market participants1 and their practices. The challenges fac‐
ing the SEC in this regard range from a lack of internal capacity to oversee the stock exchanges to the
lack of a complete, comprehensive and credible system of assuring the professional integrity, knowledge
and proficiency of market professionals and holding them accountable for their actions.

Initiatives 18 through 24‐27 are intended to address these challenges. Consumers should be able to rely
on the SEC’s certification and authorization process to “weed out” bad actors (i.e. those who are poorly
trained, ill‐informed, unprofessional and/or unethical). SEC intends to enhance the professionalism, in‐
tegrity and accountability of the brokerage industry. While professionals in the brokerage industry are
already required to obtain training, they are not required to demonstrate their proficiency and knowl‐
edge, and they are not held accountable in the event they (or their subordinates) fail to adhere to pro‐
fessional standards. We recognize that this is a standard international best practice, and that its adop‐
tion in Bangladesh will raise the standards of our capital markets.

The SEC also authorizes the issuance of securities by issuers. This process has tended to be excessively
slow in Bangladesh and it has often been pointed out as a factor contributing to the stock market bub‐
ble, as it had the effect of constraining the supply of securities in the face of strong demand stimulated
by excess liquidity and lax margin rules. The primary factor contributing to this delay appears to be the
lack of adherence of submissions to the SEC’s requirements. Initiative 28 is intended to provide a
mechanism to clearly communicate and provide guidance to the issuer community on the SEC’s re‐
quirements with respect to the issuance of securities, and will enhance transparency in this regard.

2.2.5 Demutualization of Exchanges:

Traditionally stock exchanges operate as a club of brokers which offers secondary securities trading ser‐
vices to the investing community as monopoly operator serving under a mutual governance structure.
The broker community act as owner, trader and manager of the exchanges which sometimes posses se‐
rious “conflict of interest” environment. Regulator and investors at large are raising their voice to put an

1
In this context the term “market participant” refers to market professionals, intermediaries, market operators
(i.e. the stock exchanges), and securities issuers.

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end to this culture. Consequently, around the globe stock exchanges are now increasing changing their
business model and restructuring themselves through demutualization.

Demutualization, which separates the trading rights from the ownership and management of exchanges,
is widely practiced form around the globe to improve the governance structure of the exchanges. We
believe that exchanges should be subject to higher governance standards than is the norm currently
practiced. The creation of a board structure with balanced representation from trading community and
independent category shall bring in smooth functioning culture combing the business need as well as
upholding the public interest.

The separate functioning of a chief regulatory officer within the demutualized exchange is expected to
offer better investor friendly structure and at the same time shall ensure more confidence from the in‐
vesting community resulting in higher business volume for the members of the exchanges. Initiative 26
is undertaken aiming to resolve the mentioned governance issue of stock exchanges.

2.2.6 Monitoring and Investigating Market Participants

Having certified that a market participant has reached a standard to qualify for an authorization, there is
an implied obligation on the SEC to monitor the holder of that authorization to ensure that (s)he or it
maintains those standards. Monitoring is the sustained and routine observation of participants and re‐
lies on information that is publicly available or voluntarily made available. Monitoring includes both off‐
site supervision activities (i.e. reviewing reports and documents filed with the SEC) and on‐site inspec‐
tion activities (i.e. inspecting the operations regulated entities). Its goals are to ensure that the protec‐
tions afforded under the laws, rules and regulations are in place and are operating well.

Investigations are conducted to determine whether or not a violation of the law is, has or is about to be
committed. They rely on the use of the SEC’s statutory or contractual powers to obtain information that
otherwise would not be available to it. A regulator’s investigative capacity depends on the investigative
tools available to it (i.e. ability to subpoena relevant records and documents, compel testimony under
oath, etc.), its skill and expertise in conducting investigations (i.e. controlling documents, examining wit‐
nesses, etc.) and evaluating the information collected.

With inclusion of the provision of direct access to banking records, the SEC possesses adequate powers
and tools for both monitoring and investigating. The challenge facing the SEC is one of a lack of capacity
– the lack of knowledgeable well‐trained staff in sufficient quantities, and the lack of adequate informa‐
tion systems to support monitoring and investigating teams in their efforts.

2.2.7 SEC Information System

At present, SEC’s information systems are outdated and inadequate. As a result, it is unable to receive
broker/dealer reports (for offsite supervision) or regular filings from listed companies electronically or to
sufficiently perform surveillance of trading on the DSE and CSE. With assistance from ADB (ADB TA No.
2322‐BAN: Improvement of Capital Markets Governance), the SEC has undertaken the acquisition of a

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new surveillance system, and we are committed to the immediate implementation of this system. We
are also committed to implementing an electronic data gathering and retrieval system to enable the SEC
to receive regular reports from brokers/dealers (for offsite supervision) and receive and disseminate
regular (corporate disclosure) filings from listed companies. Initiative 29 is designed to accomplish this.

We recognize that implementing Initiative 30 and 31 in conjunction with 25 will strengthen the SEC’s
ability to oversee the stock exchanges. I18 is for the SEC’s department responsible for monitoring the
stock exchanges (SRMIC) to undergo intensive training in stock exchange oversight. SEC shall begin con‐
ducting comprehensive examinations of the two exchanges in Bangladesh for the stock exchanges to
develop and submit to the SEC their plans for protecting investors in view of their new governance and
incentive structures adopted as a result of their demutualization. It is expected that the implementation
of these recommendations, along with the SEC’s expected adoption of a comprehensive state‐of‐the‐art
surveillance system and procedures2, and a climate of stricter enforcement resulting from the imple‐
mentation of initiatives to enhance enforcement discussed below, will result in a more closely, and ef‐
fectively supervised and regulated securities market; one in which the abuses of the recent past are less
likely to recur.

