Technical Assistance Consultant’s Report7. The East Pakistan Stock Exchange Association Ltd. was...

Technical Assistance Consultant’s Report

Project Number: 36197; Technical Assistance Number: 4246 July 2007

Bangladesh: Financial Markets Governance Program (Financed by the ADB’s TA funding program)

Prepared by The International Securities Consultancy Limited, Singapore

In association with

The Aries Group Limited, USA

HB Consultants Limited, Bangladesh

For Finance Division, Ministry of Finance, Government of Bangladesh

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

TA No. 4246-BAN Preparing The Financial Markets Governance Program

Report on Demutualization and Merger of the Dhaka and Chittagong Stock Exchanges FINAL REPORT April 2006

The International Securities Consultancy Limited 9A, Carfield Commercial Building, 75-77 Wyndham Street, Central, Hong Kong

in association with

The Aries Group Limited

4905 Del Ray Ave. Suite 210, Bethesda, MD 20814, USA

and

HB Consultants Limited 3rd Floor, BTMC Building, 7-9 Kawran Bazar C/A, Dhaka-1215, Bangladesh

TA No. 4246-BAN: Preparing The Financial Markets Governance Program Report on Demutualization and Merger of the Dhaka and Chittagong Stock Exchanges

FINAL REPORT

ISC Strictly private & confidential

i April 2006

TABLE OF CONTENTS

ABBREVIATIONS ................................................................................................................................1

INTRODUCTION AND METHODOLOGY ......................................................................................2

BACKGROUND.....................................................................................................................................3 Background information on the exchanges........................................................................................3 Exchange Revenue Sources ...............................................................................................................6 Financial Analysis..............................................................................................................................8 Background to merger and demutualisation ....................................................................................11

MERGER..............................................................................................................................................13 Existing Market Structure ................................................................................................................14 The Benefits of Merger....................................................................................................................16

DEMUTUALISATION........................................................................................................................19 Benefits of demutualisation .............................................................................................................21 Benefits of demutualisation in the context of Bangladesh...............................................................22

Broadening Exchange ownership..............................................................................................23 Allowing Members the ability to realize the value of their assets ............................................23 Spreading ownership risk ..........................................................................................................24 Making the Exchange less susceptible to Members’ vested interests .......................................24

Regulatory Review Committee ........................................................................................... 24 Providing greater access to capital ............................................................................................25 Providing greater speed and flexibility in decision making ......................................................25 Diversifying into other markets and services ............................................................................25 Adopting clearer and simpler governance.................................................................................25 Having greater flexibility in negotiations with others...............................................................26 Bringing market discipline to bear upon management..............................................................26 Incentivising management.........................................................................................................26 Facilitate merger........................................................................................................................27

Risks associated with demutualisation.............................................................................................27 The Exchanges’ Views ....................................................................................................................29 The SEC’s View ..............................................................................................................................29 The Members’ View ........................................................................................................................29 The Institutional Opinion.................................................................................................................30

CONCLUSIONS AND RECOMMENDATIONS .............................................................................30 Merger..............................................................................................................................................30 Demutualisation ...............................................................................................................................31 Timetable .........................................................................................................................................31

SURVEILLANCE ................................................................................................................................31 Exchange Front-line Supervision.....................................................................................................31 SECAS.............................................................................................................................................33 Surveillance Recommendations.......................................................................................................34

Improved systems for surveillance monitoring .........................................................................34 Dealing with insider trading................................................................................................ 34 Dealing with front running.................................................................................................. 35 Dealing with market manipulation...................................................................................... 35


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Investigation monitoring systems..............................................................................................36 Remove duplication in surveillance ..........................................................................................36 SEC to acquire its own surveillance system..............................................................................36 Separation of surveillance and investigation.............................................................................36 Training .....................................................................................................................................37 Inter-Market Surveillance Unit .................................................................................................37 Review of exchange disciplinary and appeal procedures..........................................................37

Surveillance Costs............................................................................................................................37 APPENDIX A: VALUATION OF EXCHANGES............................................................................39

APPENDIX B: EXAMPLES OF UNIFICATIONS ..........................................................................43

APPENDIX C: TYPES OF MARKET ABUSE ................................................................................48

APPENDIX D: EXAMPLE SURVEILLANCE PROCEDURE ......................................................54

APPENDIX E: LIST OF PEOPLE MET...........................................................................................58

APPENDIX F: DEMUTUALISATION SITUATION IN INDIA AND PAKISTAN.....................60 Figure 1: Annual Turnover during the last 4 years...................................................................................5 Figure 2: Monthly Turnover for the 14 months to February 2005 ..........................................................6 Figure 3: Services and sources of revenues..............................................................................................7 Figure 4: The process of exchange demutualisation ..............................................................................20 Table 1: DSE and CSE income sources ...................................................................................................7 Table 2: DSE and CSE break-up and net asset values .............................................................................8 Table 3: Value of DSE as going concern - On the basis of average potential future earnings.................9 Table 4: Value of CSE as going concern - On the basis of average potential future earnings...............10 Table 5: Value of DSE as going concern - On the basis of Free Cash Flow to Equity-holders .............10 Table 6: Value of CSE as going concern - On the basis of Free Cash Flow to Equity-holders .............11 Table 7: Value of equity trading in exchanges throughout Asia-Pacific................................................17 Table 8: Survey results - Demutualisation status of exchanges in selected emerging markets..............20 Table 9: Benefits of demutualisation......................................................................................................23


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ABBREVIATIONS

ADB Asian Development Bank API Application Protocol Interface ATS Alternative Trading System CMDP Capital Markets Development Program CEO Chief Executive Officer CSE Chittagong Stock Exchange DDN Direct Dedicated Network DEX Colombo Stock Exchange Debt Securities Trading System DSE Dhaka Stock Exchange ECN Electronic Communications Network EDIFAR Electronic Data Information Filing And Retrieval system FCF Free Cash Flow HKEx Hong Kong Exchanges and Markets IOSCO International Organization of Securities Commission IPO Initial Public Offering ISC The International Securities Consultancy MD Managing Director NASD National Association of Securities Dealers NASDR NASD Regulation Inc. Nasdaq Nasdaq Stock Market, Inc NYSE New York Stock Exchange P/E price-earnings ratio PSE Pacific Stock Exchange RNS Regulatory News Service SAFE South Asian Federation of Exchanges SEC Securities and Exchange Commission SECAS Securities and Exchange Commission Automation System SFC Hong Kong Securities and Futures Commission SRO Self Regulatory Organisation Tk Taka TSX Toronto Stock Exchange US$ United States Dollar WFE World Federation of Exchanges


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2 April 2006

INTRODUCTION AND METHODOLOGY 1. This Draft Final Report reflects the outcome of the Workshop held in Dhaka on 16 June 2005

organised by the SEC and ADB to discuss the Mid-Term Report of the consultant on the Demutualisation and Merger of the Dhaka and Chittagong Stock Exchanges. This Report in particular takes account of the statement read out by the Chief Executive of the Dhaka Stock Exchange from his President that “The Members of Dhaka Stock Exchange are not inclined to open any discussion on any proposal of merger with any other exchange and or demutualisation”. This statement was issued following an emergency special meeting of the members of the Dhaka Stock Exchange Ltd. held on 15 June 2005. Additional comments from the statement issued by the chairman of the DSE following the emergency special meeting are referred to later in this Report.

2. The Terms of Reference of the project are to:

• Consider whether it would be appropriate to preserve the current two stock exchanges or to merge their operations in the interest of market efficiency and development. Should the recommendation be to maintain the status quo, propose suitable ways for enhancing current operations, including specialization in specific areas to minimize overlapping. If a merger is the better option, propose suitable and practical ways for implementing it.

• Determine the feasibility of demutualising the Dhaka Stock Exchange (DSE) and

Chittagong Stock Exchange (CSE):

a) Define advantages and disadvantages;

b) Identify the costs involved;

c) Prepare a detailed analysis and time-bound action plan for demutualisation and/or merger;

The plan should consider:

(i) valuation of the exchanges;

(ii) reconciliation of commercial interest and regulatory responsibilities relating to monitoring, investigation, dispute resolution, and sanctions;

(iii) differentiation between right to trade and ownership of the new or merged exchange;

(iv) specific requirements and limitations on listing and transferring shares of the new exchange;

(v) avoidance of monopolistic practices; and

(vi) adherence to international standards.

d) Provide technical support for a program of stakeholder consultation and consensus building to carry out the action plan.

3. In view of the stance adopted by the DSE, the Report focuses more on how some (many can

only be achieved through merger and demutualisation) of the benefits of merger/demutualisation could be achieved without a merger or demutualisation taking place than on how to bring about merger and demutualisation. The Recommendations contained later in the Report are on improving regulation, surveillance and enforcement which is the major concern of the SEC. The SEC also has a concern for market efficiency but must accept that such benefits resulting from a merger of the two exchanges will not be realised.


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4. This Report sets out the objectives and rationale for demutualisation and merger of the Dhaka

and Chittagong stock exchanges. It considers the views of various stakeholders (SEC, exchange management, board, members, and investors1). It also considers the financial and regulatory implications of demutualisation and merger. Whilst these considerations are obviously focused at a domestic/national level, they are set against a backdrop of international expectation and standards. However, there is no hard and fast rule that says exchanges must demutualise or merge or that demutualised exchanges make better exchanges. Demutualisation is not a cure for what ails a market but a process that will facilitate a change in the governance of the exchange.

5. In order for the exchanges to merge it is not absolutely essential that they demutualise.

Demutualisation just makes the process that little bit easier. Exchanges demutualise for many different reasons and some of these are discussed later. Most exchanges demutualise because of the benefits that it would create. In some instances exchanges have been encouraged to demutualise by their regulators largely with the objective of countering member self interest although other benefits have been officially expressed.

6. Stock exchanges are now increasingly changing their business model and restructuring

themselves across the world due to the simultaneous convergence of a number of powerful developments. The most notable of these has been the: (i) rapid advancement and innovation in technology that has facilitated alternative trading systems (ATS) including electronic communication networks (ECNs); and (ii) growing market competition and integration as well as globalization induced partly by cross-border listing and portfolio flows, etc. Together these developments have eroded the significance of physical national stock exchanges and their trading floors. Consequently, across the globe stock exchanges are now rethinking their business strategy and model in order to find ways of how best to survive. In the process, exchanges have evolved towards new corporate, legal and business models to strengthen governance and face the competition.2

BACKGROUND

Background information on the exchanges 7. The East Pakistan Stock Exchange Association Ltd. was formed on 28 April, 1954 as a public

company. On 23 June, 1962 the name was changed to East Pakistan Stock Exchange Ltd. and again on 14 May, 1964 to Dhaka Stock Exchange Ltd. (DSE). The capital of the DSE is Tk1,000,000 divided into 500 shares of Tk2,000 each. The paid up capital is Tk460,000 divided into 2303 shares of Tk2,000 each. The DSE is registered as a public limited company and its activities are regulated by its Articles of Association, rules, regulations and bye-laws together with the Securities and Exchange Ordinance, 1969, Companies Act, 1994 and Securities & Exchange Commission Act, 1993.

1 Issuers were not involved in the study. Provided their interests continue to be protected by the SEC

through its approval of exchange listing regulations, there should be no implications for issuers. 2 “Demutualization of Stock Exchanges – Problems, Solutions and Case Studies”, Shamshad Akhtar, Asian

Development Bank, 2002. 3 In early 2005, the DSE issued 35 shares to banks and other financial institutions as part of an expansion of

its market and fund raising exercise to help pay for the development of the new trading platform and its new building near the airport. The issue price was Tk8 million per share and the amount raised was Tk270 million.


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4 April 2006

8. The Chittagong Stock Exchange was formed in 1995. It has an authorised share capital of Tk150,000,000 divided into 500 Ordinary shares of Tk300,000 each. The issued share capital is Tk38,700,000 divided into 129 Ordinary shares. The rationale for the establishment of the CSE, which was well expressed at the time, was to establish in Bangladesh’s second city a modern and high tech securities exchange and to provide good standards of governance which would attract investors and listed companies. In practice it spurred the DSE to modernise and it also spurred the extension of access to the exchange nationwide. Initially, and largely because of its technological approach, the CSE was highly successful in attracting business from the DSE but as the DSE has sought to modernise its systems, so volume has returned to the Dhaka market.

9. The DSE and CSE list equities and a small number of mutual funds and debentures. Liquidity

is centred in the top twenty or so securities. Most of the securities listed on the DSE and CSE are largely illiquid. There are 237 equities listed on the DSE and 195 on the CSE.

10. The DSE has a board of 24 comprising 12 directors elected by the membership and 12

nominated directors. The elected directors elect the positions of President, Senior Vice-President and Vice-President. Meetings must be presided over by the President, Senior Vice-President or Vice-President or in the event that none of these are present, the directors present shall choose one of their number to preside over the meeting. In the event of an equality of voting at a meeting of the board, the person presiding shall have a second or casting vote. A quorum is eight directors (one-third) at least one of whom must be a non-elected director. The Chief Executive Officer (CEO) of the DSE is appointed by the board, with the consent of Securities and Exchange Commission, (SEC). The CEO cannot be dismissed or removed without a special resolution passed by the board and without the consent of the SEC. The CEO, who may attend meetings of the board but has no voting right, has specific responsibility for regulation and enforcement. The DSE has 12 committees.

11. The CSE has a board of 25 comprising 12 directors elected by the membership, 12 selected

directors approved by the Commission, and the CEO who is ex-officio without the right to vote. The CEO cannot be dismissed or removed without a special resolution passed by two-thirds majority of the board and without the consent of the SEC. The board elects the President and Vice-Presidents (there are three). A quorum is eight directors (one-third excluding the CEO) at least one of whom must be a non-elected director. The CSE has 14 different Committees (up from 12 last year) and although the CEO has specific responsibility within the Articles of Association for regulation and enforcement, the Surveillance and Inspection Committee has, as part of its terms of reference, powers to “Monitor compliance of rules and regulations by the Members and listed companies”.

12. There are 259 securities listed on the DSE (239 equities) compared with 198 on the CSE (184

equities). On an average day, around 66% of the securities listed on the DSE are traded whereas this drops to approximately 30% on the CSE. All but two of the equity securities listed on the CSE are also listed on the DSE. The listing regulations of the two exchanges are identical. The market capitalisation of both exchanges, as at mid April 2005, is of the order of US$3.5 billion. The DSE has 195 members4 whereas there are 129 members on the CSE. A large proportion of the members of both exchanges are inactive – 35% in the case of the CSE and 14% in the case of the DSE. There are around thirty common members.

13. There is some variation in the prices of securities at each exchange. A sample day showed

only six securities that were traded that day on both exchanges had an identical closing price. The variation tended to be around 1% to 2% although in one security there was a variation of

4 Excluding the 35 new members from banks and other financial institutions who have yet to start trading.


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4.4% and in another 4.5%. Of the 57 securities that traded on both exchanges on the sample day, 36 recorded a higher closing price on the CSE than on the DSE. This, the Consultant was told, is fairly typical and results in “arbitrage” across both markets. Arbitrage is normally defined as “the simultaneous purchase and sale of the same security in different markets” whereas what is actually happening in Bangladesh is that members are taking advantage of pricing differences to buy or sell for their clients in the market that gives the client best execution – very few of the “arbitrage” trades, the Consultant was told, were actually simultaneous buy and sell orders. Successful reliance on arbitrage requires that participants are aware of what is going on in other markets and have access to them – i.e., they are open and transparent. Where competing markets are restricted or opaque, then arbitrage is less likely to prevent price fragmentation. In addition, although arbitrage will keep prices in line, it does not necessarily protect order priority. The thirty or so common members can and do take advantage of these pricing variations to offer best execution to their clients. Whereas it could be argued that those who are not common members cannot offer best execution unless they trade through a common member.

14. The following tables compare turnover of the two exchanges:

Figure 1: Annual Turnover during the last 4 years

Annual Turnover Value (Tk mn)

0

10000

20000

30000

40000

50000

60000

2001 2002 2003 2004

DSE CSE

Sources: DSE and CSE 15. Figure 1 clearly shows the steady decline in trading volumes at both exchanges during the

three years to end 2003. It also shows the very strong recovery in the value of trades conducted at the DSE in 2004 – a 114% increase on 2003 figures against the CSE’s 88%.


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6 April 2006

Figure 2: Monthly Turnover for the 14 months to February 2005

Monthly Turnover Value (Tk mn)

02,0004,0006,0008,000

10,00012,000

Jan-0

4

Mar-04

May-04

Jul-0

4

Sep-04

Nov-04

Jan-0

5

DSE CSE

Sources: DSE and CSE 16. Although the DSE experienced a substantial drop in the value of securities traded in the early

part of 2005, the CSE held its own and actually succeeded in increasing its market share. 17. Neither exchange has plans to move into the area of derivatives trading at this time. The DSE

is focusing heavily on the implementation of its new trading platform, the addition of new members and the planned development of its new headquarters. The CSE has plans for the expansion of its activities. However, because of confidentiality and competition issues, it would be inappropriate to refer to them in this Report. Both exchanges would welcome more companies coming for a listing.

Exchange Revenue Sources

18. Exchange income, as defined by the World Federation of Exchanges (the WFE), comes from

three principal sources. Those are trading, services, and listing fees. Based on the 2001 Cost and Revenue Survey conducted by the WFE and published in November 20025, trading, which is defined as transaction fees, trade-matching fees, and terminal-leasing fees, is by far the main source of revenue for exchanges around the world representing 37.2%. This figure underlines the fact that trading remains the principal activity of exchanges. Service revenues which include clearing and settlement activities, depository services, membership fees, and dissemination of market data and information, represented almost 29.1% of total revenues in 2001. The third highest single provider of exchange income is listing fees, contributing 14.2% of total income in 2001. The balance is taken up by “other” revenue sources which include system sales income, investment income, fines, and rental income.

19. The above percentages are a guide and although there are annual variations, the percentages

do not differ materially year on year. They are partially supported by a survey on Extended Exchange Services conducted for the WFE Working Committee by the Taiwan Stock Exchange Corporation, March 2004 which concluded that market participants contributed higher percentages of revenues than did listed companies or other intermediaries over six broad categories of services, as illustrated in Figure 3. The market participants’ category was

5 World Federation of Stock Exchanges “Focus” newsletter November 2002 – No. 117 “2001 Cost &

Revenue Study Second Part : World Federation of Exchanges’ Revenue & Cost Structure”


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7 April 2006

the most important source of revenues among the recipients of services rendered by exchanges. However, the survey added that the actual amount of revenues and costs would need to be collected to analyse the importance of each revenue source more carefully.

Figure 3: Services and sources of revenues

0%

20%

40%

60%

80%

100%

Work for

Issu

ers

Data/In

formati

on D

is.

Mkting

/PR/Edu

Risk M

gmt fo

r Inter

med.

Depos

itory

IT Service

s

Trade-re

lated

Serv

ices

Settlem

ent

Clearing

Listed CoOther Intermed.Participants

Source: WFE

20. The following table illustrates the source of income across the WFE from the survey

conducted in 2001 compared to the DSE’s income for 2003/04 and the CSE’s income for 2003.

Table 1: DSE and CSE income sources

Income Source WFE Average DSE CSE Trading 37.2% 29.6% 6.8% Services 29.1% 3.7% 1.4% Listing 14.2% 49.5% 39.9% Other 19.5% 17.2% 51.9%6

Source: WFE and annual accounts of DSE and CSE 21. At both the DSE and CSE, a very high proportion of exchange income is derived from listing

fees – almost half in the case of the DSE and 40% in the case of the CSE. Trading and Service fees i.e. those charged to members are particularly low, especially at the CSE.

22. An assumption that could be made from this is that both exchanges are favouring one

stakeholder i.e. their members to the detriment of another stakeholder i.e. issuers of securities. However, one year of data is insufficient on which to assert that this is a correct assumption and much more analysis is required.

6 Over 50% of Other Income resulted from the profit on the sale of land owned in Dhaka.


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8 April 2006

Financial Analysis 23. As part of the process of advising on the demutualisation of the DSE and CSE, a valuation of

both exchanges was undertaken. The valuations were carried out based on the latest copies of the reports and accounts of both companies and therefore prior to the DSE sale of 35 shares to banks and other financial institutions.

24. The exchanges were valued both on the basis of break-up-value as if it is liquidated now and

on the basis of potential earnings opportunity in the future/free cash flow to the equity holders viewing the exchanges as going concerns.

25. Using Balance Sheet Model, the break-up value of both the exchanges was computed on the

basis of historical cost as well as replacement cost. The break-up value and net asset value per share in terms of replacement cost for the both exchanges are shown below7:

Table 2: DSE and CSE break-up and net asset values DSE CSE Break-up-value (Historical Costs)

Taka 0.44 million Taka 1.70 million

Net Asset Value per share (realizable market value)

Taka 2.99 million Taka 2.73 million

26. The break-up-value of the DSE on the basis of historical cost is Tk0.44 million, and Tk1.70

million for CSE. However, when tangible fixed assets, especially land and buildings, are valued in terms of realizable market values (Appendix A), the net asset value per share (break-up-value in terms of replacement cost) of the DSE is Tk2.99 million, and Tk2.73 million for CSE. It is worth to mention that the above mentioned computed value per share does not include the value of right to trade.

27. Using Earnings Multiple Model, the value of the exchanges has been computed as a going

concern on the basis of estimating future potential earnings opportunities. While estimating future potential earnings opportunity of the exchange, not only the sources of revenue and nature of expenses have been identified but also the projection of these revenues and expenses has been made based on growth rate, depreciation schedules and system maintenance contract. Revenues have been primarily decomposed into main categories, namely, a) trading and service revenues (and other) and b) listing fees (both initial and annual listing fees). The first source of revenues is a function of annual turnover, while the second source of revenues is dependent on both annual IPO listing on the exchanges and average size of issued capital of listed companies. The annualised growth rate (geometric) of annual turnover in Tk million over the last five years is assumed to continue and has been used as projected growth rate of the first source of revenues. The average issue size of listed IPO over the last five years and its annualised growth, geometric mean of IPO listing, and the average size of issued capital of listed companies and its annualised growth, have been used to predict the second source of revenues, listing fees over the coming five year-forecasted periods.

28. In projecting expenses over the forecasted periods, expenses have been classified into three

categories, a) system maintenance expenses, b) depreciation expenses and c) all other expenses. The first two expense categories have been estimated based on the system

7 The computation of break-up-value in terms of historical cost and replacement cost for both the exchanges,

DSE and CSE, has been shown in exhibit # 1 of the appendix.


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9 April 2006

maintenance and project cost of trading system upgrade and depreciation schedule8 being followed in DSE, while annual system maintenance expense and Direct Dedicated Network (DDN) service expense that was growing at 15% over the last three years in CSE have been assumed to continue in the future and depreciation expense is based on depreciation schedule being followed in CSE on tangible fixed assets and automation. All other expenses have been projected using the relationship of all other expenses to revenue9 that took place over the last four years.

29. In order to compare the potential earnings opportunities between DSE and CSE, depreciation

expenses of total system up-grade for DSE has also been estimated as if it would be charged at 20% as it is for CSE. The average potential forecasted earnings have been estimated after discounting potential forecasted earnings at 6% (presumed inflation rate) and then would be multiplied by earnings multiple to provide the value of exchange as a going concern. The price-earning ratio (P/E) of 21.7410 of financial institutions in 2004 has been used as an earnings multiple. With varying growth rate, expense/revenue ratio, and depreciation rate, the following table shows the value of DSE as going concern under the scenario ranging from pessimistic to optimistic:

Table 3: Value of DSE as going concern - On the basis of average potential future earnings

Pessimistic Optimistic Growth rate 7% 7% 7.0% 8.5% 10% Expenses/Revenue 83% 80% 80% 78% 75% Depreciation 33% 33% 20% 20% 20% Value (Tk. mn) 435.7 462.1 486.3 512.2 549.6 No. of Shares 195 195 195 195 195 Share(Issue) Price 2.23 mn 2.37 mn 2.49 mn 2.63 mn 2.82 mn

30. The annualised growth rate of 7% (geometric mean) of the annual turnover in Tk million had

been realized for DSE over the last five years. It is assumed that this growth rate of 7% for the projection of revenue other than listing fees is expected at least to continue in future and would increase to 10 % or even more in an optimistic scenario. The expense to revenue11 ratio ranges 75% in an optimistic scenario to 83% in a pessimistic scenario. With a view to comparing the value between DSE and CSE, one would have to stick to the value of DSE having depreciation rate of 20% that should have been used. In that sense, the share price of DSE ranges from Tk2.49 million to Tk2.82 million12.

8 The depreciation rate of DSE varies from 15% to 33% for network services and automation equipments,

whereas the depreciation rate of CSE varies 10% to 20% for the abovementioned services and equipments. However, it is worth mentioning that most of automation equipments and some of tangible assets have been fully depreciated for CSE and as there is no contract for system up-gradation now, hence the depreciation expense for CSE reflects downward biased and consequently forecasted earnings are upward biased.

9 Expense to revenue ratio was estimated for DSE varying from 75% to 83%, while it was for CSE varying from 90% to 140%. It is noted that expenses does not include expenses for system maintenance & dep. and revenue does not include Initial and annual listing fees as well.

10 The weighted average of P/E ratio of Financial Institutions in 2004 is 21.74, while the simple average of P/E ratio is 29.8.

11 It is noted that expenses does not include expenses for system maintenance & dep. and revenue does not include Initial and annual listing fees as well.

12 The membership of DSE is sold recently at a value of Tk 8 mn, which fetch the going market value of Tk. 11 mn. However, owning a membership entitle ones to right to trade. Hence this value of Tk. 8 mn or Tk. 11 mn includes the value of right to trade.


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31. With varying growth rate, expense/revenue ratio, and depreciation rate, the following table shows the value of CSE as going concern under the scenario ranging from pessimistic to optimistic:

Table 4: Value of CSE as going concern - On the basis of average potential future earnings

Pessimistic Optimistic Growth rate 3% 4% 5% 6% 6% Expenses/Revenue 140% 130% 120% 100% 90% Depreciation 20% 20% 20% 20% 20% Value (Tk. mn) 70.3 122.4 177.7 298.3 360.4 No. of Shares 129 129 129 129 129 Share(Issue) Price 0.55 mn 0.95 mn 1.38 mn 2.31 mn 2.79 mn

32. The annualised growth rate of 3% (geometric mean) of the annual turnover in Tk million had

been realized for DSE over the last five years. It is assumed that this growth rate of 3% for the projection of revenue other than listing fees is expected at least to continue in future and would increase to 6% or even more in an optimistic scenario. The expense to revenue ratio ranges 90% in an optimistic scenario to 140% in a pessimistic scenario. Though the depreciation rate of 20% has been used, yet it does not reflect proper depreciation amount, because it is noted that most of automation equipments and networks services have been fully depreciated and there is no as such contract for system improvement or system up-gradation. The share price of CSE ranges from Tk0.95 million to Tk2.79 million13.

33. Using Free Cash Flow Model, the value of the exchanges has been computed as a going

concern on the basis of estimating future free cash flow to equity-holders. It is expected that the free cash flow to equity-holders would grow at the presumed growth rate with the cost of equity. In estimating the cost of equity, it is in consideration that the equity market is affected by the volatility of the market and hence the required rate of return of the market should be used as a proxy for the cost of equity. The required rate of return of the stock market has been estimated as sum of the geometric mean of annualised return of the general share price index over the twelve years period and the average dividend yield of these periods.

Table 5: Value of DSE as going concern - On the basis of Free Cash Flow to Equity-holders

Pessimistic Optimistic Growth rate 7% 7% 7.0% 8.5% 10% Cost of Equity 10% 11% 12% 13% 15% Free Cash Flow (Tk. in mn) 15.15

15.15

15.15

15.15

15.15

Value (Tk. mn) 540.4 465.4 409.1 365.3 333.4 No. of Shares 195 195 195 195 195 Share(Issue) Price 2.77 mn 2.39 mn 2.10 mn 1.87 mn 1.71 mn

34. The above table shows the value of DSE as a going concern on the basis of Free Cash Flow

(FCF) to equity-holders, which is assumed to grow at the varying above-mentioned rate with the varying cost of equity. The share price of DSE ranges from Tk1.71 million to Tk2.77

13 The membership of CSE was sold in 1997 at a value of Tk 5 mn, which fetch the going market value of Tk.

3.5 mn. However, owning a membership entitle ones to right to trade. Hence this value of Tk. 5 mn or Tk. 3.5 mn includes the value of right to trade.


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11 April 2006

million. It is noted that this estimated value does not include the value of right to trade either as a broker-member or dealer member.

Table 6: Value of CSE as going concern - On the basis of Free Cash Flow to Equity-holders

Pessimistic Optimistic Growth rate 3% 4% 5.0% 5.5% 6% Cost of Equity 8% 10% 12% 13% 14% Free Cash Flow (Tk. in mn) 9.25

9.25

9.25

9.25

9.25

Value (Tk. mn) 190.5 160.3 138.7 130.1 122.5 No. of Shares 129 129 129 129 129 Share(Issue) Price 1.47 mn 1.24 mn 1.07 mn 1.01 mn 0.95 mn

35. The above table shows the value of CSE as a going concern on the basis of Free Cash Flow

(FCF) to equity-holders, which is assumed to grow at the varying above-mentioned rate with the varying cost of equity. The share price of DSE ranges from Tk0.95 million to Tk1.47 million. It is noted that this estimated value does not include the value of right to trade either as a broker-member or dealer member.

Background to merger and demutualisation

36. A report by ISC in March 2003 suggested that by merging the markets in Bangladesh there

will be a coherent structure which will be more attractive to investors and more straightforward to regulate. A single exchange will be more responsive to the needs of the country and provide better services to all investors and the country than the two separate exchanges. By demutualising the exchanges, conflicts of interest will be reduced and governance enhanced.

37. In its response, the DSE made the following points14:

DSE Response: Consultant’s Remarks: 1. the current problems, mentioned in

the report, can be adequately and effectively dealt with by bringing about changes in the Stock Exchanges internal management by discussion between the DSE board and the SEC; all the benefits from demutualisation listed in the report can be obtained without having to change the existing stock exchange structure;

The Consultant accepts that some of the benefits of demutualisation can be achieved without demutualisation. In the absence of a decision on demutualisation, this Report identifies ways in which some of these benefits can be achieved.

2. demutualisation of the stock exchange is, in itself, not sufficient to ensure that the vested interests do not adversely intervene in the trading activities;

Agreed – In order to be successful, demutualisation must ensure that vested interest plays no part in the future structure of the market.

3. there is no hindrance to employing competent people, at the exchange,

One of the advantages of demutualisation is that it encourages management to work in a business like

14 Extract from Response to Market Structure Document.


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other than the ability to pay adequate salaries; the issue of finding the right people will not be automatically addressed by demutualising the exchange;

manner as opposed to a service industry attitude where the sole objective is satisfying member interest.

4. there has in the past been inadequate supervision of the exchanges by the SEC and this has resulted in officials being employed by the stock exchange who were not always professionally competent or efficient;

This appears to be an admission by the DSE that in the past it has employed staff that were not always professionally competent or efficient; presumably either because of labour costs or because the staff would do what they were told by the members. The introduction of professional management practices and incentives offered to management will address these concerns.

5. improved governance requires proper and realistic guidelines to be provided by the SEC to the board of directors of the Stock Exchange and the SEC ensuring that their actions and decisions are based on fairness, equitable and are transparent;

Agreed and this would be addressed by demutualisation.

6. the DSE do not accept that making the exchange a profit making entity will be to the benefit of the market and listing the exchange may lead to a conflict of interest situation, which is undesirable.

Almost 40% of the exchanges that are members of the World Federation of Exchanges have demutualised without detriment to the markets they serve. Many of those exchanges have listed on themselves without conflict of interest.

38. With regard to demutualisation, the DSE went on to state:

DSE comments on Demutualisation Consultant’s Remarks: The DSE is almost run by professionals and therefore the main apparent objective of demutualisation is already being met.

This conflicts with the statement earlier that the DSE has in the past employed unprofessional and inefficient staff. It also suggests that the main objective of demutualisation is the employment of professional staff which is obviously not the case.

The DSE currently consider very carefully the interests of all their members before they take any decisions.

This is the whole point about demutualisation. In a restructured and demutualised DSE, the Board would consider ALL stakeholders not just members.

A move to a profit making body would mean that costs would increase for all the active brokers as the board would be required to put the interests of shareholders first.

Demutualisation would lead to a more profit orientated and more efficiently run exchange. Businesses that are profitable look not just to how they can raise revenue but how they can control costs and be more efficient.

At present the DSE is making a loss and has done so for the past two or three years. It would not be possible to successfully de-mutualise a loss making entity.

The Consultant agrees that demutualising a loss making entity is more difficult. This is why the DSE needs to look to how it can become more profitable. The DSE has operated hitherto as a not-for-profit organisation and has therefore deliberately no sought to make profits.


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39. As stated at the beginning of this Report, the view of the Dhaka Stock Exchange expressed at the emergency special meeting held on 15 June 2005 is against demutualisation and merger with any exchange. The notice issued by the Chief Executive of the Dhaka Stock Exchange (the Board and members refused to attend the Workshop) stated that “the meeting observed that the DSE is the prime and the oldest bourse of the country. The exchange and its members are following all the norms, rules and requirements as needed by law, rules and regulations. As recommended by ADB under its CMDP, the exchange has also implemented all necessary reforms for the development of the capital market of the country”.

40. The notice went on to say “management of the exchange was separated from the Board,

automated trading system was introduced and other trading and related regulations were updated. The exchange out of its own resources has upgraded the trading system, which will be operational from August 20, 2005. The new system will be able to offer trading facilities to all areas in the country. Recently the exchange has expanded its membership by issuing 35 new shares. Beside these, over the years, the trading volume of the exchange has grown significantly and the operation of the exchange is now considered efficient. Honorable Finance Minister in his budget speech has recognized it as transparent and said to have attained dynamism. In the backdrop of the above situations, the members of the exchange had discussed with the consultants of ADB on these issues on several occasions. The members of the exchange are of the opinion that, they are not inclined to discuss the issue of merger or demutualization again at present time”.

41. The notice concluded by saying that “members are of the opinion that, the DSE is a very old

institution and have struggled over the years to reach the present level. To reach this level, they have got the support from ADB and SEC of different issues and feel that with gratitude. However, on the issue presented in the Workshop to discuss today, that unanimously resolve that: The Members of the Dhaka Stock exchange are not inclined to open any discussion on any proposal of merger with any other exchange and or demutualization”.

42. The Chittagong Stock Exchange was represented at the Workshop by its Chief Executive and

members of its Board. The CSE stated that a committee of six members had been formed to discuss demutualisation and merger and to report back to the Board of the exchange on its recommendations for rejection or acceptance. The CSE wanted to explore the desirability and acceptability of demutualisation and the grounds for it as well as explore international best practice.

43. In a letter dated 20 June 2005 to the Country Director, ADB the CSE said that “it would like

to examine the feasibility further and therefore, solicit your advice and assistance of the following issues:

i. A TA for detailed independent valuation on the asset of CSE

ii. Finding interested buyer if the stock exchange is demutualized” 44. The CSE went on to say that “as the proposal for Demutualization comes from ADB, we

would request you to kindly let us know if the private sector investment arm of ADB will be interested to invest in equity share of the exchange if demutualized”.

MERGER 45. At this stage in its development Bangladesh needs an exchange with the attributes of a

traditional and nationwide exchange. It is necessary for the country to have a forum in which a reasonably well –off person (no poor person should be dealing on any stock exchange) can


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put some of his savings without fear that the company in which he is investing is run dishonestly or the market is stacked against him from the start. Institutional investors both domestic and international will be attracted to a market in which all participants adhere to broadly accepted international standards of operation.

46. Bangladesh must now put in place efficient and fair structures for all aspects of exchange

operation and regulation. There needs to be a “level playing field” where an investor can be reasonably confident that the market in which he is investing is not manipulated either by those committing dealing malpractices (market rigging of one type or another) or by those misusing privileged information gained by virtue of their special connection to the listed issuer (broadly termed insider dealing). An investor must not be in a position where those privileged to be members of the stock exchange and directors of listed companies get a better “deal” than himself. Overall, investors’ rights must be protected; the market must be fair to all investors, as well as efficient and transparent. The market needs to ensure that all investors have equal access to information that will enable them to judge the true value of any securities in which they may wish to invest. Just as importantly, all investors need a market where the broker he uses treats him honestly, efficiently and fairly in all aspects of their relationship. All market participants need a market where the inherent systemic and market risks are minimised.

47. While the existence of multiple exchanges can create a competitive landscape, it has the

disadvantage of fragmenting liquidity as well as resulting in economic inefficiencies with different sets of intermediaries, front-end trading systems, information channels and compliance requirements for the various exchanges.

48. This has been recognised by two of Bangladesh’s neighbours, India and Pakistan. In both

these countries, the regulator and Governments have strongly recommended the demutualisation and/or merger of the local exchanges. There has been slow progress on this in India following the publication of the Kania Report in August 2002. However, in Pakistan all three exchanges have endorsed the principle of demutualisation following the publication, in September 2004, of the Report of the Expert Committee appointed to advise on the consolidation/merger and/or transformation of the stock exchanges in Pakistan and two, the Lahore and Islamabad exchanges have agreed to merge15. The Expert Committee highlighted the low level of market capitalisation (US$25 billion compared to Bangladesh’s US$3.5 billion) as one justification for the merger of the three stock exchanges.

Existing Market Structure

49. It is generally held that the keenest prices are obtained where the maximum orders for any

security come together at the same time, thus enabling the price to be based on the most accurate picture of supply and demand at any one time. Due to the existence of two separate trading systems there are two different price formation mechanisms in Bangladesh for all of the main listed securities. Although some brokers are content with this situation as they can arbitrage on price differentials, the debate is open on the merits of arbitrage as it is often held to be economically wasteful.

50. “General wisdom” and academic studies during the last decade hold that the best prices are

obtained where the maximum orders for the same security meet at the same time. If one subscribes to this theory it follows that in Bangladesh, there should be one trading system.

15 The consultant is advising the SECP, under an ADB Project (TA No. (LN) 1957-PAK: Strengthening

Regulation, Enforcement and Governance of Nonbank Financial Markets), on the demutualisation of the Pakistan stock exchanges and on various aspects of the regulation of the exchanges post demutualisation.


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51. The simple answer is that there is only one way of getting the “best” and “truest” price for any security - and that is to bring as many buy and sell orders in the same security together at the same time. In Bangladesh this means that a security should be traded on only one system and one exchange. The US SEC has long extolled the virtues of competition between exchanges and systems and indeed fostered it. However, in recent years it too has recognised that in these circumstances investors could not be guaranteed best execution.

52. It is the responsibility of intermediaries when executing orders for investors to obtain best

execution for their clients. It is fundamentally an issue of investor protection, but it also has important implications for price discovery. Therefore, in many jurisdictions, it straddles the boundary between the national regulator and the exchange.

53. On its investor protection side, best execution rules are intended to oblige intermediaries to act

to the client's best advantage when executing instructions. Historically best execution was interpreted as getting the best price in the market at the time the order was executed. As such, it was an important buttress of price discovery, forcing intermediaries to seek out the best price and for their counterparties to compete through their offers.

54. Some recent developments have affected best execution:16

• Order books have eliminated some of the searching for the best price within a single market. They not only display the best price without any need to search, but they will not allow execution at other than the best price.

• Getting the best price from the order book is not necessarily the best execution for a large

trade. The best visible price is achieved by "walking the book" but in the case of block trades, better prices may be attained through private negotiation. Best execution for institutional trades has come to mean something wider than just the best visible price.

