Private companies must have a net worth of Tk 10 million to sponsor investment funds

The securities regulator has set certain criteria for limited liability companies seeking to become sponsors of investment funds, as part of its investment fund sector reform initiatives.

As per a recent regulation of the Bangladesh Securities and Exchange Commission (BSEC), a private company must have a net worth of at least Taka 10 million to sponsor an investment fund.

The sponsor provides the initial capital for the investment fund, enabling it to attract further investment from investors in a regulated manner. The sponsor provides the initial capital, the asset manager oversees the investment fund’s assets, and the trust committee acts as a board that manages the operations of the investment fund.

The custodian, in turn, is responsible for ensuring that the securities held by the investment funds are kept safely in its custody while the auditor verifies the authenticity of the financial statements published by the asset manager and approved by the custodian.

The BSEC in its latest directive also stated that the amount that the sponsor undertakes to subscribe to the investment fund must be supported by an equivalent amount in cash or easily liquid assets. Regulatory officials said this requirement will prevent sponsors from failing to deliver the committed funds on time.

To ensure the quality of the sponsoring company, the regulator also mandated that the limited liability company must have at least three directors on its board, including one independent director.

Of course, as per the Credit Information Bureau (CIB) report of Bangladesh Bank, neither the sponsoring company itself nor any of its directors can be the defaulter on the loan.

If a sponsoring company or any of its directors is involved in money laundering or terrorist financing, that company will be disqualified from sponsoring an investment fund.

According to BSEC, which has already initiated a major reform in the country’s mutual fund sector, the directive will come into effect immediately.

Unlike markets with similar structures, mutual funds in Bangladesh are relatively small compared to the size of the overall stock market.

According to research by EBL Securities, in 2023, the assets under management (AUM) of the mutual fund industry accounted for 0.24% of Bangladesh’s GDP, while in Pakistan the figure was 1.3%, in India 16.2%, in Malaysia 54% and in the US over 195%.

A February 2024 report by IDLC Research suggests that the total AUM in Bangladesh was a little over Tk 16,000 crore, managed across 125 mutual funds. The AUM was not even 3% of the total market capitalisation on the Dhaka Stock Exchange.

Moreover, AUM as compared to total deposits in the band is extremely low in Bangladesh. According to a report by EBL Securities last year, AUM in Bangladesh was 0.01%, while in Pakistan it was 6.8% and in India 20.8%.

Experts blame lack of development opportunities for talented fund managers, frauds by a handful of asset managers, lack of fiduciary duties and several other factors for the sorry state of the sector in Bangladesh.

BSEC officials said that in order to expand the sector, the regulator is encouraging more qualified professionals and companies to enter the industry in order to gain and maintain investor confidence.

The number of asset management companies in Bangladesh has now increased to 66.