On‐site inspection of intermediaries has suffered as a result of the SEC’s resource constraints. As a mat‐
ter of necessity, there has been a lack of emphasis on the inspection of non‐broker intermediaries.
Once the SEC is staffed at higher levels it will increase its on‐site inspection activities, especially with re‐
spect to non‐broker market participants (e.g. merchant banks, mutual funds, issue managers, etc.).

In addition to the limited inspection capability caused by lack of resources, much needs to be done in
terms of basic protections for investor when dealing with brokers. They relate to the right to periodic
customer account statements; know‐your‐customer (KYC) suitability protections; anti‐money laundering
protections; internal systems and controls that are designed to ensure that a firm is properly managed
and customers' interests are protected; supervisory responsibility rules that hold the officers and man‐
agers liable for failure to supervise and strengthened risk adjusted capital adequacy rules tailored to the
level and type of risks to which a firm is exposed. Initiative 37‐39 are designed to address these issues.

We recognize that an effective takeover regime that allows minority shareholders with legitimate griev‐
ances to discipline management and other insiders provides an important incentive to company insiders
(management and controlling shareholders) to manage the company in the best interest of all of its
shareholders. This is especially important in Bangladesh because of its weak disclosure incentives. The
Takeover Rule in Bangladesh has been suspended pending a review. We are committed to completing
this review and implementing an effective Takeover Rule as soon as practicable.

Direct access to banking records is a key investigative tool for a securities regulator. It is also an IOSCO
requirement. Initiative 31 (Authorizing SEC direct access to banking records) is crucial to complete the
SEC’s investigative toolkit. The SEC has proposed an amendment to the SEC Ordinance to that effect and
this amendment will be adopted by Parliament as soon as practicable.

2
As recommended under ADB TA No 2322‐BAN: Improvement of Capital Markets Governance

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A final matter with respect to investigations is the common practice of the SEC of disclosing investiga‐
tions to the public before any determination of wrongdoing has been made. This practice unfairly sub‐
jects persons or firms under investigation to unwarranted and unfair publicity and can bring the subject
of such an investigation into disrepute regardless of whether such investigation has any merit. We rec‐
ognize that the best international practice is to only disclose an investigation after a violation has been
determined, and to not disclose ongoing investigations or those that do not result in a determination of
a wrongdoing.

2.2.8 Enforcing Laws and Regulations

The capital markets in any country present an abundance of opportunities for bad actors to defraud in‐
vestors in securities. As mentioned earlier, the problem in Bangladesh is not so much related to the ab‐
sence of laws designed to protect investors, as there are abundant laws designed to govern the capital
markets and protect investors. The problem in Bangladesh is more the lack of a climate of strict en‐
forcement in which there is zero tolerance for such behavior. Few initiatives are intended to strengthen
the SECs enforcement capabilities and to promote such a climate of strict enforcement.

As a regulatory agency with a principal objective of enforcing the securities laws, the lack of lawyers and
qualified investigators is likely to be hindering the SEC’s enforcement capability. In recognition of this,
we commit to implementing initiative 33 (I33), which is intended to address this weakness.

We recognize that one of the principal impediments to the effective enforcement of securities laws and
regulations in Bangladesh is the court system itself. Cases may drag on for years and sometimes dec‐
ades in the court system. There were reportedly a large number of securities cases pending in the court
system as today, some of which stem from the stock market crash of 1996. Part of the problem is that
ordinary court dockets are seriously overcrowded, resulting in cases not being heard for months or even
years. A second part of the problem is that defendants can sabotage the enforcement process by filing
endless appeals. Initiative 40 will insure the establishment of a specialized Capital Market Tribunal
(CMT) that is appropriately constituted to ensure that its jurisdiction, functioning, status, the selection
and training of judges, and its appeal procedures would facilitate the timely and effective adjudication of
securities cases and help to improve the effectiveness of the SEC’s enforcement process.

Two factors significantly impede the SEC’s ability to sanction auditors who are not effectively monitoring
issuers of securities. First, the SEC’s efforts to discipline auditors pursuant to 12(b) (3) of the SEC 1987
Rules have been frustrated by the requirement to refer disciplinary actions against auditors to the Insti‐
tute of Chartered Accountants of Bangladesh (ICAB). A Financial Reporting Act (FRA) has been under
discussion for the better part of the last decade, and we recognize that its adoption is long overdue. Ini‐
tiative 41 is intended to address this matter. Second, the SEC does not have an Office of Chief Account‐
ant; an office which can monitor the performance of accountants who practice before the SEC (i.e. who
prepare and audit the financial statements of issuers of securities), and sanction them for poor perform‐
ance. Initiative 46 is intended to address this matter.

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2.2.9 Market Development and Promoting Education & Understanding
The SEC is mandated by law and by its own policy to actively promote the development of Bangladesh’s
capital markets and to contribute to the education and understanding of capital markets with respect to
the community it regulates as well as the broader general public. It presently does this through four
principal means – through publishing an Annual Report; through its website; through its investor educa‐
tion programs; and through public statements such as press releases, speeches at industry events, etc.
The SEC’s Annual Report is informative and useful albeit lagging real‐time events considerably; its web‐
site is considerably inferior to those of other regional financial regulators with respect to organization,
content, ease of use, etc.; its investor education program is not well‐targeted or actively promoted; and
the effectiveness of its public statements in promoting understanding and education is limited.