• A further extension of the point is that there may be other dimensions than price in

assessing execution quality. For larger trades immediacy tends to cost, either through a wider spread or through higher price impact. That cost can be reduced by more patient trading. So best execution has become a multi-dimensional concept for institutional trades. This is difficult to measure so, in practice, most regulators see best execution as mainly important for retail clients with less relevance to institutions. This seems perverse in that the impact of execution is far larger on institutional trades than on retail, where commission usually dwarfs the consequences of poor execution. Indeed, where they have the opportunity to "opt out" of best execution by becoming market counterparties, relatively few institutions choose to do so.

• Where trading is fragmented - either because the exchange operates multiple systems that

are not formally linked, or because there are competing exchanges - then best execution should, logically, involve examining execution possibilities across several trading systems. In practice it rarely does.

• Where regulation of intermediaries’ behaviour with respect to clients resides or has moved

to the national regulator, best execution tends not to be an exchange responsibility. 55. In practice, best execution in most jurisdictions is judged to be achieved by getting the best

price on the exchange. 16 Extract from Price Discovery and the Competitiveness of Trading Systems. A Report to the FIBV Annual

Meeting, Brisbane – 3 October 2000 by Stephen Wells.


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56. Stock exchange unifications and mergers are not just a recent trend although some have been much publicised recently. The experience of merging exchanges which traded in the same or largely the same listed securities has been very successful. The examples of Hong Kong, Philippines and the United Kingdom17 set out in Appendix B are illustrative of basic exchange mergers with lessons that could be applicable to Bangladesh. The examples are set out in some detail because experience has shown that one of the biggest obstacles for any exchange in the merger process is overcoming the negative mindset which will allow it to combine with its former business rivals.

The Benefits of Merger

57. Investors will benefit from a merger of the two exchanges because there will only be one

market where the highest bid and the lowest offer in the same issue or listed security are displayed at any given time. Therefore investors are assured of the best price or ‘best execution’ of their orders by brokers.

58. Maximising order flow will improve the quality of pricing. If trading is fragmented between

different trading venues for whatever reason, it has been argued theoretically that this dispersal of orders lowers the probability of execution at each location and may therefore reduce liquidity and also increase the volatility of transaction prices.

59. Waste associated with duplication of facilities such as the exchange buildings, trading

platforms and communications networks will be avoided. Members’ costs will be reduced as a result.

60. Maximising the use of professional management within a single organisation; not two.

Bangladesh has too few experienced exchange management professionals who are presently occupied in competing with each other. The limited talent that is available could be put to better use in the development of a National Stock Exchange.

61. Common Members will only have one single trading system to watch; not two. 62. The public dissemination of information as well as educational and promotional campaigns

will be improved through the concentration of budget and resources. 63. There would be a common centre providing research and statistical information to the general

public. 64. Issuers will only have one exchange through which to release corporate information. This will

also result in ensuring equal access to vital corporate information. 65. Issuers would have reduced fees to pay as they would only apply for a listing to one exchange. 66. There will be more efficient and cost effective regulation. There will be a single surveillance

unit at the unified exchange undertaking front-line market supervision. The SEC will only have one exchange to regulate not two. As a result, the systems necessary for regulation of a single market will be simpler and less costly than those required to regulate two.18

17 ISC directors had direct personal experience of these three unifications, in the Philippines in 1994; in Hong

Kong in 1986; and the UK in 1973. 18 The issue of Surveillance is further discussed in greater detail below.


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67. The National Stock Exchange of Bangladesh will be a stronger, unified exchange with improved ability to negotiate with other regional exchanges (particularly at SAFE) rather than worrying about domestic territorial issues.

68. Bangladesh is too small a country to sustain two competing stock exchanges each trading the

same securities. The combined value of trading across the two exchanges is US$1,100 million. The following table shows how that compares with other exchanges in Asia:

Table 7: Value of equity trading in exchanges throughout Asia-Pacific

US$ million Asia - Pacific 3,220,030 Tokyo S E

719,537 Taiwan S E Corp. 525,169 Australian S E 488,719 Korea Exchange 439,580 Hong Kong Exchanges 322,826 Shanghai S E 260,784 National Stock Exchange India 194,456 Shenzhen S E 134,251 Osaka S E 118,436 BSE, The S E Mumbai 116,857 Thailand S E 107,249 Singapore Exchange

73,115 Karachi S E 61,636 Bursa Malaysia 27,594 Jakarta S E 14,774 Lahore S E 17,071 New Zealand Exchange

3,680 Philippine S E 1,114 Islamabad S E

886 Dhaka 573 Colombo S E 211 Chittagong

Source for other than the Bangladesh and Pakistan stock exchanges: WFE. Source for Pakistan stock exchanges: ‘Business Recorder’ Pakistan. Source for Bangladesh stock exchanges: DSE and CSE.

69. It is interesting to note that turnover on Pakistan’s smallest exchange (Islamabad) which

accounts for only around 1% of total turnover across the three exchanges in Pakistan, and which is shortly to merge with the Lahore Stock Exchange because it is too small to survive, is more than that of the combined trading volume of the Dhaka and Chittagong stock exchanges.

70. The trend today is for merger (e.g. Europe, India and Pakistan) or regionalisation and the

threat to the DSE and CSE in the future will not come from each other but from the new regional financial centres being formed in such places as Dubai, Qatar and Labuan. It is these regional financial centres with their ability to attract international investors and international intermediaries because of the internationally acceptable rules under which they are formed, who will tempt the largest domestic companies in the region to list on those exchanges. The majority of companies seek a listing on a stock exchange for the purposes of raising finance. These new regional financial centres are being formed for that very purpose and their target listings are the largest companies in the region. If they are successful, and many millions of


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US Dollars are being spent on making them so, all that will be left for the local domestic markets to trade will be the shares of small and medium sized companies.

71. Unquestionably, there are considerable benefits in merging as demonstrated earlier. However,

neither exchange is seeking a merger and if the SEC will not force one upon them, although merger would be the better option, it will not take place.

72. If no merger can be achieved, the Terms of Reference calls for suitable ways for enhancing

current operations, including specialisation in specific areas to minimize overlapping. An overlap on products is inevitable. Neither exchange would benefit from being told that it cannot trade equities, or that this equity will hence forth be traded at that exchange, or that this or that exchange must concentrate on bonds or derivatives. This would not be good for the future development of the Bangladesh financial markets. Free market forces must be allowed to prevail. In the longer term, liquidity will concentrate in one exchange and the weaker of the two will be forced to close. For the moment, that suggests it will be the CSE. However, much will depend upon how successful it will be with its new development initiatives.

73. The following table looks at the benefits of merger and examines if any of these can be

achieved without merger.

1 Investors assured of best execution

2 Improved quality of pricing

Neither of these can be achieved unless the SEC introduces a best execution rule that requires all market participants to execute transactions on the market that is displaying the best price at the time of execution. In order to achieve this, both exchanges would have to invest heavily in a combined market tape and an order handling system that would automatically route orders to the market where the customer’s order would receive best execution. Such a system would be prohibitively expensive to introduce.

3 No duplication of facilities

Neither exchange has a disaster recover sight. It is unlikely that either exchange would be willing to offer the other DR capability. However, the suggestion is worth thinking about.

4 Single professional management

Cannot be achieved without merger

5 Single trading system

Could be achieved but only through a third party taking an API feed from both markets and combining the data into a single system and then on-selling this to exchange members.

6 Combined educational and promotional campaigns

7 Common centre for research and information

Could be achieved without a merger but it’s unlikely that either of the exchanges would agree to these.

8 Single point for the release of corporate data

This could be achieved by, for example, the SEC, or for that matter and independent commercial organisation (could be formed jointly by the exchanges), setting up a ‘Regulatory News Service’ whereby companies would report their announcements to this RNS (e.g. EDIFAR in India19). The RNS then distributes the announcements

19 EDIFAR is automated system for filing, retrieval and dissemination of time sensitive corporate information

filed physically by the listed companies with the stock exchanges in India. By centralising the information


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to the exchanges, news vendors etc.

9 Reduced listing fees

New issuers are presently not required to seek a listing on both exchanges. However, neither exchange has a facility whereby existing listed issuers can voluntarily de-list. Allowing existing issuers to voluntarily de-list would reduce the annual listing costs for those issuers that do not see the value of having a listing on both exchanges but will seriously impact on exchange revenue (see Table 1).

10 More efficient and cost effective regulation

Most of the benefits would be lost if there is no merger. However, the exchanges should establish an Inter-Market Surveillance Unit – see section of the report under the heading “Surveillance”.

11 Image of a stronger, unified exchange

Cannot be achieved without a merger.

DEMUTUALISATION

74. The pace of exchange demutualisation in developed market jurisdictions has been quite rapid.

In the fifteen years since the first exchange demutualisation took place in 1993, 21 exchanges in developed market jurisdictions have demutualised – representing almost 40% of the membership of the World Federation of Exchanges20. In contrast, the pace of demutualisation in emerging market jurisdictions has been relatively slower. As at the point of report, exchange demutualisation have been completed in only 5 jurisdictions out of a total of 76 emerging market jurisdictions.21

75. A recent survey, by the Emerging Markets Committee of the International Organisation of

Securities Commission (IOSCO), April 2005, based on a sample of 15 emerging market jurisdictions, indicated that the option of demutualisation was considered by the majority of respondents while 4 were in the process of undergoing demutualisation. It is quite likely that the proportion of positive responses would decrease substantially if the survey sample was broadened as the survey was mainly targeted at the relatively larger and more mature market jurisdictions.

through on-line filing, EDIFAR’s primary objective is to centralise the information and accelerate its dissemination and by doing so enhance the transparency and efficiency for the benefit of all the stakeholders in the securities market.

20 Source: World Federation of Exchanges Annual Report and Statistics 2003. 21 Source: IOSCO EMC WG2 surveys.


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Table 8: Survey results - Demutualisation status of exchanges in selected emerging markets Jurisdictions Considered Status Brazil No Not demutualised China No Not demutualised Poland No Not demutualised South Africa Yes Not demutualised Sri Lanka Yes Not demutualised Thailand Yes Not demutualised India Yes In the process Indonesia Yes In the process Pakistan Yes In the process Turkey Yes In the process Chile Yes Demutualised Hungary Yes Demutualised Malaysia Yes Demutualised Philippines Yes Demutualised Chinese Taipei Yes Demutualised

Source: IOSCO EMC WG2 Surveys.

Figure 4: The process of exchange demutualisation

76. The DSE and CSE are somewhere between a Mutual Society and a For-Profit Private

Company in that both are shareholding companies that do not distribute profits to their shareholders.

77. “Demutualisation” in the context of a stock exchange, means separating ownership from the

right to use the exchange’s trading system. In the mutual ownership model, a broker seeking to trade on the exchange had first to be approved as an owner. Conversely, only brokers who wished to trade on the exchange would be approved as owners. If a broker resigned from the exchange or left the business, its membership (ownership) would cease.22 Demutualisation separates these roles so that one no longer need be a shareholder (owner) to be granted trading privileges and one can be a shareholder without being a broker.

78. Demutualisation, or more generally, a change in the corporate governance structure of an

exchange, is not an end in itself. The exchanges that have demutualised have done so because

22 In mutual exchanges with a seat structure, a broker leaving the business could sell its seat(s) to another

member or to a broker desiring to become a member. Alternatively, as is the case in Bangladesh, some exchanges allow the former member to retain the seat and lease out the trading privileges attached to it, although the former member may lose voting rights.


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they found that their mutual governance structure, which once served them well, had become a hindrance to positioning themselves competitively in a global trading environment.

79. Where exchanges have demutualised, the appointment of government appointed officials (a

common feature of exchanges in developing economies) has by and large been viewed as controversial given that the demutualised exchange is a private sector company operating in a competitive environment.

80. The traditional model of an exchange as a purely national, or even local, entity organised on a

mutual basis by market intermediaries is on its last leg. The big trading houses are now global and have no loyalty to any particular market or exchange. And their big clients, the institutions, no longer need brokers to funnel their orders to exchanges: in an electronic environment, investors can access trading systems directly. This means that the exchanges must change their business model entirely to survive. First, the concept of “membership” is irrelevant with electronic trading—the marginal cost of adding an additional trader to an electronic network is rapidly declining toward zero, meaning that only transaction based charging can survive. Second, exchanges cannot afford to have their strategic focus dictated by brokers, who are naturally determined to prevent disintermediation of their services. Demutualisation is imperative—not to raise capital, which is a smokescreen—but to disenfranchise the members who block trading system expansion and innovation. Finally, exchanges must take the market to Mohammed. Providing direct remote access for investors, foreign and domestic, is increasingly essential to attracting, and even keeping, their business.23

81. Dr. Steil’s final point is aptly supported by the Stock Exchange of Thailand’s recent decision

to accept trading orders sent by investors themselves via the Internet. This new procedure, which may be executed at or outside the brokers’ offices, will be effective by April 2005.

Benefits of demutualisation

82. Mutual exchanges often lack focused strategic goals and business purposes and tend not to

have clear accountability. This is in part because most are structured as not-for-profit organisations for which creating shareholder value is not a priority.24 It is often exacerbated by a potential disconnect between the owners and the exchange. The members may be more concerned about their business interests as brokers than the exchange’s interests as a whole. Members in a mutual, not-for-profit organisation will not have the same view as shareholders in a corporation because they will not directly benefit, through a higher share price or dividend stream, from the exchange’s growth (although they may benefit indirectly through lower transaction fees). Management’s (and the organisation’s) interests are more easily aligned with shareholders than with members.

83. Mutual exchanges also can become mired in attempts to build member consensus on issues

before bringing them to a conclusion, slowing the decision-making process considerably. The members may not be of one mind on many or most issues.

23 Dr. Benn Steil, the Linda J. Wachner Senior Fellow in Foreign Economic Policy at the Council on Foreign

Relations in New York speaking in Perspectives Trading 2000. Dr. Steil has conducted extensive research on market structure and exchange issues in the U.S. and Europe and is widely regarded as one of the leading independent commentators in those areas.

24 Although the norm is for a mutual exchange to be not-for-profit, this has not always been the case. The London Stock Exchange was a for-profit entity that paid dividends from its inception until 1948, as did the Tokyo Stock Exchange prior to WWII.


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84. The governance structure of a mutual exchange serves only one stakeholder: the stockbroker. Listed companies and investors, whose participation is crucial to a successful market, have no role unless appointed as “public” or “independent” members of the board of directors. They may see the exchange as a “private club” either opposed to their interests or not inclined to treat their concerns as a priority.

85. Mutual entities cannot tap the equity markets for capital. Their inability to access equity

markets may also limit their ability to access debt markets on the same terms as comparable corporations. This may expose the members to levies to cover expenditures or shortfalls, as the exchange has no other financing option. In some exchanges the members’ liability is limited but for other exchanges it is unlimited.

86. In the new competitive environment, the promise of demutualisation is that, along with the

capital necessary for investments in technology, the shareholders of the newly demutualised exchanges will provide a new corporate governance structure that is far more effective in managing conflicts among market participants.

87. In addition to raising equity capital, demutualised exchanges can use their stock as currency in

acquisitions and mergers and to facilitate strategic alliances. Stock option and purchase plans can also be significant compensation mechanisms for management and staff. Demutualisation in Hong Kong and Singapore facilitated the merger of stock and futures exchanges. Demutualisation of the Pacific Stock Exchange (PSE) facilitated an alliance with Archipelago, an alternative trading system that operates the PSE’s now fully-automated equity market and which, it has just been announced, is to merge with the New York Stock Exchange (NYSE).

88. The transformation from a mutual member-based to a demutualised exchange involves the

transfer of ownership from members to non-members and there are various ways that this can be achieved. Sequentially, it involves conversion of existing member seats by monetising these and assigning a certain value per seat. The ability to monetise their ownership stake, is not something that cannot be done in a mutual environment. Once the valuation is done, members can opt to convert their membership to share ownership or to sell off their interest to non-members. They can sell their shares without giving up their trading rights, hold the shares as an investment or even increase their ownership stake in the exchange (subject to limits on ownership concentration). The shares can be included in their regulatory capital, freeing up excess capital for other purposes. The extent to which these benefits will be achieved will depend to a large extent on the restrictions, if any, on transferability following demutualisation and the existence of a ready secondary market to provide an outlet for sale and a value for the securities.

89. A study conducted by the WFE determined that more than 70% of WFE exchanges had

transformed their legal structure into commercial businesses and changed drastically their corporate culture to adopt more business-oriented and customer-focused policies. This high percentage indicates that profit has also become a goal for a large majority of exchanges. The new commercial approach adopted by most exchanges has also obliged most of them to pay more attention to issuers and customer needs, but also to concentrate on their owners’ expectations of increased shareholder value, especially in the case of publicly listed companies. The study also found that “listed exchanges were by far the most profitable exchanges”.

Benefits of demutualisation in the context of Bangladesh

90. The following Table summarises the benefits of demutualisation in the context of the situation

in Bangladesh.


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Table 9: Benefits of demutualisation Benefits of Demutualisation DSE CSE Broadening Exchange ownership

No benefit e.g. 35 new shareholders

No benefit. 129 existing shareholders with ability to go to 500

Allowing Members the ability to realize the value of their assets

Benefit but NAV per share of Tk3 million compares with current share price of Tk11 million

Benefit. NAV per share of Tk2.7 million is only slightly less than current share price of around Tk3.5 million

Spreading ownership risk Benefit Benefit Making the Exchange less susceptible to Members’ vested interests

Benefit but can be controlled to a limited extent by improved governance

Benefit but can be controlled to a limited extent by improved governance

Providing greater access to capital

Benefit but this has not proved problematic to date

Benefit although CSE has used the sale of land to provide capital

Providing greater speed and flexibility in decision making

Benefit if board smaller Benefit if board smaller

Diversifying into other markets and services

Benefit Benefit

Adopting clearer and simpler governance

Benefit if board restructured Benefit if board restructured

Having greater flexibility in negotiations with others

Benefit Benefit

Incentivising management Benefit Benefit Bringing market discipline to bear upon management

Benefit Benefit

Facilitate merger of the two exchanges

Benefit Benefit

Broadening Exchange ownership

91. The benefit that demutualisation would bring by broadening exchange ownership does not

appear to be present in Bangladesh as evidenced by the DSE’s recent decision to admit 35 new banks and other financial institutions into membership of the exchange. The DSE appears to have found no difficulty in raising Tk280 million by such an exercise. The money will be used to modernise its trading platform and to assist with the development of its new headquarters. The CSE similarly has the ability to introduce new member shareholders; it has in the past gone from its original 70 founding members to its current figure of 129.

Allowing Members the ability to realize the value of their assets

92. This is certainly a benefit that could only be derived through demutualisation. Currently, the

35 new members of the DSE have each contributed Tk8 million which, if the exchange was demutualised, could have been used to develop the members’ businesses rather than tying up capital by purchasing a trading right. Similarly, other members could have the ability to sell their shares without losing the right to trade and invest the proceeds in developing their brokerage businesses.


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Spreading ownership risk 93. Demutualisation, assuming the shares are widely held and freely transferable to non-members,

would achieve the objective of spreading ownership risk which currently lies solely with the members of each exchange. However, in reaching that situation, both exchanges would need to make themselves more attractive as investment opportunities.

94. However, if the shares in the demutualised exchange are issued only to the members, they

become the sole shareholders and retain control of the company which acts against the following benefit; i.e. that of making the exchange less susceptible to Members’ vested interests. There are a number of models of demutualisation that have been used to counter this including distributing a proportion of the shares amongst other stakeholders. This has been successfully carried out in situations that do not involve “seats”. However, a “free” distribution to other stakeholders would be inappropriate in these circumstances. One option would be to have an IPO from the outset. However, this would be contrary to the listing regulations which require a company to have a track record. A second option would be to offer a proportion of the shares in NewCo to institutional investors. The difficulty here would be in determining the proportion and the issue price. Furthermore, if the objective is ultimately to list the company on the exchange, this pre-placing of shares could damage the success of any future IPO. Ideally, the IPO would take place once NewCo has established an adequate track record for listing purposes and would be carried out by existing members disposing of at minimum 75% of the holdings in NewCo. Limitations should be put into the Articles of Association of NewCo on the amount of holdings that can be held by any single person or persons acting in concert (this should be capable of being waived by the SEC should circumstances permit – e.g. in the case of a take-over where SEC determines that this is in the public interest).

Making the Exchange less susceptible to Members’ vested interests

95. Both exchanges have gone some way towards improving their governance structure by the

addition of non-members on their boards. However, the perception is that the boards are still susceptible to members’ vested interests. This is further evidenced by the Committee structure that exists in both exchanges and these should be drastically reduced. In order to further limit members’ vested interest in the area of supervision, the exchanges should establish Regulatory Review Committees:

Regulatory Review Committee

96. The Regulatory Review Committee is designed to give an independent assessment of whether

or not the Exchange is fulfilling its regulatory function and as such will give greater comfort to the SEC that the Exchange is properly carrying out its SRO duties.

97. The Regulatory Review Committee, which would comprise people such as lawyers and

accountants who are unconnected with the Board and members of the Exchange, would:

a. set policy and direction in applying the regulatory function of the Exchange fairly, consistently and in the public interest;

b. review the policies and procedures of areas in the Exchange which have supervisory

functions, including the review of the level of funding and resources for supervisory functions;


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c. provide reports and express opinions to the Board and to the SEC on whether appropriate standards are being met and whether the level of funding and resources for supervisory activities are adequate;

d. receive quarterly reports from the Exchange giving details of all client complaints

received and actions taken to resolve the complaints; e. receive quarterly reports from the Exchange giving details of all investigations and

their progress; f. receive quarterly reports from the Disciplinary and Appeals Committees giving details

of all disciplinary and appeal hearings and the statement of findings in respect thereof. 98. The Regulatory Review Committee would submit a quarterly report of its activities to the

Board and to the SEC and it would prepare a report at the end of the financial year of the Exchange for inclusion in the annual report and accounts.

99. In this way, all matters relevant to the Committee’s role and responsibilities will be reported to

the Board and to the SEC.

Providing greater access to capital 100. Demutualisation would enable the exchanges to tap the equity market if they needed capital

rather than the more restricted options open to them currently of selling new trading rights or selling land.

Providing greater speed and flexibility in decision making

101. With boards of 24 and 25 directors respectfully plus their various committees below that,

decision making must be a cumbersome affair. A streamlined board together with fewer committees and a more professional approach to management of the company rather than looking after members’ interests would lead to streamlining of the decision making process.

Diversifying into other markets and services

102. Being a “mutual” does not prevent an exchange from diversifying into another market or to

offer other services. There are numerous examples of product diversification amongst the exchanges of the world. For example, the Colombo Stock Exchange, and its Debt Securities Trading System (DEX) – whilst existing members opposed demutualisation and an extension of membership to newcomers they approved the creation of a separate category of membership for the trading of government bonds on the exchange; and indeed, the London Stock Exchange did this with membership of its London Traded Options Market twenty years ago.

103. However, the advantage of being demutualised is that the exchange company has a much

broader range of options available to it e.g. the New York Stock Exchange’s plans for the acquisition of Archipelago Holdings. This could not be achieved without the NYSE’s conversion into a public for profit entity.

Adopting clearer and simpler governance

104. Large boards and large numbers of committees with duties and responsibilities that inter-relate

have the effect of creating an environment that often results in management time and


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resources servicing the board and its committees rather than getting on with the job of managing the business.

105. Decisions by exchanges to demutualise, are based on the recognition that the old member

owned association structure fails to provide the flexibility and the financing needed to compete in today’s competitive environment. Over the long run, for-profit exchanges run by entrepreneurs and disciplined by profit-seeking investors will produce better-financed organisations with greater ability to respond quickly to preserve the value of their franchises. Besides helping exchanges adapt to a fast-changing marketplace, demutualisation is also expected to promote the exchanges’ efforts to leverage their brand values by expanding into new businesses. Equipped with better financing, more flexible decision mechanisms, and heightened accountability (to shareholders), demutualised exchanges are emerging as leaner, more competitive, and more transparent organisations.

Having greater flexibility in negotiations with others

106. If a mutual exchange wishes to enter into a contract with another exchange or supplier of

services, it has limited options as to how it would pay for the service or how it would negotiate on the contract. Payment will either have to be in cash or in kind or a share of revenue resulting from the new service. Demutualisation opens up the possibility of paying through an issue of shares or granting an option on the shares of the exchange company.

Bringing market discipline to bear upon management

107. Management and more particularly the board will be encouraged to, in fact, must adopt a more

proactive and business like approach to the running of the exchange company. Under a mutual structure, board and management can all too often fall into the civil service mentality because there is no profit incentive. Mutual exchanges are not-for-profit and although board and management will wish to operate to budget, they know that budget variations will be acceptable. Senior management is accountable to the board but the board is (only) accountable to the membership. “Only” because mutual exchanges are “clubs” and very few club members criticise their peers. In a shareholder owned environment, shareholders will criticise if the company fails to perform and directors and management may risk losing their positions as a result.

Incentivising management

108. By and large, managing directors of stock exchanges (and the writer once was one) were not

incentivised by financial reward but by the position they held. Historically, managing directors or chief executives of exchanges were appointed from within and the post was one for life if the incumbent so desired. Very rarely were the MDs of stock exchanges sacked or “asked to resign”. However, in recent years that has changed. Only one CEO of the London Stock Exchange has resigned voluntarily in the last 25 years.

109. CEOs of major exchanges are now very rarely appointed from within. Most are in fact

appointed because of their business acumen rather than their knowledge of securities markets. Running a mutual stock exchange is a major undertaking. Running a demutualised stock exchange is big business and requires very different skills. At this level, position is very important but money and financial reward come more to the fore.

110. Many companies have found that management and workers are more incentivised if they have

a share in the business they are working for and more importantly, helping to build. This cannot happen in a mutual exchange.


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Facilitate merger 111. As stated earlier, the demutualisation of the Dhaka and Chittagong stock exchanges will

simplify the process by which a merger of the two exchanges can take place.

Risks associated with demutualisation 112. Although demutualisation has many benefits, it is not without risk. One is that once

ownership and use are decoupled, brokers may not feel any loyalty in the market and may easily turn to alternatives (domestic or foreign markets or alternative trading systems). They may develop alternative trading systems to internalise their order flow rather than send it to the exchange. However, in some markets (e.g. the London Stock Exchange and Nasdaq) this occurred before demutualisation and the need to compete with these new systems itself became a catalyst for demutualisation.

113. The second is the exchange’s ability to transform itself. Once it demutualises, it must become

a profit-oriented, competitive organisation accountable to its shareholders. If the exchange also becomes a public company (as many have), it will also become subject to the disciplines of the market, having to release bad news as well as good, meet financial and periodic reporting obligations and meet market earnings expectations. Many exchanges adopted a two-stage demutualisation process where the shares initially issued to the members were not transferable for a period of time. This was to give the exchange time to change its internal culture.

114. Third, the exchange can become a potential take-over target, although this can be managed

through ownership limits. The London Stock Exchange lifted its limits to facilitate a merger with the Deutsche Börse, which opened the door to a competing take-over bid by OM Gruppen. Both bids ultimately failed.

115. Fourth, the conflicts of interest that exist in a self-regulatory organisation may be exacerbated

in a for-profit environment. The exchange may adopt anti-competitive rules (e.g. restricting the ability of trading participants to trade elsewhere). A for-profit exchange may not adequately fund its regulatory activities because there is insufficient return on investment. Conversely, the exchange may view its regulatory programme as a profit centre and begin to aggressively fine trading participants for minor rule infractions. Confidential information about trading participants’ activities garnered for surveillance purposes could be leaked to the business side. Concerns about such conflicts forced the Toronto Stock Exchange to spin off its market regulation functions into a new body jointly owned by it and the Investment Dealers Association of Canada.

116. A major concern among regulators is that the attempts to maximize profits and shareholder

value by demutualised exchanges will come at the expense of reduced self-regulation and supervision. The self-regulating functions of exchanges typically consist of the following:

• Trading: Setting rules for trading, conducting surveillance, and enforcing the rules. • Market manipulation: Overseeing the trading system to prevent abuses. • Membership: Establishing rules to govern the conduct of members and monitoring

compliance with and enforcement of rules.


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117. These functions must continue to be carried out by exchanges that demutualise. A number of regulatory models have been adopted:25

1. A demutualised exchange continues to perform all of its regulatory functions, even after

becoming a for-profit organisation. Although conflicts of interest arise in both non-profit and for-profit exchanges, concerns have been raised about whether a demutualised exchange will take enforcement actions and impose penalties on those who are major providers of revenue. The NYSE, for example, arguing that the regulatory function is an integral part of the exchange’s reputation; initially backed away from demutualisation because of the SEC’s insistence that the NYSE first set up an independent regulatory body. Exchange reputation and branding is even more important in a demutualised environment to protect the commercial viability of the exchange.

2. For-profit exchanges can establish a separate entity to conduct regulatory functions,

thereby avoiding some of the conflict-of-interest issues. Nasdaq has taken this approach. In April 2000, the NASD started the process of demutualisation and created two subsidiaries: NASD Regulation Inc. (NASDR), which was the regulatory arm, and the Nasdaq Stock Market, the commercial trading arm. This set-up reduces the problem of conflict of interest. The Chinese walls between NASDR and Nasdaq were strengthened and NASD sold its remaining 27% ownership to Nasdaq, thereby completing the spin-off.

3. An exchange can also outsource its regulatory functions to a completely independent

third party. This approach may help avoid the perception of conflict of interest. However, there must be some way to ensure that the third-party regulator is accountable and will perform its functions effectively to avoid harm to the reputation and brand name of the exchange. In the U.S. futures market, the National Futures Association performs this function for several exchanges. This third party can be a registered futures association, or an entity registered with and regulated by the Commodity Futures Trading Commission, to ensure direct governmental oversight of the party carrying out the regulatory function. In conclusion, it’s important to keep in mind that both for-profit and not-for-profit exchanges can be inadequately regulated.

118. Demutualisation also brings new conflicts, as an exchange pursuing business opportunities

may find itself in conflict with one or more of its listed companies. The Australian Stock Exchange competed against Computershare, a listed company, in a take-over bid for the Sydney Futures Exchange (neither was successful).

119. Fifth, the demutualised exchange’s ability to quickly respond to new pressures and

opportunities may be thwarted if it is still subject to excessive regulatory oversight, with lengthy periods required for rule and policy changes to be approved, while alternative trading systems can implement changes overnight.

120. The following point comes from the recently published IOSCO report on demutualisation and

maybe particularly relevant in the context of Bangladesh:

25 Extract from the Journal of Applied Corporate Finance, Spring 2002 by Reena Aggarwal, Professor of

Finance at Georgetown University’s McDonough School of Business.


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The development of exchanges in many emerging markets is seen as part and parcel of national policy given the strategic importance of the exchange in promoting economic development. Another factor that should be taken into consideration is the relatively nascent development of market institutions or the capital market industry – requiring governments and regulators in emerging markets to typically provide considerable support and implement initiatives that are usually the purview of the private sector in developed markets. This probably explains the significant role played by the government or regulator in initiating reform efforts in emerging market jurisdictions. Many regulators in emerging markets, in fact, have statutory obligations placed on them for both regulation and development. Following discussions with emerging market regulators, concerns were expressed that this prescriptive approach could force a pre-mature solution in an environment where the necessary pre-conditions for demutualised exchanges to thrive successfully may not be present. Follow-up discussions with emerging market regulators in relation to the relatively prescriptive approach revealed that many emerging market regulators believed that they were not in a position to adopt a laissez-faire approach to demutualisation as they considered that the costs and risks involved in the failure of a demutualised exchange could have a far-reaching impact on national economic development. This view was based on the observation and experience that economic development was generally led by the public sector in emerging markets and that the private sector was not sufficiently mature nor were the market mechanisms sufficiently developed to be fully self-dependent and self-sustaining. The survey responses reflected concerns of emerging market regulators that, in some cases, the economic and capital market environment and relevant pre-conditions may not exist or be sufficiently developed in order to ensure the success of a demutualised exchange in emerging market jurisdictions.

Source: IOSCO EMC WG2 Surveys

The Exchanges’ Views 121. The Board of the CSE has appointed a committee to discuss demutualisation and merger and

to report back to the Board of the exchange on its recommendations for rejection or acceptance. The DSE Board, having sought the views of its members, is categorically opposed to merger and/or demutualisation. The SEC’s View

122. The SEC supports demutualisation and merger of the two exchanges but has no desire to push

forward on them unless there is support from the exchanges.

The Members’ View 123. There were mixed views on demutualisation and merger. Some members interviewed were

strongly opposed to demutualisation and merger whilst others were at least interested to listen to what benefits they might bring. Some actually recognised and supported those benefits but would like to see how they could be achieved by alternative means. No one interviewed was of the opinion that a merger would take place in the foreseeable future.


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The Institutional Opinion 124. A small number of institutions were interviewed. Not surprisingly they had no strong

opinions on demutualisation but would welcome a governance structure at the exchanges that considered all stakeholders and not just members. There was general support for a merger of the exchanges which it was felt would create a stronger and less fragmented national exchange. In fact, some would argue for a regional rather than national exchange.

CONCLUSIONS AND RECOMMENDATIONS

Merger 125. The conclusion of the consultant is that the Chittagong and Dhaka stock exchanges should

merge in the interests of investors, other market users, cost efficiency, and efficiency of regulation. However, as neither exchange has a desire to merge and in the case of the DSE; is very much opposed to merger, this could only be achieved through Government intervention.

126. The consultant agrees with the view of the SEC that a forced marriage would be unsuccessful

and, given the strong views expressed by the DSE, recommends that no further action to bring about the merger of the two exchanges should be initiated by the SEC at this time.

127. However, the SEC should instruct the exchanges to respond with proposals as to how they

intend to address the points raised by the consultant in this Report. In particular the exchanges should set out in detail how they will address merger benefits 1, 2, 8 and 9 without achieving a merger.

Benefit 1 Investors assured of best execution 2 Improved quality of pricing 8 Single point for the release of corporate data 9 Reduced listing fees

128. With regard to benefit 9, the SEC should also undertake a review of listing fees and charges at

the DSE and CSE to ensure that issuers are not being unfavourably treated to the benefit of Members of the exchanges. In particular, the SEC should examine exchange costs of operating and maintaining their listings divisions compared with the income from listing fees to ensure that issuers are not being unduly overcharged for this service.

129. Should at some point in the future, the exchanges decide on a merger, the consultant makes a

number of recommendations. First, it could be achieved by a take-over of the CSE by the DSE but this would be unnecessarily complex. Demutualisation of both exchanges ahead of merger would solve many of the problems that would be created by a take-over. It would also solve the problem of non-active members. In a demutualised National Stock Exchange of Bangladesh, there would be no such thing as non-active members.

130. Second, each exchange should be independently valued and terms agreed for a distribution of

shares in the new exchange to existing members in proportion to the value of the respective exchanges.

131. Third, existing active trading members should be given a trading right in the new exchange.


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132. Fourth, consideration should be given to differentiating between the number of shares issued to active and non-active members. Active members are contributing to the market and should be given greater reward for their contribution. Existing members may, depending upon the chosen mechanism for demutualisation and merger, be given shares in the exchanges in which they are currently members. These would be exchanged for shares in the National Stock Exchange of Bangladesh under the terms agreed for the merger.

Demutualisation

133. Although there are undoubted benefits to be obtained from demutualisation, a number of these

can be brought about by improved governance; smaller boards; fewer committees; a new Regulatory Review Committee; and improved surveillance.

134. The consultant’s view is that the major benefit that demutualisation would bring in the short

term would be to facilitate a merger between the two exchanges. However, as merger is not likely to happen, demutualisation should not be imposed upon the exchanges.

135. That is not to say that the exchanges should totally ignore the other benefits that

demutualisation would bring. In particular: 136. The Boards of the DSE and CSE should be cut by half with each Board comprising a majority

of independent members. 137. The number of Committees should be reduced to the following:

• Finance Committee • Audit and Risk Committee • Remuneration and Nomination Committee (to include Corporate Governance once the

Code of Corporate Governance comes into being) • Disciplinary Committee • Appeal Committee • Regulatory Review Committee (possibly including Audit and Risk or separate)

138. Listing should be a function of the Executive not a Committee. Listings should be approved by the Executive under authority granted by the Board. If the Executive has an issue with a particular listing, it should refer the matter to the Board for consideration. The other market committees should be established as Advisory Groups e.g. Rules.

Timetable

139. The SEC should set a target date of no more than six months for the implementation of these

recommendations.

SURVEILLANCE

Exchange Front-line Supervision 140. In determining the feasibility/desirability of demutualising and/or merging the two stock

exchanges, the Consultant undertook an analysis of the regulatory operational areas within the exchanges, paying particular attention to the market surveillance units. It is in this area that the SEC is particularly concerned to ensure that the exchanges have the ability and independence from Member interference to regulate the market. In addition to the recommendation earlier for the establishment of a Regulatory Review Committee, the


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following section of this Report sets out the Consultant’s findings and recommendations with regard to the surveillance of the market.

141. At the CSE, surveillance, market operations and listings have been amalgamated into one area,

that of ‘Market Operations’. The DSE is in the process of doing this. The DSE is also in the process of developing a database of company directors and connected persons to assist in the investigation of possible cases of insider dealing. However, at both exchanges, great care has to be taken not to co-mingle or confuse the two very disparate roles of supervision and business development. The exchanges should keep separate from Market Operations that part of listings that relates to bringing companies to a listing on the exchange. Attracting and approving companies for listing is a business development role; whilst ensuring companies’ compliance with the continuing disclosure obligations of listing is a surveillance role.

142. Surveillance at the exchanges focuses on issuers’ disclosure obligations, member position

monitoring, market manipulation and insider dealing. The systems used for this are relatively basic in design and if they were all operated in an on-line mode would undoubtedly severely stretch the computing capacity of the respective trading platforms. For this reason, some of the activities are carried out off-line. However, this is not too much of an issue if managed properly i.e. monitoring for market abuse needs to be done on-line whereas some other activities can be done off-line.

143. What is of concern is that neither exchange has an effective system designed specifically to

monitor for market abuse26. Nor do the exchanges have adequate automated information control systems to maintain and monitor progress on cases of suspected market abuse or company failure to comply with its disclosure obligations. Cases are hand written and typed up instead of being retained in a central surveillance monitoring system. A computerised monitoring system should be used to manage progress on investigations, to produce reports for senior management and the SEC. The system would contain information regarding the investigation, progress, result of the investigation and action taken, if any. Names and details of all parties would be recorded in the database and could be used to cross-check with other suspected violations for patterns or relationships between involved parties (particularly useful in the case of insider dealing and/or market manipulation involving collusion by the brokerage firm).

144. The staff at the exchanges are knowledgeable in what they do but would benefit from training

in the techniques of market surveillance, in evidence gathering and in analysis of data. A common complaint from brokers was that surveillance staff, in their eagerness to identify cases of market manipulation, often mistook basic trading strategies for something more sinister – a complaint also levied at the staff of the SEC e.g. a question asked of one broker “Why did your client buy on a falling market?”

145. SEC staff have a surveillance terminal from the CSE together with a remote terminal (not a

surveillance terminal) from the DSE. The SEC staff watch the surveillance and trading screens in the same way as the staff at the exchanges in order to identify abnormalities in trading. This is clearly duplication of effort but, in the opinion of the SEC, necessary in order to ensure that exchange staff are doing their job. Members of the DSE reported a number of instances where they had received calls from both the DSE and SEC asking the same questions.

26 Market manipulation and insider dealing.


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SECAS 146. Securities and Exchange Commission Automation System (SECAS) is an application software

which was developed to automate data recording and retrieval of the SEC. SECAS is basically a data accumulation and reporting system and performs only a limited amount of analysis. The system, funded by the ADB, was originally installed in 2001. The final version of software went live end 2002/early 2003.

