The securities regulator has set certain criteria for private limited companies intending to be a sponsor of any mutual fund, as part of its mutual fund sector reform initiatives.
According to a recent directive by the Bangladesh Securities and Exchange Commission (BSEC), a private company must have a minimum net worth of Tk10 crore to become a sponsor of a mutual fund.
A sponsor provides the initial capital for a mutual fund, enabling it to attract further investment from investors in a regulated manner. The sponsor provides the initial capital, the asset manager oversees the mutual fund’s assets, and the trustee committee acts as the board to govern the mutual fund’s operations.
The custodian, on the other hand, is responsible for ensuring that the securities held by mutual funds are safely kept under its custody, while the auditor verifies the authenticity of the financial statements published by the asset manager and approved by the trustee.
The BSEC, in its recent directive, also stated that the amount a sponsor commits to subscribe to a mutual fund must be backed by an equivalent amount in cash or readily liquidatable assets. Regulatory officials said this requirement will prevent sponsors from failing to provide the committed funds on time.
To ensure the quality of a sponsor company, the regulator also mandated that a private limited company must have at least three directors on its board, including one independent director.
Of course, the sponsor company itself, or any of its directors, cannot be a loan defaulter according to the Credit Information Bureau (CIB) report of the Bangladesh Bank.
If the sponsor company or any of its directors is associated with money laundering or terrorism financing activities, the company will be disqualified from being a mutual fund sponsor.
The directive will have immediate effect, according to the BSEC, which has already initiated a major reform in the country’s mutual fund sector.
Unlike in peer markets, mutual funds in Bangladesh have been relatively small compared to the size of the overall equity market.
According to EBL Securities research in 2023, the asset under management (AUM) of the mutual fund industry was 0.24% of the GDP in Bangladesh, which was 1.3% in Pakistan, 16.2% in India, 54% in Malaysia, and over 195% in the USA.
A February 2024 report by IDLC Research suggests that total AUM in Bangladesh was slightly over Tk16,000 crore that was being managed under 125 mutual funds. The AUM was not even 3% of the total market capitalization in the Dhaka Stock Exchange then.
Also, the AUM compared to the total band deposits is extremely low in Bangladesh. According to the EBL Securities report last year, AUM in Bangladesh was 0.01%, which was 6.8% in Pakistan and 20.8% in India.
Experts blame lack of opportunities for brilliant fund managers, fraudulent acts by a handful of asset managers amid a lack of fiduciary responsibilities, among a few others, together for the sorry state of the sector in Bangladesh.
BSEC officials said that for expanding the sector, the regulator has been welcoming more qualified professionals and firms to enter the industry and earn and retain investors’ trust.
The number of asset management firms has already risen to 66 in Bangladesh.