An Initiative is planned to develop a comprehensive, well‐designed, well‐coordinated and well‐executed

public information and education program which incorporates at least two key elements: A completely
revamped website with the objective of making it one of the primary vehicles for executing the SEC’s
mandate concerning promoting understanding and education of the securities markets; and a com‐
pletely revamped investor education program, potentially with significant involvement of the Bangla‐
desh Institute for Capital Markets (BICM).

Financial education deals with information and learning. It is essential to help people of the country to
better manage their financial life and favorable choices that will contribute to increase their well‐being
too. Financial education should go hand‐in‐hand with financial inclusion. If mass people do not have fi‐
nancial literacy, they will not be interested to the formal financial system and if they come forward
without financial literacy, there is every possibility that they will not be able to get the benefits.

Financial education should be started from the school level to make it effective. To include the financial
education in our text curriculum, a national policy may be taken. Organisation for Economic Co‐
operation and Development (OECD) started their campaign for financial education since 2008, which has
stressed to adopt ‘National Policy for Financial Education’ by every member country and to start finan‐
cial education from school level.

2.2.10 Organizational Challenges

The SEC’s present organizational structure fragments authority and responsibility, separates closely re‐
lated functions that would be better coordinated if reporting to the same Member, and requires six of
the seven Executive Directors to report to two different Members. As constituted, it sometimes, creates
possible conflicts, does not allow the SEC to take advantage of natural synergies, and hinders coordina‐
tion and consistency of policies. Initiative 14, an initiative to simplify and consolidate the organizational
structure, is intended to address this problem.

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A longer range organizational enhancement that would encourage the development of a strong and in‐
dependent professional executive staff and further insulate the SEC from political influence is to en‐
hance the executive role and responsibilities of the Executive Directors and to transition the role of the
Members/ Commissioners to that of a policy‐making, deliberative body. Under this structure, the Mem‐
bers/Commissioners would set policy, hear/adjudicate cases, and respond to staff initiatives and rec‐
ommendations. Executive Directors, rather than Members/Commissioners would have full responsibility
for the day‐to‐day operation of the various SEC departments.

Finally, we recognize the crucial importance of the SEC’s integrity assurance programs ‐ i.e. the meas‐
ures the SEC has in place for detecting and deterring misconduct by SEC Members and staff and the ac‐
tions taken to detect and deter such conduct – to the integrity of the markets and to the confidence of
market participants. The business of regulating the securities markets is complex and this complexity
will only increase in the future as the market develops and becomes more diverse. These changes will
also create new ethical challenges for the SEC. It is absolutely necessary that the SEC have a central set
of guiding principles to act as a legal and ethical compass for its staff and Members. The present SEC
Code of Conduct is incomplete. Therefore, we commit to undertaking a comprehensive Vulnerability
Assessment (VA) to assess where the vulnerabilities for misconduct lie and the effectiveness of existing
control mechanisms. Based on this assessment, a strategic analysis of the problem will be formulated
and a range of programs will be identified and implemented to address the issue of integrity in a cus‐
tomized and effective way (i.e. a comprehensive Integrity Assurance Program).

2.3 Bond Market Initiatives

A well‐functioning domestic debt market is essential to the efficient allocation of capital to support rapid
and sustainable growth. By facilitating the effective use of domestic savings, it reduces dependence on
external borrowing for government and corporations. Bond financing is generally less expensive than
commercial bank loans and can be structured to meet the needs of institutional investors. While this is
generally recognized, the establishment of such markets has received inadequate attention in many
countries, and Bangladesh is no exception.

2.3.1 Government Bond Market Initiatives

We recognize that private/corporate bond markets depend crucially upon a well‐functioning govern‐
ment bond market. A well‐developed government benchmark yield curve that accurately reflects the
cost of funds at different borrowing horizons; price discovery about inflation prospects and other mac‐
roeconomic fundamentals is indispensable for pricing of private sector debt instruments. Studies have
shown that in those emerging markets that do not have efficient government yield curves, the corporate
bond markets are very small.

Since it is widely recognized that the development of private bond markets depends critically on the un‐
fettered, market‐driven operation of government securities markets, we will support a number of initia‐
tives that focus on this subject and are designed to stimulate the development of a reliable risk free
yield curve.

Page | 12
We recognize that when interest rates on government securities are suppressed, financial institutions
are compelled to purchase government securities at a lower than market‐determined yield, and secon‐
dary markets lack transparency, the government yield curve is not able to signal the true level of risk‐
free rates in the economy or accurately reflect the cost of funds at different borrowing horizons, infla‐
tion prospects and other macroeconomic fundamentals. In such a situation, pricing of corporate bonds
becomes an exercise in uncertainty which significantly impedes the development of corporate bond
markets. SEC is aware that Bangladesh Bank is taking measures to facilitate establishment of a reliable
reference “benchmark” yield curve.

2.3.2 Corporate Bond Market Initiatives

A second set of initiatives will focus on the corporate bond markets and are designed to reduce the
costs and uncertainties associated with issuing corporate bonds and to raise market awareness. We rec‐
ognize that one of the significant impediments to the issuance of corporate bonds has been the high
level of interest rates throughout the economy.

Another significant impediment to issuing corporate bonds has been the issuance process itself. Long
delays in the approval/registration process often result in changes in market conditions, or in the needs
of the issuer which lead to a withdrawal of the issuance application and a failed issuance effort. The
cost of issuance is also comparatively high in Bangladesh, some of which is undoubtedly attributable to
the length of time it takes for approval. Initiatives 48‐49 are intended to address these problems.

Finally, as bonds are comparatively complex securities both from the perspective of issuers as well as
investors, we are committing to undertake a series of “road shows”, perhaps jointly sponsored by the
SEC and the private sector, that may be beneficial in raising awareness of the intricacies of bonds and
bond markets. Initiative 50 is intended to address this issue.