147. The system has ten modules:

1. Surveillance 2. Supervision and Monitoring 3. Compliance and Enforcement 4. Legal Affairs 5. Registration and Licensing 6. Corporate Finance (Issuer) 7. Personnel Information 8. Document Tracking 9. Executive Information 10. System Administration

148. For the purposes of this Report, the Consultant has undertaken only a review of module one

(Surveillance). This module tracks data related to each transaction on the Dhaka and Chittagong stock exchanges. The information captured in this module is imported from transaction data files sent by email from the stock exchanges at the end of each day. There are five screen forms associated with this module into which the SEC user inputs information for either the storage or retrieval of data:

• Data Transfer Form: The purpose of this form is to import market data that the SEC

receives from the Dhaka and Chittagong stock exchanges. Because the format is inconsistent across the two exchanges, the user has to select the right files for the right exchange.

• Market Information Form: This is used to maintain a record of the indices and the market

capitalisation of both exchanges. • Inspection Form: This form is used to record and monitor progress on any investigation

being undertaken by the Surveillance Department. • Paper Clips Form: This form is used to maintain a record of all paper clippings for the

Surveillance Department. This module differs from the Document Tracking Module in that the original document is not saved but the text of the document (could be a newspaper) is input into the database.

• Report Form: This form allows the user to generate reports from the market data received

from the Dhaka and Chittagong stock exchanges. The report can be viewed on screen, exported to a file, or sent to a printer. There are twenty-five standard reports that can be generated plus there is a capability for the system to produce ad hoc reports. However, because of the size of the database and the slowness of the servers, it can take between thirty and sixty minutes to view a single report.

149. SECAS is a management information system. The Surveillance Module was not designed to

provide on-line market surveillance.


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150. The comment from the SEC is that SECAS is underpowered for the function it now performs. This is evidenced by the amount of time taken to produce reports from the Surveillance Module. The implementation of a new Surveillance System would greatly reduce the load on SECAS. Whether or not SECAS needs an additional upgrade is not within the scope of this project.

151. Although, in terms of market surveillance, module one of SECAS should be replaced by a

modern market surveillance system, SECAS could be adapted to retain information about company directors and other company connected persons and could, through a link to the surveillance system, provide a database of information for use in insider dealing investigations. In addition, the Inspection Form should be retained.

Surveillance Recommendations

Improved systems for surveillance monitoring

152. The exchanges should develop or acquire improved systems for surveillance monitoring.

These systems should be rule driven and should provide alerts to surveillance staff who will follow-up and report. Appendix C identifies the types of market manipulation and insider dealing activities that such a system should monitor for. The most common forms of market abuse found in stock exchanges tend to be insider dealing, front running and share ramping. The following are examples and how they can be dealt with by surveillance staff using modern surveillance systems:

Dealing with insider trading

153. This query is intended to detect insider trading, it should be triggered automatically if possible (otherwise manually) and run each time there is a market announcement.

1. For the security which just had a market announcement, refer to a historical matched trades database and identify all trades completed during X days prior to the announcement.

2. Then lookup the names of both buyer and seller of each trade against the names in the database of directors and connected persons for that security.

3. Any matches between the names should be further analysed.

4. The report from the query should be submitted to Investigations Department and to SEC.

5. Analyze information from the trades of non-insiders identifying any large and/or unusual trades.

6. Check the database to see if there is anything known about the person(s) trading (e.g. known associations with insiders or similarity in addresses).

7. Check dealing account of person(s) at brokerage firm for frequency of dealing, normal dealing size and any information that can be provided by the broker.

8. Prepare report on findings and submit to Investigations or close case.


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Dealing with front running

154. This attempts to detect front running, which is when a large trade will be preceded by a small trade carried out by a trader or a trader using the dealing account of a connected person. This query should be run automatically on a daily basis followed by a daily process for the staff. 1. In the matched trades database, look for all trades that exceed volume X and/or trade

value Y.

2. For each trade highlighted from the step above, identify all orders Z minutes before till the reminder of the trading day.

3. Identify trades where the trader identification is the same as the large trade identified in step 1 above.

4. Present these results with the same fields present in the matched trades table.

5. Check the database to see if there is anything known about the person(s) trading ahead of the large order.

6. Check dealing account of person(s) at brokerage firm for frequency of dealing, normal dealing size and any information that can be provided by the broker (e.g. is dealing account alias or connected person of trader? Is this a discretionary account operated by the trader?).


Dealing with market manipulation

155. This aims to detect market manipulation, which is most commonly share ramping and often done with the connivance and/or support of a trader27. The following task should trigger the query which is then followed by the subsequent process for surveillance staff.

1. Each day physically enter the index value at the close of the days trading.

2. In the matched trades database, check movement of price over/under by X% in correlation to index over a period of Y days.

3. Identify trades in securities underperforming or outperforming the index and present

results with the same fields present in the matched trades table.

4. Analyze trades of person(s) dealing.

5. Check for known associates and/or similarities in addresses.

6. Build picture of trading activity concentrating on alleged offence (remove clutter).


27 Additionally, look out for “unconnected” trades carried out by traders either in their own name or in the

name of a favoured account or connected person jumping on the band wagon.


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156. Any of the variables (X, Y, Z) identified in the queries above can be tweaked over time if results are not satisfactory or if too much normal trading activity is being picked up. The results for each auto-query should be sort-able by the user by any of the displayed fields.

Investigation monitoring systems

157. The exchanges should develop or acquire (if it does not come as part of the surveillance

system) a system for recording and maintaining progress on analysis and investigations being undertaken. Reports from this monitoring system would be provided to the SEC on a regular basis.

Remove duplication in surveillance

158. The SEC needs to implement its policy of top-down regulation and surveillance of the market

in Bangladesh. Currently there is duplication of effort with the exchanges conducting their own analysis and investigations and the SEC undertaking similar if not identical analysis. The exchanges are SROs and should get on with the job of front-line market surveillance. The role of the SEC should be to ensure that the exchanges are doing what is required of them as an SRO. There needs to be clearly defined demarcation lines between what the exchanges do and how far they can take investigations and what the SEC does. As a general rule of thumb, if it is a breach of stock exchange rules then exchange investigates and disciplines. If it’s a breach of legislation or SEC rules, then the exchange passes the information onto the SEC to investigate and discipline. An example is set out in Appendix D showing how a case of front running should be investigated by the exchange and the points at which the SEC should become involved in the process. Largely, a breach of exchange rules by persons over which the exchange has jurisdiction should be dealt with by the exchange. Where there is non-Member involvement, the matter should be handed over to the SEC; and in the case of fraud to the police. A further project needs to study the existing roles and responsibilities of the stock exchanges and the SEC and recommend ways to enhance the roles and responsibilities for rule making and enforcement by the exchanges to complement the SEC. SEC to acquire its own surveillance system

159. The SEC should develop or acquire its own market surveillance system – not to duplicate what the exchanges are doing but to monitor the exchanges. The SEC surveillance system, because it will be accumulating data form both exchanges, will also give an overview of the entire market. There naturally exists the opportunity of all three organisations acquiring the same system thereby achieving savings on the purchase of the system. Hong Kong and Singapore are examples where both the exchange and regulator have the same surveillance system. In Hong Kong both the Securities and Futures Commission (SFC) and the Hong Kong Exchanges (HKEx) have purchased Computershare’s SMARTS system and run it independently of each other. The SFC can now monitor surveillance activity and proactively instruct the HKEx to follow up and report on market anomalies SFC detects. This avoids the situation where either the SRO missed or did not fully investigate problems. The constant and active oversight by the regulator puts pressure on the SRO to adjust their surveillance to at least the level of the regulator to be judged as “doing their job”.

Separation of surveillance and investigation

160. The Surveillance Department of the SEC should be responsible for surveillance of the exchanges and of the market. It should be an evidence gathering department using modern surveillance and database systems to gather information/evidence electronically (a revamped SECAS holding company director information would assist in the investigation of suspected


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cases of insider dealing) for further analysis and investigation by an Investigations Department. The Investigations Department analyses the information, determines what rules have been broken and advises on appropriate charges. It is the Investigations Department which does periodic and ad hoc inspections of brokerage firms. Training

161. Staff of the SEC, CSE and DSE should undergo training in modern market surveillance and investigation techniques. This training will help surveillance and investigations staff to be more effective in their role. The training should include examination of evidence and analysis of dealing accounts of brokerage firms. In addition, the training should be given in the rules of evidence to enable staff to be able to stop short of contaminating evidence that may later be used by the courts.

Inter-Market Surveillance Unit

162. The CSE and DSE should form an Inter-Market Surveillance Unit to share and discuss areas

of mutual concern, share information and learn from each other. The SEC should have observer status.

Review of exchange disciplinary and appeal procedures

163. The composition, duties and responsibilities of the Disciplinary and Appeals Committees at

the stock exchanges should be reviewed with the objective of ensuring that the rules are monitored and enforced and that appeal procedures are in place.

Surveillance Costs

164. A modern and efficient market surveillance for the exchanges and the SEC is estimated at

US$300,000 each. This figure is based upon estimates for a similar system for another securities regulator in the region. Training in the use of the system is included within the cost of the supply of the system.

165. The SEC will require the services of an international consultant for three months to help

define the requirements for the surveillance system and to issue a Request for Proposals to potential systems vendors.

166. In addition, the services of an international consultant will be required for two months to:

• Establish systems and procedures for SECP to undertake market surveillance, monitoring and supervision and in general, deal with market malpractice and abuse.

• Study the existing roles and responsibilities of the stock exchanges and SEC.

Recommend ways to enhance the roles and responsibilities for rule making and enforcement by the exchanges to complement the SEC and recommend how the exchanges and the SEC can coordinate to effectively supervise and develop the securities market in Bangladesh.

• Assess the capacity of the SEC and the exchanges for effective supervision of the market and make recommendations on how to enhance enforcement procedures and investigation techniques by SEC and the exchanges.

• Determine whether the disciplinary and appeal procedures established at the exchanges

are fair, independent and clear and make recommendations accordingly.


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• Recommend appropriate sanctions and penalties for different market malpractices.

167. Training to staff of the SEC and the exchanges in the surveillance and regulation of markets

would utilise the services of an international consultant for two months in the preparation and delivery of an interactive training course.


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APPENDIX A: VALUATION OF EXCHANGES


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Calculation of Break-Up- Value of DSE as at June 30, 2004

On Historical On Replacement Cost SL # Heads Cost basis or Realizable Values 1 Fixed Assets at WDV 60,375,920 557,091,078 Automation Project 4,104,541 4,104,541 Land 46,337,973 260,000,000 Buildings 4,946,869 288,000,000 Others 4,986,537 4,986,537 2 Investment in CDBL 4,000,000 4,000,000 3 Net Current Assets 69,373,671 69,373,671 Current Assets 220,562,811 220,562,811 Less Current Liabilities 151,189,140 151,189,140 4 Total Assets 133,749,591 630,464,749 5 Long Term Liabilities 47,062,223 47,062,223 6 Net Asset Value 86,687,368 583,402,526 7 No. of Share 195 195 8 Net Asset Value per share 444,551 2,991,808

or Break-Up-Value or 0.44 mn or 2.99 mn Calculation of Break-Up- Value of CSE as at December 31, 2003

On Historical On Replacement Cost SL # Heads Cost basis or Realizable Values 1 Fixed Assets at WDV 102,984,279 236,215,017 Automation 6,827,467 6,827,467 Land 68,749,738 168,750,000 Buildings 22,769,524 56,000,000 Others 4,637,550 4,637,550 2 Investment in CDBL 10,000,000 10,000,000 3 Net Current Assets 105,938,197 105,938,197 Current Assets 151,769,033 151,769,033 Less Current Liabilities 45,830,836 45,830,836 4 Total Assets 218,922,476 352,153,214 5 Long Term Liabilities 0 0 6 Net Asset Value 218,922,476 352,153,214 7 No. of Share 129 129 8 Net Asset Value per share 1,697,073 2,729,870


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or Break-Up-Value or 1.70 mn or 2.73 mn N.B. (a) The above mentioned break-up value (as if it is liquidated) of stock exchanges does not include the value of right to trade (b) The membership of DSE is sold recently at a value of Tk 8 mn, which fetch the going market value of Tk. 11 mn. However, owning a membership entitle ones to right to trade. Hence this value includes the value of right to trade. (c) The membership of CSE is sold in 1997 at a value of Tk 5 mn, which fetch the going market value of Tk. 3.5 mn. However, owning a membership entitle ones to right to trade. Hence this value includes the value of right to trade.

Basic Data/Information P/E ratio or Earnings Multiple in 2004

Industry/Sector Simple Avg.

Weighted Avg.

Bank 29.8 21.74 Turnover of DSE (Tk. in million) 1999 2000 2001 2002 2003 2004Annual Turnover 38964.71 40273.2 39869.48 34984.32 19152.28 52391.54% of Annual Growth 3.36 -1.00 -12.25 -45.25 173.55 1.03 0.99 0.88 0.55 2.74Annualized Growth Rate (arithmetic) 23.68Annualized Growth Rate (Geometric) 6.74 Market Capitalization (in tk million) 2000 2001 2002 2003 2004 62923.6 63769 71261.75 97587 224923% of Annual Growth 1.34 11.75 36.94 130.48Annualized Growth Rate (arithmetic) 45.13Annualized Growth Rate (Geometric) 37.50 Turnover of CSE (Tk. in million) 2000 2001 2002 2003 2004Annual Turnover 12933.8 14933.8 13580.84 6719.3 14572% of Annual Growth 15.46 -9.06 -50.52 116.87Annualized Growth Rate (arithmetic) 18.19Annualized Growth Rate (Geometric) 3.03


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Valuation of Land of DSE

SL# Description Qty (khata) Rate (Tk) Value (tk.)

1 Land at Motijheel (DSE) 10 10,000,000

100,000,000

2 Land at Nikunja 80 2,000,000

160,000,000

Total 260,000,000

N.B.: The rate is conservative market rate Valuation of Building of DSE SL# Description Sq. Feet Rate (Tk) Value (tk.)

1 Eight Storied Buildings with

57,600

5,000

288,000,000

7200 sq. ft. each floor Valuation of Land of CSE

SL# Description Qty (khata) Rate (Tk) Value (tk.)

1 Land at Agrabad (CSE) 75 2,250,000

168,750,000

Total 168,750,000

N.B.: The rate is conservative market rate Valuation of Building of CSE SL# Description Sq. Feet Rate (Tk) Value (tk.)

1 Two Storied Buildings with

28,000

2,000

56,000,000

14000 sq. ft. each floor


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APPENDIX B: EXAMPLES OF UNIFICATIONS


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Hong Kong Unification The four separate Hong Kong exchanges were unified in 1986 and the exercise was, overall, a considerable success. The exchanges traded the same larger companies and then competed to get smaller and less reputable companies. The net result was that all major stocks were dealt on at least three exchanges. The positive image engendered by the unification process gave the exchange international credibility for the first time and resulted in an increase in business volume. The daily average in terms of value increased by over 300 percent during the year after unification, setting down to about 200 percent two years after. While care must be taken in interpreting these figures, the conclusion can be drawn that in Hong Kong unification added up to more than the sum of the four exchanges' business. The overall policy on Hong Kong unification was enunciated rather late in the procedure and is stated concisely in a speech, some edited extracts from which are set out below, by the Hong Kong Financial Secretary (equivalent to Hong Kong’s Finance Minister) to the Legislative Council on 23 July 1980: “There are two main functions of stock exchanges: first to provide a means of raising capital for industry and commerce, and second, to provide a market in which investors can deal in the securities they acquire as a consequence of the first function. These functions involve exchanges in a public responsibility to those who have committed funds to the market by way of investment and to those who may wish to invest and provide new funds to finance future corporate development. In particular, investors must be satisfied that: adequate information about listed companies is available, and that the conduct of listed companies and those connected with them is subject to effective regulation; the conduct of members of the stock exchanges is subject to effective regulation; and the stock market is conducted with maximum efficiency.”

. “Hong Kong is unusual in having as many as four exchanges. To a large extent, the four exchanges have been regulating their affairs in an efficient manner. But in respect of the three aspects on which I have said investors particularly need to be satisfied, the quartet has three particularly unsatisfactory features:

• the fact that they compete to attract additional companies, tends to lead them to adopt a flexible interpretation of their own listing rules (but once listed on one exchange they were traded on all)

• the Government has greater difficulty in regulating the conduct of the members of the four

exchanges than it would if there was only one exchange; and • one exchange could be run more efficiently and economically than four exchanges”.

“In such circumstances, the growth of local and international confidence in Hong Kong as a securities and financial market has been hampered by the presence of four exchanges. Obviously, the answer lies in unification. As well as rectifying the three unsatisfactory features to which I have just drawn attention, one market would be less erratic than four, in that brokers would not be able to indulge in arbitrage between exchanges. It would also provide a better service in that it would have greater liquidity. And we think overseas investors in particular will find one exchange a greater attraction than they do four.” “So the Stock Exchanges Unification Bill 1980 provides for a single unified exchange. It is the result of detailed investigation and discussion by the Working Party on Unification the four exchanges established in May 1977 under the chairmanship of the Commissioner for Securities”. “Clearly the Exchange Company will not be ready to establish the unified exchange overnight. But when it is ready, on a day to be appointed by the Financial Secretary, it will have the exclusive right to operate


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the stock exchange in Hong Kong… The preliminaries cannot be allowed to drag on too long and the Bill prescribes that the Financial Secretary must appoint his day not later than three years after the date of commencement of the Bill. Personally, I consider three years is generous. I trust the Transitional Committee and the Exchange Committee will tackle the job diligently, and so be ready well within this time”. “..I would like to record my appreciation for the support and cooperation of the members of the four existing exchanges. It has not been easy for them to participate in the demise of the institutions they have carefully built up over the years. But they have themselves taken one major and significant step towards unification by voluntarily achieving the incorporation of the Exchange Company…”. Although business increased rapidly, behind the scenes the new Hong Kong exchange continued to operate as an old-style club exchange with little regard for public accountability and duties to the client. Problems related to the distribution of new issues to board members resulted in the chairman being imprisoned for four years and the arrest and trial of six other members as well as the chief executive of the exchange. In March 2000, there was another major change in Hong Kong which was planned to make the market more professional. The exchange merged with the futures exchange and clearing company, at the same time as it demutualised. On June 27th 2000 shares of the exchange will be listed and traded on the exchange. United Kingdom Amalgamation and ISRO Merger The UK market has effectively undergone two “unifications” - in 1973, when 22 exchanges amalgamated, and in 1986, when a group of international brokers merged with the London Stock Exchange. The impetus for the 1970s amalgamation was a major UK Government report which drew attention to the fact that the 22 separate stock exchanges did not have adequate arrangements to compensate clients in the case of broker default. The Government decided that the standards were too low and needed to be raised. The Government therefore set a stringent timetable for amalgamation without which the process would not have succeeded. The main problems in the amalgamation were getting membership agreement for the changes, the winding down of the old exchanges, and listing. Several regional exchanges did not adhere to the spirit of unification and quietly disposed of assets that should have been transferred for central use, distributing the benefits directly to their own members. Lower level listing standards of the regional exchanges were abandoned, but then the listing standards failed to meet the needs of local industries. New requirements had to be reintroduced to cope with these. The unique membership structure, which was not a seat system, made it easier to amalgamate the exchanges than if the traditional seat system had existed. Offering to exchange a seat on a small provincial exchange for one on the central London exchange, with perhaps ten times the value or more, would have been much more difficult. In November 1986, a few days after the `Big Bang' when London adopted an electronic floorless trading system, the members of the London Exchange voted to join with those members of the international broking community in London who had formed the International Securities Regulatory Organisation (ISRO). The merger with ISRO, and associated changes, considerably strengthened London's position as a centre for dealing in international securities. The Stock Exchange was re-established as a company limited by shares under the UK Companies Act. There were difficulties in working out the value of the assets to be distributed to the old members and eventually, after several failures, a fairly random solution met with the approval of the required 75% of the old members. The solution was that the exchange pay £10,000


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(US$15,000 at the time) to each member at the time they reached the age of 60, with no account taken of inflation. 28 The Philippines The commitment of the Government of the Philippines to unification was given in a speech by President Ramos on 28 July 1992: "The SEC's initiative to unite our two stock exchanges into one is precisely one of the most important initiatives that must be taken under this administration. While our neighbouring countries have already set up global linkages, we are still arguing whether to link up Manila and Makati Stock Exchanges, a short distance of five kilometres as the crow flies. Unless we keep in step with the fast-changing times, we will always be left behind. I would like to see the day therefore when we shall have one single unified exchange, wholly professionalised in the management and at par with those of our neighbours, and it better be soon."

In July 1992, the Chairman of the SEC’s views were published by the SEC: "The unification of the two stock exchanges could bring the following benefits:

• The most important benefit to be derived from unification is that investors will only have one auction market where the highest bid (buyer's price) and the lowest offer (seller's price) of the same issue or listed stock are displayed at any given time, therefore the investors are assured of the best price or `best execution' of their orders by the stock brokers.

• That the waste associated with duplication of facilities such as the Exchange building and the

computerisation, settlement and delivery services, will be avoided. • Another benefit of a unified exchange is that public dissemination of information as well as

educational and promotional campaigns, will certainly be improved with a larger budget from the new stock exchange. There will be a common centre which will provide research and statistical information to the general public.

• One common corporate disclosure policy for the unified exchange will ensure equal access to

vital information • There will only be one listing committee, as well as one common committee on admission of

new members to the unified exchange • Lastly it is envisioned that the unified exchange will be managed by an independent and

professional staff which will ensure professionalism and do away with internal politics, which invariably affect the integrity of the market”.

“All of these that I have enumerated are viable and can be accomplished by the unified exchange, which would be a self-regulating organisation, with the SEC having minimal intervention in the interests of improving the development of the capital market in the Philippines in order to improve the development of the economic condition of the country”.

28 Elderly members flocked to receive their payments, the first being a gentleman of 102.


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“It is interesting to note that the use of the Philippine Stock Market to Philippine business and to the public at large has been dismal ……” Following the 1992 statement by the President, the directors of the boards of each exchange agreed in principle to unify their operations and the Philippines Stock Exchange was incorporated. The PSE was licensed to operate in 1994. Unification of operations occurred at the end of March 1994 when the two floors of the previous exchanges were electronically linked to create a one order book system. As at June 2000, the PSE retains its two physical floors although brokers can operate from their offices and from any part of the country. The PSE system is nationwide. The unification resulted in much higher international profile for the Philippines exchange than pertained when there were two exchanges. It is now nationwide with a good standard of service to members. Its current problems result from the broker-dominated membership of the board and the fact that staff members are not able to regulate members’ activities without interference from the board. Separating ownership from membership is the only solution to this problem in the Philippines.


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APPENDIX C: TYPES OF MARKET ABUSE


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Market Manipulation Most forms of market manipulation involve gaining control of the market by purchasing significant volumes at artificially set prices. Also called “cornering”. This can be followed by increasing or decreasing prices to desired levels. The more illiquid the stock, the easier to gain control and therefore the easier to manipulate. Demand side manipulation Any manipulative technique used to increase the price of the securities. The rising price often leads other buyers into the market. The resultant market price bears no relation to the merits of the investment. Supply side manipulation Any manipulative technique used to decrease the price of securities. The falling price induces others to sell, including short sellers. The resultant market price bears no relation to the merits of the investment. Manipulation Techniques on Price29 Alert or Preventative Measure Dealing Ahead or Bait and switch Stock-of-the-month recommendations are issued, usually without appropriate foundation, and sold to a group of customers. They then re-sell the stock for a small profit, thereby creating interest and encouraging other investors to buy at higher levels. This process can be repeated several times, pushing the price higher.

Monitor brokers reports and newspaper tips and keep watch on who is trading. Analyse period prior to publication of the recommendation which will show tipster traded ahead of the recommendation. Later trading will show the profit taking.

Highest bidder or transactions at progressively higher prices Consistently appearing as the highest bidder, a device which could be used to support or raise the price of securities; following the market too closely on a rise with either purchases or bids, may also constitute apparent activity. Each time new buyers enter the market, even as a result of an independent purchase or bid, it exhausts the supply of securities at lower levels, and forces others to raise their bid (see also pump and dump). The inverse is used to lower the price of the security.

Alert should come from seeing price increase greater than market trend. Perpetrator will be identified from the order book.

Hype and dump Talking up the price of stock by using false or exaggerated reports, rumors, brokers recommendations etc. Once price has risen, stock is dumped. The antithesis can be known as slur and slurp and occurs when the price of a stock is talked down, allowing manipulator to buy shares at lower prices.

As in dealing ahead.

29 Some of the names of the offences maybe different in Bangladesh but the offence is the same.


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Share Ramping or Pump and dump Transactions at successively higher prices, giving the appearance of real activity by investors, then dumping or selling at highs. Can occur as a supply side manipulation as well, by making undisclosed offers for only small parcels of shares, thereby inducing others to sell and allowing the manipulator to buy a large parcel of shares later at a cheaper price.

Alert should come from seeing price increase greater than market trend.

Marking the Close or Ramping Marking (up) the close either by placing bid or purchasing shares at or near the close which changes the closing price (bid often dropped next morning or day only bid used). Also called painting the tape or window dressing. Can also be used to push share price lower.

Monitor orders and trades in all securities during the last [x] minutes of trading. Show pattern of trading. [set x initially at 20 minutes but gradually bring down to around 10 minutes]

Window dressing Ramping by institutional investors to allow valuation at desired prices.

As in Marking the Close. Most likely at month or quarter end.

Share support schemes Offeror company in a take-over situation in which it is offering its own shares in exchange for the shares of the offeree company buying its own shares to maintain or increase the value of the offer. Alternatively, offeree company buying its own shares to frustrate the offer or to raise the value of the company above the offer price.

All trading in both offeree and offeror companies should be monitored during contested take-over situations.

Manipulation Techniques on Volume Alert or Preventative Measure Chain letter rally Occurs as speculators enter market thereby unwittingly assisting manipulator by increasing volume and price movement.

Can confuse investigations. These trades should be eliminated from enquiries at an early stage.

Churning The manipulator acquires a holding of shares and then places both buy and sell orders either through one broker or several in order to create an impression of large turnover. These orders are usually placed at progressively higher prices. Also called pass the parcel.

Alert when same beneficial owner places simultaneous (or nearly simultaneous) buy and sell orders.

Pools A group of manipulators who trade shares back and forth between themselves, usually through one broker, thereby raising volumes and creating other investor interest. Similar to churning and pass the parcel.

Alert should come from seeing price variation greater than market trend.


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Market Domination or Short squeeze Purchasing significant amount of stock i.e. cornering the market in order to force short sellers to purchase shares to cover their short positions at successively higher prices, thereby increasing the price.

Alert should come from seeing price variation greater than market trend.

Matched orders Pre-arranged trades by associated parties who enter purchase or sale order knowing associate has entered corresponding order.

Generally only in large orders or in exceptionally illiquid securities. After event analysis from being made aware from some other source.

Wash sales Purchase and sale orders placed at same time where beneficial ownership does not change.

Alert when same beneficial owner places simultaneous (or nearly simultaneous) buy and sell orders.

General Manipulative Techniques Warehousing or parking Selling parcels of shares to the warehouser in order to disguise the path from original seller to the ultimate buyer. Often used to disguise ownership in a takeover situation, or where control over the shares is needed to ensure a company resolution is passed without disclosing the association between the warehouser and the beneficial owner.

After event analysis from being made aware from some other source.

Failure to disclose Any failure to disclose control or association of the purchase or sale of securities prescribed by statute. The lack of disclosure can allow a manipulator to incorrectly convey to the market that demand or supply for securities is genuine when, in fact, it is related to his own position.


Churning and burning The excessive trading of an account by a broker (churning) for the purpose of generating commission without regard to the needs and objectives of the client (who is burnt).

Comes from analysis of client ledger.

Guarantees or payments Guaranteeing purchasers against loss or making payments to induce others to purchase or sell the security.


Use of nominee accounts The use of nominee/fictitious accounts to stage widespread buying and selling activity at designated price levels, thereby concealing the actual control exercised by the manipulators and the purpose of such activity.

When nominee accounts appear in any dealing investigation, seek to find out who is behind the nominee account.


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Types of Insider Trading Alert or Preventative Measure Front-running When a broker/dealer, knowing a client has a large or market-sensitive order, puts through a transaction on his/her or another client’s behalf, thus benefiting from the pre-warning. Can occur in either the securities or related instruments market.

Alert showing all trades ahead of large orders

Scalping Trading prior to the release of a research report.

As in Dealing Ahead.

Piggy-backing When a broker, after observing a series of transactions of a client who has a high degree of success, repeats their investments for him/herself or clients. Is similar to front-running but occurs after the transaction of the client has been completed.


Inside market information When a broker/dealer disseminates information that certain trading activity is occurring or about to occur which will cause a price change. Similar to front running.


Classic insider trading When a director or associate of a company buys or sells shares before the release of a price-sensitive announcement.

Analysis of trades in the period ahead of an announcement.

Motives for Manipulation Motivation for manipulation can be to: • increase the price of securities for the purpose of maintaining an artificial price level at which new

shares are to be issued; • fulfil promises made to induce earlier purchases to buy the security; • interfere with the market for securities so as to affect the outcome of a takeover; • increase or maintain the price, in circumstances where there exists a direct financial interest in a

rise or price maintenance, due to an existing long position; • stabilize or raise the price in circumstances where loans exist to a substantial shareholder which

would be margined if the stock fell below a specific price; • decrease the price of securities, thereby allowing manipulator to purchase a large position at a

lower price and/or realize a tax loss to offset trading profit; • increase the price of securities in order to lend a fictitious appearance of worth to the stock, either

to attract genuine investors or to boost the asset value of the holding company or major shareholder;

• raise or maintain the price of securities in order to discourage other investors selling out or to maintain confidence in the company;

• decrease the price of securities ahead of making a takeover or privatization bid; • create a false appearance of activity in a stock, thereby inducing other buyers to enter the market;


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• support the price of securities so as not to breach an existing legal contract such as a takeover or underwriting agreement.


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APPENDIX D: EXAMPLE SURVEILLANCE PROCEDURE


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This brief guide is an example of one aspect of what is expected in a Surveillance Procedures Manual. It covers an instance of alleged front running from the point of trade analysis through to the disciplinary hearing. Surveillance Surveillance staff monitor market activity. Suspicious trades are examined see example below:

Front running This procedure attempts to detect front running, which is when a large trade will be preceded by a small trade carried out by a broker or a broker using the dealing account of a connected person. This query should be run automatically on a daily basis followed by a daily process for the staff.

8. In the matched trades database, look for all trades that exceed volume X and/or trade value Y.

9. For each trade highlighted from the step above, identify all orders Z minutes before till the remainder of the trading day.

10. Identify trades where the initiator of the order is the same as the large trade identified in step 1 above.

11. Present these results with the same fields present in the matched trades table.

12. Open file in surveillance record system enter details of the analysis being undertaken, date and time of commencement of analysis, trade data, and suspected activity.

13. Check the surveillance database to see if there is anything known about the person(s) trading ahead of the large order.

14. Telephone the Member company for information about the trade and the dealing account of person(s) who traded ahead of the large order e.g. frequency of dealing, normal dealing size and any information that can be provided by the firm (e.g. is dealing account alias or connected person of broker? Is this a discretionary account operated by the broker?).

15. Update surveillance record system.

16. Prepare report on findings and submit to Investigations Department or close case.

Investigations Department staff discuss the file with Surveillance Staff and if further enquiry is necessary seek information from the Member company.


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Investigation Inform SEC that an investigation is in progress. (a formalised reporting mechanism needs to be established with the SEC) Further information may be required and this would be achieved through a visit to the firm to check the dealing accounts of person(s) trading ahead of the large order. Also compare dates and times of other trades by the institution (initiator of the large order) and the person(s) who traded ahead of the large order to see if there were other similar trades in the past. If the person(s) who traded ahead of the large order is a director or employee or representative of the Member company serve written notice on the Member that you wish to interview the person(s) about their dealings. Interviews should be held at the stock exchange. If the person(s) who traded ahead of the large order is not a director or employee or representative of the Member company, establish from Member company any known connection with either anyone in the firm or with the initiator of the large order. If the former, conduct interview with the connected person in the firm. If the latter, pass to the SEC. If no connection can be established, close file but keep the investigation open as a connection may come to light at a later date. Prepare for interview – prepare questions in advance, have to hand copies of dealing sheets etc. Interview: Advise person(s) that you are carrying out an investigation into a possible breach of stock exchange rules (this will have been set out in the written notice of interview). State purpose of meeting is to ask questions about the orders and trades in question. At least two Investigations Department staff should be present during the interview with one taking notes and the other asking questions. The notes should be written up immediately after the interview and a copy sent to those present at the interview. The interviewee, if not a director, should be accompanied by a director of the Member company. The interviewee may also wish legal representation at the interview and this should be agreed to by the stock exchange. Where the interviewee has legal representation, the stock exchange may wish the external legal adviser also to be present although this is not always necessary. If Investigations Staff believe that there is evidence of a breach of rules they should formulate the charge and consult with the stock exchange’s l legal adviser on the evidence and on the charge(s). A report is submitted to the Chief Executive who will report the matter to the Board and at the same time establish a Disciplinary Committee. At each stage the surveillance record system should be updated with new information. Regular reporting to the SEC is also required. This should be done monthly by their being sent a copy of the log from the surveillance record system showing the status of each surveillance analysis and investigation. The system may also be used to record details of client complaints, action taken and result. Client complaints are often an indication that something is wrong in a Member’s office and could result in an investigation. Similar activities would be undertaken for other forms of market abuse.


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In cases of suspected insider dealing names and addresses of person(s) who dealt should be checked against names and addresses of directors and advisers of the company. Where there is evidence of insider dealing by a non-member, this should be passed to the SEC for action. In a case of fraud, this should be given to the police. Where a Member company is involved in insider dealing the matter should still be passed to the SEC if there is non-member involvement.


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APPENDIX E: LIST OF PEOPLE MET


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No. NAME OF PERSON MET / JOB POSITION ORGANISATION 1 Mirza Azizul Islam, Chairman 2 Md. Asraful Islam, Director 3 Anwarul Kabir Bhuiyan

Executive Director

Securities and Exchange Commission

4 Salahuddin Ahmed Khan Chief Executive Officer

5 A.S.M. Khairuzzaman, Head of IT 6 Syed Al Amin Rahman

Senior Officer in charge, Surveillance 7 Md. Samiul Islam

Senior Asst. Secretary Company Affairs & Administration

8 Khwaja Ghulam Rasul, Director 9 Md. Shahiq Khan

President

Dhaka Stock Exchange

10 Ahmad Rashid Lali Vice President Dhaka Stock Exchange

M. Abdul Rashid & Co.

11 Habibullah Khan President

12 Wali-ul-Maroof Matin Chief Executive Officer

13 Abu Bakar Siddique GM-Finance & Company Secretary

14 Md. Abdul Mutaleb Head of Systems

15 Md. Atiquzzaman Head of Compliance

Chittagong Stock Exchange

16 M. Raham Mazim Corporation 17 Md. Zakir Hossain

Chief Officer Merchant Bank Wing Arab Bangladesh Bank

18 Ershad Chowdhury Chief Information Officer

Bangladesh Online Ltd

19 Quamrul Chowdhury Managing Director

JF (Bangladesh) Ltd

20 Khwaja Asif Ahmed Managing Director

Country Stock Ltd

21 A.M. Jamal Uddin Chairman

QSI Securities Ltd

22 Sk. M.J. Rahman Moshihor Rahman 23 M. Salman Ispahani

Managing Director M.M. Ispahani Ltd

24 Tapan K. Podder Managing Director

Prime Finance & Investment Ltd

25 Imtiyaz Hosain Imtiyaz Hosain & Co 26 Md. Ziaul Haque Khondker

Managing Director 27 Md. Jahangir Miah

General Manager 28 Md. Fayekuzzaman

General Manager

Investment Corporation of Bangladesh

29 Md. Nurul Alam Chief Executive Officer

ICB Securities Trading Co. Ltd


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60 April 2006

APPENDIX F: DEMUTUALISATION SITUATION IN INDIA AND PAKISTAN


Addendum to Final Report on Demutualization and Merger of the Dhaka and Chittagong Stock Exchanges January 2006


in association with



and



FINAL REPORT


1 September 2005

Demutualisation situation in India and Pakistan 1. Paragraph 48 of the TA 4246 Demutualization Report dated September 2005 report states

“..two of Bangladesh’s neighbours, India and Pakistan… In both these countries, the regulator and Governments have strongly recommended the demutualisation and/or merger of the local exchanges. There has been slow progress on this in India following the publication of the Kania Report in August 2002. However, in Pakistan all three exchanges have endorsed the principle of demutualisation following the publication, in September 2004, of the Report of the Expert Committee appointed to advise on the consolidation/merger and/or transformation of the stock exchanges in Pakistan and two, the Lahore and Islamabad exchanges have agreed to merge”1.

2. This Addendum expands on the above paragraph. Pakistan 3. The three exchanges in Pakistan – Karachi, Lahore and Islamabad are not demutualised. The

problems faced by the market are broadly similar to those in Bangladesh which are set out in The Demutualisation Report.

4. The first relevant paper was presented to the Securities and Exchange Commission of Pakistan

(SECP) in 20002. The paper examined a number of general market issues and advised an objective of merger and demutualisation.

5. The major recent work is the Report of the Expert Committee of Demutualisation and

Integration/Transformation of the Stock Exchanges chaired by Mr Shamim Ahmad Khan3 published September 20044. The Report examines very comprehensively all aspects of demutualisation and integration.

6. The main recommendations are that there should be (1) full integration and demutualisation,

or if this is not possible (2) a new national stock exchange should be established. 7. The exchanges had reservations about the proposals5 despite there having been extensive

consultation. It was agreed in general terms by each exchange that demutualisation was acceptable. Integration was agreed between the two smaller stock exchanges-Lahore and Islamabad – but Karachi refused to consider merging.

8. In December 2004 the SECP instructed the exchanges to present their demutualisation plans

within 15 weeks with the threat that if they did not do so the SECP would demutualise them by force. Lahore and Islamabad did so but Karachi did not, although it has now agreed to do so. Each exchange has appointed professional advisors.

1 Andy Wilson has advised the Securities and Exchange Commission under ADB Project (TA No. (LN) 1957-

PAK: Strengthening Regulation, Enforcement and Governance of Nonbank Financial Markets), on the demutualisation of the Pakistan stock exchanges and on various aspects of the regulation of the exchanges post demutualisation.

2 Reference: Pakistan’s Stock Exchanges – the Way Forward, June 2000 - written by ISC Group Managing Director Susan Selwyn-Khan under TA 1577 loan which was carried out by Anderson Consulting as was. The matter was not part of the TOR of the project but the consultant was requested by the SECP Chairman Khalid Mirza to do the work. 3 Former Chairman of the SECP. 4 Ref: www.secp.gov.pk –Reports. 5 Author’s own observations and as reflected in press reports-www.dawn.com - Archive.


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9. The issue of demutualisation became increasingly political and towards the end of 2005 the SECP directed the exchanges to appoint non - member Chairman to assist good governance as a step towards demutualisation. Lahore and Islamabad complied but Karachi refused. The matter is now in the courts.

10. As at January 2006 the progress towards demutualisation has been slow, but the newly

appointed SECP Chairman is keen to minimise the delay. 11. The lesson learnt from Pakistan is that demutualisation is a sensitive issue as in any country.

In Pakistan the matters were very well considered and then publicised by the Expert Committee. However, the SECP were in such a hurry to implement reforms, under the impression that demutualisation would cure all market malpractice that they failed to convince the main player, the Karachi Exchange. The main lesson from the Pakistan experience so far is that the powerful market players must be convinced of the benefit of changes. This cannot be done in just a few months.

