Paid-up capital of a significant number of brokerage firms of Dhaka Stock Exchange (DSE) still remain poor compared to stipulated capital requirements set to avert the risk of doing business.
The Bangladesh Securities and Exchange Commission (BSEC) enacted the risk based rules in May 29, 2019 setting minimum capital requirement ranging between Tk 50 million and Tk 150 million for the stock brokers in accordance with the nature of their operations.
The BSEC set the minimum capital requirements following the bitter experience of 2010-11 stock market crash for which lenders were blamed for disbursing margin loans beyond their capacity of controlling risks.
The conditions of the Asian Development Bank (ADB) and the practices of developed countries were taken into account while formulating the risk-based supervision rules.
Of 250 brokerage firms, the paid-up capitals of six are still below Tk 10 million, while 15 brokerage firms have paid-up capital worth Tk 10 million each.
According to DSE information, 93 brokerage firms are doing business with paid-up capitals ranging from above Tk 10 million to Tk 50 million each.
The paid-up capitals of the remaining brokerage firms are above Tk 50 million each.
DSE director Minhaz Mannan Emon said the stock brokers have no way of doing business bypassing the capital adequacy set by the securities regulator.
"Extension of the existing timeframe for fulfilling the capital adequacy requirements means that stock brokers having inadequate capital base are yet to be non-compliant," Mr. Emon said.
He said the stock brokers ought to have fulfilled the capital adequacy requirement set by the regulator.
"The stock brokers have kept their funds, received from the strategic partner, in their equities without expanding the capital base," said Mr. Emon.
He also said the stock brokers must expand capital base if the regulator goes to hard line. Preferring anonymity, a shareholder of the premier bourse DSE said many stock brokers have not expanded the paid-up capital despite they got Tk 36 million each selling shares to the strategic partner.
"They have also realised profits over the years. But they did not expand their paid-up capital," the shareholder said.
He said many existing shareholders are opposing the proposed paid-up capital of Tk 30 million set for new TREC (trading rights entitlement certificate) holders.
"But those firms are still doing business with a paid-up capital worth below Tk 10 million.
"The issue of new TREC should not be mixed up with the shares of primary members. New TREC holders will not be allowed to purchase shares of the stock exchange," said the shareholder, adding that the opportunity should be created for the aspirant TREC holders for the sake of the stock exchange.
In this regard, DSE director Mr. Emon said the paid-up capital of Tk 30 million proposed for new TREC holder is very much lower compared to comprehensive value of the assets, shares and market value of the TREC held by primary shareholders.
According to Bangladesh Securities and Exchange Commission (Risk Based Supervision) Rules, 2019, a general stock broker must have a minimum regulatory capital worth Tk 50 million as base requirement.
Regulatory capital means the minimum amount of total capital (sum of core capital and supplementary capital) requirement that the intermediaries are required to main on continuous basis.
A stock broker having involvement with wholesale trading will have an additional capital worth Tk 30 million over the base requirement.
A stock broker which deals with margin financing will have an additional capital worth Tk 50 million over the base requirement.
The depository participant and clearing participant need no additional requirement over the base requirement.
A stock dealer will have an additional Tk 20 million over the base requirement, but minimum Tk 20 million is required if the entity works as stock dealer only.
And a full functional stock broker and stock dealer will have a minimum regulatory capital worth Tk 150 million.
The stock brokers will have to fulfill the capital adequacy requirements within two to three years from the effective date of the rules.
Bangladesh Securities and Exchange Commission (Risk Based Supervision) Rules, 2019 came into effect from May 29, 2019 through a gazette notification.
The president of DSE Brokers Association (DBA) Sharif Anwar Hossain said the brokerage firms are trying to fulfill the capital adequacy requirement set by the securities regulator.
"Many stock brokers were not able to get support from their business in last few years due to persistent bearish trend of the capital market. That's why, many stock brokers are yet to fulfill the capital adequacy requirements," Mr. Hossain said.
The securities regulator has already asked the stock brokers to submit a framework on their capital adequacy by June 30, 2020.
The DSE officials said the deadline of submitting the framework has been extended till December 31, 2020.
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