Table 3 – Bond Market Development Initiatives

Responsi‐
I# Initiative Time Frame
ble Party
I43 Publish anonymized results of trading in T‐Bills & T‐Bonds Short Term BB
I44 Increase issuance on shorter end of maturity spectrum Short Term BB &MoF
I45 Reduce devolvement government debt * Immediate – BB &MoF
Short Term
I46 Monitor effect of DOS Circular No. 02 and consider further measures to stimulate trading Immediate – BB
of government securities as required Short Term
I47 Adopt a policy of creating liquid benchmark issues Short Term MoF& BB
I48 Reduce and eventually eliminate fiscal deficits Short – Long MoF
Term
I49 Develop separate clear and comprehensive rules for issuing corporate bonds Short – Me‐ SEC
dium Term
I50 Develop streamlined regime for “private issuance” of corporate bonds to qualified inves‐ Short Term SEC
tors *
I51 Develop and implement a market awareness‐raising campaign for corporate bonds Medium Term SEC

Page | 13
2.4 Financial Market Infrastructure Initiatives
We recognize that while the current clearing, settlement and custody processes in Bangladesh’s capital
markets work for the current level of market development, these processes only work as a result of a
number of workarounds that reduce efficiency and increase risk. We further recognize that the current
infrastructure does not provide an adequate platform for future market development, and that without
reform, the development of the markets will be held back. Five areas of weakness are recognized,
namely:

• Duplication of clearing and settlement infrastructure at DSE and CSE;

• Lack of DVP for indirect market participants;

• The need for participants to provide cash and securities 2 days ahead of settlement date;

• The payment of cash dividends from issuers to end investors, rather than flowing through the
depository, causing delay, uncertainty and inefficiency; and

• Lack of 'straight through processing' (STP), leading to manual rekeying of orders and file trans‐
mission, and increasing operational risk.

2.4.1 Duplication of clearing and settlement functions

Clearing and settlement is provided by each of Bangladesh’s two exchanges, which send provisional and
final securities settlement instructions to the Central Depository of Bangladesh Limited (CDBL) and man‐
age cash transfer at the paying banks. There is, thus, duplication of systems, staffing, risk management,
and cost. We recognize that fragmented clearing and settlement increases risk, holds back enhance‐
ments and prevents establishment of new services such as a central counterparty (CCP). We further rec‐
ognize that the creation of a single settlement organization allows the netting of cash and securities ob‐
ligations (e.g. a participant may be long on one exchange and short on another), and that this makes for
more efficient use of resources and increases arbitrage opportunities, leading to more efficient markets
overall. It also facilitates the eventual introduction of a central counterparty system (CCP), which effec‐
tively eliminates settlement risk, provides trading anonymity, and makes settlement operations more
efficient.

2.4.2 Lack of delivery‐versus‐payment (DVP) for indirect market participants

The current process in Bangladesh provides a quasi‐DVP between direct market participants (although it
does not correspond to the BIS models). However, DVP with indirect participants is not possible. This is
because custodians and other institutions are not participants in the stock exchange clearing processes,
which is the only process that co‐ordinates both the cash and securities elements of settlement. There‐
fore movements between broker and custodian can only be made on a free of payment (FOP) basis, not
DVP. Under the current system, either investors (and their custodians) must take broker risk or the bro‐
ker must pre‐fund for 1‐2 days. This makes trading more costly and puts pressure on the settlement
timetable, as custodians, for example, wait for confirmation of receipt of cash before releasing securi‐
ties. To achieve true DVP, cash and securities settlement need to be securely linked. We recognize that
this is most easily done if settlement of cash and securities are controlled by the same entity.

Page | 14
2.4.3 The need for brokers to provide cash and securities two days ahead of settlement date
For purchases, the buying broker must provide cash to the stock exchange clearing house on T+1; for
sales, the selling broker must ensure that securities are available at the CDBL by T+1. The need to pro‐
vide cash and securities 2 days in advance of settlement date means that (i) cash is inefficiently used,
and (ii) turnaround trades, where the same security is bought and sold for the same settlement date, are
not possible unless there is an existing balance in that security. We recognize that both of these factors
inhibit trading and hence lead to lower market liquidity and efficiency.

2.4.4 Lack of centralized cash dividend payments

At present, issuers must make all cash dividend payments directly to investors or to their agents. We
recognize that it would be more efficient for the CDBL to make these dividend payments, as it would be
better equipped than most issuers to process these payments in a timely manner. This would also re‐
duce the burden on issuers who would only need to make a single payment to the CDBL for all their de‐
materialized shares. We further recognize that this method is overwhelmingly preferred by most market
participants.

2.4.5 Lack of straight‐through processing (STP)

Presently STP in trading and settlement does not exist in Bangladesh. Thus data in one system must be
rekeyed into another system, or files must be manually sent from one system to another. The key objec‐
tive of STP is to avoid the need for human involvement in processing, as this can be costly, time‐
consuming and error prone. In Bangladesh, broker orders must be manually rekeyed into the stock ex‐
change systems. After the trading session, a file of settlement instructions must be sent manually by the
exchanges to CDBL.

Initiatives 54‐56 are intended to address the above‐mentioned weaknesses in Bangladesh’s financial
market infrastructure.

In the year ended 30 June 2012, Central Depository Bangladesh Limited (CDBL) had operating income of
BDT 1,995 million against operating and administrative expenses of only BDT 107 million. The big dis‐
crepancy between operating income and expenses suggests that fees may be higher than they need to
be. Initiative 57 is to review and rationalize the CDBL’s fees is intended to address this issue.