India 12. The government of India in the early 1990s was trying to improve the governance and

operations of the Bombay stock exchange. Vested interests however hampered change. The government took advice from IFC 6 and the decided to set up a new exchange to provide competition. The National Stock Exchange of India (NSE) was incorporated in November 19927 as a tax-paying company then owned by a few government related organisations. It was demutualised i.e. it was not owned by those who traded.

13. It was anticipated that the main area of interest would be the wholesale debt market. In the

event the equities side took off very quickly, as investors had confidence that they would not be cheated.

14. The other exchanges, particularly Bombay, were spurred on to improve systems and services

but did not change their structure. 15. The key Report is the Report of the Group on Corporatization & Demutualization of Stock

Exchanges, known as the Kania Report, published in August 2002.8 The report observed that the concept of the regional stock exchanges had lost their relevance. It considered that corporatisation and demutualisation would facilitate the process of consolidation of exchanges. The committee said that the members would be entitled for shares in the corporatised / demutualised exchanges in lieu of the existing rights, while the voting rights would be determined in consultation with the government. The report did not recommend that mergers should be forced. However any stock exchange which fails to comply with the requirement of corporatisation and demutualisation by the appointed date and is accordingly derecognised, would have to distribute its assets.

16. In January 2003, The Securities and Exchange Board of India (SEBI) gave the 20 Indian

stock exchanges six months to prepare a scheme and draft byelaws and rules for implementing corporatisation and demutualisation. 18 exchanges were already corporate entities and they only need to be demutualised. The Bombay stock exchange, the Ahmedabad stock exchange and the Indore stock exchange had to be both corporatised and demutualised. The NSE and the Over the Counter Market (OTCEI) were already demutualised. Several stock exchanges were limited by guarantee and needed to be turned into profit making companies.

6 Consultants: ISC 7 ISC also worked directly with the Government of India to set up the exchange system. 8 Search SEBI website-www.sebi.gov.in


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17. The BSE’s scheme was approved in May 2005. As at January 2006, the situation is as that

BSE is demutualised and corporatised. As at September 2005, 19 of the exchanges had submitted their plans to SEBI.

18. Those exchanges which have not implemented the plan by the end of March 2006 are due to

be de- registered. 19. The NSE, established in the early 1990s, has been a role model for exchanges worldwide. The

outcome of the recent compulsory demutualisations can be appraised only after some months of live running.

TA No. 4246-BAN Preparing The Financial Markets GovernanceProgram

Report on Financial Markets Governance

FINAL REPORT December 2005


in association with



and


TA No. 4246-BAN: Preparing The Financial Markets Governance Program Report on Financial Markets Governance

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September 2005

i

TABLE OF CONTENTS

I. GOVERNANCE WORKSHOP ....................................................................................................1

II. PLAN TO STRENGTHEN SEC RULE-MAKING, POLICY DETERMINATION AND INDEPENDENCE ..........................................................................................................................1 A. Terms of Reference ...................................................................................................................1 B. Rule-making and policy determination...................................................................................1 C. Independence .............................................................................................................................2

III. PLAN FOR FINANCIAL AUTONOMY TO INCLUDE REVENUE SOURCES, GENERAL COST ATTRIBUTES AND RESERVE ACCUMULATION ...............................3 A. Terms of Reference ...................................................................................................................3 B. SEC Financial Autonomy .........................................................................................................3 C. Recommended Turnover Fee ...................................................................................................4

IV. POLICY PAPER AND IMPLEMENTATION TO ENSURE SEC TRANSPARENCY.........5 A. Terms of Reference ...................................................................................................................5 B. Proposed Rules ..........................................................................................................................5

V. REPORT TO ANALYSE AND IMPROVE GRIEVANCE MECHANISMS ..........................6 A. Terms of Reference ...................................................................................................................6 B. Analysis of grievance mechanisms...........................................................................................6 C. Recommended improvements ..................................................................................................6

VI. REPORT ON DEVELOPMENT OF REGISTRY FOR PERSONAL PROPERTY AND WORK UNDER TA-4140..............................................................................................................7 A. Terms of Reference ...................................................................................................................7 B. No action required.....................................................................................................................7

VII. DRAFT ADMINISTRATIVE ORDER CREATING A COMMISSION ON SECURITIES LAWS AND REGULATIONS ......................................................................................................7

VIII. ADDITIONAL REPORT ON THE INSTITUTIONAL STRENGTHENING OF THE SEC ..................................................................................................................................................8 A. Terms of Reference ...................................................................................................................8 B. Enhancement of enforcement powers of SEC ........................................................................8 C. Speedy resolution of securities cases........................................................................................8

IX. PROPOSE COMPANIES ACT REVISIONS TO ENSURE INTERNATIONAL BEST PRACTICE WITH RESPECT TO COPORATE GOVERNANCE .........................................9 A. Terms of Reference ...................................................................................................................9 B. Discussion...................................................................................................................................9 C. Sources .....................................................................................................................................10 D. Amendments to Companies Act.............................................................................................10 E. Action Program .......................................................................................................................11 F. Corporate Governance Rules .................................................................................................11

X. STUDYING THE DRAFT COMPANIES ACT, 2004, AND PROPOSED AMENDMENTS TO THE COMPANIES ACT, 1994 ............................................................................................12 A. Terms of Reference .................................................................................................................12 B. New Companies Act ................................................................................................................12


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APPENDIX A: WORKSHOP SEC GOVERNANCE AND CORPORATE GOVERNANCE ...13

APPENDIX B: RULE MAKING AND POLICY DETERMINATION RULES, 200X...............19

APPENDIX C: OPEN MEETINGS RULES, 200X.........................................................................22

APPENDIX D: COMPLAINT RECEIPT AND PROCESSING RULES, 200X ..........................24

APPENDIX E: PROPOSED RULES UNDER THE ARBITRATION ACT, 2001 ......................26

APPENDIX F: SECURITIES AND EXCHANGE COMMISSION (ADVISORY COMMITTEE) RULES, 2XXX..............................................................................38

APPENDIX G: PROPOSAL FOR FOUR NEW SECTIONS OF THE SEC ACT, 1993 ............42

APPENDIX H: SECURITIES AND EXCHANGE COMMISSION (APPELLATE TRIBUNAL) RULES, 2XXX..........................................................................................................46

APPENDIX I: THE COMPANY AND SECURITIES TRIBUNAL ACT, 2XXX (ACT XXX OF 2XXX)........................................................................................................................53

APPENDIX J: ASSESSING THE SALIENT FEATURES OF THE RECOMMENDATION MADE IN ADB TA-3533 WITH REGARD TO IMPROVING CORPORATE GOVERNANCE IN BANGLADESH ....................................................................57

APPENDIX K: AMENDMENTS TO DRAFT COMPANIES ACT, JUNE 2004.........................66

APPENDIX L: CORPORATE GOVERNANCE RULES, 200X ...................................................69

APPENDIX M: ANNUAL REPORT RULES, 200X........................................................................72

APPENDIX N: PROXY SOLICITATION RULES, 200X..............................................................89

APPENDIX O: DEBENTURE HOLDERS’ ASSOCIATION RULES, 200X.............................101

APPENDIX P: INSIDER TRADING RULES, 200X....................................................................104

APPENDIX Q: SELECTIVE DISCLOSURE BY ISSUERS RULES, 200X...............................108

APPENDIX R: PROPOSED AMENDMENTS TO THE COMPANIES ACT, 1994.................111

APPENDIX S: LIST OF PEOPLE MET.......................................................................................118


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I. GOVERNANCE WORKSHOP Not in TOR

1. On 30 May 2005 the Project conducted a Workshop entitled “SEC Governance and Corporate Governance”. The participants from outside of the SEC are in List of People Met. The Chairman of the SEC spoke; Mr. Wali Bhuiyan was the chairman and moderator. Four SEC executive directors attended, took part in the discussions, but did not submit questionnaires. The Workshop is referred to in these reports as the Governance Workshop. The form of materials distributed and collected at the Workshop (but not the responses to the questions) is Appendix A. In addition to this handout, the invitation to the workshop included a compact disk on which were copied the items mentioned on the second page of the handout.

II. PLAN TO STRENGTHEN SEC RULE-MAKING, POLICY DETERMINATION AND INDEPENDENCE TOR 3(ii) (first three sentences) and TOR 3(i) (first sentence)

A. Terms of Reference

2. These reports respond to the following parts of the TOR:

• 3(ii) (first three sentences): In collaboration with the DLS, recommend improvements in formulating and implementing regulations and rules. Define the formal stakeholder consultative process and formulate guidelines on who and when to consult, formal versus informal consultation, dissemination of drafts of proposals, need for exposure drafts or white papers, and appropriate consultation mechanisms such as open forums, publication, and feedback. Recommend ways for appropriate disclosure of the decision-making process at SEC that the public may be informed of the basis of SEC decisions (e.g. minutes of meetings, etc.); and

• 3(i) (first sentence): In collaboration with the domestic legal specialist (DLS), review alternative measures for achieving greater autonomy for SEC and insulating the market regulator from outside interference, study comparative practices within the region and elsewhere.

B. Rule-making and policy determination

(TOR 3(ii) (first three sentences))

3. Open rule making and policy determination may be achieved by publicly announcing in advance what rules or policies are being considered, receiving written and oral comments from any person or group that wishes to make them, considering the comments and incorporating useful comments into a final rule or policy or beginning the process over to solicit more comments. It is recommended that the SEC adopt the Rule-Making and Policy Determination Rule in Appendix B. The SEC Chairman commented that the same result could be achieved by an administrative order. It makes no difference to the consultant whether the text is a rule or an administrative order. The proposal was generally supported at the Governance Workshop. The text of rule 2 has been revised to add administrative orders and any other instrument having a legal effect to the list of items under the definition of “rule-making”. The text of rule 4 has been revised in line with the Chairman’s comment to make it clear that committees may have different memberships reflecting different stakeholders’ interests. The participants at the Governance Workshop were agreed that the SEC already has a good record of proposing rules, soliciting comments and taking them into consideration. They generally felt that these rules are unnecessary.


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C. Independence (TOR 3(i) (first sentence))

4. Independence is often the result of the interaction of the people involved in an organizational structure. Independence may be unrelated to the organizational structure. Even an agency that is formally independent will have no independence if its personnel follow directions from outside the agency. Similarly, an agency, such as the SEC that is part of a ministry, can be independent of the ministry if its personnel refuse to follow such directions. Pressure can be exerted in many ways: threat of removal from office, threat not to be reappointed for another term, offer of a better job, offer of a job for a member of the family, an outright bribe of cash or services, etc.

5. In Bangladesh, the Constitution requires that the judiciary be separated from the executive. The government has consistently refused to do so, according to many press reports, of which one is “Court System in Bangladesh: An overview”, The Daily Star, April 9, 2005, p. 18. If the government will not follow the constitution with respect to independence of the courts, there is little room for optimism that it would agree to an independent SEC.

6. The team leader and an ISC director met with the Finance Secretary of the Ministry of Finance, who said that (due to the prevailing circumstances) the SEC would not become independent nor would its staff be paid more than civil service standards.

7. The Financial Markets Governance Expert and the Domestic Legal Specialist have reviewed the laws of other counties to attempt to determine the degree of structural independence of the securities regulator in each jurisdiction. In Indonesia and Malaysia, for example, the securities regulator is a part of the Ministry of Finance, as it is in Bangladesh. Without contacting market participants and other persons in those countries, it is impossible to determine the amount of actual independence of their securities regulators. Independence is often a function of custom, practice and other relationships that are outside the formal statutory structure. Not only does independence vary from country to country that have similar statutory structures, it varies from time to time even when there has been no change in the statutory structure.

8. Independence is a means, not an end in itself. The pertinent question is whether the SEC is effective, not whether it is independent or not independent. The consensus seems to be (admittedly based on anecdotal evidence in conversations with people on another project) that the SEC is effective within the constraints of its budget and personnel.

9. The SEC Chairman commented, and the participants at the Governance Workshop expressed the view, that the SEC has been allowed to operate independently, except for grant of licenses of merchant bankers (which is done by the Ministry of Finance). Most participants at the Workshop felt that no further action is required.


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III. PLAN FOR FINANCIAL AUTONOMY TO INCLUDE REVENUE SOURCES, GENERAL COST ATTRIBUTES AND RESERVE ACCUMULATION TOR 3(i) (portion of first sentence and second sentence)


10. This Report responds to TOR 3(i) (portion of first sentence and second sentence): make suitable

recommendations to [strengthen] SEC and make it financially autonomous. Identify possible sources of revenues for establishing its own budget.

B. SEC Financial Autonomy 11. Section 8(1)(k) of the Securities and Exchange Commission Act, 1993, authorizes the Securities

and Exchange Commission (SEC) to levy fees or other charges for carrying out the purposes of that section.

12. Discussion at the Governance Workshop was mixed, with some people believing that the SEC should have financial autonomy, but others feeling that it should remain subject to government fiscal control.

13. “Appendix 6” of the Report of technical assistance project on Capacity Building for Securities and Exchange Commission (SEC) and Stock Exchanges, 2000 (TA-2913 BAN) included a long list of possible sources of fees for the SEC. They were:

(1) Government subsidy. (2) Aid, donations, grants. (3) Payment of annual fees by stock exchanges, CDSB. (4) Fee representing a percentage of the size of a public offering. (5) A levy on securities transactions on both buyer and seller. (6) A fee every document presented for SEC approval prior to publication. (7) Initial registration of a collective investment scheme. (8) Annual renewal of a registration of a collective investment scheme. (9) Penalties imposed on transgressors of the law (although these raise questions of

conflicts of interest-are the penalties to punish the transgressor or is a finding of guilt an excuse to raise money?).

(10) Initial licensing of dealers, merchant bankers, portfolio managers and investment advisers.

(11) Annual renewal of a license issued to a dealer, portfolio managers, merchant bankers and investments advisers.

(12) Initial registration of individuals working for, or being a member of, any company or entity which is subject to the licensing of the SEC, e.g., dealers, merchant bankers, portfolio managers investment advisers.

(13) Annual registration of such persons. (14) Examination fee payable by individuals sitting a securities industry qualification

examination. (15) Annual fee payable by organizations accredited for the purpose of training

individuals wishing to sit such an examination. (16) Annual fee payable by public accountants and legal profession accredited by the

SEC to perform securities related professional work. (17) Fee for a search of any register of legal entities or individuals that is maintained by

the SEC. See “Appendix 6” to the TA No. 2913-BAN report for the suggested amounts of the fees and charges. The SEC Chairman commented that some of these


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sources are being used now (see below) and that others are unlikely to yield significant revenue.

14. To this comprehensive list could be added two more sources. A separate fee could be charged for

each student trained by organizations accredited to train individuals in the industry (an extension of no. 15). This project recommends that the SEC require arbitration and mediation for all securities disputes, using the Arbitration Act (No. 1 of 2001) as a condition of creating a brokerage account, an account at the central depository, obtaining consent for an offering, etc. The SEC, like various national arbitration associations elsewhere, could administer the arbitration program and charge a fee for its administrative services in each arbitration proceeding.

15. Section 8(1) (k) of the Securities and Exchange Commission Act, 1993, authorizes the SEC to collect these fees. A difficulty in its efforts to become self-sufficient financially by levies on market participants and issuers is the small size of the Bangladeshi securities market. Further, the costs of doing business in the market are already too high. As stated in the draft final report (dated March 2005) of the International Development Association Financial Institutions Development Project, Development and Implementation of Issue Rules for Market Traded Debt Instruments and Regulations to Foster Secondary Debt Market Development in Bangladesh, the costs of issuing and trading fixed income securities in Bangladesh are significantly higher (as much as 100%) than in India, Pakistan or Sri Lanka. That report states that the SEC has agreed to reduce its fees to encourage growth of the market. Such an agreement pushes SEC self-financing farther into the future.

16. The Government of Bangladesh provides approximately Tk 20,000,000 to the SEC, In the fiscal year 2003-04, miscellaneous income was approximately Tk 10,500,000, of which stock dealer/broker registrations fees were Tk 2,885,000; merchant bank registration fees were Tk 600,000; IPO, application and filing and consent fees were Tk 4,400,000; depository participation fees were Tk 925,000; CDBL registration fee was Tk 500,000; other income was TK 1,500,000 (figures rounded).

C. Recommended Turnover Fee 17. The SEC Chairman commented that a turnover fee is being considered. A turnover fee of one

basis point (0.0001) on the combined turnover on the two stock exchanges in the year ended June 30, 2002 (Tk 51,647,000,000 as shown in the SEC Annual Report for 2002—2003, the last Annual Report published in English) would have raised Tk 51,647,000 or an amount greater than the total budget of the SEC in the fiscal year 2003-04. However, turnover was lower in the year ended June 30, 2003, so a fee of two basis points would have raised only Tk 41,508,000 in that year. It is clear that amounts can vary so greatly that they would make annual budgeting very difficult. Further, can the market afford a transaction fee of one basis point? Nonetheless, it is recommended that the SEC levy a turnover fee of one basis point upon all transactions on the two stock exchanges. Whether the fee would be paid equally by the buyer and seller or split in some other way should be decided by those who impose the fee, with a view to ease of collection.

18. One questions whether the small Bangladeshi market can bear the costs of a self-financing SEC at anytime in the foreseeable future.

19. Government appropriations and a turnover fee seem to be the best sources of income for the SEC.

20. Until the SEC is successful in raising enough money to finance its operations, including paying a larger staff more competitive compensation (which the Finance Secretary has ruled out in any event as stated in Report I above), there will be no accumulations of reserves.


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IV. POLICY PAPER AND IMPLEMENTATION TO ENSURE SEC TRANSPARENCY TOR 3(ii)


21. This report responds to TOR 3(ii): In collaboration with the DLS, recommend improvements in

formulating and implementing regulations and rules. Define the formal stakeholder consultative process and formulate guidelines on who and when to consult, formal versus informal consultation, dissemination of drafts of proposals, need for exposure drafts or white papers, and appropriate consultation mechanisms such as open forums, publication, and feedback. Recommend ways for appropriate disclosure of the decision-making process at SEC that the public may be informed of the basis of SEC decisions (e.g. minutes of meetings, etc.).

B. Proposed Rules 22. See Section II — “Plan to strengthen SEC rule-making, policy determination and independence,”

for a recommendation to increase SEC transparency in the adoption of rules and policies. Proposed rules on making rules and policy are in Appendix B.

23. Transparency in the operations of the SEC may also be ensured by having open meetings and publication of minutes of the meetings. It is recommended that the SEC adopt the Open Meetings Rule, 200X, attached as Appendix C. The SEC Chairman commented that SEC open meetings “would be unprecedented for any government organization in Bangladesh and in my assessment counterproductive.” The participants at the Governance Workshop were almost unanimous in condemning the proposed rules as leading to chaos, anarchy and confusion. Nonetheless it is recommended that they be adopted. When laws and rules promoting “government in the sunshine”, that is open meetings and publication of minutes, were first proposed in the United States, the initial reaction of many people, especially those in government, was the same as now expressed in Bangladesh. However, these rules have proven their worth and are now in effect in the Federal government and most states. Obviously, it will take years of persuasion before they are adopted in Bangladesh. A first step may be the publication of minutes, which could be done even without open meetings. But the SEC, the promoter and enforcer of full disclosure for issuers and the securities markets, should be the first agency to adopt such rules for itself as well as for those it regulates.

24. The SEC announces many of its investigations and enforcement actions. Because of the necessity to conduct some investigations confidentially to ensure preservation of evidence and other purposes, there can be no hard and fast rule for announcements of investigations and enforcement actions. These proceedings can only be announced when the announcement would not compromise the investigation or action.


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V. REPORT TO ANALYSE AND IMPROVE GRIEVANCE MECHANISMS TOR 3(iii)


25. This report responds to TOR 3(iii): Review current mechanisms available to investors for seeking

redress for grievances, e.g. complaints desk at SEC, and for the settling of disputes; and recommend improvements.

B. Analysis of grievance mechanisms 26. The consultant interviewed the Executive Director of the Supervision and Regulation of Markets

and Intermediaries Department, which is responsible for handling complaints. He confirmed that there are no rules governing the complaint-handling process, only custom. The Department has no form for a complainant to complete, but receives whatever the complainant writes. If the complaint involves a broker or dealer, the complaint is sent to the stock exchange. If the complaint involves an issuer, the complaint is sent to the issuer. In each case a copy of the transmittal letter is sent to the complainant. Some complaints are resolved at this stage. Others are sent to the Enforcement Department for resolution. A report for the January-March 2005 quarter showed 23 complaints received, 4 resolved, 11 referred to the Enforcement Department, 4 referred to a stock exchange and 4 under process. A list of complaints, by type, is published in the SEC’s Quarterly Review (published in English) and Annual Report (published only in Bengali). No other information is on the SEC web site. The complaints that result in enforcement action are also described in those reports, showing the date, name of the company against which action was taken, the nature of the default and the SEC’s decision.

C. Recommended improvements 27. It is recommended that the SEC formalize the complaint process by adopting the rules in

Appendix D, or an administrative order of similar effect, to give effect to the recommendations from the technical assistance project Capacity Building for Securities and Exchange Commission (SEC) and Stock Exchanges, 2000 (TA-2913 BAN).

28. TOR (iii) also requires a recommendation for means of improving the settling of disputes. It is recommended that the SEC require arbitration and mediation as processes that are faster and cheaper than litigation in courts. The SEC Chairman commented that the SEC cannot adopt rules under the Arbitration Act. See Report VIII for further discussion. Arbitration and mediation rules are in Appendix E. It is not necessary to repeat them here. If a decision is made to put the recommended rules in Section V, they should be taken out of the Additional Report (Section VIII) so as to avoid repetition of the longest Appendix in these reports.


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VI. REPORT ON DEVELOPMENT OF REGISTRY FOR PERSONAL PROPERTY AND WORK UNDER TA-4140 TOR 3(v)


29. This report responds to TOR 3(v): Interface with consultants under TA-4140 tasked to draft a law

on secured transactions and the development of the overall architecture for a transparent, electronic registration system for movable assets.

B. No action required 30. We understand that this project is on hold.

VII. DRAFT ADMINISTRATIVE ORDER CREATING A COMMISSION ON SECURITIES LAWS AND REGULATIONS (Not in TOR 3)

31. The securities laws and regulations of a country need constant revision to correct perceived

deficiencies, respond to new financial products and changed circumstances and to guide the markets to better compliance with international best practice. The members of the commission will also build a body of Bangladeshi expertise outside of the Securities and Exchange Commission that is outside of the regulator and of the regulated entities, although with enough overlap that the members of the commission are aware of the problems of the regulator and the capital markets. A draft of an order to create a commission is in Appendix F (where it is called a committee). The SEC Chairman commented that this commission would be most undesirable as it would involve a shift of initiative of regulatory reform from the SEC and that differences of opinion on some recommendations may degenerate into unhealthy public debate. With all due respect, an independent look at the laws and regulations should improve them without the unfavourable consequences mentioned by the Chairman.


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VIII. ADDITIONAL REPORT ON THE INSTITUTIONAL STRENGTHENING OF THE SEC TOR 3(i) third sentence), 3(ii) fourth sentence) and 3(ii) (final sentence)


32. The following report responds to TOR 3(i) (third sentence), 3(ii) fourth sentence) and 3(ii) (final

sentence): TOR 3(i) third sentence): Consider adopting a collegial body structure for deciding on policy and securities under a one-member, one-vote rule, with fixed tenure for the members and removal only for cause. TOR 3(ii) fourth sentence): Determine enhancements in enforcement powers of SEC needed to effectively pursue securities cases. TOR 3(ii) (final sentence): Determine, within the existing judicial system, what modalities may be introduced to facilitate the speedy resolution of securities cases.

33. The following items are also in the Financial Markets Governance Expert’s TOR. Change in structure of the SEC

(TOR 3(i) (third sentence)) 34. TOR (i)(second sentence) states: “Consider adopting a collegial body structure for deciding on

policy and securities (sic) under a one-member, one-vote rule, with fixed tenure for the members and removal only for cause.” It is recommended that no changes be made to satisfy that portion of the TOR. The SEC Chairman commented that Section 5(6) of the Securities and Exchange Commission Act, 1993 (Act) has already been amended (an English version is unavailable) to provide for four full-time independent members and no ex-officio members appointed by other agencies of the government. Section 7(4) of the Act provides for one vote per member (with the Chairman having “a second or casting vote” in the event of a tie). Section 5(6) of the Act provides for the full-time members to have fixed terms of three years and be eligible for reappointment. Section 6 of the Act provides for removal only for cause. Therefore, no provisions of the law require any amendments to achieve the goals of this portion of the TOR.

B. Enhancement of enforcement powers of SEC (TOR 3(ii) (fourth sentence))

35. TOR (ii) (fourth sentence) states: “Determine enhancements in enforcement powers of SEC

needed to effectively pursue securities cases.” Appendix G contains a proposal for four new sections of the Securities and Exchange Act, 1993 to enhance the powers of the SEC to enforce the law. Comments explaining each section are incorporated in the Appendix. The SEC Chairman commented that these recommendation deserve serious consideration and that one, giving the SEC the power to sue for damages on behalf of investors, is being worked on.

C. Speedy resolution of securities cases (TOR 3(ii) (final sentence))

36. TOR (ii) (final sentence) states: “Determine, within the existing judicial system, what modalities

may be introduced to facilitate the speedy resolution of securities cases.” Two modalities are recommended: The first modality is the creation of a special tribunal to hear disputes related to securities laws. The text of an act creating such a tribunal is in Appendix H. Alternatively, a Companies and Securities Tribunal could be created. The text of an act creating such a tribunal is in Appendix I. The second recommendation is to use arbitration and mediation to settle private disputes under the securities laws. The text of proposed rules under the Arbitration Act, 2001 is in Appendix E. The SEC Chairman commented that an administrative ministry, not the SEC, has the power to adopt arbitration rules. Nonetheless, the SEC can use its powers of persuasion to encourage all market participants (issuers, underwriters, mutual funds, brokers, stock


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exchanges, etc) to put arbitration language in their contracts and arbitrate their disputes. The Dhaka Stock Exchange has had success with its arbitration of disputes between its members and their customers. The SEC Chairman stated that the tribunal may add one more layer to judicial proceedings, suggesting that it will not serve a useful purpose.

IX. PROPOSE COMPANIES ACT REVISIONS TO ENSURE INTERNATIONAL BEST PRACTICE WITH RESPECT TO COPORATE GOVERNANCE (TOR 3(iv))


37. This report responds to TOR 3(iv): Propose amendments to the Companies Act to strengthen

corporate governance in Bangladesh, the recommendations of TA-3533 and the Corporate Governance Workshop of 12-13 July 2003. Interface with the Company Law Reform Committee to review Companies Act 1994 and help formulate an action program for corporate governance reforms.

B. Discussion 38. Corporate governance refers, among other things, to the relationship between shareholders on the

one hand and directors and officers (collectively, “management”) of the company on the other. The purpose of good corporate governance is primarily to prevent management from taking advantage of or abusing shareholders, particularly minority shareholders. Majority shareholders and management is frequently the same people, especially in emerging markets such as Bangladesh.

39. Corporate governance is a mixture of prescriptive legal rules that require, limit or forbid certain actions or conduct by management and of non-prescriptive legal rules that require disclosure to shareholders by management of certain facts. For example, a prescriptive rule might require three independent directors on a board of directors, while a non-prescriptive rule might only require a company to disclose its policy regarding having independent directors.

40. Good corporate governance will not just happen. Experience elsewhere has shown that managements of many companies will not act unless forced to do so. The entities with the ability to enforce good corporate governance include parliament when it amends companies laws, securities regulators when they issue and enforce rules, stock exchanges when they issue and enforce listing or annual reporting rules, mutual fund administrators when they purchase shares only in companies that practice good corporate governance, credit rating agencies when they include corporate governance in their rating criteria, and courts when they apply laws, including ordinary standards of fair dealing and fraud.

41. The questionnaire for the Governance Workshop had 33 questions relating to corporate governance. Many of the items were not controversial—the need for better notification of AGMs, better financial reporting and audit committees, etc. Others matters evoked more divided responses—whether there should be independent directors, who should appoint them if they are required (some participants said that the SEC should appoint them!), the need for shareholder approval of certain corporate actions, etc.


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C. Sources 42. There are many sources throughout the world for materials on corporate governance. The

Financial Markets Governance Expert chose three sources to distribute in the materials for the Governance Workshop. The three sources are:

(1) The Organization for Economic Co-operation and Development (OECD) published General Principles of Corporate Governance in 1999 and revised them in 2004 (OECD Principles). The OECD Principles are cited by all other authorities. They represent international best practice, although in very general form.

(2) The Malaysian Code of Corporate Governance, March 2000, is also relevant to Bangladesh for the same reasons as the Hong Kong rules are relevant, and because the securities markets in Malaysia are less developed than the markets in Hong Kong. The Malaysian Code is a mix of prescriptive and non-prescriptive rules. They are aspirational and evolutionary-in essence goals.

(3) The Hong Kong Stock Exchange rules for disclosure in annual reports are relevant as they are from a jurisdiction with a common law tradition. Because most listed companies in Hong Kong are, or began as, family-controlled companies with small minority holdings, the Hong Kong rules are particularly relevant in Bangladesh, where most listed companies are still controlled by the founders or their families. These Hong Kong rules are very detailed and precise. The provisions of the Hong Kong rules are incorporated into the Corporate Governance Rules, 200X or the Company Annual Report Rules, 200X.

D. Amendments to Companies Act 43. The TOR speaks of proposing amendments to the Companies Act. The SEC Chairman, speaking

at the Governance Workshop, pointed out that it took 16 years to produce the Companies Act, 1994 and that he does not expect to live long enough to see the completion of the present project to amend it. That statement was only partially made in jest. The Financial Markets Governance Expert met with an Executive Director of the SEC who is on the committee that wrote the Draft Companies Act, 2004 (the “Draft”). He said that it is “possible” to propose further amendments. He also said that there are no plans to submit the Draft to parliament or for the committee to meet further. (This renders interfacing rather difficult.) We discussed the nature of amendments relating to corporate governance. The Draft contains some of the items mentioned in TA-3533 BAN. Appendix J contains the recommendations set forth in the report under TA-3533 BAN and shows where those recommendations now stand. We agreed that because corporate governance rules, if not general principles, are evolving so rapidly, the best approach with respect to some issues is for the Draft to authorize the SEC to make rules or require them to be made by the stock exchanges. However, some matters must be in the Act because the changes are so fundamental that they may be beyond the power of companies to make without authorising legislation.

44. The recommendations for revisions of the Draft are in Appendix K. One of the recommendations, that shareholders approve any poison pill, is in the amendment to the Companies Act, but not in the proposed rules. Poison pills are devices used by minority managements to entrench themselves. In Bangladesh there are no minority managements—most listed companies are controlled by shareholders who own a majority of the shares. Because amendments to the Companies act will probably not become effective for many years, they should address problems that may arise in the future even if they do not exist now. So shareholder approval of poison pills is required by the amendments to the Companies Act but not in the rules recommended to the stock exchanges and SEC now.


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E. Action Program 45. The TOR also speaks of an action program to improve corporate governance in Bangladesh.

Therefore the action plan must concentrate upon actions that are possible within a reasonable period of time--specifically influencing the SEC and stock exchanges to adopt rules and guidelines along the models of Hong Kong and Malaysia. It is recommended that the Action Program:

• Request the stock exchanges to adopt corporate governance requirements in their listing agreements, including the rules in Appendices L through Q.

• Recommend that the SEC act if the stock exchanges do not. Section 33(2)(b) of the

Securities and Exchange Ordinance, 1969, gives the SEC power over any matters with respect to which a stock exchange may make regulations. Every stock exchange has the inherent authority to adopt listing rules. Section 9 of the Securities and Exchange Ordinance, 1969, refers to that power. Therefore, the SEC has the power to require listed companies to adopt corporate governance provisions that could be in listing rules of an exchange.

F. Corporate Governance Rules

46. It is recommended that the SEC and/or stock exchanges adopt the Corporate Governance Rules,

200X, attached hereto as Appendix L, to improve corporate governance. It is also recommended that the SEC adopt five rules dealing with specific situations: Company Annual Report Rules, 200X, Appendix M; Company Proxy Solicitation Rules, 200X, Appendix N; Debenture Holders’ Association Rules, 200X, Appendix O; Insider Trading Rules, 200X, Appendix P, and Selective Disclosure by Issuers Rules, 200X, Appendix Q. The Annual Report Rules are essentially the Public Issue Rules without offering information but augmented with addition requirements for disclosure about directors, major shareholders and insider transactions. The Proxy Solicitation Rules are copied from the rules of United States SEC. They are complex and will probably require several years of practice by the SEC and issuers to learn how to implement them fully. The Insider Trading Rules deal with all persons who obtain inside information, not just the insiders of a company. The Selective Disclosure by Issuers Rules clarifies when issuers are required to disclose material information outside of the annual reporting process.

47. The rules in appendices L through Q should be viewed, like the Malaysian Code, as apirational and evolutionary--as goals to be achieved over time. Some of the items may be beyond the powers of companies to put into their memorandum and articles without enabling legislation. Nonetheless, there is no harm in trying to do so prior to the enactment of the enabling legislation.


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X. STUDYING THE DRAFT COMPANIES ACT, 2004, AND PROPOSED AMENDMENTS TO THE COMPANIES ACT, 1994 New TOR dated 1 June 2005


48. Re the Companies Act, one of our key contributions will be to summarize existing views on the Act (comprehensive new act vs. modification of the Act), advise the Commerce Secretary, hold 1-2 workshops, and finally draw a conclusion for the Government (i.e., Commerce Secretary), according to the Commerce Secretary. Then the Government will take an action for the amendment.

B. New Companies Act 49. No meeting has been arranged with the Commerce Secretary, nor have workshops been

arranged. The Domestic Legal Expert (DLE) has reviewed the draft Companies Act, 2004, which to his mind seems too much accountancy and compliance oriented. Any statute should be as simple as possible and less cumbersome for its subjects. Companies Act, 1994 (Act) came into force in 1994 whereas Securities and Exchange Commission, 1993 (Act 15 of 1993) (SEC) came into force in 1993. It is absolutely quite mind striking why there is no mention about the SEC in the Act. Even there is no mention about the Securities and Exchange Ordinance, 1969 (Ordinance No. XVII of 1969) or any other security laws in force. The observations made by the SEC seems quite pertinent, however, as the proposed Draft has been rejected by the different quarters of the capital market institutions, so no further cognizance should be taken about it. The proposed amendments made by the committee headed by Dr. M. Zahir, Senior Advocate, Supreme Court of Bangladesh, also seems to have failed to address all related and relevant issues.

50. The DLE suggests a new committee may be formed to either to thoroughly revise the present Act through amendments, or go for a new company legislation replacing the present Act; however, in any case nothing should be done hectically as the result may suffer the repetition.

51. The DLE suggested some amendments to the present Act, found in Appendix R in this report.


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APPENDIX A: WORKSHOP SEC GOVERNANCE AND CORPORATE GOVERNANCE


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WORKSHOP SEC GOVERNANCE AND CORPORATE GOVERNANCE The purpose of this workshop is to solicit your views on various matters relating to certain governance issues at the SEC. These include proposed rules on SEC procedures and rules and other questions relating to the independence of the SEC—both structural and financial. The final section of the workshop deals with corporate governance. You are making comments anonymously, so express yourself freely. Please read the draft rules attached as Items 1 and 2 to answer the questions relating to them. The corporate governance items are for you to refer to at your convenience. You are not expected to read them prior to the Workshop. You can answer the questions on corporate governance based upon you knowledge of the Bangladeshi market without reference to the attachments. Please fill out the copy of this questionnaire which will be distributed at the Workshop. The questionnaire on the compact disk is provided to help you form your answers in advance of the workshop. Most of the questions refer to the materials distributed with the invitation to this workshop. However, do not feel limited by the scope of these materials. We solicit your comments on anything related to the procedures and policies of the Securities and Exchange Commission and anything relating to corporate governance. [NOTE: The spaces for answers have been eliminated from this Appendix in the interest of shortening the appendix} Thank you for your cooperation and assistance in this project. Attachments: 1. Draft of Rule-Making and Policy Determination Rules 2. Draft of Open Meetings Rules 3. OECD Principles of Corporate Governance 2004 4. Malaysian Code of Corporate Governance, 2000 5. Hong Kong Stock Exchange Corporate Governance Disclosure in Annual Reports It is not necessary to bring the compact disk to the Workshop.


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QUESTIONNAIRE A. Draft of Rule-Making and Policy Determination Rules 1. The Securities and Exchange Commission issues rules and determines questions of policy. (a) Is this process open and transparent as it exists today? (b) What would you do to make the process more open and transparent? (c) Do you think that these draft rules on rule-making and policy determination in the materials for this workshop are useful? (d) Are these draft rules necessary? (e) What would you add to these draft rules? (f) What would you take out of these draft rules? 2. Does the SEC currently explain adequately the reasons for its rules and policies? (a) Do the draft rules improve the situation? (b) If you answered question A.2 (a) negatively, what would you do to improve the process? B. Open Meetings Rules The materials for this workshop also include rules on open meetings and publication of minutes. (a) Do you think that these rules are useful? (b) Are these draft rules necessary? (c) What would you add to these draft rules? (d) What would you remove from these draft rules? C. SEC Independence There is no attached text for these questions. Some people believe that the independence of the SEC from the government needs to be strengthened.

(a) Do you agree or disagree with this view? (b) Why? (c) If you agree, what changes in the structure of the SEC within the government would you make to strengthen the independence of the SEC?

D. SEC Financial autonomy There is no attached text for these questions. Financial autonomy means the ability to become self-supporting, so that the SEC does not need to rely upon the government’s budget for its support and can pay its staff above the civil service scale. 1. Do you think that the SEC should, as a matter of public policy, become self-supporting? 2. Do you think that the SEC can become self-supporting? 3. If you answered “yes” to question 2, where would the money come from? 4. How would the SEC collect the money? E. Corporate Governance Corporate governance refers to the relationship between shareholders on the one hand and directors and officers (collectively, “management”) of the company on the other. The purpose of good corporate governance is primarily to prevent management from taking advantage of or abusing shareholders, particularly minority shareholders. Majority shareholders and management are frequently the same people, especially in emerging markets such as Bangladesh.


