To avert withdrawal pressure, BSEC seeks 5-year extension for banks’ capital market fund

To avert withdrawal pressure as maturity looms, the Bangladesh Securities and Exchange Commission (BSEC) has urged the central bank to extend the tenure of banks’ special capital market investment funds by five years.

The capital market regulator requested the money market regulator last week, according to a letter obtained by The Business Standard.

The tenure for special funds of Tk200 crore per bank, formed in 2020 to enhance liquidity in the capital market, is scheduled to expire in December.

So far, over 30 banks are enjoying the central bank’s policy support outside their standard capital market exposure limits to invest in the capital market, according to Bangladesh Bank. 

However, neither the BSEC nor the central bank has confirmed how much money the banks have actually invested from these funds in the capital market, when asked by TBS.

Upon request from the capital market regulator amid an acute liquidity shortage and weakening investor confidence, the central bank has decided not to grant a blanket extension, said Arief Hossain Khan, spokesperson for Bangladesh Bank.

“Unlike before, the tenure of the special fund for banks will not be extended en masse. Instead, the central bank will consider individual bank extension requests, if they apply,” he said.

Noting that more than 30 banks are currently benefiting from the facility, he added that Bangladesh Bank will review applications on a case-by-case basis as they are submitted.

When asked how much banks have currently invested under this special facility, he said the exact figure was not immediately available.

To bolster liquidity in the capital market under a long-term plan, Bangladesh Bank initially permitted each scheduled bank in 2020 to form a dedicated Tk200 crore special fund for stock market investment, with a five-year tenure set to expire in February 2025.

Later, in response to requests from market stakeholders and persistent volatility, the central bank extended the fund’s facility until 31 December 2026. 

Not only the regulator, the DSE Brokers Association (DBA) also urged the central bank to extend the tenure of the special funds for five years for the stability in the market. 

A letter signed by BSEC Chairman Masud Khan on 29 October applauded the central bank’s role in providing policy support to boost institutional participation in the capital market dominated 90% by retail investors.

Market experiencing acute liquidity shortage: BSEC

In a letter to the governor of the Bangladesh Bank, the BSEC said the capital market is currently experiencing an acute liquidity shortage and weakening investor confidence.

“Global upheavals, combined with the constraints facing the domestic economy, have heightened uncertainty and discouraged fresh investment. In a market overwhelmingly dependent on retail participation, declining confidence and inadequate liquidity can reinforce each other, making recovery increasingly difficult,” the letter read.

“The BSEC has received numerous representations from market intermediaries and leading market professionals emphasising that renewal and enhancement of this facility are critical at this juncture,” it added.

Uncertainty over its continuation, together with the approaching expiry, risks further weakening confidence and discouraging both retail and institutional investment when such participation is particularly needed, it said.

The latter further stated that the present government accorded high priority to the revival of the stock market in its election manifesto. A timely decision to extend and enhance this facility would translate that commitment into a concrete policy measure.

It would send a credible signal to existing and prospective investors that the Government’s commitment is being supported by action, helping restore confidence and encourage renewed participation, it noted.

Against this background, the BSEC requested the BB to consider extending the special fund facility for a further five years, from 1 January 2027 to 31 December 2031 and enhancing the maximum fund size from Tk200 crore to Tk300 crore for each scheduled bank.

The BSEC said, “An early announcement, ahead of the existing expiry date, would reduce uncertainty and allow participating banks and intermediaries to plan their investments with greater confidence.

“It would also help avoid withdrawal pressures at a time that may result in substantial loss, when the market’s capacity to absorb them is limited.”