As the market in Bangladesh develops and more sophisticated and complex products are offered (i.e.
derivatives), consideration will be given to establishing a central counterparty (CCP). The main role of a
CCP is to become the legal counterparty to all qualifying trades shortly after they have been executed,
allowing trading participants to settle all trades with the CCP rather than with each other. We recognize
that a CCP reduces counterparty risk, provides trading anonymity, and improves the efficiency of the
overall settlement process. Initiative 60 is intended to address this issue.

Page | 15
Table 4 – Financial Market Infrastructure Initiatives

Responsi‐
I# Initiative Time Frame
ble Party
I52 Upgrade systems to improve participant connectivity Short Term CDBL
I53 Centralize and improve settlement guarantee and investor protection funds Short Term CDBL, SEC
I54 Centralize distribution of cash dividends (at CDBL) Short Term CDBL
I55 Consolidate the post‐trade clearing functions of the two exchanges under a separate Short Term
entity
I56 Enhance CDBL systems to enable DVP settlement between broker and investor Short– Me‐
dium Term
I57 Remodel the post‐trade process so that movement of cash and securities both take place Medium Term
on settlement date
I58 Review and rationalize CDBL fees Short Term SEC
I59 Evaluate costs and benefits of a central counterparty (CCP) for cash equity securities and Medium – SEC, CDBL
derivatives (when introduced) Long Term Exchanges

2.5 Initiatives to Expand the Institutional Investor Base

Institutional investor participation in Bangladesh’s capital markets has been limited. We recognize the
need to improve the enabling environment through the adoption of policies that stimulate the expan‐
sion of the institutional investor base specifically with respect to three types of institutional investors:
mutual funds, insurance companies, and pension and provident funds.

In the case of mutual finds we recognize that the legal and regulatory framework governing these col‐
lective investment schemes (CIS) may be overly restrictive and constraining and commit to undertaking
a comprehensive overhaul of the mutual fund rules to broaden participation (of investors as well as op‐
erators), increase the variety of mutual funds, improve protections for investors, and eliminate the pref‐
erential treatment of state‐sponsored mutual funds to remove distortions and create a level playing
field between state‐owned and private sector asset management companies. We also recognize the im‐
portance of establishing a mutual fund industry association to, among other things, promote the devel‐
opment and professionalization of the industry.

Initiatives 61‐64are intended to address the above‐referenced issues.

We also recognize that a 10% tax credit for investments in ICB open‐end mutual funds gives ICB an un‐
fair competitive advantage over the other (private sector) operators of open‐end mutual funds, and
commit to take appropriate measure which will help to promote a level playing field between ICB and
the private sector.

There are a very few pension and provident funds in existence in Bangladesh, and, to the extent they do
exist, they are largely unregulated. We recognize that Bangladesh trails its peers with respect to pen‐
sion reform, and that most of the countries in the region have already initiated the process of pension
reform. We commit to commencing a national conversation on pension policy that includes reforming
the public sector pension schemes and introducing pensions in the formal private sector, possibly in the
form of defined contribution plans. Over time, this would create large pools of liquidity that would, due
to the nature of the obligations, find their way to the capital markets.

Page | 16
One of the major impediments of our capital market is that our retail investors are not aware of the risks
associated with the market. If the investors are not aware of the risks, they often involve themselves
with risky speculations and rumor‐based decision making. As a result, not only the retail investors incur
huge losses, but it also damages the basic structure of the market, because our market is still dominated
by the retail investors. So, to retain them as well as to increase their participation, both financial educa‐
tion and financial inclusion are required.

Financial inclusion is required to bring mass people into the formal financial markets so that they can
enjoy the benefits of modern systems, safeguard themselves from deprivation and develop their savings
habits to contribute to the national economy. But at the same time, they should be protected from
competitions with bigger capitals, so small investors should be accommodated by institutional frame‐
work and provided with basic financial education.

Table 5 – Initiatives to Expand the Institutional Investor Base

Responsi‐
I# Initiative Time Frame
bleParty
I60 Require ICB Funds to comply with mutual fund rules concerning conflicts of interest Short Term SEC
I61 Adopt new legal/regulatory regime for mutual funds that broadens participation, allows Short ‐ Me‐ SEC
introduction of different types of mutual funds, strengthens investor protections, and dium Term
eliminates preferential treatment of state‐sponsored mutual funds
I62 Assist the mutual fund industry in structuring and registering a mutual fund association Short Term SEC
I63 Develop plan for achieving industry‐wide compliance with minimum capital require‐ Short Term IDRA
ments
I64 Amend IDRA Act to provide for independence of IDRA Short Term IDRA
I65 Adopt investment (and other) regulations as required by the IDRA Act 2010 and Insur‐ Immediate ‐ IDRA
ance Act 2010 Medium Term
I66 Acquire and implement an electronic data gathering and retrieval (EDGAR) system Short ‐ Me‐ IDRA
dium Term
I67 Begin a national discussion on pension policy to include reforming the public sector pen‐ Short ‐ Me‐ MoF
sion schemes and introducing pensions in the formal private sector dium Term
I68 Adopt a national pension policy Medium Term MoF
I69 Determine/allocate responsibility for regulating pensions Medium Term MoF
I70 Undertake reform of public pension plans/schemes Medium Term MoF,
Pension
Regulator
I71 Introduce defined contribution pension plans/schemes for the private sector Medium – Pension‐
Long Term Regulator

2.6 Initiatives to Promote Derivatives and Securitization

Asset securitization has been tried in Bangladesh with limited success. The current legal framework and
tax code make it difficult to achieve a “true sale” status in securitization transactions, and thus to
achieve “bankruptcy remoteness”, and to enable the removal of the securitized assets from the issuer’s
balance sheet, two of the principal objectives of asset securitization. Without these, issuers cannot
achieve the full effects and benefits of asset securitization.