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The materials on the Compact Disk distributed with your invitation include drafts of proposed rules relating to corporate governance: Annual Reports, Proxy Solicitation, Insider Trading, and Selective Disclosure by Issuers. The materials on the Compact Disk also include the Organization for Economic Co-operation and Development (OECD) Principles of Corporate Governance, 2004; the Malaysian Code on Corporate Governance, March 2000; and an edited version of the Hong Kong Stock Exchange’s Corporate Governance Disclosure in Annual Reports, 2004. As you can see, the OECD and Malaysian materials are primarily general principles. The Hong Kong materials are detailed disclosure requirements. What are the issues or problems in Bangladesh with respect to the following issues and what would you do to improve corporate governance in Bangladesh: 1. Notification of AGM Is this an issue in Bangladesh? How to improve: 2. Date of AGM Is this an issue in Bangladesh? How to improve: 3. Extensions of time for AGM Is this an issue in Bangladesh? How to improve: 4. Location of AGM Is this an issue in Bangladesh? How to improve: 5. Form of proxies Is this an issue in Bangladesh? How to improve: 6. Procedures at AGM Is this an issue in Bangladesh? How to improve: 7. Cumulative or proportional voting at AGM Is this an issue in Bangladesh? How to improve: 8. Quorum for AGM Is this an issue in Bangladesh? How to improve: 9. Independent directors Is this an issue in Bangladesh? How to improve: 10. Quorum for directors meetings Is this an issue in Bangladesh? How to improve: 11. Audit committee of the board of directors Is this an issue in Bangladesh? How to improve: 12. Compensation committee of the board of directors Is this an issue in Bangladesh? How to improve: 13. Declaration of dividends Is this an issue in Bangladesh? How to improve:


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14. Payment of dividends Is this an issue in Bangladesh? How to improve: 15. Accurate and timely disclosure of company information Is this an issue in Bangladesh? How to improve: 16. Shareholder approval for incurring significant debt Is this an issue in Bangladesh? How to improve: 17. Shareholder approval of significant acquisitions of assets Is this an issue in Bangladesh? How to improve: 18. Shareholder approval of significant dispositions of assets Is this an issue in Bangladesh? How to improve: 19. Shareholder approval of insider dealings Is this an issue in Bangladesh? How to improve: 20. Shareholder approval of any change n shareholder rights Is this an issue in Bangladesh? How to improve: 21. Shareholder approval of directors’ and top managers’ compensation and benefits Is this an issue in Bangladesh? How to improve: 22. Directors, top managers or their families taking business opportunities that are in the businesses of the company (expropriation of corporate opportunities) Is this an issue in Bangladesh? How to improve: 23. Disclosure of shareholdings of directors, top managers and their families Is this an issue in Bangladesh? How to improve: 24. Disclosure of shareholdings of major shareholders (5%, 10%) Is this an issue in Bangladesh? How to improve: 25. Disclosure of cross holdings with other companies Is this an issue in Bangladesh? How to improve: 26. Prohibition of insider trading of company securities, except for limited times after announcements of earnings or dividends Is this an issue in Bangladesh? How to improve: 27. Disclosure of trading of company securities by major shareholders, directors and top managers Is this an issue in Bangladesh? How to improve: 28. Shareholder approval of poison pills or other management entrenchment devices Is this an issue in Bangladesh? How to improve: 29. Companies should make timely and accurate disclosure of material current events Is this an issue in Bangladesh? How to improve: 30. Companies have a code of conduct to govern relations with government, suppliers, customers, employees, and others. Is this an issue in Bangladesh? How to improve:


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31. Companies should not engage in any illegal activities. Is this an issue in Bangladesh? How to improve: 32. Companies should keep financial records that are accurate and complete. Is this an issue in Bangladesh? How to improve: Please write any other comments you may have with respect to corporate governance. Again, thank you for your participation in this workshop and the time you have taken to complete this questionnaire.


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APPENDIX B: RULE MAKING AND POLICY DETERMINATION RULES, 200X


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RULE MAKING AND POLICY DETERMINATION RULES, 200X As authorized by section 33 and 34 of the Securities and Exchange Ordinance, 1969, for smooth functioning SEC makes the following rule: 1. Short title:--These rules may be called the Rule-Making and Policy Determination Rules, 200X.

2. Definitions:-- In these rules, unless there is anything repugnant in the subject or context,

(a) “Commission” means the Securities and Exchange Commission; (b) “Rule making” means the procedures to be followed by the Commission whenever it considers a

new rule, regulation, notification, guideline, administrative order or any other instrument having a legal effect, or amendment or repeal of an existing instrument having legal effect; and

(c) “Policy determination” means the procedures to be followed by the Commission whenever it considers following a new policy or a change in an existing policy.

3. Sources of Proposals:--Proposals for rule making and for policy determination may be made by the Commission upon its own initiative or in response to requests from Members, the staff of the Commission, the securities industry, investors, the public or other government agencies. [The Secretary] [An Executive Director] shall present to the Commission all petitions for rule making or policy determination.

4. Committee:--The Commission may subject to the provision in section 27 of the Securities and Exchange Ordinance, 1969 form a permanent or temporary committee, composed of such members and experts as the Chairman may decide (having due regard for their expertise and the application of the matter under consideration), to review all proposals for rule making or policy determination. The committee may hold hearings, review the testimony submitted pursuant to rule 8, solicit the views of the staff and make a recommendation to the Commission. [The committee contemplated by this rule will be unnecessary if the Commission on Securities Laws and Regulations set forth in Section VI is formed. In that case, this rule should refer to that Commission.]

5. Notice:--Whenever the Commission decides to begin a rule making procedure or a policy determination procedure, it shall publish a general notice of the proposed rule making or policy determination. The notice shall be published in the [official government publication for notices, etc.], on the Commission’s web site, (others). The notice shall include:

(a) a statement of the time (which shall be not less than thirty days after publication of the notice), place and rules governing the public rule making proceedings or policy making procedures;

(b) reference to the legal authority under which the rule or policy is proposed; (c) either the text of a proposed rule or a description of the subjects and issues involved; and (d) solicitation of written comments in advance of the public rule making or policy determination

proceedings. 6. No Notice:--Rule 5 shall not apply to interpretations of rules or rules of the organization, procedure

or practice of the Commission.

7. Temporary Rules:--Temporary rules or policies may be issued by the Commission without following the procedures in rule 5. Such rules or policies shall expire in 90 days unless the procedures of rule 5 are followed to make the rule or policy permanent.

8. Public Participation:--The Commission, or if appointed, the committee, shall give persons an opportunity to participate in the rule making procedure or the policy determination procedure through the submission of written data, views, or arguments with or without the opportunity for oral presentation. The Commission or committee shall decide whether to hear oral presentations and may hear oral presentations from some persons and not others.

9. Adoption or Re-proposal:--After consideration, the Commission may adopt the rule or policies as proposed or with changes. Alternatively, the Commission may make another rule making proposal or policy determination proposal following the procedures of rule 5.


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10. Publication; Reasons:--The Commission shall publish the rule or policy and a concise general statement of the basis and purpose of the rule or policy. Publication shall be not less than thirty days before the effective date of the rule or policy. The rule or policy may become effective less than thirty days after publication if the rule or policy:

(a) grants or recognizes an exemption or relieves a restriction; (b) is interpretative of an existing rule or policy; or (c) so provides for good cause found by the Commission and stated and published with the rule or

policy.


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APPENDIX C: OPEN MEETINGS RULES, 200X


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OPEN MEETINGS RULES, 200X As authorized by section 33 and 34 of the Securities and Exchange Ordinance, 1969, for smooth functioning SEC makes the following rule: 1. Short title:--These rules may be called the Open Meetings Rules, 200X.


(a) “Commission” means the Securities and Exchange Commission; (b) “Meetings” means any occasion in which the members of the Commission are together to discuss

any matter within the authority of the Commission or to make any decision for the Commission. (c) The “public” includes individuals, representatives of regulated entities and representatives of

other entities. 3. Open meetings:--

(a) All meetings of the Commission shall be open to the public. (b) The public may be excluded from a meeting or portion of a meeting at which confidential

personnel matters are discussed or decided. (c) The public may be excluded from a meeting or portion of a meeting at which proposed

disciplinary matters are discussed or investigations authorized. (d) Members of the staff of the Commission may attend meeting by invitation of the Commission.

4. Notice of meetings:

(a) Announcement of regular meetings of the Commission shall be made at the beginning of each year for the year or at the next preceding meeting.

(b) Special meetings of the Commission shall be announced as soon as practicable in advance of the meeting, but in no case less than 24 hours in advance.

(c) A meeting which deals exclusively with confidential matters which permit the exclusion of the public need not be announced in advance.

(d) The Commission, by order, may determine that an emergency exists and hold a meeting without prior public notice. The reasons for the emergency shall be stated in the minutes of the meeting.

5. Minutes of meetings:

(a) The Commission shall regulate and document the minutes of its meetings in a special record. (b) The minutes shall record a brief summary of the statements made by members and others

attending the meeting. The person who made the statement may request corrections of the summary of the statement. The Commission shall consider the request at the meeting at which it approves the minutes.

(c) The minutes shall record the vote of each member on each decision made by the Commission. The minutes may note that the vote was unanimous without specifying the vote of each member.

(d) Drafts of minutes shall be available for public inspection and copying not more than 72 hours after the meeting.

(e) Confidential matters, including confidential personnel matters, shall not be recorded in the minutes that are available for public inspection, but shall be kept in separate confidential minutes.


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APPENDIX D: COMPLAINT RECEIPT AND PROCESSING RULES, 200X


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COMPLAINT RECEIPT AND PROCESSING RULES, 200X 1. Short title:--These rules may be called the Complaint Receipt and Processing Rules, 200X.


(a) “Commission” means the Securities and Exchange Commission; (b) “Complaint” means any written statement by any person who is not a member of the Commission

or its staff that the person has been harmed in any way by another person who has violated any provisions of the securities laws of regulations;

(c) “Complaint desk” means the physical place where the Commission receives complaints that are made in person at its offices;

(d) “Department” means the Supervision and Regulation of Markets and Intermediaries Department of the Commission or such other department that handles complaints; and

(e) “Processing” means the procedures to be followed by the Commission to investigate a complaint, resolve it if within the powers of the Commission and inform the person who made the complaint of the outcome of the investigation and resolution of the complaint.

3. Complaint Desk:

(a) The Commission shall designate a place in its offices where a complaint may be made in person. The location of the place shall be prominently displayed in the elevator lobby of each floor of the Commission’s offices.

(b) The Commission shall also receive complaints by mail, telephone and e-mail. (c) The Commission shall make available to each complainant a form that solicits the information the

Commission needs to process complaints efficiently. Use of the form shall not be required. (d) The form shall be the form delivered to the Commission as Exhibit 37 by the Capacity Building

for Securities and Exchange Commission (SEC) and Stock Exchanges, 2000 (TA-2913 BAN). 4. Processing:

(a) Complaints shall be processed by the Department. (b) To the extent practicable, the Department shall use the procedure recommended in the Investor

Complaint Investigation Procedure delivered to the Commission as Exhibit 36 by the Capacity Building for Securities and Exchange Commission (SEC) and Stock Exchanges, 2000 (TA-2913 BAN).

(c) The Department shall monitor the progress made by the stock exchanges or issuers in resolving complaints and shall require a detailed report of the actions taken by them. The report shall be made every two weeks until the matter is resolved or returned to the Commission for referral to the Enforcement Department.


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APPENDIX E: PROPOSED RULES UNDER THE ARBITRATION ACT, 2001


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PROPOSED RULES UNDER THE ARBITRATION ACT, 2001 Arbitration and Mediation Rules, 200X 1. Short title: ─ These rules may be called Arbitration and Mediation Rules, 200X. 2. Arbitration.—Rules for arbitration are numbered A-1 through A-44. A-1. Agreement of Parties

(a) The parties have made these rules a part of their arbitration agreement. The parties, by written agreement, may vary the procedures set forth in these rules. After appointment of the arbitrators, such modifications may be made only with the consent of the arbitrators.

A-2. Initiation of an Arbitration

(a) Arbitration under the agreement shall be initiated by the initiating party (the “claimant”) who shall, within the time period, if any, specified in the agreement, give to the other party (the “respondent”) written notice of its intention to arbitrate (the “demand”), which demand shall contain a statement setting forth the nature of the dispute, the names and addresses of all other parties, the amount involved, if any, the remedy sought, and the hearing locale requested. The notice shall be sent by registered mail.

(b) A respondent may send an answering statement within 15 days. If a counterclaim is asserted, it shall contain a statement setting forth the nature of the counterclaim, the amount involved, if any, and the remedy sought. The answering state shall be sent to the claimant and the arbitrators by registered mail.

(c) If no answering statement is filed within the stated time, respondent will be deemed to deny the claim. Failure to file an answering statement shall not operate to delay the arbitration.

(d) When filing any statement pursuant to this section, the parties are encouraged to provide descriptions of their claims in sufficient detail to make the circumstances of the dispute clear to the arbitrators.

A-3. Changes of Claim

After filing of a claim, if either party desires to make any new or different claim or counterclaim, it shall be made in writing and filed with the arbitrators. The party asserting such a claim or counterclaim shall provide a copy to the other party, who shall have 15 days from the date of such transmission within which to file an answering statement. After the chairman of the panel is appointed, however, no new or different claim may be submitted except with the arbitrators’ consent.

A-4. Jurisdiction

(a) The arbitrators shall have the power to rule on their own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.

(b) The arbitrators shall have the power to determine the existence or validity of the agreement. The arbitration clause shall be treated as an agreement independent of the other terms of the agreement. A decision by the arbitrators that the agreement is null and void shall not for that reason alone render invalid the arbitration clause.

(c) A party must object to the jurisdiction of the arbitrators or to the arbitrability of a claim or counterclaim no later than the filing of the answering statement to the claim or counterclaim that gives rise to the objection. The arbitrators may rule on such objections as a preliminary matter or as part of the final award.


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A-5. Mediation

At any stage of the proceedings, the parties may agree to conduct a mediation conference under the Mediation Rules in Rules M-1 through M-17 in order to facilitate settlement. The mediator shall not be an arbitrator appointed to the case.

A-6. Fixing of Locale

The parties may mutually agree on the locale where the arbitration is to be held. If any party requests that the hearing be held in a specific locale and the other party files no objection, the locale shall be the one requested. If a party objects to the locale requested by the other party, the arbitrators shall have the power to determine the locale, and their decision shall be final and binding.

A-7. Appointment of Arbitrators

(a) The claimant shall appoint an arbitrator in the demand and provide contact information (address, telephone, fax and e-mail).

(b) The respondent shall appoint an arbitrator in the answering statement and provide contact information (address, telephone, fax and e-mail).

(c) The arbitrators appointed by the parties shall appoint another arbitrator, who shall be the chairman of the arbitration panel (chairman). If appointment of that arbitrator shall result in the a panel of an even number (because there are more than two parties to the arbitration), the chairman shall appoint another arbitrator to make the panel have an odd number of arbitrators.

(d) If the respondent shall fail to make an answering statement within the specified time, the arbitrator named by the claimant shall name the chairman, who shall name another arbitrator.

(e) Every arbitrator, regardless of who shall have appointed him or her, shall be impartial and independent and shall perform his or her duties with diligence and in good faith, and shall be subject to disqualification for

(i) partiality or lack of independence,

(ii) inability or refusal to perform his or her duties with diligence and in good faith, and

(iii) any grounds for disqualification provided by applicable law.

(f) If any party shall challenge the impartiality and independence of an arbitrator appointed by another party, the chairman shall decide the question. If the chairman decides that the challenged arbitrator is impartial and independent, that decision shall be final. If the chairman decides that the challenged arbitrator is not impartial and independent, the party appointing that arbitrator shall appoint another arbitrator, who may be challenged and decided in like manner.

A-8. Disclosure

(a) Any person appointed or to be appointed as an arbitrator shall disclose to the parties and other arbitrators any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives. Such obligation shall remain in effect throughout the arbitration.

(b) In order to encourage disclosure by arbitrators, disclosure of information pursuant to this Section is not to be construed as an indication that the arbitrator considers that the disclosed circumstance is likely to affect impartiality or independence.


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A-9. Communication with Arbitrator

No party and no one acting on behalf of any party shall communicate ex parte with an arbitrator or a candidate for arbitrator concerning the arbitration, except that a party, or someone acting on behalf of a party, may communicate ex parte with a candidate for appointment in order to advise the candidate of the general nature of the controversy and of the anticipated proceedings and to discuss the candidate’s qualifications, availability, or independence in relation to the parties or to discuss the suitability of candidates for selection as a third arbitrator where party-designated arbitrators are to participate in that selection.

A-10. Vacancies

(a) If for any reason an arbitrator is unable to perform the duties of the office, the remaining arbitrators may, on proof satisfactory to them, declare the office vacant. Vacancies shall be filled in accordance with the applicable provisions of these rules.

(b) In the event of a vacancy after the hearings have commenced, the remaining arbitrator or arbitrators may continue with the hearing and determination of the controversy, unless the parties agree otherwise.

(c) In the event of the appointment of a substitute arbitrator, the panel of arbitrators shall determine in its sole discretion whether it is necessary to repeat all or part of any prior hearings.

A-11. Preliminary Hearing

(a) At the request of any party or at the discretion of the arbitrators, the arbitrators may schedule as soon as practicable a preliminary hearing with the parties and/or their representatives. The preliminary hearing may be conducted by telephone at the arbitrators’ discretion.

(b) During the preliminary hearing, the parties and the arbitrators should discuss the future conduct of the case, including using mediation to settle the case, clarification of the issues and claims, a schedule for the hearings and any other preliminary matters.

A-12. Exchange of Information

(a) At the request of any party or at the discretion of the arbitrators, consistent with the expedited nature of arbitration, the arbitrators may direct

(i) the production of documents and other information, and

(ii) the identification of any witnesses to be called.

(b) At least five business days prior to the hearing, the parties shall exchange copies of all exhibits they intend to submit at the hearing.

(c) The arbitrators are authorized to resolve any disputes concerning the exchange of information.

A-13. Date, Time, and Place of Hearing

The arbitrators shall set the date, time, and place for each hearing. The parties shall respond to requests for hearing dates in a timely manner, be cooperative in scheduling the earliest practicable date, and adhere to the established hearing schedule. The chairman of the panel shall send a notice of hearing to the parties at least 10 days in advance of the hearing date, unless otherwise agreed by the parties.


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A-14. Attendance at Hearings

The arbitrators shall maintain the privacy of the hearings unless the law provides to the contrary. Any person having a direct interest in the arbitration is entitled to attend hearings. The arbitrators shall otherwise have the power to require the exclusion of any witness, other than a party or other essential person, during the testimony of any other witness. It shall be discretionary with the arbitrators to determine the propriety of the attendance of any other person other than a party and its representatives.

A-15. Representation

Any party may be represented by counsel or other authorized representative. A party intending to be so represented shall notify the other party and the arbitrators of the name and address of the representative at least three days prior to the date set for the hearing at which that person is first to appear. When such a representative initiates an arbitration or responds for a party, notice is deemed to have been given.

A-16. Oaths

Before proceeding with the first hearing, each arbitrator may take an oath of office and, if required by law, shall do so. The arbitrator may require witnesses to testify under oath administered by any duly qualified person and, if it is required by law or requested by any party, shall do so.

A-17. Stenographic Record

Any party desiring a stenographic record shall make arrangements directly with a stenographer and shall notify the other parties of these arrangements at least three days in advance of the hearing. The requesting party or parties shall pay the cost of the record. If the transcript is agreed by the parties, or determined by the arbitrators to be the official record of the proceeding, it must be provided to the arbitrators and made available to the other parties for inspection, at a date, time, and place determined by the arbitrators.

A-18. Interpreters

Any party wishing an interpreter shall make all arrangements directly with the interpreter and shall assume the costs of the service.

A-19. Postponements

The arbitrators may postpone any hearing upon agreement of the parties, upon request of a party for good cause shown, or upon the arbitrators’ initiative.

A-20. Arbitration in the Absence of a Party or Representative

Unless the law provides to the contrary, the arbitration may proceed in the absence of any party or representative who, after due notice, fails to be present or fails to obtain a postponement. An award shall not be made solely on the default of a party. The arbitrators shall require the party who is present to submit such evidence as the arbitrators may require for the making of an award.

A-21. Conduct of Proceedings

(a) The claimant shall present evidence to support its claim. The respondent shall then present evidence to support its defence. Witnesses for each party shall also submit to questions from the arbitrators and the adverse party. The arbitrators has the discretion to vary this procedure, provided that the parties are treated with equality and that each party has the right to be heard and is given a fair opportunity to present its case.

(b) The arbitrators, exercising their discretion, shall conduct the proceedings with a view to expediting the resolution of the dispute and may direct the order of proof, bifurcate proceedings and direct the


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parties to focus their presentations on issues the decision of which could dispose of all or part of the case.

(c) The parties may agree to waive oral hearings in any case.

A-22. Evidence

(a) The parties may offer such evidence as is relevant and material to the dispute and shall produce such evidence as the arbitrator may deem necessary to an understanding and determination of the dispute. Conformity to legal rules of evidence shall not be necessary. All evidence shall be taken in the presence of all of the arbitrators and all of the parties, except where any of the parties is absent, in default or has waived the right to be present.

(b) The arbitrators shall determine the admissibility, relevance, and materiality of the evidence offered and may exclude evidence deemed by the arbitrators to be cumulative or irrelevant.

(c) The arbitrators shall take into account applicable principles of legal privilege, such as those involving the confidentiality of communications between a lawyer and client.

(d) An arbitrator or other person authorized by law to subpoena witnesses or documents may do so upon the request of any party or independently.

A-23. Evidence by Affidavit and Post-hearing Filing of Documents or Other Evidence

(a) The arbitrators may receive and consider the evidence of witnesses by declaration or affidavit, but shall give it only such weight as the arbitrators deem it entitled to after consideration of any objection made to its admission.

(b) If the parties agree or the arbitrator directs that documents or other evidence be submitted to the arbitrator after the hearing, the documents or other evidence shall be delivered to the arbitrators and all parties. All parties shall be afforded an opportunity to examine and respond to such documents or other evidence.

A-24. Inspection or Investigation

Arbitrators finding it necessary to make an inspection or investigation in connection with the arbitration shall so advise the parties. The arbitrators shall set the date and time and shall notify the parties. Any party who so desires may be present at such an inspection or investigation. In the event that one or all parties are not present at the inspection or investigation, the arbitrators shall make an oral or written report to the parties and afford them an opportunity to comment.

A-25. Interim Measures

(a) The arbitrators may take whatever interim measures they deem necessary, including injunctive relief and measures for the protection or conservation of property.

(b) Such interim measures may take the form of an interim award, and the arbitrators may require security for the costs of such measures.

(c) A request for interim measures addressed by a party to a judicial authority shall not be deemed incompatible with the agreement to arbitrate or a waiver of the right to arbitrate.

A-26. Closing of Hearing

The arbitrators shall specifically inquire of all parties whether they have any further proofs to offer or witnesses to be heard. Upon receiving negative replies or if satisfied that the record is complete, the arbitrators shall declare the hearing closed. If briefs are to be filed, the hearing shall b e declared closed as


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of the final date set by the arbitrators for the receipt of briefs. If documents are to be filed as provided in Section 23 and the date set for their receipt is later than that set for the receipt of briefs, the later date shall be the closing date of the hearing. The time limit within which the arbitrators are required to make the award shall commence, in the absence of other agreements by the parties, upon the closing of the hearing.

A-27. Reopening of Hearing

The hearing may be reopened on the arbitrators’ initiative, or upon application of a party, at any time before the award is made. The arbitrators may reopen the hearing and shall have 30 days from the closing of the reopened hearing within which to make an award.

A-28. Waiver of Rules

Any party who proceeds with the arbitration after knowledge that any provision or requirement of these rules has not been complied with and who fails to state an objection in writing shall be deemed to have waived the right to object.

A-29. Extensions of Time

The parties may modify any period of time by mutual agreement. The arbitrators may for good cause extend any period of time established by these rules, except the time for making the award. The arbitrators shall notify the parties of any extension.

A-30. Serving of Notice

(a) Any papers, notices, or process necessary or proper for the initiation or continuation of an arbitration under these rules, for any court action in connection therewith, or for the entry of judgment on any award made under these rules may be served on a party by mail addressed to the party, or its representative at the last known address or by personal service, provided that reasonable opportunity to be heard with regard to the dispute is or has been granted to the party.

(b) The arbitrators and the parties may also use overnight delivery or electronic facsimile transmission (fax), to give the notices required by these rules. Where all parties and the arbitrator agree, notices may be transmitted by electronic mail (e-mail), or other methods of communication.

(c) Unless otherwise instructed by arbitrators, any documents submitted by any party to the arbitrators shall simultaneously be provided to the other party or parties to the arbitration.

A-31. Majority Decision

A majority of the arbitrators must make all decisions.

A-32. Time of Award

The award shall be made promptly by the arbitrators and, unless otherwise agreed by the parties or specified by law, no later than 30 days from the date of closing the hearing, or, if oral hearings have been waived, from the date the final statements and proofs are delivered to the arbitrators.

A-33. Form of Award

(a) Any award shall be in writing and signed by a majority of the arbitrators. It shall be executed in the manner required by law.

(b) The arbitrators need not render a reasoned award unless the parties request such an award in writing prior to appointment of the arbitrators or unless the arbitrators determine that a reasoned award is appropriate.


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A-34. Scope of Award

(a) The arbitrators may grant any remedy or relief that the arbitrators deem just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract.

(b) In addition to a final award, the arbitrators may make other decisions, including interim, interlocutory, or partial rulings, orders, and awards. In any interim, interlocutory, or partial award, the arbitrators may assess and apportion the fees, expenses, and compensation related to such award as the arbitrators determine is appropriate.

(c) In the final award, the arbitrators shall assess the fees, expenses, and compensation provided in Rules A-40 and A-41. The arbitrators may apportion such fees, expenses, and compensation among the parties in such amounts as the arbitrators determine is appropriate.

(d) The award of the arbitrators may include:

(i) interest at such rate and from such date as the arbitrators may deem appropriate; and

(ii) an award of attorneys’ fees if all parties have requested such an award or it is authorized by law or their arbitration agreement.

A-35. Award upon Settlement

If the parties settle their dispute during the course of the arbitration and if the parties so request, the arbitrators may set forth the terms of the settlement in a “consent award.” A consent award must include an allocation of arbitration costs, including fees and expenses as well as arbitrators’ fees and expenses.

A-36. Delivery of Award to Parties

Parties shall accept as notice and delivery of the award the placing of the award or a true copy thereof in the mail addressed to the parties or their representatives at the last known addresses, personal or electronic service of the award, or the filing of the award in any other manner that is permitted by law.

A-37. Modification of Award

Within 20 days after the transmittal of an award, any party, upon notice to the other parties, may request the arbitrators to correct any clerical, typographical, or computational errors in the award. The arbitrators are not empowered to re-determine the merits of any claim already decided. The other parties shall be given 10 days to respond to the request. The arbitrator shall dispose of the request within 20 days after transmittal to the arbitrator of the request and any response thereto.

A-38. Retention and Release of Documents for Judicial Proceedings

(a) The chairman of the panel shall retain the demand, answering statement, counterclaim if any, and award for [6] years.

(b) The chairman shall, upon the written request of a party, furnish to the party, at the party’s expense, certified copies of any papers in the chairman’s possession that may be required in judicial proceedings relating to the arbitration.

A-39. Applications to Court and Exclusion of Liability

(a) No judicial proceeding by a party relating to the subject matter of the arbitration shall be deemed a waiver of the party’s right to arbitrate.

(b) No arbitrator in a proceeding under these rules is a necessary or proper party in judicial proceedings relating to the arbitration.


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(c) Parties to an arbitration under these rules shall be deemed to have consented that judgment upon the arbitration award may be entered in any court having jurisdiction thereof.

(d) Parties to an arbitration under these rules shall be deemed to have consented that no arbitrator shall be liable to any party in any action for damages or injunctive relief for any act or omission in connection with any arbitration under these rules.

A-40. Expenses

The expenses of witnesses for either side shall be paid by the party producing such witnesses. All other expenses of the arbitration, including required travel and other expenses of the arbitrators, and any witness and the cost of any proof produced at the direct request of the arbitrators, shall be borne equally by the parties, unless they agree otherwise or unless the arbitrator in the award assesses such expenses or any part thereof against any specified party or parties.

A-41. Arbitrators’ Compensation

(a) Each arbitrator shall be compensated at a rate consistent with the arbitrator’s stated rate of compensation.

(b) If there is disagreement concerning the terms of compensation, an appropriate rate shall be established with the arbitrator by the party that appointed the arbitrator and confirmed to the parties.

(c) Any arrangement for the compensation of the chairman of the panel shall be made directly between the parties and the chairman. If no agreement is reached within 10days of the appointment of the chairman by the other arbitrators, the chairman shall resign and the remaining arbitrators shall appoint a new chairman.

A-42. Deposits

The arbitrators may require the parties to deposit in advance of any hearings such sums of money as they deem necessary to cover the expense of the arbitration, including the arbitrator’s fee, if any, and shall render an accounting to the parties and return any unexpended balance at the conclusion of the case.

A-43. Interpretation and Application of Rules

The arbitrators shall interpret and apply these rules.

A-44. Suspension for Non-payment

If the arbitrators’ compensation or expenses have not been paid in full, the chairman may so inform the parties in order that one of them may advance the required payment. If such payments are not made, the arbitrators may order the suspension or termination of the proceedings. 3. Mediation.—Rules for mediation are numbered M-1 through M-17. M-1. Agreement of Parties

The Company, Trustee, Debenture Holders’ Association and each Debenture holder have made these procedures a part of their agreement.

M-2. Initiation of Mediation

Any party or parties to a dispute may initiate mediation by delivering a written request for mediation pursuant to these procedures.


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M-3. Requests for Mediation

A request for mediation shall contain a brief statement of the nature of the dispute and the names, addresses, and telephone numbers of all parties to the dispute and those who will represent them, if any, in the mediation. The initiating party shall send one copy to every other party to the dispute.

M-4. Appointment of the Mediator

A single mediator will serve. The mediator will be chosen by the agreement of the parties to the dispute. If they cannot agree upon a mediator, there shall be no mediation.

M-5. Qualifications of the Mediator

No person shall serve as a mediator in any dispute in which that person has any financial or personal interest in the result of the mediation, except by the written consent of all parties. Prior to accepting an appointment, the prospective mediator shall disclose any circumstance likely to create a presumption of bias or prevent a prompt meeting with the parties. Upon receipt of such information, the parties shall either replace the mediator or waive the conflict of interest.

M-6. Vacancies

If any mediator shall become unwilling or unable to serve, the parties agree to appoint another.

M-7. Representation

Any party may be represented by persons of the party’s choice. The names and addresses of such persons shall be communicated in writing to all parties.

M-8. Date, Time, and Place of Mediation

The mediator shall fix the date and the time of each mediation session. The mediation shall be held at any convenient location agreeable to the mediator and the parties, as the mediator shall determine.

M-9. Identification of Matters in Dispute

(a) At least ten days prior to the first scheduled mediation session, each party shall provide the mediator with a brief memorandum setting forth its position with regard to the issues that need to be resolved. At the discretion of the mediator, such memoranda may be mutually exchanged by the parties.

(b) At the first session, the parties will be expected to produce all information reasonably required for the mediator to understand the issues presented.

(c) The mediator may require any party to supplement such information.

M-10. Authority of the Mediator

(a) The mediator does not have the authority to impose a settlement on the parties but will attempt to help them reach a satisfactory resolution of their dispute. The mediator is authorized to conduct joint and separate meetings with the parties and to make oral and written recommendations for settlement.

(b) Whenever necessary, the mediator may also obtain expert advice concerning technical aspects of the dispute, provided that the parties agree and assume the expenses of obtaining such advice.

(c) Arrangements for obtaining such advice shall be made by the mediator or the parties, as the mediator shall determine.

(d) The mediator is authorized to end the mediation whenever, in the judgment of the mediator, further efforts at mediation would not contribute to a resolution of the dispute between the parties.


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M-11. Privacy

Mediation sessions are private. The parties and their representatives may attend mediation sessions. Other persons may attend only with the permission of the parties and with the consent of the mediator.

M-12. Confidentiality

(a) Confidential information disclosed to a mediator by the parties or by witnesses in the course of the mediation shall not be divulged by the mediator. All records, reports, or other documents received by a mediator while serving in that capacity shall be confidential.

(b) The mediator shall not be compelled to divulge such records or to testify in regard to the mediation in any adversary proceeding or judicial forum.

(c) The parties shall maintain the confidentiality of the mediation and shall not rely on, or introduce as evidence in any arbitral, judicial, or other proceeding:

(i) views expressed or suggestions made by another party with respect to a possible settlement of the dispute;

(ii) admissions made by another party in the course of the mediation proceedings;

(iii) proposals made or views expressed by the mediator; or

(iv) the fact that another party had or had not indicated willingness to accept a proposal for settlement made by the mediator.

M-13. No Stenographic Record

There shall be no stenographic record of the mediation process.

M-14. Termination of Mediation

The mediation shall be terminated:

(a) by the execution of a settlement agreement by the parties;

(b) by a written declaration of the mediator to the effect that further efforts at mediation are no longer worthwhile; or

(c) by a written declaration of a party or parties to the effect that the mediation proceedings are terminated.

M-15. Exclusion of Liability

The mediator is not a necessary party in judicial proceedings relating to the mediation. No mediator shall be liable to any party for any act or omission in connection with any mediation conducted under these procedures.

M-16. Interpretation and Application of Procedures

The mediator shall interpret and apply these procedures.

M-17. Expenses

(a) The expenses of witnesses for either side shall be paid by the party producing such witnesses. All other expenses of the mediation, including required travelling and other expenses of the mediator, and


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the expenses of any witness and the cost of any proofs or expert advice produced at the direct request of the mediator, shall be borne equally by the parties unless they agree otherwise.

(b) The parties are responsible for compensating the mediator at his or her published rate, for conference and study time (hourly or per diem).

All expenses are generally borne equally by the parties. The parties may adjust this arrangement by agreement.


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APPENDIX F: SECURITIES AND EXCHANGE COMMISSION (ADVISORY

COMMITTEE) RULES, 2XXX


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SECURITIES AND EXCHANGE COMMISSION (ADVISORY COMMITTEE) RULES, 2XXX No. SEC/……../………./Admin………-In exercise of the power conferred by section 33 read with section 27 of the Securities and Exchange Ordinance, 1969 (XVII of 1969), the Securities and Exchange Commission makes, the following Rules, namely:- 1. Short title.- (1) These rules may be called the Securities and Exchange Commission (Advisory Committee) Rules,

2XXX.

(2) It shall come into force from the date of its Notification in the Bangladesh Gazette. 2. Definitions.- (1) In these rules, unless the context otherwise requires,-

(a) “Advisory Committee” shall mean the Advisory Committee constituted under the provisions of section 27 of the Securities and Exchange Ordinance, 1969 (XVII of 1969); (b) "Chairman" means the Chairman of the Commission; (c) “Commission” means the Securities and Exchange Commission (or in short ‘SEC’) established under the provision of section 3 of the Securities and Exchange Commission Act (Act 15) of 1993;

(d) “Committee” shall mean the Advisory Committee constituted under these rules; (e) “delegated authority” shall mean any authority delegated by the Commission by virtue its authority prescribed in section 28 of the Ordinance; (f) “exchange” means a stock exchange established under the Securities and Exchange Ordinance, 1969 (XVII of 1969); (g) “Ordinance” shall mean Securities and Exchange Ordinance, 1969 (XVII of 1969); (h) "regulation" means a regulation made under the Securities and Exchange Commission Act (Act 15) of 1993; (i) "rule" means a rule made under the Securities and Exchange Commission Act (Act 15) of 1993; (j) "member" means a member of the Commission;

(2) Words and expressions used herein and not defined, but defined in the Securities and Exchange Ordinance, 1969 (XVII of 1969), Securities and Exchange Commission Act (Act 15) of 1993, the Rules and Regulations made under the said Ordinance and Act, and the Companies Act (Act 18) of 1994 shall have the same meanings respectively assigned to them in the said Ordinance, Acts, Rules and Regulations. 3. Constitution of the Advisory Committee.- (1) As soon as may be after the Official Notification of these rules in the Bangladesh Gazette the Commission shall, by notification in the official Gazette, constitute an Advisory Committee by the name and style of Securities and Exchange Commission Advisory Committee for carrying out the purpose of Securities and Exchange Ordinance, 1969 (XVII of 1969).


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(2) The Advisory Committee will advice on matters referred to it by the Commission as the Commission from time to time deems necessary. 4. Office - The Office of the Committee shall be at the Head Office of the Commission or at any other place as the Commission decides. 5. Composition of the Committee.- (1) The Advisory Committee shall consist of nine persons, seven of whom shall be chosen by the Commission from amongst persons especially qualified in the field of capital market, its institutional laws and other avenues as the Commission deems it necessary with knowledge and expertise in the field of:

(a) Securities Market and its institutions; (b) Law; (c) Audit; (d) Accountancy; (e) Merchant Banking; (f) Mutual Fund; (g) Stock Market; (h) Banking; (i) Insurance; (j) Mortgage and lending; (k) Cost-Accountancy; (l) Taxation; (m) Infra-Structure Development.

The two remaining members of the Committee will be the representatives as chosen by the Commission, for which the Commission may either depute any of its officers not below the rank of Executive Director, or choose from amongst any other discipline as it deems qualified to represent it. (2) The Commission shall select the President of the Committee from amongst the members of the Advisory Committee. 6. Tenure of responsibility.- (1) The President and the members of the Committee shall hold their offices for a period of three years beginning from the date of their engagement and shall be eligible for reappointment. (2) The President and any member may at any time before the expiry of the term of their engagement resign from their responsibility by an advance notice of no less than one months addressed to the Commission. (3) The Commission may withdraw either the President or any member of the Committee before the completion of his /her tenure of responsibility in the Committee without showing any reason thereof. 7. Disqualification of the Chairman, etc. - A person shall be disqualified for engagement in the Committee as, or for being, the President or member, if-

(a) he is an undischarged insolvent; (b) he is declared by a court to be of unsound mind; (c) he has been convicted for a criminal offence involving moral turpitude; (d) he has been sued either by the Commission, or any stock exchange for breach of any security law.


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8. Meetings of the Advisory Committee.- (1) The Advisory Committee shall meet upon the call of its President. (2) Five members shall form the quorum at a meeting of the Committee. (3) Every meeting of the Committee shall be presided over by the President and, in his absence, by any other member chosen by the majority present. (4) All matters at a meeting of the Committee shall be decided by the votes of the majority of the members present and, in the event of equality of votes, the person presiding shall have a second or casting vote. (5) No act or proceeding of the Committee shall be invalid or be called in question merely on the ground of any vacancy in, or any defect in the constitution of, the Committee. 9. Reports, etc. The Committee shall, within seven days of stipulated time for completion of any assigned task shall submit its recommendations to the Chairman of the Commission. 10. Compensation- The President and members of the Committee shall be eligible to receive an amount of Taka ……………. for every meeting, and Taka ………. for every hour or its part thereof spent in discharging his responsibility.


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APPENDIX G: PROPOSAL FOR FOUR NEW SECTIONS OF THE SEC ACT,

1993


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PROPOSAL FOR FOUR NEW SECTIONS OF THE SEC ACT, 1993 A. COMMISSION MAY BEGIN A CIVIL PROCEEDING

Where, as a result of an investigation after notice and an opportunity to be heard, or from a record of an examination, it appears to the Commission to be in the public interest for a person to begin and carry on a proceeding in the High Court for: 1. the recovery of damages for fraud, negligence, default, breach of duty, or other misconduct,

committed in connection with a matter to which the investigation or examination related; or

2. recovery of property of the person;

3. the Commission, if the person is an entity, may cause; or otherwise, may, with the person's written consent, cause, such a proceeding to be begun and carried on in the person's name.

[Comment: This new section deals with beginning a civil proceeding on behalf of an individual, company, special purpose vehicle or other entity. It is not a proceeding on behalf of the SEC itself. It is adapted from the Australian Securities and Investment Commission Act, 2001. It permits the SEC to begin a civil process for an entity even without the entity’s consent. This prevents the board of directors from denying the SEC the right to sue a board member for violating his duty to the company, for example. However, the SEC may sue on behalf of an individual only with the consent of the individual.] B. JUDICIAL ACTIONS BY THE COMMISSION 1. Whenever it shall appear to the Commission upon the record, after notice and an opportunity to be

heard, that any person has violated any provision of this ordinance or the rules there under, the Commission may bring an action in the High Court to seek a civil penalty to be paid by the person who committed such violation.

2. The amount of the penalty which may be imposed on the person who committed such violation shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of such violation.

3. The amount of the penalty which may be imposed on any person who, at the time of the violation, directly or indirectly controlled the person who committed such violation, shall be determined by the court in light of the facts and circumstances, but shall not exceed the greater of Tk________ [$1,000,000], or three times the amount of the profit gained or loss avoided as a result of such controlled person's violation.

4. Any sum directed to be paid under this section shall be recoverable as an arrear of land revenue under the Public Demands Recovery Act, ……….. .

[Comment: This new section authorises the SEC to bring a suit for a civil penalty in any case involving a violation of any securities law. The civil penalty may be as high as three times the profit from the insider trading or the loss avoided by the violation.]

C. CIVIL REMEDIES IN ADMINISTRATIVE PROCEEDINGS 1. In any proceeding instituted against any person, the Commission may impose a civil penalty if it

finds, on the record after notice and opportunity for hearing, that such person

(a) has wilfully violated any provision of the Securities and Exchange Ordinance, 1969 or the rules or orders there under;


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(b) has wilfully aided, abetted, counselled, commanded, induced, or procured such a violation by any other person;

(c) has wilfully made or caused to be made in any application for registration or report required to be filed with the Commission, or in any proceeding before the Commission with respect to registration, any statement which was, at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such application or report any material fact which is required to be stated therein; or

(d) has failed reasonably to supervise, within the meaning of sections 23 (4) and 24 (2) with a view to preventing violations, another person who commits such a violation, if such other person is subject to his supervision;

(e) and that such penalty is in the public interest.

2. The maximum amount of the penalty shall depend upon the nature of the violation.

3. In considering under this section whether a penalty is in the public interest, the Commission may consider:

(a) whether the act or omission for which such penalty is assessed involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement;

(b) the harm to other persons resulting either directly or indirectly from such act or omission; (c) the extent to which any person was unjustly enriched, taking into account any restitution

made to persons injured by such behaviour; (d) whether such person previously has been found by the Commission or a court to have

violated securities laws, has been enjoined by a court from violations of such laws or rules, or has been convicted by a court of violations of such laws or of any felony or misdemeanour involving financial matters;

(e) the need to deter such person and other persons from committing such acts or omissions; and

(f) such other matters as justice may require. 4. In any proceeding in which the Commission may impose a penalty under this section, a respondent

may present evidence of the respondent's ability to pay such penalty. The Commission may, in its discretion, consider such evidence in determining whether such penalty is in the public interest. Such evidence may relate to the extent of such person's ability to continue in business and the collectability of a penalty, taking into account any other claims of the Government of Bangladesh or third parties upon such person's assets and the amount of such person's assets.

5. In any proceeding in which the Commission may impose a penalty under this section, the Commission may enter an order requiring accounting and disgorgement, including reasonable interest. The Commission is authorized to adopt rules, regulations, and orders concerning payments to investors, rates of interest, periods of accrual, and such other matters as it deems appropriate to implement this subsection (5).

6. Appeals from any order of the Commission under this section shall be to the Commission and then to the superior court.


[Comment: The third new section authorises the SEC to impose civil penalties for violations of the Ordinance or rules under it. It also authorises the SEC to require disgorgement of gains obtained in violation of the Ordinance.]


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D. COMMISSION MAY BRING A CRIMINAL PROSECUTION 1. Where, as a result of an investigation after notice and an opportunity to be heard, or from a record of

an examination, it appears to the Commission that a person may have committed an offence against the this Ordinance and ought to be prosecuted for the offence, the Commission itself prosecute the person for the offence in the high court.

2. Nothing in this section affects the operation of the Criminal Procedure Code, 1989 (Act …., 1989) or any other law enforceable for the time being in force.


[Comment: This new section authorises the SEC to begin a criminal prosecution for violation of the Ordinance if it believes that a criminal prosecution is warranted. This section is adapted from the Australian Securities and Investment Commission Act, 2001. The jurisdiction of the Commission to prosecute a criminal case does not affect the jurisdiction of the public prosecutor. However, the Commission should be aware that the public prosecutor is unlikely to want to spend its resources on securities laws cases if the Commission has independent authority to bring a criminal case.]


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APPENDIX H: SECURITIES AND EXCHANGE COMMISSION (APPELLATE TRIBUNAL) RULES, 2XXX


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SECURITIES AND EXCHANGE COMMISSION (APPELLATE TRIBUNAL) RULES, 2XXX To consolidate and make effect the provision of hearing appeal as provided in section 20 of the Securities and exchange Commission Act, 1993 (Act XV of 1993) with regard to the Securities and Exchange Commission, securities and exchange markets and matters connected therewith or incidental thereto; and In pursuance of the powers conferred by section 25 of the Securities and Exchange Commission Act, 1993 (Act XV of 1993) read with Securities and Exchange Commission (Appeal) Regulations, 1995 and section 33 of the Securities and Exchange Ordinance, 1969 (Ordinance XVII of 1969), the Government hereby makes the following rules, namely:-

1. Short title and commencement.- (1) These rules may be called the Securities and Exchange Commission Appellate Tribunal (Procedure) Rules, 2XXX. (2) They shall come into force on the date of their publication in the official Gazette. 2. Definitions.- (1) In these rules, unless the context otherwise requires:

(a) "Act" means the Securities and Exchange Commission Act, 1993 (Act XV of 1993); (b) "Adjudicating Officer" means an officer appointed under rule ….. of this rule; (c) "Appeal" means an appeal preferred by any person aggrieved by any order made by any officer of the Securities and Exchange Commission under section 22 of the Act, read with rule 3 of the Securities and Exchange Commission (Appeal) Regulations, 1995; (d) "Appellant" means a person making an appeal to the Appellate Tribunal under section 22 of the Act; (e) "Appellate Tribunal" means the Securities and Appellate Tribunal established under these rules pursuant to section 22 and 25 of the Securities and Exchange Commission Act, 1993 (Act XV of 1993); read with Securities and Exchange Commission (Appeal) Regulations, 1995; and section 33 of the Securities and Exchange Ordinance, 1969 (Ordinance XVII of 1969); (f) “Commission” means the Securities and Exchange Commission. (g) “opposite party” means any person connected with the concerned order and shown as an opposite party in the prescribed form, and includes any other person shown by the Commission as an opposite party: Provided that, no member, officer or employee of the Commission shall be shown as an opposite party; (h) “person” includes any company, body corporate, partnership firm or any other organization. (i) “Ordinance” means Securities and Exchange Ordinance, 1969 (Ordinance XVII of 1969); (j) "prescribed form" means the form appended to these rules;


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(k) "legal practitioner" shall have the same meaning as assigned to it in the Bangladesh Legal Practitioners and Bar Council Order, 1972 (President’s Order No. 46 of 1972); (l) "Presiding Officer" means the Presiding Officer of the Securities Appellate Tribunal appointed under section ……. of the Act; (m "Registrar" means the Registrar of an Appellate Tribunal and includes any officer of such Appellate Tribunal to whom the powers and functions of the Registrars may be assigned; (n) "Registry" means the Registry of the Appellate Tribunal; (o) “representative” means a person duly authorised by the appellant to present appeal or to give reply on its behalf before the Appellate Tribunal.

(2) Words and expressions used and not defined in these rules but defined in Securities and Exchange Commission Act, 1993 (XV of 1993); shall have the meanings respectively assigned to them in that Act. 3. Sittings of Appellate Tribunal- An Appellate Tribunal shall hold its sittings either at the Head Office of the Commission at Dhaka, or at such other place falling within its jurisdiction as it may deem convenient. 4. Language of Appellate Tribunal.- (1) The proceedings of the Appellate Tribunal shall be conducted either in English, or Bangla, or simultaneously. (2) No appeal, reference, application representation, document or other matters contained in any language other than English or Bengali shall be accepted by the Appellate Tribunal, unless the same is accompanied by a true copy of translation thereof in English or Bengali. 5. Procedure for filing appeals.- (1) A memorandum of appeal shall be presented in the form annexed to the Securities and Exchange Commission (Appeal) Regulations, 1995 by the Appellant either in person to the Registrar of the Appellate Tribunal as described regulation 3 of the Securities and Exchange Commission (Appeal) Regulations, 1995. (2) An appeal against more than one order shall not be filed in one form. (3) In the specified part of the form, the relevant facts and grounds for appeal shall be mentioned clearly and in brief, and the irrelevant or redundant statements shall be avoided, provided that for the purpose of submitting those statements separate sheets of paper may be used. (4) If the appellant mentions any opposite party in the prescribed form or if the Commission identifies any person as an opposite party, the appellant shall file an additional copy of the filled up form of appeal and each document submitted, and the Commission shall send the said form and document to the opposite party along with the notice to be sent under regulation 5 (2). (5) The following documents shall be submitted along with the form, namely: -

(a) two attested copies of the order against which the appeal is to be filed; (b) necessary documents and facts in support of the grounds;


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(6) (2) Where the appellant is company a memorandum of appeal may be preferred, -

(a) any lawyer receiving certificate for legal practice from the Bangladesh Bar Council; (b) any chartered account or cost and management accountant; (c) any other person who is capable to submit the statements of the appellant regarding the facts of appeal.

(7) Where the appellant is other than a company he may prefer an appeal in person or by his authorised agent or by a duly authorised person as mentioned clause (6) legal practitioner. (8) An appeal sent by post under sub-rule (1) shall be deemed to have been presented to the Registrar on the day on which it is received in the office of the Registrar.

6. Presentation and scrutiny of memorandum of appeal.- (1) The Registrar shall endorse on every appeal the date on which it is presented under that rule and shall sign endorse. (2) If, on scrutiny, the appeal is found to be in order, it shall be duly registered and given a serial number. (3) If an appeal on scrutiny is found to be defective and the defect noticed is formal in nature, the Registrar may allow the appellant to rectify the same in his presence and if the said defect is not formal in nature, the Registrar, may allow the appellant such time to rectify the defect as he may deem fit.

(4) If the concerned appellant fails to rectify the defect within the time allowed in sub-rule (3), the Registrar may by order and for reasons to be recorded in writing, decline to register such memorandum of appeal. (5) An appeal against the order of the Registrar under sub-rule (4) shall be made within fifteen days of making of such order to the Presiding Officer concerned in his chamber, whose decision thereon shall be final. 7. Place of filing memorandum of appeal- The memorandum of appeal shall be filed by the appellant with the Registrar of the Appellate Tribunal. 8. Fee- (1) Every memorandum of appeal under rule 5 shall be accompanied with a fee provided in sub-rule (2) and such fee may be remitted either in the form of demand draft or …………… drawn on a scheduled bank in favour of the Registrar. (2) The amount of fee payable in respect of appeal under rule 5 shall be as follows:-

TABLE AMOUNT OF PENALTY IMPOSED/ AMOUNT OF FEES PAYABLE 1. Less than Taka ten thousand; / any other matter

Taka. …………..

2. Taka ten thousand or more but less than one lakhs;

Taka………………

3. Taka one lakh or more. Taka………. plus Taka………. for every additional one lakh of penalty.


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9. Deposit of amount of penalty- Where an appeal is preferred by a person under section 22 of the Act, such appeal shall not be entertained by the Appellate Tribunal unless such person has deposited with the Appellate Tribunal either the whole amount of penalty imposed upon him, or a guarantee equal to the amount of penalty imposed by the Adjudicating Officers. Provided that the Appellate Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited with the Appellate Tribunal. 10. Contents of memorandum of appeal.- (1) Every memorandum of appeal filed under rule 5 shall set forth concisely under distinct heads; the grounds of such appeal without any argument or narrative, and such grounds shall be numbered consecutively and shall be typed in double line space on one side of the paper. (2) It shall not be necessary to present separate memorandum of appeal to seek interim order or direction if in the memorandum of appeal, the same is prayed for. 11. Documents to accompany memorandum of appeal.- (1) Every memorandum of appeal shall be filed in triplicate and shall be accompanied with at least one truly certified copy of the order against which the appeal is filed. (2) Where the parties to the appeal are being represented by an authorised agent, documents authorising him to act as such agent shall also be appended to the appeals.

Provided that where an appeal is filed by a local practitioner, it shall be accompanied by a duly executed Vokalatnama.

(3) Where a company is being represented by any of its Officers to act as authorised agent before the Appellate Tribunal, the document authorising him to act as authorised agent shall be appended to the memorandum of appeal. 12. Plural remedies.- A memorandum of appeal shall not seek relief or relieves based on more than a single cause of action in one single memorandum of appeal/ form unless the relieves prayed for are consequential to one another. 13. Endorsing copy of appeal to the Commission- A copy of the memorandum of appeal and paper book shall be served on the Commission, as soon as they are filed, by the Registrar by registered post. 14. Filing of reply to the appeal and other documents by the respondent or the Board.- (1) The respondent or the Commission may file four complete sets containing the reply to the appeal along with documents in a paper book form with the registry within one month of the service of the notice on him of the filing of the memorandum of appeal. (2) The respondent or the Commission shall also endorse one copy of the reply to the appeal along with documents as mentioned in sub-rule (1) to the appellant. (3) The Appellate Tribunal may, in its discretion on application by the respondent or the Commission, allow the filing of reply referred to in sub-rule (1), after the expiry of the period referred to therein. 15. Date and place of hearing to be notified- The Appellate Tribunal shall notify the parties the date and place of hearing of the appeal in such a manner as the Presiding Officer may by general or special order direct.


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16. Order to be signed and date.- (1) Every order of the Appellate Tribunal shall be in writing and shall be signed and dated by the Presiding Officer of the Appellate Tribunal. (2) The order shall be pronounced in open court. 17. Publication of Orders- The orders of the Appellate Tribunal as are deemed fit for publication in any authoritative report or the press may be released for such publication on such terms and conditions as the Appellate Tribunal may lay down. 18. Communication of order- Every order passed on an appeal shall be communicated to the appellant and to the respondent and to the Commission and Adjudicating Officer concerned either in person or by registered post free of cost. 19. Fee for inspection of records and obtaining copies thereof.- (1) A fee of Taka……… for every hour or part thereof of inspection subject to a minimum of Taka ……….. ………….. hundred shall be charged for inspecting the records of a pending appeal by a party thereto. (2) A fee of Taka …….. for a folio or part thereof not involving typing and a fee of Taka ……. for a folio or part thereof involving typing of statement and figures shall be charged. 20. Orders and directions in certain cases. The Appellate Tribunal may make such orders or give such directions as may be necessary or expedient to give effect to its orders or to prevent abuse of its process or to secure the ends of justice. 21. Working hours of the Appellate Tribunal.- (1) Except on Fridays and other public holidays the offices of the Appellate Tribunal shall, subject to any other order made by the Presiding Officer, remain open daily from 09 a.m. to 4 p.m. (2) The sitting hours of the Appellate Tribunal shall ordinarily be from 10.00 am. to 1.00 p.m. and 2.00 p.m. to 3.30 p.m. subject to any order made by the Presiding Officer. 22. Holiday- Where the last day for doing any act falls on a day on which the office of the Appellate Tribunal is closed and by reason thereof the act cannot be done on that day, it may be done on the next day on which that office opens. 23. Powers and functions of the Registrar.- (1) The Registrar shall have the custody of the records of the Appellate Tribunal and shall exercise such other functions as are assigned to him under these rules or by the Presiding Officer by a separate order in writing. (2) The official seal shall be kept in the custody of the Registrar. (3) Subject to any general or special direction by the Presiding Officer, the seal of the Appellate Tribunal shall not be affixed to any order, summons or other process have under the authority in writing from the Registrar.

(4) The seal of the Appellate Tribunal shall not be affixed to any certified copy issued by the Appellate Tribunal save under the authority in writing of the Registrar.


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24. Additional powers an duties of Registrar- In addition to the powers conferred elsewhere in these rules, the Registrar shall have the following powers and duties subject to any general or special orders of the Presiding Officer namely:- (1) to receive all appeals and other documents; (2) to decide all question arising out of the scrutiny of the appeals before they are registered; (3) to require any appeal presented to the Appellate Tribunal to be amended in accordance with the rules; (4) subject to the directions of the Presiding Officer to fix date of hearing of the appeals or other proceedings and issue notices thereof; (5) direct any formal amendment of records; (6) to order grant of copies of documents to parties to proceedings; (7) to grant leave to inspect the record of Appellate Tribunal; (8) dispose of all matters relating to the service of notices or other processes, application for the issue of fresh notice or for extending the time for or ordering a particular method of service on a respondent including a substituted service by publication of the notice by way of advertisements in the newspapers; (9) to requisition records from the custody of any court or other authority. 25. Seal and emblem – The official seal and emblem of the Appellate Tribunal shall be the seal and emblem of the Securities and Exchange Commission.


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APPENDIX I: THE COMPANY AND SECURITIES TRIBUNAL ACT, 2XXX

(ACT XXX OF 2XXX)


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THE COMPANY AND SECURITIES TRIBUNAL ACT, 2XXX (ACT XXX OF 2XXX) An Act to provide for the establishment of Company and Securities Tribunal to exercise jurisdiction in respect of matters to or arising out of the issues relating to provisions in the Companies Act, 1994 and all security laws in force in Bangladesh. Whereas section ………. of the Companies Act, 1994 provides, inter alia, that Government may by law establish one or more Company and Securities Tribunal in respect of matters to or arising out of the issues relating to provisions in the Companies Act, 1994 and all security laws in force in Bangladesh. And whereas it is expedient to provide for the establishment of Company and Securities Tribunal to exercise such jurisdiction and for matters connected therewith; It is hereby enacted as follows: 1. Short title and commencement- (1) This Act may be called the Company and Securities Tribunal Act, 2XXX. (2) It shall come into force on such date as the Government may, by notification in the official Gazette, appoint. 2. Definitions- (1) In this Act unless there is anything repugnant in the subject or context, -

(a) "Officer" means an officer of the Company and Securities Tribunal Act, 2XXX. (b) “tribunal” means any Company and Securities Tribunal established under this Act;

(2) Words and expressions used herein and not defined, but defined in the Securities and Exchange Ordinance, 1969 (XVII of 1969), Securities and Exchange Commission Act (Act 15) of 1993, the Rules and Regulations made under the said Ordinance and Act, and the Companies Act (Act 18) of 1994 shall have the same meanings respectively assigned to them in the said Ordinance, Acts, Rules and Regulations shall have the same meaning. 3. Establishment of Company and Securities Tribunal – (1) The Government may, by notification in the official Gazette, establish one or more Company and Securities Tribunals for the purpose of this Act. (2) Where more than one Company and Securities Tribunal is established, the government shall, by notification in the official Gazette, specify the area within which each Tribunal shall exercise jurisdiction. (3) A Company and Securities Tribunal shall consist of one member who shall be appointed by the Government from among persons who has requisite qualification and experience in the company and security laws, or a person who is either in service or has retired from the service of the Republic with not below the rank of a District Judges. (4) A member of a Company and Securities Tribunal shall hold office on such terms and conditions as the Government may determine.


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4. Jurisdiction of Company and Securities Tribunal- (1) A Company and Securities Tribunal shall have exclusive jurisdiction to hear and determine applications made by either the Registrar of Joint Stock Companies and Firms, Securities and Exchange Commission, Government of the Peoples Republic of Bangladesh, autonomous body, municipal, local or private authority, any body corporate, organization, cooperative society, or any individual in respect of any company and securities laws and concerned disputes. (2) Any person, Registrar of Joint Stock Companies and Firms, Securities and Exchange Commission, Government of the Peoples Republic of Bangladesh, stock exchange, autonomous body, municipal, local or private authority, any body corporate, organization, cooperative society, may make an application to a Company and Securities Tribunal, if he is aggrieved by any order or decision in respect of any matter arising out of any company or securities laws in force in Bangladesh; (3) In this section “person” also includes any artificial legal person. 5. Jurisdiction of Company and Securities Appellate Tribunal – (1) The Company and Securities Appellate Tribunal shall have jurisdiction to hear and determine any dispute arising out of the Companies Act, 1994 (Act 18 of 1994); Securities and Exchange Ordinance, 1969 (Ordinance No. XVII of 1969) and any rules, regulations, notifications made thereunder; Securities and Exchange Commission Act, 1993 (Act 15 of 1993). (2) The Company and Securities Appellate Tribunal may, on petition, confirm, set aside, vary or modify any order or decision of any one as set out in its jurisdiction in section 5 of this Act. 6. Powers and Procedure of Tribunals- (1) For the purposes of hearing an petition, a Tribunal shall have all the powers of civil court, while trying a suit under the Code of Civil Procedure, 1908 (V of 1908) in respect of the following matters, namely:

(a) summoning and enforcing the attendance of any person and examining him on oath; (b) requiring the discovery and production of any document; (c) requiring evidence on affidavit; (d) requisitioning any private or public record or a copy thereof from any office; (e) issuing commissions for the examination of witnesses or documents; (f) such other matters as may be prescribed.

(2) Any proceedings before a Tribunal shall be deemed to be a judicial proceeding within the meaning of section 193 of the Penal Code (XLV of 1860). (3) A Tribunal shall hold its sittings at such place or places as the Government may fix. 7. Death of the applicant- (1) If a petitioner dies during the pendency of the hearing, the right to sue of that applicant shall survive to his legal heirs.


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(2) Where the right to survive under sub-section (1) such legal representative of the deceased petitioner who would have been entitled to the compensation or any benefit at the event of the death deceased petitioner may be substituted, upon an application, made to the Tribunal, within sixty days from the date of the death of the petitioner. (3) The legal representative of the deceased, as referred to in sub-section (2), shall be entitled to the compensation and benefits which would have been payable to the deceased if he was not dead. 8. Amendment of application- The Tribunal may, at any stage of the proceedings, allow the petitioner to alter or amend his petition in such manner and on such terms as it thinks fit. 9. Appeal- (1) Any person aggrieved by an order or decision of a Company and Securities Tribunal may, within three months from the date of making of the order or decision, prefer an appeal to the High Court Division of the Supreme Court of Bangladesh. (2) Notwithstanding the provisions of sub-section (2), an appeal may be admitted after the period of three months specified in that sub-section but not later than six months, if the appellant satisfies the Court that he had sufficient cause for not preferring the appeal within three months. 10. Penalties for obstruction- A Tribunal shall have power to punish any person who, without lawful excuse, obstructs it in the performance of its functions with simple imprisonment which may extend to three month, or with fine which may extend to ten thousand taka, or with both. 11. Contempt of Tribunals- A Tribunal shall have power to punish for contempt of its authority as if it were the High Court Division of the Supreme Court. 12. Act to override other laws- The provisions of this Act shall have effect notwithstanding anything contained in any other law for the time being in force. 13. Power to make rules- (1) The Government may, by notification in the Official Gazette, make rules for carrying out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely;

(a) form and manner in which and the fee on payment of which a petition may be made; (b) registration of petition; (c) procedure to be followed by a Tribunal in hearing a petition; (d) form and service of notices, summonses and requisitions; (e) prescription of records and reports to be maintained or prepared by a Tribunal; (f) execution of decisions and orders of a Tribunal; (g) any other matter which is to be or may be prescribed.


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APPENDIX J: ASSESSING THE SALIENT FEATURES OF THE RECOMMENDATION MADE IN ADB TA-3533 WITH REGARD TO

IMPROVING CORPORATE GOVERNANCE IN BANGLADESH


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ASSESSING THE SALIENT FEATURES OF THE RECOMMENDATION MADE IN ADB TA-3533 WITH REGARD TO IMPROVING CORPORATE GOVERNANCE IN BANGLADESH Introduction: In the ADB TA-3533 project entitled “Capacity Building of the Securities and Exchange Commission and Selected Capital Market Institutions” some Legislative Recommendations were suggested to the Securities and Exchange Commission (SEC). For overall efficiency of an efficient capital market is a good corporate governance, which will promotes the efficient use of capital, both by an individual company and by the national economy. Good corporate governance helps protecting the credit markets and the banking system, improved tax collection, protection of the national economy from unjustified swings in equity prices due to excessive speculation and increased employment. To obtain substantial local and foreign investments, Bangladesh must change not only its practices, but also the investment community’s perception about it. Foreigners will participate in Bangladesh’s capital market when local investor rights are acknowledged and protected. To creep to a minimum level compared to the international standard some recommendations were made in the aforesaid ADB TA. Here below, I the present project have tried to assess the improvements made, if any, since the recommendations were submitted.

Serial No. Recommendations made in the ADB TA- 3533 Actions so far taken for

implementation 1. Shareholder Approval of Certain Actions

It is recommended that the Companies Act, 1994 (the “Act”) be amended to provide that each company’s Articles of Association contain provisions requiring a favourable vote of a majority of shareholders for the following transactions:

any proposed transaction between the company and its affiliated persons

any proposed adoption of anti-takeover measures

any proposed spin off of a significant subsidiary.

No step has yet been taken by the government to implement this recommendation. [See Exhibit ---, Amendments to Draft Companies Act, 2004, Section 78A; and Exhibit __, Corporate Governance Rules, 200X, rule 3.]

2. Proxies Regulations 61 through 68 under the Act deal with procedural aspects of “Votes of Members.” Although Regulation 66 (requiring that proxies be in writing and other matters) is mandatory, the other regulations promote good governance and it is recommended that the Companies Act and exchange regulations be amended to make these provisions mandatory.

No step has yet been taken either by the government, or by the exchanges, to implement this recommendation. [See Exhibit __, Company Proxy Solicitation Rules, 200X.]

3. Multiple Voting Classes Although various classes of shares should be permitted (various classes of preferred stock, convertible stock, etc.) variations in voting rights among common shareholders should be prohibited, that is, there should be a prohibition against non-voting common shares, and a prohibition against “golden shares” with either a multiple amount of votes or a veto over other shareholder votes. The principle should be “one share,

No positive step has yet been taken either by the government, exchanges, or any company to implement this proposition.


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implementation one vote” for common shareholders. Government, the exchanges and Companies should implement this proposal.

4. Cumulative Voting Cumulative voting for directors permits minority shareholders to be represented on the board of directors in certain circumstances. This means that a shareholder or shareholders holding 25% of the shares (plus one share) may elect 25% of the directors, when the company has at least four directors, and the 25% shareholder or shareholders cumulate all their votes for that director or directors. The Act should be amended to explicitly permit cumulative voting.

No step has yet been taken. However, the proposed amendments to the Act has recommended for this provision.

5. Anti-Dilutive Measures Section 71 of the Act requires approval by class of change in rights of shareholders; non-consenting shareholders (holding less than 10% of the class) may apply for court review. Section 71 of the Act should be amended to specify what percentage of favourable shareholder vote is required to approve any such change, and the limitation that only shareholders holding less than 10% of the class of affected shares may apply for court review of the action should be removed or reduced.

No step has yet been taken. [See Exhibit ---, Amendments to Draft Companies Act, 2004, Section 78A; and Exhibit __, Corporate Governance Rules, 200X, rule 3.]

6. Initial Public Offerings of Subsidiaries The Act should be amended to require a shareholder vote in all circumstances when a significant subsidiary is being sold.

No step has yet been taken. [If the subsidiary’s are significant to the company, see Exhibit ---, Amendments to Draft Companies Act, 2004, Section 78A; and Exhibit __, Corporate Governance Rules, 200X, rule 3.]

7. Capital Increases Section 53(1) (a) of the Act permits a company, if authorized by its Articles to amend its Memorandum to increase its share capital by the issue of new shares. Section 53(3) requires that “the powers conferred by this section can only be exercised by the company in a general meeting.” The Act should be amended to provide that shareholder approval is required for any proposed transactions, rather than for the amendment to the Memorandum, and that any shares issued in a capital increase should be first offered pro rata to existing shareholders. The SEC and the exchanges should adopt rules requiring such a shareholder vote on capital increases.

No step has yet been taken.

8. Notice of Shareholders’ Meetings No step has yet been taken.


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implementation Section 85 of the Act requires 14 days notice of an Annual General Meeting, and 21 days notice if a special resolution is to be adopted. We recommend that the Act be amended to require that the meeting notice and agenda be sent at least one month before the date of the meeting. The SEC and the exchanges should also adopt such a requirement.

However, the proposed amendments to the Act has recommended for this provision. [See Exhibit --, Corporate Governance Rules, 200X, Rule 7 for a requirement of 30 days’ notice for AGMs.]

9. Shareholders’ Meeting Procedure Regulations 50 to 60 regulate procedure at general meetings. Provisions to prevent vote fraud (including secret ballots) and a mechanism for recount of contested ballots should be implemented by the exchanges.

No step has yet been taken. [See Exhibit __, Company Proxy Solicitation Rules, 200X.]

10. Special Meetings Regulations 50 through 68 under the Act deal with the conduct of shareholders’ general meetings. Only Regulations 56 (dealing with adjournments) and 66 (requiring proxies to be in writing) are mandatory. The Act should be amended to make all of the Regulations under Schedule I from 50 through 68 mandatory. In addition, a regulation should be added to Schedule I, to require a recount of votes upon the request of any shareholder present at the meeting.


11. Conflicts between Shareholders There should be a mechanism whereby a majority of the minority shareholders can refer a dispute between themselves and the majority shareholders to arbitration. The exchanges should institute such provisions.

No step has yet been taken. [See Report VIII C and Exhibit --, Arbitration and Mediation Rules, 200X.]

12. Quorum for Shareholders’ Meetings Section 85(2) (a) of the Act provides for a quorum of at least 2 shareholders with 10% of the paid up capital, if the Articles do not otherwise provide. There should be a mandatory minimum quorum, perhaps one-third of voting shares. The Act and the exchange listing requirements should adopt such a requirement.

No step has yet been taken. [See Exhibit --, Corporate Governance Rules, 200X, Rule 6 for a requirement of a majority of shares to be present.]

13. Petition Rules: Objections to Majority Shareholder Activities Under current law, shareholders holding at least 10% of a company’s issued shares have the right to petition the court to redress grievances. (Sections 233 and 195 of the Act) Exchange rules should be amended to require that minority shareholders holding a specified minimum number of shares should have the right to formally present views to the board.



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implementation 14. Definition of Independence of Directors

We recommend that the Act be amended and that rules be adopted by the SEC and the exchanges to provide a definition of “independent director.” The following definition is suggested: An ‘independent director’ is a person who is not a current or former employee of the company, does not receive direct or indirect compensation in any capacity other than as a director, has no interest in any transactions or business relationships with the company, has, together with his family, no more than 1% of the outstanding shares of the company, does not serve on the board of directors or as an executive officer or employee of another company which has the same sponsor as the company, has not been an independent director for more than 10 years, and is free from any other relationship that would interfere with the exercise of independent judgement.

No step has yet been taken. However, recommendations have been made for amendment to the Act. [See Exhibit --, Corporate Governance Rules, 200X, Rule 9.]

15. Percentage of Directors who are Independent The Act should be amended to provide that where the public owns a majority of a company’s stock, a majority of the board of directors should be independent. This provision should also be adopted under the SEC and by the exchanges.

No step has yet been taken. However, recommendations have been made for amendment to the Act. [See Exhibit --, Corporate Governance Rules, 200X, Rule 9 requires two independent directors, not a percentage.]

16. Frequency and Record of Directors’ Meetings Currently, boards of directors must meet at least one in every three months and at least four times a year. All proceedings and minutes must be recorded in writing. The SEC and the exchanges should require that (a) company board meetings be held at least every 3 months, (b) that audit committees meet at least every 6 months, (c) that minutes of meetings be available to shareholders, and that independent directors should meet periodically (at least once a year) without the CEO or other non-independent directors.

No step has yet been taken. However, recommendations have been made for amendment to the Act.

17. Quorum for Directors’ Meetings The SEC and the exchanges should specify that a quorum for directors’ meetings should require at least one independent director.


18. Term Limits for Independent Directors The SEC and the exchanges should amend their rules to specify that after service of 10 years, a director should no longer be considered independent.



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implementation Immediate Disclosure of Information that Affects Share Prices, Including Major Asset Sales or Pledges Under current law any price sensitive information must be published in the newspaper and also sent to the SEC and the exchanges. Exchange regulations require immediate announcements of some 14 categories of information. Exchanges should also require that such information be published on the respective company’s website if it has one.

19. Remuneration of Individual Executive and Non-executive Directors Remuneration of all directors should be disclosed in the companies’ annual reports. All options, expense payment or other forms of compensation should also be disclosed and subject to shareholder approval. The SEC and the exchanges should adopt rules requiring such disclosure.

No step has yet been taken. [See Exhibit --, Company Annual Report Rules, 200X, Item 10.]

20. Conflicts of Interest The Act, the SEC and the exchanges should require that (a) any potential or actual conflict of interest by directors or senior executives should be disclosed before a transaction is engaged in, (b) the head of the Audit Committee should not have any conflicts, (c) board members should abstain from voting and not be present when any transaction involving a conflict of interest is voted upon, (d) any transaction involving a conflict of interest should be subject to ratification by the shareholders, with shares held by the person who has the conflict not voting.

No step has yet been taken. However, (c) does not require amendment to the Act as similar provision is available. [See Exhibit --, Company Annual Report Rules, 200X, Item 11.]

21. Protection of Whistleblowers The Act should be amended to protect whistleblowers from direct or indirect retaliation for advising the SEC, the exchanges or law enforcement officials of improper activities. The law should protect the confidentiality of their identities and prohibit retaliation by their employers or other persons. These provisions should be also be adopted by the SEC and the exchanges.

No step has yet been taken. However, some other laws may protect them in the absence of specific provision in the Act.

22. National/International Accounting and Auditing Standards The ICAB should pass standards on quality control, documentation of audits, assessment of internal control, related party transactions and other essential standards and require that consolidated accounting should be used for all subsidiaries in which sizable ownership exists and those which are under common control. The SEC

In continual process. However, if section 185 and Schedule- XI to the Act is not amended mandatory provision to follow remains binding.

23. Audit Quality Some steps are being taken


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implementation The Act should be amended to require that (a) the ICAB have responsibility for audit standards under supervision of SEC, (b) the ICAB be required to enforce auditing standards, a Code of Ethics and discipline among members, and (c) the SEC should have independent authority to suspend auditors from audits of public companies. The SEC and the ICAB should implement these provisions.

by the SEC and the Exchanges, which concerns only the listed companies. To bind all the companies’ amendment to the Act is required.

24. Adequacy of Number of Certified Accountants ICAB and ICMAB seem to have restricted entry to professions to approximately 13 chartered accountants and 18 management accountants for the past 3 years. The Bangladesh Chartered Accountants Order, 1972 should be amended to provide that one or more universities should be authorized to examine accounting graduates for admission to the profession. Practice of the profession should be allowed upon completion of an experience requirement.


25. Audit Committees The exchanges should adopt provisions to require that companies have Audit Committees with a majority of members being independent.

No step has yet been taken. However, recommendations have been made for amendment to the Act. [See Exhibit --, Corporate Governance Rules, 200X, Rule 10.]

26. Background of Audit Committee Members The exchanges should adopt provisions requiring that the Chairman of each company’s Audit Committee should have an appropriate financial, accounting and business education and understanding of national and international accounting and of financial matters.


27. Relationship/Communication with Internal Auditor and External Auditor The exchanges should require that each company’s Audit Committee (a) have the right to communicate with auditors (internal and external), (b) exercise that right, and (c) have the right to communicate with cost auditors and internal and external auditors without other board members or executives present.


28. Majority Ownership The Government, SEC and exchanges should adopt provisions setting forth a definition of majority ownership. In addition, and significant shareholding, perhaps over 25% should be defined as control.

Apart from SEC (Substantial Acquisition of Shares) Rules, 2002 no further step has yet been taken.

29. Related-Party Ownership



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implementation The SEC and the exchanges should adopt disclosure rules requiring that companies should disclose sponsor, senior executives and board members holdings annually, and disclose share transactions within 5 days.

[See Exhibit --, Company Annual Report Rules, 200X, Items 9 and 11.]

30. Significant Shareholders The SEC and the exchanges should adopt rules requiring that total share ownership and transactions in the company’s shares of any person exceeding 5% of outstanding shares be disclosed.

SEC (Substantial Acquisition of Shares) Rules, 2002, covers it up to some extent and requires amendment to the Act. [See Exhibit --, Company Annual Report Rules, 200X, Items 9 and 14.]

31. Enforcement of the Companies Act The Act should be amended to authorize the Securities and Exchange Commission have authority to bring an action against companies and/or their shareholders and directors for any alleged violation of the Companies Act having to do with a company listed on a stock exchange.

No step has yet been taken. However, it should be limited to listed companies only.

32. Access to the Courts Section 233 (a), (b) and (c) of the Act prescribe the types of actions that may be brought by debenture or shareholders who believe company actions are improper. Shareholders representing 10% of the companies’ shares must be represented in the petition. In addition, under Section 193 the Register of Companies has certain investigatory power and the right to refer matters to the courts. The requirement that 10% of shareholders participate in a petition to the court should be removed. The courts should be given authority to impose remedies, including significant monetary relief, against individual directors and executives.


33. Designation of Court The law should be amended to designate a special bench of the High Court Division to have original jurisdiction of all cases involving alleged breaches of the Companies Act or the laws on Securities and Exchange.

No step has yet been taken. However, it is proposed that either in the High Court Division as doing at present may further be vested with the security matters, a SEC (Appellate Tribunal), a Company Board, or Company Tribunal be constituted.

34. Recovery of Investor Losses Currently, any fines or penalties assessed by the SEC are ultimately paid to the Bangladesh government. The Act should be amended to require that all or a portion of the fines and penalties assessed and collected by the

No step has yet been taken. [See Exhibit --, Proposal for Four New Sections of the SEC Act, 1993, Proposal A.]


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implementation SEC be paid to a fund to recompense investors who have suffered loss by reason of the violation. The fund should have trustees appointed by the SEC to determine and pay claims.

So, it transpires that most of the recommendations have remained unattended to by the Government. It should not be forgotten that to make any amendment to any Act or Ordinance requires the consent of the Parliament. This is a very cumbersome process. The government seems very serious about either amending the Companies Act, 1994, or substitute it by a new one. May be in a few years time recommended changes will be come to effect.


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APPENDIX K: AMENDMENTS TO DRAFT COMPANIES ACT, JUNE 2004


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AMENDMENTS TO DRAFT COMPANIES ACT, JUNE 2004

The following sections of the Draft Companies Act, June 2004, are added or revised: New Section 5A: 5A. Corporate Governance:- (a) The securities and exchange commission shall by rule require public-listed companies to constitute committees of the board of directors, shareholders or debenture holders and adopt policies incorporating international best practice with respect to corporate governance. (b) The securities and exchange commission may by rule require stock exchanges to adopt rules requiring public-listed companies to constitute committees of the board of directors, shareholders or debenture holders and to adopt policies incorporating international best practice with respect to corporate governance. (c) The securities and exchange commission and stock exchanges may by rule require public-listed companies to make any disclosures required by international best practices of corporate governance. New Section 78A: 78A. Action by shareholders:- (a) The approval of holders of the majority of the outstanding shares of a company shall be required for:

(1) any transaction not in the ordinary course of business of the company between the company

and any director, manager, officer, holder of five percent or more of any class of shares, any relative of such person or any company or trust of which such person has an interest of five-percent or more;

(2) Any issue of debentures and any loan in excess of fifty percent of shareholders’ equity; (3) The adoption of any device or scheme to prevent or impede the free transfer of shares and

control of the company (anti-takeover devices or schemes); and (4) Any acquisition or disposition of significant assets of the company.

(b) No change in the rights of any class of shares shall be effective unless approved by the holders of two-thirds of the shares of the class. (c) The securities and exchange commission shall by rule define terms used in this section and may add other matters to subsection (a). New Section 88 (6): (6) Notwithstanding any penalty or fine otherwise provided by this act, each director of a company that fails to hold its meeting in accordance with this act shall forfeit all salary or benefits due for the period from the date the meeting is required until the date upon which it is held. No company meeting, commission, tribunal or court shall have the power to waive the forfeiture. The board of directors of a company that so fails to hold its meeting shall have no power to act except to hold the meeting. If the meeting has not been called or held, any shareholder may petition the tribunal to call a meeting to elect a board of directors. No person on the board of directors that failed to call the meeting shall be eligible to be elected as a director at the meeting called by the tribunal or thereafter for a period of five years.