Page | 17
We recognize that because of ambiguities in the law, asset securitization remains under a cloud of un‐
certainty, requiring a risk premium in the pricing of such transactions that makes them less attractive.
We commit to reform the legal regime for asset backed securities to allow for the “true sale” status of
assets transferred in connection with a securitization, and to remove the legal ambiguities with respect
to the “bankruptcy remoteness” of such transactions (Initiative 69). We also commit to revising the tax
code to recognize the “pass‐through” nature of such transactions, and to remove stamp duties (or sub‐
stantially reduce them) on the transfer of assets from the originator to the SPV. Finally, we recognize
that asset‐backed securities are complex instruments and that potential issuers and investors alike need
to be informed of the advantages and drawbacks of issuing and investing in them. We commit to under‐
taking an awareness‐raising campaign, perhaps jointly between the SEC and the private sector.

While derivatives tend to improve the functioning of the price discovery mechanism and provide hedg‐
ing and risk management tools to financial and non‐financial firms, we recognize that their introduction
should be undertaken only after their respective underlying cash markets have achieved a certain de‐
gree of maturity, otherwise, they are likely to have a destabilizing effect on the markets. Some of the
issues that will need to be addressed for the introduction of derivatives in Bangladesh include the legal
framework and regulatory structure governing derivatives markets, the types of derivatives that are
likely to be successful in Bangladesh, the conditions under which their introduction would be advisable,
and the actions that can be taken to prepare for their introduction. As starting point, we will commission
(initiative 65) a study to measure the potential demand for three basic types of derivatives (financial,
equity and commodity).

Once it is determined which types of derivatives are likely to succeed and a plan is devised to sequence
their introduction, a decision will be made about regulatory structure. Some of the questions that will
be considered in this regard are:

• Should there be a specialized regulator or should the task be assigned to existing regulators?

• If the task is assigned to existing regulators, should all derivatives be regulated by a single regu‐
lator or should there be multiple regulators?

• If multiple, how should the division of responsibilities be made – by instrument type, or by type
of regulated entity?

Once the matter of regulatory responsibility is determined, we will ensure that the responsible regulator
will undertake to develop and oversee the adoption of comprehensive, specialized dedicated legal
framework to govern derivatives. We will also ensure that the tax authorities will recognize the special
nature of hedging transactions and will allow for income/losses from a hedge to be offset with in‐
come/losses from the asset it was employed to protect, and that the accounting profession will be pre‐
pared for hedge accounting under IAS 39.

Page | 18
Table 6 – Initiatives to Promote Derivatives and Securitization

Responsi‐
I# Initiative Time Frame
ble Party
I72 Commission study to estimate the demand for 3 basic types of derivative instruments – Medium Term SEC & BB
Financial (i.e. interest rate, currency), Equity (i.e. index, single stock), and Commodity
(i.e. rice, jute, tea)
I73 Determine regulatory structure & assign responsibility ‐ appoint high‐level commission Medium Term SEC & BB
to study the matter and make recommendations
I74 Adopt a comprehensive, specialized, dedicated legal framework for derivatives Medium – Desig‐
Long Term nated
Regulator
I75 Adopt provisions/amendments to the tax code to address/facilitate introduction of de‐ Medium – NBR
rivatives Long Term
I76 Conduct readiness assessment for hedge accounting in accordance with IAS/BAS 39 and Medium – ICAB
develop and implement awareness campaign for accountants and auditors Long Term
I77 Develop and implement campaign to raise awareness of derivatives among potential Medium – Desig‐
users and market practitioners Long Term nated
Regulator
I78 Reform legal/regulatory regime for ABS to include, “true sale” status of transferred re‐ Medium Term SEC & BB
ceivables, SPV as “pass‐through” entity, “bankruptcy remoteness” of transaction.
I79 Develop and implement campaign to raise awareness of ABS among potential issuers and Medium Term SEC, BB
investors &Pvt Sec‐
tor

2.7 Taxation Initiatives

We recognize that the taxation of financial instruments and institutions in Bangladesh will need to move
toward best international practice. At 37.5%, the corporate tax rate in Bangladesh is one of the highest
in the world. To further add to the tax burden, inter‐company dividends are taxed, which may result in
tax rates as high as 70%. We recognize that this creates strong incentives for companies to underreport
income to evade taxes, and that the resulting inaccuracies in financial information may be the single
strongest disincentive to investing in the capital markets in Bangladesh.

Financial institutions (FIs) are taxed at an even higher flat rate of 42.5% (a 5% surtax) which may be hin‐
dering financial intermediation in Bangladesh. Currently there is a 3% tax on “IPO premiums”. This tax is
imposed on the difference between the face value and the sale price of the IPO. This tax was introduced
in the Finance Act of 2010 and is administered by the SEC.

There is also a transaction tax on securities of 0.1% (0.05% on the seller; 0.05% on the buyer). This is an
ad‐valorem tax and is levied as a percentage of the total value of the transaction (both on the sale and
the purchase) of stocks and bonds. There are also a variety of taxes (in the form of stamp duties) that
are attracted by asset securitizations which discourage the sale of assets as part of a securitization. We
recognize that transactions taxes may discourage financial innovation and secondary trading of financial
instruments and are not consistent with best international practice.