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New Section Relating to Non-payment of Declared Dividends: Dividends declared by a company shall be paid to all shareholders not later than thirty days after adoption of the resolution to pay the dividend. Each director of a company that fails to pay a declared dividend within thirty days shall forfeit all salary or benefits due for the period from the date the dividend is declared until the date upon which it is paid. No company meeting, commission, tribunal or court shall have the power to waive the forfeiture. The board of directors of a company that so fails to pay its dividend shall have no power to act except to pay the dividend and to hold a meeting to elect new directors. If the meeting has not been called or held, any shareholder may petition the tribunal to call a meeting to elect a board of directors. No person on the board of directors that failed to pay the dividend or to call the meeting shall be eligible to be elected as a director at the meeting called by the tribunal or thereafter for a period of five years. New Section 88(2) shall be amended to read as follows as follows:

(2) An annual general meeting and any extra-ordinary meeting of a public-listed company shall be held in the town in which the registered office of the company is situate or in the city in which is situate the stock exchange on which it is listed.

New Section 194A: 194A. Debenture holders association:- (a) Holders of debentures of a given issue or several issues may combine in a debenture holders’ association as a legal personality to protect their common interests. They may meet, appoint officers and appoint an agent or advocate to represent them. (b) The securities and exchange commission may by rule prescribe the procedures for debenture holders associations. New Section 103(3): (3) Notwithstanding any other provision of this act, holders of debentures may elect a majority of the directors of a company if payment of the principal of the debentures is in arrears for one month or payment of interest upon the debentures is in arrears for six months. The board of directors, or if it shall fail to act, the tribunal, shall call a general meeting upon the request of any debenture holder. The securities and exchange commission may by rule enforce this subsection.


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APPENDIX L: CORPORATE GOVERNANCE RULES, 200X


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CORPORATE GOVERNANCE RULES, 200X 1. Short title:--These rules may be called the Corporate Governance Rules, 200X. 2. Definitions:-- In these rules, unless there is anything repugnant in the subject or context,

(a) “Commission” means the Securities and Exchange Commission;

(b) “company” means any company or other issuer of securities listed on any stock exchange;

(c) “subsidiary company” is an enterprise that is controlled by another enterprise(known as the parent);

(d) “sister concern” means any company or concern in which the issuer has any share or interest.

3. Action by shareholders:- (a) The articles of association of the company shall require approval of holders of the majority of the outstanding shares of the company for:

(1) any transaction not in the ordinary course of business of the company, including the grant of

options or sale of securities, between the company and any director, manager, officer, holder of five percent or more of any class of shares, any relative of such person or any company or trust of which such person has an interest of five-percent or more;

(2) compensation of directors and the five highest paid officers; (3) any issue of debentures and any loan in excess of fifty percent of shareholders’ equity; and (4) any acquisition or disposition of significant assets of the company.

(b) No change in the rights of any class of shares shall be effective unless approved by the holders of two-thirds of the shares of the class. (c) The Commission may by further rule define terms used in this rule and may add other matters to subsection (a). 4. Meeting Location: The articles of association of the company shall state that the annual general meeting and any extra-ordinary meeting shall be held in the town in which the registered office of the company is situate or in a city in which is situate the stock exchange on which it is listed.

5. Annual Meeting Date: The articles of association of the company shall state that the annual general meeting shall be held on a stated day of a month, e.g., the third Saturday of April. The articles of association of the company shall state that there may be no extension of the date of the annual general meeting except for national or local emergencies.

6. Meeting Quorum: The articles of association of the company shall state that the quorum for the annual general meeting and any extra-ordinary meeting shall be not less than the majority of the ordinary shares outstanding. Shareholders may be present in person or by proxy.

7. Meeting Notice: The articles of association of the company shall state that the notice of an annual general meeting and any extra-ordinary meeting shall be given not less than thirty days prior to the meeting and shall be in the form required by the Proxy Solicitation Rules, 200X.

8. Directors elected by proportional representation: The articles of the company shall state that the appointment (election) of not less than two-thirds of the total number of directors of the company according to the principle of proportional representation whether by a single transferable vote or by a


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system of cumulative voting or otherwise, the appointments being made once every three years and interim casual vacancies being filled in accordance with the provisions of law. 9. Independent directors: The articles of association of the company shall require that at least two directors be independent directors. An ‘independent director’ is a person who is not a current or former employee of the company; holds or has held any post in the company within the preceding five years; does not receive direct or indirect compensation in any capacity other than as a director; has no interest in any transactions or business relationships with the company, holding company of the company or sister concern; has any transaction with company, directors or managers in connection with business or profession or any other capacity; has, together with his family, no more than 1% of the outstanding shares of the company; does not serve on the board of directors or as an executive officer or employee of another company which has the same sponsor as the company, has not been an independent director for more than five years; is not a relative of any directors or managers; is not and has not for five year been an auditor or consultant for company; for during any of 5 preceding years; is or has been for five years a supplier or vendor or customer of the goods of the services of the company; is not and has not for five years been a member of a stock exchange or engaged in business of brokerage or dealings in the securities of listed companies; has been convicted by a court as a defaulter in payment of any loan to a bank or financial institution; suffers from any disqualifications set forth in the companies Act; and is free from any other relationship that would interfere with the exercise of independent judgment.

10. Committees of the Board of Directors: (a) Audit Committee. The Audit Committee shall be comprised of at least three members, two-thirds of whom shall be independent directors. The Audit Committee shall oversee the financial reporting process and the adequacy and effectiveness of the company's system of internal control. During the year, the Committee shall carry out its own independent review of the interim and annual financial statements and financial reports and statements included in circulars of the company published during the year. And with the assistance of the internal audit department, which shall report directly to the committee, the Committee shall complete its review of the adequacy and effectiveness of the company's systems of internal control and reported its findings and recommendations to the Board.

(b) Remuneration Committee. The Remuneration Committee shall be comprised of at least three members, two-thirds of whom shall be independent directors. The Committee shall consult the Chairman and the Chief Executive about its proposals and shall have access to professional advice from inside and outside the company. The Committee shall make recommendations to the Board. No director shall play a part in any discussion about his or her own remuneration. The remuneration of the non-executive directors shall be determined by the Board.

11. Fiduciary duty of directors and officers: (a) Each member of the board of director and each officer, when discharging duties to the company, shall act in good faith, and in a manner the person reasonably believes to be in the best interests of the company. (b) No director or officer shall compete with the company or take any opportunity of the company.

12. Insider trading: (a) No director or officer of a company shall buy or sell securities of the company except during the period beginning five days and ending fifteen days after the announcement by the company of its earnings or of any extraordinary event. (b) The stock exchange upon which the securities of the company are listed may permit the waiver of the rule set forth in sub-rule 12(a) in an individual case for good cause. The stock exchange shall announce the waiver at least two business days prior to the permitted sale or purchase.


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APPENDIX M: ANNUAL REPORT RULES, 200X


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ANNUAL REPORT RULES, 200X 1. Short title:--These rules may be called the Company Annual Report Rules, 200X. 2. Definitions:-- In these rules, unless there is anything repugnant in the subject or context, (a) “associate company” is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor; (b) “Commission” means the Securities and Exchange Commission; (c) “company” means any company or other issuer of securities listed on any stock exchange; (d) “sponsors” means any persons who form a company; (e) “subscription” means applying by the general public for any securities offered by any issuer; (f) “subsidiary company” is an enterprise that is controlled by another enterprise(known as the parent); (g) “sister concern” means any company or concern in which the issuer has any share or interest. 3. Annual report:-- (a) Every company that is listed on a stock exchange shall prepare an annual report in the form and contents set forth in rule 4 of these rules. (b) The annual report required by sub-rule 3 (a) shall be delivered to shareholders, each stock exchange upon which the company is listed and the Commission with in 90 days after the end of the fiscal year of the company. (c) The annual report need not contain the information required by rule 4 (B) (8), (9), (10), (11), (12) and (14) if the company’s proxy statement is delivered to security holders, each stock exchange on which the company is listed and the Commission on or before the date on which the annual report is delivered to them. Companies are encouraged to deliver their annual report and proxy statement simultaneously. (d) Three copies of the annual report signed by the company’s principal executive officer, principal financial officer, comptroller or principal accounting officer, chairman, managing director and all directors shall be filed with the Commission. The report of the auditor of the company contained in the annual report shall be signed by the auditor. The Commission may comment upon the annual report and require amendment and redistribution if material changes are required to comply with these rules.

4. Format and contents of the annual report.-- A. Material information:

(1) In addition to the information specifically required by this rule, the annual report shall contain all material information necessary to enable investors and their investment advisers to make an informed assessment of the business engaged in, or to be engaged in, by the company, its assets and liabilities, its financial position, its profits and losses and its future prospects and the rights attaching to the securities outstanding.

(2) The Commission may require disclosure of additional information in the annual report as it considers appropriate in a particular offering, and the applicant shall comply.


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(3) If the Commission requires such information it shall inform the applicant of the additional information in writing. B. Information to be included in the annual report:

(1) Cover Page of Annual Report: On the front cover page of the annual report the following information and statements shall be given, namely: - (a) name, address, telephone and e-mail numbers of the company and the name of the contact person; (b) the title “Annual Report for the year ended _____, 2____; (c) the date of the annual report (2) Table of Contents: On the inside cover page of the annual report – (a) a detailed table of contents showing the various sections or subdivisions of the annual report and the page number on which each such section or subdivision begins shall be given; and (b) immediately preceding the table of contents, it shall be indicated that a annual report may be obtained from the company and the stock exchange(s) where the securities are traded.

(3) Risk Factors: Immediately following the cover page of the annual report, all risk factors are to be clearly stated which may include, among others:–

(a) no recent receipt of revenues;

(b) poor financial conditions; (c) industry risks; (d) currency risks; (e) market and technology-related risks;

(f) potential or existing government regulations;

(g) potential changes in global or national policies;

(h) no operating history; (i) any default under any indenture of the company.


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(5) Description of Business: (a) The date on which the company was organized and the date on which it commenced operations and the nature of the business which the company and its subsidiaries are engaged in or propose to engage in shall be indicated in the annual report. (b) The annual report shall contain the following information in respect of its business operation,

namely: (1) the principal products or services of the company and the markets for such products or services;

(2) if the company has more than one product or service, the relative contribution to sales and

income of each product or service that accounts for more that 10% of the company’s total revenues ;

(3) if the company has associate/related concerns lines of business of the associate/related concerns, including the amount and nature of inter-group transactions and holdings;

(4) how the products or services are distributed;

(5) competitive conditions in the business;

(6) sources and availability of raw materials and the names of the principal suppliers;

(7) sources of , and requirement for, power, gas and water;

(8) names of any customers who purchase 10% or more of the company’s products;

(9) description of any contract which the company has with its principal suppliers or customers showing the total amount and quantity of transaction for which the contract is made and the duration of the contract;

(10) description of any material patents, trademarks, licenses or royalty agreements;

(11) number of total employees and number of full-time employees. (6) Description of Property: The annual report shall contain the following information in respect of plants and property, namely: -

(1) location of the principal plants and other property of the company and the condition thereof;

(2) whether the property is owned by the company or taken on lease;

(3) if the property is owned by the company, whether there is a mortgage or other type of lien on the property;

(4) if the property is taken on lease, the expiration date of the lease. (7) Plan of Operation and Discussion of Financial Condition: (a) If the company had no revenues from operations in each of the last two years, the company’s plan of operations for the next twelve months shall be described in the annual report which shall, among others, include:-


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(1) a discussion of how long the company can satisfy its cash requirements and whether it shall have to raise additional funds in the next twenty four months;

(2) a summary of any product research and development that the company shall perform in the next twelve months;

(3) any expected purchase or sale of plant and equipment;

(4) any expected significant changes in the number of employees. (b) If the company had revenue from operations in each of the last two years, the company’s financial condition, changes in financial condition and results of operations for each of the last two years shall be given in the annual report which shall, among others, include the following information, to the extent material, namely: -

(1) internal and external sources of cash;

(2) any material commitments for capital expenditure and the expected sources of funds for such expenditure;

(3) causes for any material changes from period to period in income, cost of goods sold, other operating expenses and net income;

(4) any seasonal aspects of the company’s business;

(5) any known trends, events or uncertainties that shall have a material effect on the company’s future business;

(6) any change in the assets of the company used to pay off any liabilities;

(7) any loans taken by the company, either from a subsidiary or associate concern or from any other party or parties, giving full details of all related parties transactions;

(8) any future contractual liabilities the company might enter into in the future, and the impact it would have on the company’s financial fundamentals;

(9) the estimated amount, where applicable, of future capital expenditure;

(10) any VAT, income tax, customs duty or other tax liability which is yet to be paid, including any contingent liabilities stating why the same was not paid prior to the issuance of the annual report;

(11) source from which these VAT, income tax , customs duty and other tax liabilities are to be paid;

(12) details of any operating lease the company has entered into during the five years preceding the publication of the annual report, clearly indicating terms of the lease and how the company proposes to liquidate such lease;

(13) any financial commitment, including lease commitment, the company had entered into during the past five years, giving details as to how the liquidation was or is to be effected;

(14) details of all personnel related schemes for which the company has to make provision for in future years;


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(15) breakdown of all expenses connected with the public issue showing specifically: (i) payments made to manager to the issue;

(ii) payments made to underwriters;

(16) if the issuer company has revalued any of its assets, the name, qualification, work done to date

by the valuer and the reason for the revaluation, showing the value of the assets prior to the revaluation, itemizing separately each asset revalued in a manner which shall facilitate comparison between the historical value and the amount shown after revaluation and giving a summary of the valuation report;

(17) where the issuer company is a holding or main company, there shall be full disclosure in the annual report about the transactions, including its nature and amount, between it and its subsidiary companies or sister companies, including transactions which have taken place within the last five years of the publication of the annual report or the date of incorporation of the issuer company, whichever is earlier, clearly indicating whether the issuer company is a debtor or a creditor;

(18) where the issuer company is a banking company, a declaration by the board of directors shall be included in the annual report stating that all requirements as specified in the banking companies act. 1991 (Act No. 14 of 1991) have been adhered to;

(19) a special report from the auditors regarding any allotment of shares to promoters or sponsors shareholders for any consideration otherwise than for cash;

(20) any material information, suppression of which is likely to have an impact on the offering or change the terms and conditions under which the offer has been made to the public. (8) Board of Directors and Committees: The annual report shall contain the following information in respect of the board of directors and its committees.

(1) Board of Directors (a) Responsibilities of the board; (b) Number of meetings of board attended by each director in latest full year;

Example: There were 12 Board meetings during the year and those attending were as set out below: No. of meetings attended: Mr. A (Chairman) 11; Ms. B (Chief Executive) 12; Ms. C 10; Mr. D (non-executive) 11; Mr. E 10; Mr. F (independent non-executive) 12; Ms. G (independent non-executive) 10.

(c) Names and description of role and contribution of non-executive directors; Are they independent? (d) Directors' appointment and termination arrangements; (e) A statement of directors' responsibilities in connection with the preparation of the

financial statements; (f) Any other relevant additional information;

(g) Names and responsibilities of each committee of the board.

(2) Audit committee (a) Composition, name and independence of each member; (b) Role and function; (c) Number of meetings; (d) Attendance at meetings of each member; (e) Statement on its independence;


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(f) Report of work done and significant issues addressed including in respect of review of financial reports and internal controls;

(g) Any other relevant additional information. Example: The Audit Committee consists of the three non-executive directors, two of whom are

independent: Mr. D (Chairman), Mr. F and Ms. G. During the year the Audit Committee met 4 times with all members being in attendance. None of the members of the Committee has any personal financial interests (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in the running of the business. The Audit Committee oversees the financial reporting process and the adequacy and effectiveness of the company's system of internal control. During the year, the Committee carried out their own independent review of the interim and annual financial statements and financial reports and statements included in circulars of the company published during the year. And with the assistance of the internal audit department, which reports directly to the committee, the Committee completed its review of the adequacy and effectiveness of the company's systems of internal control and reported its findings and recommendations to the Board.

(3) Remuneration committee (a) Composition, name and independence of each member; (b) Role and function; (c) Number of meetings; (d) Attendance at meetings of each member (e) Report of work done, how compensation was determined and significant issues

addressed;

(f) Any other relevant information.

Example: The Remuneration Committee consists of three non-executive directors, two of whom are

independent: Mr. F (Chairman), Ms. G and Mr. D. None of the members of the Committee has any personal financial interests (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in the running of the business. The Committee consults the Chairman and the Chief Executive about its proposals and has access to professional advice from inside and outside the company. The Committee makes recommendations to the Board. No director plays a part in any discussion about his or her own remuneration.

Remuneration policy Executive remuneration packages are prudently designed to attract, motivate and retain directors of the high calibre needed to maintain the company's position as market leader and to reward them for enhancing value to shareholders. The performance evaluation of the executive directors and key members of senior management and the determination of their annual remuneration package is undertaken by the Committee. The remuneration of the non-executive directors is determined by the Board. There are four main elements of the remuneration package for executive directors and senior management as follows: basic annual salary (including directors' fees) and benefits; annual bonus payments; share option incentives; and pension arrangements. [Provide details about recommendations of the Committee in item 10.]


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(9) Directors and Officers: The annual report shall contain the following information in respect of its officers and directors, namely: - (1) names and ages of all officers of the company, including the length of their service in the company, and of all directors of the company and any person nominated to be an officer or director, showing the period for which the nomination has been made; (2) Details of directors' service contracts; a statement is required as to the period unexpired of any service contract, which is not determinable by the employer within one year without payment of compensation, of any director proposed for re-election at the forthcoming annual general meeting or, if there are no such service contracts, a statement of this fact.

(3) position and office that each officer, director and nominee holds in the company;

(4) in the case of a director or nominee, the date on which he first became a director and the date on

which his current term of office shall expire;

(5) directors and senior managers' biographical details, the business experience of each officer, director and nominee for the last five years; where any of the directors is interested in any business which competes or is likely to compete, either directly or indirectly, with the business of the group, details of such interests should be prominently disclosed in the annual report;

(6) if any officer or officer nominee of the company is currently employed by another company, the

name of such company and the position that the officer holds in that company and the percentage of such officer’s time spent on the business of that company;

(7) if any director or nominee for director is also a director of another company, the name of such

other company;

(8) any family relationships among directors, officers and nominees. (10) Compensation:

(1) Board and executive remuneration are an area of concern to shareholders. Companies are generally expected to disclose sufficient information on the remuneration of board members and key executives for shareholders to properly assess the costs and benefits of remuneration plans and the contribution of incentive schemes, such as share option schemes, to performance.

(2) Details of how, and by whom, non-executive directors' fees and other benefits are determined.

(3) Disclosure should be made of the analysis of directors' remuneration between "performance based" and "non-performance based" compensation.

(4) Disclosure should be made of the remuneration of individual directors.

(5)Disclosure of the analysis of standard directors' remuneration, between basic salaries, housing allowances, other allowances and benefits in kind.

(6) Disclosure by individual director of the aggregate value realised on the exercise of options during the year, together with an indication of the closing market price of the shares at the balance sheet date.


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(7) Disclosure of the aggregate amount of remuneration paid to all of the officers and directors as a group during the last year;

(8) Disclose the amount of remuneration paid to any director who was not an officer during the last fiscal year;

(9) Disclose the terms of any contract with any officer or director providing for the payment of future compensation;

(10) if the company intends to substantially increase the remuneration paid to its officers and directors in the current year appropriate information regarding thereto.


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Example: Directors' and Officers’ Remuneration Housing allowance Tk ‘000 Benefits-in-kind/ Discretionary Tk ’000 Fees Tk ’000 Salary Tk ’000 Retirement scheme contributions Tk ’000 Other allowances Tk ’000 Bonus Tk ’000 Total Tk ’000 Mr. A X X X X X X X Ms. B X X X X X X X Etc. Directors' and Officers’ Share Options Mr. A Ms. B Ms. C Mr. D Holding at [date] 1.12.1999 Note 1. Value realised is calculated as the excess of the market price on the day of exercise of options over the exercise price multiplied by the number of shares acquired as a result of the exercise of the options, irrespective of whether the related shares have been sold or not. Note 2. The closing market price at the balance sheet date as at [-------] was Tk ___ per share. Directors' Shareholdings Disclosure in respect of directors’ shareholdings may be included either in this item or in item 14, Ownership of the Company’s Securities. No. of Shares Name of Director Holding at Purchased (including options Sold during the year Holding at balance sheet date) Exercised during the year to balance sheet date Mr. A


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Personal Interests: ____ shs Family Interests: ______shs Corporate Interests: _____ shs Other Interests: _____ shs Ms. B Etc. (11) Certain Relationships and Related Transactions:

(1) It is important that shareholders are provided with sufficient information to understand transactions and balances with parties related to the company and the implications for the performance and financial situation of the company.

(2) Transactions with Promoters:

(a) If the company was organized in the past five years, the names of the promoters, the nature

and amount of anything of value received or to be received by each promoter, directly or indirectly, from the issuer and the nature and amount of any assets, services or other consideration therefore received or to be received by the issuer shall be stated in the annual report;

(b) If any assets were acquired or are to be acquired from a promoter, the amount paid for such assets and the method used to determine the price shall be mentioned in the annual report, and if the assets were acquired by the promoter within two years prior to their transfer to the issuer, the cost thereof to the promoter shall also have to be shown therein.

(3) Related party transactions The annual report shall contain a description of any transaction during the last two years, or any proposed transactions, between the company and any of the following persons, giving the name of the persons involved in the transaction, their relationship to the issuer, the nature of their interest in the transaction and the amount of such interest, namely: -

(a) any director or executive officer of the company;

(b) any nominee for director or officer;

(c) any person owning 5% or more of the outstanding stock of the company;

(d) any member of the immediate family (including spouse, parents, children, and in-laws) of any of the above persons;

(e) any transaction or arrangement entered into by the company or its subsidiary for a person who is currently a director or in any way connected with a director of either the issuer company or any of its subsidiaries or sister concerns, or who was a director or connected in any way with a director at any time during the last three years prior to the publication of the annual report;

(f) any loans either taken or given from or to any director or any person connected with the director, clearly specifying details of such loan in the annual report, and if any loan has been taken from any such person who did not have any stake in the issuer company or its sister concerns prior to such loan, rate of interest applicable, date of loan taken, date of maturity of loan;

(g) any director holding any position, apart from being a director in the issuer company, in any company, society, trust, organization, or proprietorship or partnership firm;


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(h) all interests and facilities enjoyed by a director, whether pecuniary or non-pecuniary, and any

changes in those interests between the date of publication of the annual report and the period ending on the date the annual report is published; (i) Details, if not otherwise given, of any management/administrative contracts, of connected party transactions for which waiver was obtained, any service contracts with any shareholder, and any other significant contracts with any shareholder. (12) Involvement of Officers and Directors in Certain Legal Proceedings: The following events shall be described in the annual report, if they have occurred during the last ten years, namely: -

(a) any bankruptcy petition filed by or against any company of which any officer or director or nominee of the company filing the annual report was a director, officer or general partner at the time of the bankruptcy or within two years prior to that time;

(b) any conviction of an officer, director or nominee in a criminal proceeding or any criminal proceeding pending against him;

(c) any order, judgment or decree of any court of competent jurisdiction against any officer, director or nominee permanently or temporarily enjoining, barring, suspending or otherwise limiting the involvement of any officer or director or nominee in any type of business, securities or banking activities;

(d) any order of the Commission, or other regulatory authority or foreign financial regulatory authority, suspending or otherwise limiting the involvement of any officer or director or nominee in any type of business, securities or banking activities;

(e) Any petition, suit or arbitration against the company or any subsidiary by any director, nominee

for director or officer.

(13) Options granted to Officers, Directors and Employees: The following information shall be given in the annual report in respect of any option held by the three top officers, each director, and all other officers as a group, namely: -

(a) the date on which the option was granted;

(b) the exercise price of the option;

(c) the number of shares or stock covered by the option;

(d) the market price of the stock on the date the option was granted;

(e) the expiration date of the option. If such options are held by any persons other than the officers and directors of the company, the following information shall be given in the annual report, namely: -

(a) the total number of shares covered by all such outstanding options;

(b) the range of exercise prices;


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(c) the range of expiration dates.

(14) Ownership of the Company’s Securities:

(a) There shall be disclosed in the annual report, in tabular form, the name and address of any person who owns, beneficially or of record, 5% or more of the securities of the company, indicating the amount of securities owned, whether they are owned beneficially or of record, and the percentage of the securities represented by such ownership;

(b) There shall also be a table in the annual report showing the number of shares of the company’s securities owned by each of the top three officers, each director, and all officers as a group, indicating the percentage of outstanding shares represented by the shares owned. Notes: a) Where any of the directors or senior managers are related, having with any other director or senior manager any one of the relationships set out below, that fact should be stated. The relationships are spouse; any person cohabiting with the director or senior manager as a spouse; and any relative, meaning a child or step-child regardless of age, a parent or step-parent, a brother, sister, step-brother or step-sister, a mother-in-law, a father-in law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, and their respective controlled companies (with control of management or one-third of voting rights either directly or indirectly through another corporation in which they control one-third of voting rights). This will include a director’s interest under a discretionary trust which holds interests in equity or debt securities of the company. b) Where any director of the company is a director or employee of a company which has an interest in the share capital of the company, that fact shall be stated and the amount of the holding shall be stated. c) In the case of ‘corporate’ and ‘other’ interests, a note setting out the nature of such interests should be provided to assist shareholders and investors to understand how the interests arise. d) It is the responsibility of the directors of the company to determine which individual or individuals constitute senior management. Senior management may include directors of subsidiaries, heads of divisions, departments or other operating units within the group as, in the opinion of the company’s directors, is appropriate. e) Give the details of any right to subscribe for equity or debt securities of the company granted to any director or chief executive of the company or to the spouse or children under age 18 of any such director or chief executive, and of the exercise of any such right, or, if no such interest or right has been granted or exercised, a statement of this fact. (15) Market for the Securities: The name of each stock exchange on which the company’s securities are listed shall be given in the annual report. Report any impediments to trading on any stock exchange. (16) Description of Equity Securities Outstanding: The annual report shall:–

(a) describe any dividend, voting and pre-emption rights of any common stock outstanding;

(b) describe the dividend, voting, conversion and liquidation rights, as well as redemption or sinking fund provisions, of any preferred stock outstanding;

(c) if there are any limitations on the payment of dividends to common or preferred stockholders

because of provisions in debt instruments or otherwise, explain such limitations;


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(d) describe any other material rights of the common or preferred stockholders. (e) describe any issuances of securities in the year ended on the balance sheet date, the prices thereof, and the reasons for the issuance and shall describe any proposed issuances, the expected prices thereof and the reasons therefore. (17) Debt Securities: If any debt securities, except commercial paper, are outstanding, the annual report shall:-

(a) If debt securities are outstanding, state the title of such securities, the principal amount outstanding, and, if a series, the total amount authorized and the total amount outstanding as of the most recent practicable date; and describe such of the matters listed in items (a) (1) through (12) as are relevant. A complete legal description of the securities need not be given. For purposes solely of this sub-rule, debt securities that differ from one another only as to the interest rate or maturity shall be regarded as securities of the same class. Outline briefly:

(1) Provisions with respect to maturity, interest, conversion, redemption, amortization, sinking fund, or retirement;

(2) Provisions with respect to the kind and priority of any lien securing the securities, together with a brief identification of the principal properties subject to such lien;

(3) Provisions with respect to the subordination of the rights of holders of the securities to other security holders or creditors of the issuer; where debt securities are designated as subordinated in accordance with paragraph (b) of this sub-rule, set forth the aggregate amount of outstanding indebtedness as of the most recent practicable date that by the terms of such debt securities would be senior to such subordinated debt and describe briefly any limitation on the issuance of such additional senior indebtedness or state that there is no such limitation;

(4) Provisions restricting the declaration of dividends or requiring the maintenance of any asset ratio or the creation or maintenance of reserves;

(5) Provisions restricting the incurrence of additional debt or the issuance of additional securities; in the case of secured debt, whether the securities being registered are to be issued on the basis of unmortgaged mortgageable property, the deposit of cash or otherwise; as of the most recent practicable date, the approximate amount of unmortgaged mortgageable property available as a basis for the issuance of bonds; provisions permitting the withdrawal of cash deposited as a basis for the issuance of bonds; and provisions permitting the release or substitution of assets securing the issue; provided however, that provisions permitting the release of assets upon the deposit of equivalent funds or the pledge of equivalent property, the release of property no longer required in the business, obsolete property, or property taken by eminent domain or the application of insurance moneys, and other similar provisions need not be described;

(6) The general type of event that constitutes a default and whether or not any periodic evidence is required to be furnished as to the absence of default or as to compliance with the terms of the indenture;

(7) A description of any existing or reasonably foreseeable default;

(8) Provisions relating to modification of the terms of the security or the rights of security holders;


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(9) If the rights evidenced by the securities outstanding are, or may be, materially limited or qualified by the rights of any other authorized class of securities, the information regarding such other securities as will enable investors to understand the rights evidenced by the securities;

(10) The tax treatment of the debt in the hands of the holder;

(11) The name of the trustee(s) and the nature of any material relationship with the company or with any of its affiliates; the percentage of securities of the class necessary to require the trustee to take action; and what indemnification the trustee may require before proceeding to enforce the lien;

(12) Calculation of ratio of earnings to fixed charges. (b) Wherever the title of securities is required to be stated, there shall be given such information

as will indicate the type and general character of the securities, including the rate of interest; the date of maturity or, if the issue matures serially, a brief indication of the serial maturities, such as "maturing serially from 2010 to 2015"; if the payment of principal or interest is contingent, an appropriate indication of such contingency; a brief indication of the priority of the issue; and, if convertible or callable, a statement to that effect.

(c) Calculation of ratio of earnings to fixed charges.

(1) In calculating the ratio of earnings to fixed charges, use the following definitions:

(a) The term "earnings" is the amount resulting from adding and subtracting the following items. Add the following: (i) pre-tax income from continuing operations before adjustment for minority interest in consolidated subsidiaries or income or loss from equity investees, (ii) fixed charges, (iii) amortization of capitalized interest, (iv) distributed income of equity investees, and (v) the company's share of pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges. From the total of the added items, subtract the following: (i) interest capitalized, (ii) preference security dividend requirements of consolidated subsidiaries, and (iii) the minority interest in pre-tax income of subsidiaries that have not incurred fixed charges. "Equity investees" are investments the company accounts for using the equity method of accounting.

(b) The term "fixed charges" means the sum of the following: (i) interest expensed and capitalized, (ii) amortized premiums, discounts and capitalized expenses relating to indebtedness, (iii) an estimate of the interest within rental expense, and (iv) preference security dividend requirements of consolidated subsidiaries.

(2) Set forth the ratio of earnings to fixed charges for each of the last three fiscal years of the company and the latest interim period for which financial statements are presented in the document. If a ratio indicates less than one-to-one coverage, disclose the Taka amount of the deficiency.

(3) If the proceeds from the sale of debt securities will be used to repay any of the company's outstanding debt or to retire other securities, and the change in the ratio would be ten percent (10%) or greater, include a pro forma ratio showing the application of the proceeds for the most recent fiscal year and the latest interim period. Use the net change in interest or dividends from the refinancing to calculate the pro forma ratio.

(18) Asset Based Securities. If any asset based securities are outstanding, the annual report shall state the title of such securities, the principal amount outstanding, and describe such matters listed in items (1) through (12) as are relevant. A complete legal description of the securities need not be given. Outline briefly:


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(1) The names, addresses, telephone and e-mail numbers of the special purpose vehicle, sponsor, trustee, credit enhancer if it is an entity other than the sponsor, servicing agent and any other entities selecting or holding the assets or involved in the flow of cash from obligors on the assets to investors in the securities;

(2) Describe the assets, state the earliest, average and latest maturity dates in the pool, the default and

prepayment rates of the pool (or if it is newly formed, the default and prepayment rates of comparable pools of assets of the sponsor);

(3) That payments upon the securities depend upon cash flows from the assets and not upon the

sponsor and are not the obligation of the sponsor (except to the extent the sponsor provides credit enhancement);

(4) Provisions with respect to the maturity and interest rate of the securities;

(5) The tax treatment of the security in the hands of the holder and any taxes payable by others with

respect to the assets or the cash flows;

(6) The nature of any material relationship of the trustee with the sponsor, credit enhancer, underwriter or other participant in the transaction;

(7) Provisions supporting the ability of obligors on the assets to pay their obligations (such as credit

life insurance for mortgagors, casualty insurance for property, title insurance for immovables, etc.); (8) Provisions for credit enhancement, the terms of the enhancement, the provider of the

enhancement, and other relevant details, including examples of situations showing when credit enhancement will apply and when it will not;

(9) The opinion of counsel as to a true sale and other protections from bankruptcy of the sponsor,

credit enhancer or trustee; (10) The rights, if any, of the security holders when there is an event of default, the priority of

payment in the event the cash flow is inadequate at any time to pay all obligations of the special purpose vehicle, and provisions for using surplus cash to bring past-due obligations current;

(11) The accounting treatment of the transaction; (12) The credit rating of the asset based security, an explanation of the rating, and a statement that it

is the security, not the sponsor, trustee or other participant that is rated. (19) Financial Statement Requirements: The annual report shall include financial statements and a report by an auditor who shall be a regular member of the Institute of Chartered Accountants of Bangladesh (ICAB) and fulfils the requirements of Company Law, 1994 Section 212. Such financial statements and the audit report shall be prepared in accordance with all applicable International Accounting Standards (IAS) and the audit thereof shall be conducted in accordance with the International Standards of Auditing (ISA) as contained in the Members’ Handbook published by the ICAB; and the said financial statements and audit report shall contain the following:-

(a) Summary of Earnings: A summary of earnings (on a consolidated basis, if the company has subsidiaries) for the last five financial years, or if the company has not been in existence for such years, for the period of existence of the company, showing sales before charges for depreciation, interest and income tax.


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(b) Consolidated Financial Statements:

(i) The company shall submit to the Commission audited consolidated balance sheets as of the end of

the five most recent fiscal years of the company. If the company has been in existence for less than five years the above mentioned submission will have to be made for the period of existence of the company.

(ii) The issuer shall submit to the audited consolidated profit and loss accounts and cash flow

statements as of the end of the five most recent fiscal years of the company. If the company has been in existence for less than five years the above mentioned submission will have to be made for the period of existence of the company. (20) Exhibits: The following documents should be filed as exhibits to the annual report if they have not been previously filed. If previously filed, the transmittal letter for the annual report shall state the document with which the exhibit was filed and the date of the filing. (1) Memorandum and Articles of Association- in original attested by the Managing Director (2) Certificate of Incorporation and Certificate of Commencement of Business – Photocopy attested by the Managing Director (3) Extract from the Minutes of Meeting of the Board of Directors for raising paid up capital – photocopy attested by the Managing Director (4) Consent of the Directors to serve – in original signed by all director (5) Land Title Deed – photocopy attested by the Managing Director (6) If Plant & Machinery is reconditioned or second-hand – a certificate from SGS or Lloyds agency on its economic life and price competitiveness duly certified by the Chamber of Commerce of the exporting country or the country of origin – in original (7) Loan agreements if any – photocopy attested by the Managing Director (8) Joint venture agreement if any-attested by the Managing Director (9) Tax Holiday Approval Letter from NBR – attested by the Managing Director

5. Penalty.--If any company or its representative violates any of the provisions of these rules or furnishes false, incorrect, misleading information or suppresses any information, the Commission may impose penalty as prescribed under the Securities and Exchange Ordinance, 1969.


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APPENDIX N: PROXY SOLICITATION RULES, 200X


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PROXY SOLICITATION RULES, 200X 1. Short title.—These rules may be called the Company Proxy Solicitation Rules, 200X. 2. Definitions.—In these rules, unless there is anything repugnant in the subject or context,

(a) “Associate”. The term "associate," used to indicate a relationship with any person, means:

(i) Any corporation or organization (other than the company or a majority owned subsidiary of the company) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities;

(ii) Any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and

(iii) Any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the company or any of its parents or subsidiaries.

(b) “Commission” means the Securities and Exchange Commission.

(c) “Company” means the issuer of the securities in respect of which proxies are to be solicited

(d) “Last fiscal year”. The term "last fiscal year" of the company means the last fiscal year of the company ending prior to the date of the meeting for which proxies are to be solicited.

(e) “Proxy” includes every proxy or authorization within the meaning of section 15 of the Ordinance.

(f) Proxy statement” means the information statement required by rule 6 of these rules, whether or not contained in a single document.

(g) “Record date” means the date as of which the record holders of securities entitled to vote at a meeting shall be determined.

(h) “Solicitation” The terms "solicit" and "solicitation" include:

(i) Any request for a proxy whether or not accompanied by or included in a form of proxy:

(ii) Any request to execute or not to execute, or to revoke, a proxy; or

(iii) The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.

3. Application of rules.— (a) These rules apply to every solicitation of a proxy for any meeting of security holders with respect

to securities listed on any stock exchange.


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(b) These rules do not apply to the following:

1. Any solicitation through the medium of a newspaper advertisement which informs security holders of a source from which they may obtain copies of a proxy materials, form of proxy and any other soliciting material and does no more than (1) name the company, (2) state the reason for the advertisement, and (3) identify the proposal or proposals to be acted upon by security holders.

2. Any solicitation made otherwise than on behalf of the company where the total number of persons solicited is not more than ten; and

3. The furnishing of proxy voting advice by any person (the "advisor") to any other person with whom the advisor has a business relationship, if:

i. The advisor renders financial advice in the ordinary course of his business;

ii. The advisor discloses to the recipient of the advice any significant relationship with the company or any of its affiliates, or a security holder proponent of the matter on which advice is given, as well as any material interests of the advisor in such matter, and

iii. The advisor receives no special commission or remuneration for furnishing the proxy voting advice from any person other than a recipient of the advice and other persons who receive similar advice under this subsection.

(c) Three copies of the proxy statement, duly completed, signed by the company’s principal executive officer, the chairman, the managing director and all directors shall be filed with the Commission at least 30 days prior to the anticipated mailing date of the proxy statement. On receipt of the proxy statement, the Commission shall review the proxy statement. In case nothing is communicated to the Company within 15 days after receipt of the proxy statement, the Commission shall be deemed to have approved it. If the Commission shall communicate its requests for changes in the proxy statement, the company shall make the changes.

(d) The annual report of the company shall be delivered to security holders and each stock exchange upon which the security is listed with or prior to the delivery of the proxy statement to the security holders and each stock exchange.

4. Form of proxy.— (a) The form of the proxy

1. shall indicate in bold-face type whether or not the proxy is solicited on behalf of the company’s board of directors or, if provided other than by a majority of the board of directors, shall indicate in bold-face type on whose behalf the solicitation is made;

2. Shall provide a specifically designated blank space for dating the proxy card; and

3. Shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the company or by security holders


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(b) Means shall be provided in the form of proxy whereby the person solicited is afforded an opportunity to specify by boxes a choice between approval or disapproval of, or abstention with respect to each separate matter referred to therein as intended to be acted upon, other than elections to office. A proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the security holder provided that the form of proxy states in bold-face type how it is intended to vote the shares represented by the proxy in each such case.

(c) A form of proxy which provides for the election of directors shall set forth the names of persons nominated for election as directors. Such form of proxy shall clearly provide any of the following means for security holders to withhold authority to vote for each nominee:

1. A box opposite the name of each nominee which may be marked to indicate that authority to vote for such nominee is withheld; or

2. An instruction in bold-face type which indicates that the security holder may withhold authority to vote for any nominee by lining through or otherwise striking out the name of any nominee; or

3. Designated blank spaces in which the security holder may enter the names of nominees with respect to whom the security holder chooses to withhold authority to vote; or

4. Any other similar means, provided that clear instructions are furnished indicating how the security holder may withhold authority to vote for any nominee.