We are committed to the elimination of multiple taxation of corporate income/dividends , the phasing
out of the 5% surtax on financial intermediation , the elimination of the 3% tax on “IPO premiums”, the

Page | 19
removal of the 0.1% ad valorem transaction tax on bonds and the elimination or substantial reduction
of stamp duties on transfers of assets in connection with securitizations .

Finally, a 10% tax credit for investments in ICB open‐end mutual funds gives ICB an unfair competitive
advantage over the other (private sector) operators of open‐end mutual funds. Initiative would be taken
to ensure a level the playing field between ICB and the private sector.

Table 7 – Taxation Initiatives

Responsi‐
I# Initiative Time Frame
ble Party
I80 Eliminate 3% tax on “IPO Premiums” * Short Term MoF/NBR
I81 Remove tax credit for all tax‐advantaged mutual (i.e. ICB open‐end) funds Short Term MoF/NBR
Short – Me‐
I82 Eliminate multiple taxation of income/dividends MoF/NBR
dium Term
*
I83 Eliminate transaction tax on bonds Short Term MoF/NBR
Eliminate or substantially reduce stamp taxes on transfers of assets (e.g. receivables) in
I84 Short Term MoF/NBR
connection with asset securitizations *
Eliminate surtax on financial intermediation – reduce corporate income tax rate for FIs to
I85 Medium Term MoF/NBR
general CIT level of 37.5%

Page | 20
Appendix 1 –Capital Market Development Master Plan Matrices

Matrix 1: Implementation Arrangements

Imme‐
Short Term Medium Term Long Term
I# Working Plan of SEC diate
2012 2013 2014 2015 2016 2017 2018‐2022
01 Implement structure to in‐
clude authorization, account‐
√ √
ability , staffing and resource
allocations
02 Implement processes to in‐
clude monitoring, evaluation
√ √ √ √ √ √ √
(M&E), reporting of progress,
and amending implementa‐
tion plan to account for
evolving circumstances
03 Appoint/engage and author‐
ize Implementation Leader
√
and Team

04 Appoint Specialized/Expert
Working Committees with
√
considerable private sec‐
tor/industry participation

05 Develop and launch imple‐

mentation (public account‐
√
ability) website

06 Monitor, evaluate and report

on progress
√ √ √ √ √ √
07 Re‐evaluate master plan/road
map and modify based on
√ √ √ √ √
lessons learned from M&E

Matrix 2: Legal and Regulatory Initiatives

Imme‐
Short Term Medium Term Long Term
I# Working Plan of SEC diate
2012 2013 2014 2015 2016 2017 2018‐2022
08 Develop and implement (SEC)
an awareness‐raising program
√ √
to sensitize key MOF officials
to the crucial importance of
SEC independence
09 Amend (Parliament) Sections
3 of the SEC Act to Enhance
√
SEC independence
10 Amend (Parliament) Sections
5 of the SEC Act to Enhance
√
SEC independence

11 Amend (Parliament) Sections

9 of the SEC Act to Empower
√
SEC to appoint requisite
number of staffs

21 | P a g e
 Imme‐
Short Term Medium Term Long Term
I# Working Plan of SEC diate
2012 2013 2014 2015 2016 2017 2018‐2022
12 Amend (Parliament) Sections
13 of the SEC Act to Empower
√
SEC to prepare their own
budget without Ministry’s
approval
13 Amend (Parliament) Sections
16 of the SEC Act to restrict
√
Govt’s power to give direction
to SEC except policy matters
14 Restructure organizational
structure and pay structure at
√ √
least to make equivalent to
Central Bank’s pay structure

Institute a program (SEC &

BB) and establish a forum for
√
15
high level coordination of the
*
SEC and BB
16 Execute MOU between SEC
and BB on the collection and
√
sharing of supervisory infor‐
mation

17 Authorize (MoF/MoFA) SEC to

enter MOUs with foreign
√
regulators within parameters

18 Activate (SEC & BB) “Joint

Inspection Team” and con‐
√
duct joint inspections of
jointly‐regulated institutions
(e.g. merchant banks, etc.)

19 Develop (SEC & BB) uniform

margin standards applicable
√
*
to entire financial sector
20 Codify (SEC) the securities
laws
√ √ √

21 Present (SEC) laws, rules,

regulations and notifications
√ √ √
in English as well as Bengali
22 Simplify (SEC) organizational
structure and combine re‐
√ √ √
lated functions into one of
four departments
23 Establish (SEC) an office of
Chief Counsel and recruit
√ √ √
attorneys

24 Undertake (SRMIC/SEC) in‐

tensive training in stock ex‐
√ √
change oversight
 Imme‐
Short Term Medium Term Long Term
I# Working Plan of SEC diate
2012 2013 2014 2015 2016 2017 2018‐2022
25 Begin testing (SEC/BICM)
Authorized Representatives’
√ √ √
proficiency and Principals’
knowledge of responsibilities
as a basis for licensing
26 Demutualization of Exchanges
√ √
27 Adopt (SEC) rule to hold sen‐
ior management of interme‐
√ √ √
diaries responsible for failure
to supervise
28 Publish (SEC) guid‐
ance/guidelines for IPO Appli‐
√ √
cations

29 Acquire (SEC) and implement

an electronic data gathering
√ √ √
and retrieval (EDGAR) system

30 Conduct (SEC) comprehensive

inspections of the exchanges
√ √ √
and plans to protect t inves‐
tors given new incentive
structure created by demutu‐
alization

31 Authorize (MoF) SEC direct

access to banking records
√
32 Increase (SEC) number of
non‐broker inspections (e.g.
√ √ √
merchant banks, portfolio
managers, etc.)
33 Adopt (SEC) market conduct
rule for intermediaries ad‐
√ √ √
dressing account statement,
internal controls, KYC, and
compliance monitoring by
third parties
34 Begin (SEC) strict enforce‐
ment of laws against insider
√
“short swing” profits
35 Revise (SEC) the Takeover
Rules
√ √
36 Develop (SEC) better‐
calibrated risk‐based capital
√ √ √
*
requirements
37 Begin the transition to risk‐
based supervision and utiliza‐
√ √ √
tion (SEC) of early warning
systems to minimize risk of
failure of an intermediary
38 Discontinue (SEC) practice of
disclosing investigations
√
 Imme‐
Short Term Medium Term Long Term
I# Working Plan of SEC diate
2012 2013 2014 2015 2016 2017 2018‐2022
39 Enhance (SEC) investigation
and enforcement capacity by
√ √ √
recruiting and training law‐
yers and investigators
40 Establish (Parliament) a spe‐
cialized “Capital Market Tri‐
√
*
bunal” (CMT)
41 Adopt (Parliament) a Financial
Reporting Act (FRA) *
√ √
42 Develop (SEC) and implement
a comprehensive, coordi‐
√ √
nated public information and
education program
43 SEC proposal to the Govt. to
adopt “National Policy on
√ √
Financial Literacy”

44 Introduce (MOF/MOE) finan‐

cial literacy course from
√ √ √
school/college level

45 Transition (SEC) Mem‐

bers/Commissioners from
√ √ √ √
operational to policy focus

46 Establish (SEC) the Office of

Chief Accountant and recruit
√ √ √
& train accountants *

47 Conduct (SEC) a vulnerability

assessment
√ √ √

Matrix 3: Bond Market Initiatives

Imme‐
Short Term Medium Term Long Term
I# Working Plan of SEC diate
2012 2013 2014 2015 2016 2017 2018‐2022
48 Develop (SEC) streamlined
regime for “private issuance”
√
of corporate bonds to quali‐
fied investors *

49 Develop (SEC) separate clear

and comprehensive rules for
√ √
issuing corporate bonds

50 Develop (SEC & private stake‐

holders) and implement a
√ √ √ √ √
market awareness‐raising
campaign for corporate bonds
Matrix 4: Financial Market Infrastructure Initiatives
Imme‐
Short Term Medium Term Long Term
I# Working Plan of SEC diate
2012 2013 2014 2015 2016 2017 2018‐2022
51 Upgrade (CDBL) systems to
improve participant connec‐
√ √ √
tivity

52 Centralize and improve set‐

tlement guarantee (CDBL)
√ √ √
and investor protection (SEC)
funds

53 Centralize distribution of cash

dividends (at CDBL)
√ √ √
54 Consolidate the post‐trade
clearing functions of the two
√ √
exchanges under a separate
entity, i.e. clearing corpora‐
tion

55 Enhance CDBL systems to

enable DVP settlement be‐
√ √ √
tween broker and investor

56 Remodel the post‐trade

process so that movement of
√ √ √ √
cash and securities both take
place on settlement date

57 Review (SEC) and rationalize

CDBL fees
√ √
58 Install a state of the art sur‐
veillance software at SEC with
√
online data feed from stock
exchanges & depository

59 Install state of the art surveil‐

lance software at stock ex‐
√
changes
60 Evaluate (SEC jointly with
D/CSE & CDBL) costs and
√ √
benefits of a central counter‐
party (CCP) for cash equity
securities and derivatives
(when introduced)
Matrix 5: Institutional Investors Initiatives

Imme‐
Short Term Medium Term Long Term
I# Working Plan of SEC diate
2012 2013 2014 2015 2016 2017 2018‐2022
61 Ensure level playing field for
all AMC and Mutual Funds
√ √ √
(for both Govt. and private
sectors)

62 Adopt (SEC) new le‐

gal/regulatory regime for
√ √ √
mutual funds that broadens
participation, allows introduc‐
tion of different types of mu‐
tual funds, strengthens inves‐
tor protections, and elimi‐
nates preferential treatment
of state‐sponsored mutual
funds
63 Assist (SEC) the mutual fund
industry in structuring and
√ √ √
registering a mutual fund
association
64 Chanelize retail investors into
institutional means (Mutual
√ √ √
Fund/Portfolio Investment)

Matrix 6: Derivatives and Securitization Initiatives

Imme‐
Short Term Medium Term Long Term
I# Working Plan of SEC diate
2012 2013 2014 2015 2016 2017 2018‐2022
65 SEC & BB to study to estimate
the demand for 3 basic types
√ √ √ √
of derivative instruments –
Financial (i.e. interest rate,
currency), Equity (i.e. index,
single stock), and Commodity
(i.e. rice, jute, tea)
66 Determine (SEC & BB) regula‐
tory structure & assign re‐
√ √ √ √
sponsibility ‐ appoint high‐
level commission to study the
matter and make recommen‐
dations
 Imme‐
Short Term Medium Term Long Term
I# Working Plan of SEC diate
2012 2013 2014 2015 2016 2017 2018‐2022
67 Adopt (regulator) a compre‐
hensive, specialized, dedi‐
√ √ √ √ √ √
cated legal framework for
derivatives
68 Develop (designated regula‐
tor & private sector) and im‐
√ √ √ √ √ √
plement campaign to raise
awareness of derivatives
among potential users and
market practitioners
69 Reform (Govt.) le‐
gal/regulatory regime for ABS
√ √ √ √
to include, “true sale” status
of transferred receivables,
SPV as “pass‐through” entity,
“bankruptcy remoteness” of
transaction.

70 Develop (SEC, BB & private

sector) and implement cam‐
√ √ √ √
paign to raise awareness of
ABS among potential issuers
and investors