Such form of proxy also may provide a means for the security holder to grant authority to vote for the nominees set forth, as a group, provided that there is a similar means for the security holder to withhold authority to vote for such group of nominees. Any such form of proxy which is executed by the security holder in such manner as not to withhold authority to vote for the election of any nominee shall be deemed to grant such authority, provided that the form of proxy so states in bold-face type. (d) A proxy may confer discretionary authority to vote on any matters.

(e) No proxy shall confer authority:

1. To vote for the election of any person to any office for which a bona fide nominee is not named in the proxy statement (A person shall not be deemed to be a bona fide nominee and he shall not be named as such unless he has consented to being named in the proxy statement and to serve if elected.),

2. To vote at any annual meeting other than the next annual meeting (or any adjournment thereof) to be held after the date on which the proxy statement and form of proxy are first sent or given to security holders,

3. To vote with respect to more than one meeting (and any adjournment thereof) or

4. To consent to or authorize any action other than the action proposed to be taken in the proxy statement.

(f) The proxy statement or form of proxy shall provide, subject to reasonable specified conditions, that the shares represented by the proxy will be voted and that where the person solicited specifies by means of a ballot provided pursuant to paragraph (b) of this section a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the specifications so made.


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(g) No person conducting a solicitation subject to this regulation shall deliver a form of proxy, consent or authorization to any security holder unless the security holder concurrently receives, or has previously received, a definitive proxy statement that has been filed with the Commission.

5. False or Misleading Statements.— (a) No solicitation subject to this regulation shall be made by means of any proxy statement, form of

proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.

(b) The fact that a proxy statement, form of proxy or other soliciting material has been filed with or examined by the Commission shall not be deemed a finding by the Commission that such material is accurate or complete or not false or misleading, or that the Commission has passed upon the merits of or approved any statement contained therein or any matter to be acted upon by security holders. No representation contrary to the foregoing shall be made.

Note: The following are some examples of what, depending upon particular facts and circumstances, may be misleading within the meaning of this section.

a. Predictions as to specific future market values.

b. Material which directly or indirectly impugns character, integrity or personal reputation, or directly or indirectly makes charges concerning improper, illegal or immoral conduct or associations, without factual foundation.

c. Failure to so identify a proxy statement, form of proxy and other soliciting material as to clearly distinguish it from the soliciting material of any other person or persons soliciting for the same meeting or subject matter.

d. Claims made prior to a meeting regarding the results of a solicitation. 6. Information required in proxy statement A. Material Information: (1) In addition to the information specifically required by this rule, the proxy statement report shall

contain all material information necessary to enable security holders and their investment advisers to make an informed assessment of the matters to be voted upon at the meeting.

(2) The Commission may require disclosure of additional information in the proxy statement as it

considers appropriate for a particular meeting, and the company shall comply. (3) If the Commission requires such information it shall inform the company of the additional information

in writing.


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B. Information to be included in the proxy statement (1) Cover Page of the Proxy Statement: On the front cover page of the proxy statement the following information and statements shall be given, namely: - (a) name, address, telephone and e-mail numbers of the company and the name of the contact person; (b) the title “Proxy Statement for the _______ meeting to be conducted on _____, 2____; (c) the date of the proxy statement. (2) Table of Contents: On the inside cover page of the proxy statement – (a) a detailed table of contents showing the various sections or subdivisions of the proxy statement and

the page number on which each such section or subdivision begins shall be given; and (b) immediately preceding the table of contents, it shall be indicated that a proxy statement may be

obtained from the company and the stock exchange(s) where the securities are traded, naming the stock exchange(s) and giving their address, telephone and e-mail numbers.

(3) Date, time and place information State the date, time and place of the meeting of security holders, and the complete mailing address of the principal executive offices of the company. (4) Revocability of proxy State whether or not the person giving the proxy has the power to revoke it. If the right of revocation before the proxy is exercised is limited or is subject to compliance with any formal procedure, briefly describe such limitation or procedure. (5) Persons making the solicitation (a) If the solicitation is made by the company, so state. Give the name of any director of the company who has informed the company in writing that he intends to oppose any action intended to be taken by the company and indicate the action which he intends to oppose. (b) If the solicitation is made otherwise than by the company, so state and give the names of the participants in the solicitation. (c) If the solicitation is to be made otherwise than by the use of the mails, describe the methods to be employed. If the solicitation is to be made by specially engaged employees or paid solicitors, state (i) the material features of any contract or arrangement for such solicitation and identify the parties, and (ii) the cost or anticipated cost thereof. (d) State the names of the persons by whom the cost of solicitation has been or will be borne, directly or indirectly.


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(6) Interest if certain persons in mattes to be acted upon (a) Describe briefly any substantial interest, direct or indirect, by security holdings or otherwise, of each of the following persons in any matter to be acted upon, other than elections to office:

(i) If the solicitation is made on behalf of the company, each person who has been a director or member of senior management of the company at any time since the beginning of the last fiscal year.

(ii) If the solicitation is made otherwise than on behalf of the company, each participant in the solicitation.

(iii) Each nominee for election as a director of the company.

(iv) Each associate of any of the foregoing persons.

(b) Except in the case of a solicitation subject to these rules made in opposition to another solicitation subject to this regulation, this sub-rule (6) shall not apply to any interest arising from the ownership of securities of the company where the security holder receives no extra or special benefit not shared on a pro rata basis by all other holders of the same class. (7) Voting securities and principal holders thereof (a) As to each class of voting securities of the company entitled to be voted at the meeting, state the number of shares outstanding and the number of votes to which each class is entitled. (b) State the record date, if any, with respect to this solicitation. (c)Furnish the information required by rule 4(B)(14)-“Ownership of the Company’s Securities” of the Company Annual Reports Rules, 200X. (8) Directors and senior management If action is to be taken with respect to the election of directors, furnish the following information (in tabular form to the extent practicable). If, however, the solicitation is made on behalf of persons other than the company, the information required need be furnished only as to nominees of the persons making the solicitations. (a) The information required by rule 4(B)(8)-“Directors and Officers”, 4(B)(9)-“Involvement of Officers and Directors in Certain Legal Proceedings”, and 4(B)(10)-“Certain Relationships and Related Transactions”, of the Company Annual Reports Rules, 200X. (b) If the company has a nominating or similar committee, state whether the committee will consider nominees recommended by security holders and, if so, describe the procedures to be followed by security holders in submitting such recommendations. (c) State the total number of meetings of the board of directors (including regularly scheduled and special meetings) which were held during the last full fiscal year. Name each incumbent director who during the last full fiscal year attended fewer than 75% of the aggregate of (i) the total number of meetings of the board of directors (held during the period for which he has been a director) and (ii) the total number of meetings held by all committees of the board on which he served (during the periods that he served). (9) Compensation of directors and senior management (a) Furnish the information required by rule 4 (B)(11)-“Executive Compensation”, and 4(B)(12)-“Options Granted to Officers, Directors and Employees”, of the Company Annual Report Rules, 200X if action is to be taken with regard to: (i) the election of directors;


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(ii) any bonus, profit sharing or other compensation plan, contract or arrangement in which any director, nominee for election as a director, or senior manager of the company will participate; (iii) any pension or retirement plan in which any such person will participate; or (iv) the granting or extension to any person of any options, warrants or rights to purchase any securities, other than warrants or rights issued to security holders as such, on a pro rata basis.] (b) If the solicitation is made on behalf of persons other than the company, the information required need be furnished only as to nominees of the persons making the solicitation and associates of such nominees. (10) Auditors If the solicitation is made on behalf of the company and relates to (i) the annual (or special meeting in lieu of annual) general meeting of security holders at which directors are to be elected or (ii) the election, approval or ratification of the company's auditors, furnish the following information describing the company's relationship with its auditors: (a) The name of the principal auditor selected or being recommended to security holders for election, approval or ratification for the current year. If no auditor has been selected or recommended, so state and briefly describe the reasons therefore. (b) The name of the principal auditor for the fiscal year most recently completed if different from the auditor selected or recommended for the current year or if no auditor has yet been selected or recommended for the current year. (c) The proxy statement shall indicate (i) whether or not representatives of the principal auditor for the current year and for the most recently completed fiscal year are expected to be present at the security holders' meeting, (ii) whether or not they will have the opportunity to make a statement if they desire to do so, and (iii) whether or not such representatives are expected to be available to respond to appropriate questions. (11) Authorization or issuance of securities otherwise than for exchange; capital increase If action is to be taken with respect to the authorization or issuance of any securities otherwise than for exchange for outstanding securities of the company, furnish the following information: (a) State the title and amount of securities to be authorized or issued. If equity securities, furnish the information required by rule 4(B)(16)-“Description of Equity Securities Outstanding”. Also furnish information on any amendment to the memorandum or articles of association to authorise the securities. If debt securities, furnish the information required by rule 4(B)(17)-“Debt Securities”. If the securities are additional shares of common stock of a class outstanding, the description may be omitted except for a statement of pre-emptive rights, if any. (b) If the terms of the securities cannot be stated or estimated with respect to any or all of the securities to be authorized, because no offering thereof is contemplated in the proximate future, and if no further authorization by security holders for the issuance thereof is to be obtained, it should be stated that the terms of the securities to be authorized, including dividend or interest rates, conversion prices, voting rights, redemption prices, maturity dates and similar matters will be determined by the board of directors. (c) Describe briefly the transaction in which the securities are to be issued, including a statement as to (i) the nature and approximate amount of consideration received or to be received by the company and (ii) the approximate amount devoted to each purpose so far as determinable for which the net proceeds have been or are to be used. If it is impracticable to describe the transaction in which the securities are to be issued, state the reason, indicate the purpose of the authorization of the securities, and state whether


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further authorization for the issuance of the securities by a vote of security holders will be solicited prior to such issuance. (d) If the securities are to be issued otherwise than in a public offering for cash, state the reasons for the proposed authorization or issuance and the general effect thereof upon the rights of existing security holders. (12) Modification or exchange of securities If action is to be taken with respect to the modification of any class of securities of the company, or the issuance, or authorization for issuance, of securities of the company in exchange for outstanding securities of the company, furnish the following information: (a) If outstanding securities are to be modified, state the title and amount thereof. If securities are to be issued in exchange for outstanding securities, state the title and amount of the securities to be so issued, the title and amount of outstanding securities to be exchanged therefore, and the basis of the exchange. (b) Describe any material differences between the outstanding securities and the modified or new securities, including any of the matters relating to the description of the securities which would be required by rule 9(a) above. (c) State the reasons for the proposed modification or exchange and the general effect thereof upon the rights of existing security holders. If the existing security is presently listed on a securities exchange, state whether the company intends to apply for listing of the new or reclassified security on such securities exchange or any other securities exchange. (If the company does not intend to make such application, state the effect of the termination of such listing.) (d) Furnish a brief statement as to arrears in dividends or as to defaults in principal or interest in respect to the outstanding securities which are to be modified or exchanged and such other information as may be appropriate in the particular case to disclose adequately the nature and effect of the proposed action. (e) Outline briefly any other material features of the proposed modification or exchange. (13) Mergers, consolidations, acquisitions and similar matter If action is to be taken with respect to any transaction involving (i) the merger or consolidation of the company into or with any person or of any other person into or with the company; (ii) the acquisition by the company or any of its security holders of securities of another person; (iii) the acquisition by the company of any other going business or of the assets thereof; (iv) the sale or other transfer of all or any substantial part of the assets of the company; or (v) the liquidation or dissolution of the company; furnish the following information: (a) Information About the Transaction. Furnish the following information concerning the company and (unless otherwise indicated) each other person: which is to be merged into the company or into or with which the company is to be merged or consolidated; the business or assets of which are to be acquired; which is the issuer of securities to be acquired by the company in exchange for all or a substantial part of the company's assets; or which is the issuer of securities to be acquired by the company or its security holders; (i) The name, complete mailing address and telephone and e-mail numbers of the principal executive offices. (ii) A brief description of the general nature of the business conducted by the other person. (iii) A summary of the material features of the proposed transaction. The summary shall include, where applicable: (a) A brief summary of the terms of the transaction agreement.


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(b) The reasons for engaging in the transaction. (c) An explanation of any material differences in the rights of security holders of the company as a result of the transaction. (d) A brief statement as to the accounting treatment and tax consequences of the transaction. (iv) A brief statement as to dividends in arrears or defaults in principal or interest in respect of any securities of the company or of such other person and as to the effect of the transaction thereon, and such other information as may be appropriate in the particular case to disclose adequately the nature and effect of the proposed action. (v) In comparative columnar form, historical and pro forma per share data of the company and historical and equivalent pro forma per share data of the other person (as of the dates and for the periods for which financial data is presented in the annual report of the company for the following items: (a) Book value per share. (b) Cash dividends declared per share. (c) Income (loss) per share from continuing operations. (vi) A statement as to whether any governmental regulatory requirements must be complied with or approval must be obtained in connection with the transaction, and if so, the status of such compliance or approval. (vii) If a report, opinion or appraisal materially relating to the transaction has been received from an outside party, and such report, opinion or appraisal is referred to in the proxy statement, furnish the following information: (a) Identify such outside party and briefly describe the qualifications of such party. (b) Describe any material relationship between such outside party and the company which existed during the past two years and any compensation received as a result of such relationship. (viii) A description of any past, present or proposed material contracts, arrangements, understandings, relationships, negotiations or transactions during the past two years between the other person or its affiliates and the company or its affiliates, such as those concerning a merger, consolidation or acquisition; a tender offer or other acquisition of securities; an election of directors; or a sale or other transfer of a material amount of assets. (ix) As to each class of securities of the company or of the other person which is listed on a securities exchange and which will be materially affected by the transaction, state the high and low sale prices (or in the absence of trading in a particular period, the range of bid and asked prices) as of the date preceding public announcement of the proposed transaction, or if no such public announcement was made, as of the day preceding the day the agreement or resolution with respect to the action was made. (x) A statement as to whether or not representatives of the principal auditor for the current year and for the most recently completed fiscal year: (a) Are expected to be present at the security holders' meeting; (b) Will have the opportunity to make a statement if they desire to do so; and


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(c) Are expected to be available to respond to appropriate questions. (b) Information About the Company and the Other Person. Furnish the information specified below for the company and for the other person designated in paragraph (a) of this rule, if applicable (hereinafter all references to the company should be read to include a reference to such other person unless the context otherwise indicates): (i) Information required by rule 4(B)(7)-“Plan of Operation and Discussion of Financial Condition”, and 4(B)(19)-“Financial Statement Requirements”, of the Company Annual Report Rules, [2004]. (ii) Information required by rule 4(B)(5)-“Description of Business”, of the Company Annual Report Rules, [2004]. If the company or any of its securities or assets is to be acquired by the other person, the information regarding the other person required by this rule need be provided only to the extent that (i) the company or its security holders who are entitled to vote will become or remain security holders of the other person; or (ii) such information is otherwise material to an informed voting decision. (14) Restatement of accounts If action is to be taken with respect to the restatement of any asset, capital or surplus account of the company, furnish the following information: (a) State the nature of the restatement and the date as of which it is to be effective. (b) Outline briefly the reasons for the restatement and for the selection of the particular effective date. (c) State the name and amount of each account (including any reserve accounts) affected by the restatement and the effect of the restatement thereon. (Tabular presentation of the amounts shall be made when appropriate, particularly in the case of recapitalizations.) (d) To the extent practicable, state whether and the extent, if any, to which the restatement will, as of the date thereof, alter the amount available for distribution to the holders of equity securities. (15) Action with respect to reports If action is to be taken with respect to any report of the company or of its directors, officers or committees or any minutes of a meeting of its security holders, furnish the following information: (a) State whether or not such action is to constitute approval or disapproval of any of the matters referred to in such reports or minutes. (b) Identify each of such matters which it is intended will be approved or disapproved, and furnish the information required by the appropriate rule or rules with respect to each such matter. (16) Matters not required to be submitted If action is to be taken with respect to any matter which is not required to be submitted to a vote of security holders, state the nature of such matter, the reasons for submitting it to a vote of security holders, and what action is intended to be taken by the company in the event of a negative vote on the matter by the security holders.


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(17) Amendment of memorandum or articles If action is to be taken with respect to any amendment of the company's memorandum or articles of association as to which information is not required above, state briefly the reasons for and the general effect of such amendment. (18) Other proposed action If action is to be taken on any matter not specifically referred to in these rules, describe briefly the substance of each such matter in substantially the same degree of detail as is required by rules (6) to (17), inclusive. (19) Voting procedures As to each matter which is to be submitted to a vote of security holders, furnish the following information: (a) State the vote required for approval or election, other than for the approval of auditors. (b) Disclose the method by which votes will be counted, including the treatment and effect of abstentions under applicable law as well as company’s memorandum or articles provisions. 7. Penalty.--If any company or its representative violates any of the provisions of these rules or furnishes false, incorrect, misleading information or suppresses any information, the Commission may impose penalty as prescribed under the Securities and Exchange Ordinance, 1969.


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APPENDIX O: DEBENTURE HOLDERS’ ASSOCIATION RULES, 200X


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DEBENTURE HOLDERS’ ASSOCIATION RULES, 200X [These Rules are part of the proposed Debt Market Issue Rules, 200X, submitted to the SEC on 3 March 2005 by the Development and Implementation of Issue Rules and Regulations to Foster Primary and Secondary Debt Market Project, a part of the International Development Association Financial Institutions Development Project. They are repeated here because they deal with an aspect of corporate governance as it relates to holders of a company’s debentures.] Company debenture holders’ association.─ (1) Every holder of debt securities issued by a company (except a special purpose vehicle) shall be a

member of a group called the “debenture holders’ association”. A debenture holders’ association shall be formed for each issue of company debentures.

(2) The issuer shall call a meeting of the debenture holders’ association at the time and place of the

issuer’s annual general meeting. The first meeting of the debenture holders’ association may be on the day and place (but not the time) of the first annual general meeting after issue of the debentures. Alternatively, the first meeting of the debenture holders’ association may be 30 days after the Trustee shall give notice under of an event of default.

(3) The officers of the debenture holders’ association shall be a chairman, deputy chairman and secretary.

The first officers shall be elected at the first meeting of the association. The association may decide the term of office of the officers, which may not be less than one year nor more than three years, and whether an officer shall be eligible for re-election. No officer of the debenture holders’ association may be a holder of more than five percent of the shares of any obligor under the trust deed or a director, officer, or employee of the issuer or a member of the family of any such person.

(4) The debenture holders’ association may choose to have a board of directors. The number of directors,

their term of office and powers shall be as prescribed by a charter adopted by the debenture holders’ association.

(5) The debenture holders’ association shall protect the interests of the debenture holders and shall

cooperate with the trustee to ensure the enforcement of their rights. (6) The expenses of the debenture holders’ association, including the fees and expenses of the debenture

holders’ advocate, shall be paid by the issuer. If the issuer shall default in any payments of expenses, the debenture holders’ association may pay them and proceed against the issuer to recover them.

(7) If debentures are sold in a private placement in compliance with the Private Placement Rules, 2001,

the debenture holders may decide not to have a debenture holders’ association. Meetings of the debenture holders’ association.─

(1) The issuer shall call the meetings of the debenture holders’ association provided that at least of one meeting is held per year. If the issuer shall fail to call an annual meeting, the trustee shall do so. If the trustee shall fail to call an annual meeting, the officers of the debenture holders’ association shall do so.

(2) The procedures for calling and conducting meetings of the debenture holders’ association shall be the same as for calling and conducting the issuer’s annual general meeting, with such changes as may be approved by the officers of the debenture holders’ association.


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(3) All resolutions of the debenture holders’ association shall be recorded and reported to debenture holders, the issuer, the Commission and the securities exchange if the debentures are listed. The trustee shall perform the duties of the secretary of the association if so requested by the secretary.

Debenture holders’ advocate.—

(1) The trustee shall appoint a member of the bar or a law firm to be the debenture holders’ advocate within thirty days after the occurrence of an event of default, as defined in the indentured. The board of directors or officers of the debenture holders’ association shall appoint the debenture holders’ advocate if the trustee shall fail to do so. The debenture holders’ advocate shall be appointed in the same manner if the trustee shall default in performing its duties under the indenture. The debenture holders’ advocate shall advise the officers of the debenture holders’ association when requested.

(2) The debenture holders’ advocate may not be the advocate for the issuer or the trustee.

(3) If debentures are sold in a private placement in compliance with the Capital Issue of Limited Companies through Private Placement Rules, 2001, the debenture holders may decide not to have a debenture holders’ advocate.


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APPENDIX P: INSIDER TRADING RULES, 200X


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INSIDER TRADING RULES, 200X 1. Short title:--These rules may be called the Insider Trading Rules, 200X. 2. Definitions:-- In these rules, unless there is anything repugnant in the subject or context,

(a) “Insider" means the issuer; a director or officer of the issuer; a person controlling, controlled by, or under common control with, the issuer; or a person who by virtue of his relationship or former relationship of trust or confidence to the issuer knows a material fact about the issuer or the security that is not generally available. (b) “Misappropriate" means to obtain material, non-public information by unlawful means. It also means to appropriate material, non-public information to one's own use or benefit, or to the use or benefit of another person where, because of fiduciary, contractual, employee, or other relationship, one is under a duty not to appropriate it. (c) “Tippee” is a person who receives a material fact directly or indirectly from an insider, with knowledge that the fact is material and the fact is not generally available.

(d) A fact is "generally available" when such steps have been taken, and such time has elapsed, that it can be reasonably anticipated that the fact is or should be known to interested investors in the relevant markets for the security in question. (e) A "fact" includes a promise, prediction, estimate, projection, or forecast, or a statement of intention, motive, opinion, or law. (f) "Knowledge," "knows," "knowing" and "knowingly" include conduct that is either knowing or reckless. (g) “Trader” has the meaning set forth in rules 7 or 8.

3. No Insider Trading:--An insider shall not sell or buy a security if he knows a fact that is material

and non-public concerning the issuer or the security. 4. Misappropriated Fact:--No person shall sell or buy any security if he knows a fact that is material

and non-public concerning the issuer or the security, and he has misappropriated the fact. 5. Tippee:--No person shall sell or buy a security if he learns a fact that he knows is material and non-

public concerning the issuer or the security from an insider, fiduciary, or a direct or indirect tippee of an insider or fiduciary with the knowledge that the person from whom he learns the fact is an insider, fiduciary, or a direct or indirect tippee of an insider or fiduciary.

6. No Communication:--No insider, fiduciary, or tippee of an insider or fiduciary shall communicate

to any other person a fact that is material and non-public concerning the issuer or the security, knowing that such communication is likely to result in trading on the basis of material, non-public information. This rule shall not apply to a communication made in good faith (1) to any person in connection with the performance by such person of his duties or obligations to the issuer, or (2) to any person pursuant to a requirement of any law or regulation.

7. Individual Trader:--No individual who purchases or sells a security ("trader") shall be liable for

violation of rules 3 through 6 if he shows that (1) he reasonably believed that the fact was public or not material, (2) that the other party to the transaction knew the fact; or (3) the identity of the other


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party to the transaction (or his agent) was known to the trader, and the trader reasonably believed that the other party (or his agent) knew the fact.

8. Entity Trader:--No person that is an entity that purchases or sells a security ("trader") shall be

liable for violation of paragraphs b through e if it shows that (1) the individual making the investment decision on behalf of the trader to purchase or sell any security, or to cause any such security to be purchased or sold by or on behalf of others, did not know the material fact; and (2) the trader had implemented one or a combination of policies and procedures, reasonable under the circumstances, taking into consideration the nature of the trader's business, to ensure that an individual making investment decisions would not violate paragraphs b through e, which policies and procedures may include, but are not limited to, those which restricted any purchase, sale and causing any purchase and sale of any such security or those which prevent such individuals from knowing such information.

9. Defense:--No trader who purchases or sells a security shall be liable for violation of rules 3 through

6 if he shows that the purchase or sale was caused solely by factors other than the trader's knowledge of the material fact.

10. Controlling Person:--A person who controlled a trader at the time of any act giving rise to liability

is liable to the same extent as the controlled person. 11. Controlling Person Defense:--A controlling person is not liable under rule 10 if he proves that he

reasonably did not know that the controlled person traded on the basis of or tipped material, non-public information. No person shall be liable under rule 10 solely by reason of employing another person who is so liable, if there are procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any violation by the controlled person, and the controlling person has reasonably discharged the duties and obligations incumbent upon him by reason of those procedures and system without reasonable cause to believe that those procedures and system were not being complied with.

12. Aiding:--Any person who knowingly causes or gives substantial assistance to conduct by another

person liable under these rules with knowledge that the conduct is unlawful or involves trading on the basis of or tipping material or non-public information is liable as the other person.

13. Liability to Matched Party:--If a transaction is not effected in a manner that would make the

matching of buyers and sellers substantially fortuitous, a seller or buyer who violates these rules is liable to his buyer or seller for reversal of the transaction or damages.

14. Liability to Other Parties:--If a transaction is effected in a manner that would make the matching

of buyers and sellers substantially fortuitous, a seller or buyer who violates these rules is liable for damages to a person who buys or sells during the period beginning at the start of the day when the defendant first unlawfully sells or buys, and ending at the end of the day when all material facts became public.

15. Damages Calculation:--Damages are calculated as follows:

(a) Damages in private actions arising under rules 13 or 14 is the amount the buyer paid (with interest) less the value of the security as of the end of a reasonable period after the time when all material facts become generally available, and less any return (with interest) that he received on the security.

(b) Damages in private actions arising under rules 13 or 14, if the plaintiff is a seller, is the value of

the security as of the end of the reasonable period after the time when all material facts became


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public plus any return (with interest) that the defendant received on the security, less the amount (with interest) that the plaintiff received.

(c) The damages provided in this rule is limited as if all the plaintiffs, together, had bought (or sold)

only the amount of securities that the defendant had sold (or bought). 16. Liability of Tipper:--Any person who in violation of rule 4 tips a fact that is material and not public

to a tippee shall be liable under rules 13 and 14 to the same extent as the tippee.


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APPENDIX Q: SELECTIVE DISCLOSURE BY ISSUERS RULES, 200X


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SELECTIVE DISCLOSURE BY ISSUERS RULES, 200X 1. Short title:--These rules may be called the Selective Disclosure by Issuers Rules, 200X. 2. Definitions:-- In these rules, unless there is anything repugnant in the subject or context, (a) A fact is "material" if there is a substantial likelihood that:

(i) A normal investor would consider it important under the circumstances in determining

his course of action, and it would be likely, on being made public, to affect the market price of a security to a significant extent; or

(ii) A normal investor would consider it especially important under the circumstances in determining his course of action in the light of such factors as degree of its specificity, the extent of its difference from public information, and its nature and reliability.

(b) "Promptly" means disclosure as soon as reasonably practicable (but in no event more than 24

hours) after a senior official of the issuer knows, or is reckless in not knowing, of the non-intentional disclosure. A "senior official" means any director, any executive officer, any investor relations or public relations officer, or any other person with similar functions.

(c) “Public disclosure” means disseminating a press release containing that fact through a widely circulated news or wire service, or disseminating the fact through any other method of disclosure that is reasonably designed to provide broad public access to the fact and does not exclude any members of the public from access, such as announcement at a press conference to which reporters are granted access (e.g., by personal attendance or by telephonic or other electronic transmission). Unless there has been public disclosure of a fact, the fact shall be presumed to be “nonpublic”.

(d) A selective disclosure of a material, nonpublic fact is "intentional" when the individual making the disclosure either knew prior to the disclosure, or was reckless in not knowing, that he or she would be communicating a fact that was material and nonpublic.

(e) Any officer, director, employee, or agent of an issuer, who discloses a material, nonpublic fact while acting within the scope of his or her authority, shall be considered to be a "person acting on behalf of the issuer." An officer, director, employee, or agent of an issuer who discloses a material, nonpublic fact in breach of a duty of trust or confidence to the issuer shall not be considered to be acting on behalf of the issuer.

3. Nature of disclosure:--This rule governs intentional disclosure and inadvertent disclosure of a material, nonpublic fact.

4. Right to confidentiality:--An issuer may keep any fact confidential unless required by law to disclose it. 5. When to disclose:--Whenever an issuer, or any person acting on its behalf, discloses any material, nonpublic fact regarding that issuer or its securities to any person or persons outside the issuer, the issuer shall:

(1) In the case of an intentional disclosure, make public disclosure of that fact simultaneously; and

(2) In the case of non-intentional disclosure, make public disclosure of that fact promptly.


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6. Confidential disclosures:--Rule 5 shall not apply when a disclosure is made to a person who owes a duty of trust or confidence to the issuer (including, for example, an outside consultant such as an attorney, investment banker, or accountant) or to a person who has expressly agreed to maintain such fact in confidence.


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APPENDIX R: PROPOSED AMENDMENTS TO THE COMPANIES ACT, 1994


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PROPOSED AMENDMENTS TO THE COMPANIES ACT, 1994 Act: Companies Act, 1994 SEC: Securities and Exchange Commission Serial

No. Section Content of the section Proposed change and justification

1. 2 Definition (i) Inclusion of SEC and other securities definitions as those are absolutely absent in the Act. (ii) Government companies; (iii) Statutory companies.

2. 3 393

Jurisdiction of the High Court Division

A Company Board/ Commission may be constituted to deal with company and security matters before it goes to the High Court Division. This Board will also continually assess and re-asses the need for any amendment to the company and security laws. Jurisdiction of some commercial matters, such as banking disputes (other than mortgage and loan), company and commercial arbitration, negotiable instruments (other than fraud cases), insurance disputes, Non-Banking Financial Institution disputes etc. Some limited magisterial power may also be vested in it with power of civil and penal authority. This Board will act as a Tribunal and also as a supervisor to the company affairs over the Registrar of Joint Stock Company and Firms. Along with the company matters the security matters should also be included. The provisions enunciated in sections 3 and 393 are self-contradictory. Section 3 says- “Jurisdiction of the Court.- (1) The Court having jurisdiction under this Act shall be the High Court Division.” … and section 393 states- “Cognizance of offence.- (1) No Court inferior to that of a Magistrate of the first class shall try any offence under this Act.” … The jurisdiction needs to be specified.

3. No provision

Government companies There is no provision for companies owned by the government. There is a good number of companies which were nationalised and are subject to the Act but are not governed by the Act. The statutory minimum number of members in case of a private company is two, public company- seven, and private company which is subsidiary of a public company limited by share is three. The companies 100% owned by government does certainly have violated these provisions since their nationalisation in 1972 as its membership is always one (1), as government is to be treated as a single member. So, the provisions regarding the number of directors are also violated. Even in the recent past government has violated these provisions. In the year 1986, when Rupali Bank has


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Serial No. Section Content of the section Proposed change and justification

been privatised, the initial subscribers to the memorandum should have been at least seven, when all the nine subscribers were from the government alone. Alternatively a provision may be inserted to the effect that in case of a company 100% owned by the government certain provisions regarding the number of members and directors shall not apply. This may also be extended in the case of statutory companies.

4. No provision

Statutory company There is no such provision in the Act. Dhaka Electric Supply Company have been formed through statutory declaration, which either should have completely separate company law for it or in the case of following the Act for its management and other affairs, its inclusion in the Act is quite mandatory.

5. No provision

Compliance to “security laws” in force binding upon the public companies going to issue prospectus.

(i) It should be made mandatory upon all the public limited companies, which are going to issue a prospectus to comply with all the security laws in force. (ii) It should be made mandatory upon all public limited companies, which are going to submit ‘statement in lieu of prospectus’ to comply with all the security laws in force when it goes public.

6. 6, 7, 8 Schedules- VI, VII, VIII and IX

Memorandum of Association

The provision of object clause should not be restrictive. As the world is developing faster and many countries have opened it up, so every company should be allowed to carry on with any business which is legal within Bangladesh. The authority may vest with the company to be decided in General Meeting to bound its limit of objects, so that it may change it time to time.

7. Section 71 and Schedule-I, rule-4. Conflicting situation

Extraordinary resolution Section 71 says – resolution; In absence of specification it is presumed to be an ordinary resolution. Rule 4 of Schedule- I requires “extraordinary resolution”. Such conflicts must be removed.

8. Section 81 and 82

Annual General Meeting; and penalty for its default.

Failing to hold AGM has become a sort of practice for many companies as one third of the directors are to retire and election is to be held, so some directors are avoiding it intentionally. More stringent penal provision is to be inserted. May be automatic vacation of the office the directors those who are to retire in the forthcoming AGM is also a measure be considered. Failing to comply with other mandatory provisions which are required to be complied with at every AGM should face penal measures in addition to


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normal penalties. 9. 85(2)(a) Quorum for

Shareholders’ Meetings

Section 85(2) (a) of the Act provides for a quorum of at least 2 shareholders with 10% of the paid up capital, if the Articles do not otherwise provide. There should be a mandatory minimum quorum, perhaps one-third of voting shares. The Act may be amended to this extent of the section.

10. No provision

Cumulative voting Provision for proportional or cumulative voting may be included through amendment of the Act. Cumulative voting for directors permits minority shareholders to be represented on the board of directors in certain circumstances. This means that a shareholder or shareholders holding 25% of the shares (plus one share) may elect 25% of the directors, when the company has at least four directors, and the 25% shareholder or shareholders cumulate all their votes for that director or directors. The Act should be amended to explicitly permit cumulative voting.

11. No provision

Secretary There is only a definition to this position in section 2(1) (t) in the Act. The position of Secretary may be made compulsory for public companies. Their functions and liabilities are to be defined and specified. Qualification should not be advantageous only to certain quarter.

12. No provision

Independent director Section 91(1) (b) may be amended to pave the way for appointment of independent director as the present provision doesn’t allow anyone except a shareholder to be a director. This provision should be made only for the public companies. 20% of the total number of directors should be independent directors.

13. No provision

Audit committee There is no such provision at this moment. Independent director(s) provision should be inserted first and then the provision for an Audit Committee may be inserted. However, the provision may be made for public companies only. Duties and liabilities should be specified.

14. 116- 125. Managing Agent The provision should be omitted as it has no use in the present day context.

15. 227 Arbitration It is only the company, which is allowed to refer a matter to arbitration, no individual person or shareholder is allowed to refer any matter to arbitration. This provision should be amended. Arbitration Act, 1940 has been substituted by Arbitration Act, 2001; this should be amended though it is automatically affected.

16. 185 Schedule- XI Part- I

Balance Sheet Profit and Loss Account

The Schedules should be omitted. Section-185 should amended containing the provision that the specification for Balance Sheet and Profit and


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Part- II Part- III

Loss Account will be notified by the Government from time to time through Gazette Notification. The reason for this is that the Government is trying to update its accounting standard with the International Financial Reporting Standards (IFRS); and International Accounting Standards (ISA), so for keeping room for modification it should not be made restrictive to parliamentary amendment, which is quite cumbersome and time consuming.

17. 183 Annual balance sheet The provision for following the guideline for audit should be set out by the government. And to that effect provision is to be inserted containing that the Financial Reporting Standards will be notified by the government time to time through notification in the Official Gazette. The justification is to coup with the International Financial Reporting Standards (IFRS).

18. 58 Buy back shares Provisions with conditions for buying back own shares to the public limited companies may be inserted.

19. 138 Registration of prospectus

Provision for approval of prospectus of a “public limited company” by the SEC before its registration with the Registrar should be inserted.

20. No provision

Dematerialization Provisions for dematerialization of shares for listed plc’s is to be inserted. However, it will automatically attract, if security laws are made mandatory for listed plc’s.

21. Part- V Sections 234- 346

Winding up The provisions for winding up of companies need serious attention to simplify it. The present system is quite cumbersome.

22. 345 226

Rule making power At the moment there are conflicting situations as to rule making powers. The Act has come into force in 1994 and until now no rule has been made. The authority vested in the Supreme Court regarding rule making is quite limited and it concerns only to – “345. Power of Supreme Court to make rules.- (1) The Supreme Court, may from time to time, make rules consistent with this Act and with the Code of Civil Procedure, 1908 (Act V of 1908) concerning the following matters namely:-

(a) the mode of proceedings to be held for winding up of a company in the High Court Division and in a court subordinate thereto; (b) in the case of voluntary winding up by members or creditors, for the holding of meetings of creditors and members in connection with proceedings under section 228 of this Act;


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(c) giving effect to the provisions of this Act for the purpose of reduction of share capital and sub-division of the shares of a company; (d) all applications to be made to the Court under the provisions of this Act.

(2) The Court shall make rules providing for all matters which by this Act, are required to be prescribed. (3) Without prejudice to the generality of the foregoing power, the Supreme Court may by such rules enable or require all or any of the powers and duties conferred and imposed on the Court by this Act in respect of the matters following to be exercised or performed by the official liquidator, and subject to the control of the Court, that is say, the powers and duties of the Court in respect of -

(a) holding and conducting meetings to ascertain the wishes of creditors and contributories; (b) settling lists of contributories and rectifying the register of members where required, and collecting and applying the assets of the company; (c) requiring delivery of property or documents to the liquidator; (d making calls; (e) fixing a time within which debts and claims must be proved;

Provided that the official liquidator shall not, without the special leave of the Court, rectify the register of members, and shall not make any call without the special leave of the Court.” and contrary to that a wide range of power has been vested in the government through section 226, which read-

“SCHEDULES AND RULES AS TO PRESCRIBED MATTERS

226. Application and alteration of schedules and power to make rules as to prescribed matters.- (1) The forms specified in Schedules VI to XII or forms as near thereto as circumstances admit shall be used in all matters to which those forms refer.


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(2) The Government may alter any of the Schedules except Schedule Il. (3) Any alteration made under sub-section (2) shall be published in the official Gazette and on such publication the Schedules so altered shall have effect as if enacted in this Act, but no alteration made by the Government in Schedule I, shall affect any company registered before the alteration as respects that company or any portion of that Schedule. (4) In addition to the powers herein before conferred by this section, the Government may make rules providing for all or any matters which by this Act are to be prescribed by its authority. (5) Every such rule shall be published in the official Gazette, and on such publication shall have effect as if enacted in this Act.” These two provisions must be synchronised to provide authority either in one, or be specifically segregated. Immediate action by the government is required to make Company Rules, XXXX.

23. 233 Minority protection The provisions regarding minority protection is inadequate. Individual shareholders must be given the right to move the Court in case of substantial violation of any provision of the Act, memorandum of association and articles of association.

24. 371-377 Unregistered company winding up.

These provisions are to be deleted. If a company is not registered with the Registrar of Joint Stock Companies and Firms then there is no necessity of putting such provision in the Act. Civil laws in force is good enough to deal with such issues. For partnerships, Partnership Act, 1932 Act IX if 1932) is exhaustive enough to deal with the partnership issues. For dissolution of a partnership Chapter VI (sections 39- 55) of the Partnership Act, 1932 deals with it.


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APPENDIX S: LIST OF PEOPLE MET


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LIST OF PEOPLE MET No. NAME OF PERSON MET/ JOB POSITION ORGANISATION 1 Mansur Alam, Executive Director Securities & Exchange Commission 2 Farhad Ahmed, Executive Director Securities & Exchange Commission 3 Anwarul Kabir Bhuiyan, Executive Director Securities & Exchange Commission 4 Mangala Boyagoda, Team Leader IDA-FIDP: Development and Implementation of Issue Rules for Market Traded Debt Instruments and Regulations to Foster Secondary Debt Market Development in Bangladesh 5 Dr. Mirza Md. Azizul Islam Chairman, Securities & Exchange Commission 6 Ehsaur Rahman Executive, Listing Affairs, Dhaka Stock Exchange 7 Wali Bhuiyan Managing director, BOC Bangladesh Limited 8 Mohd. Sanaullah Company Secretary & Corporate Affairs Manager,

Singer Bangladesh Limited, and president, corporate secretaries association

9 Md. Tofazzul Hussain, ACA Assistant Manager, Rahman Rahman Huq, Chartered

Accountants 10 Kaiser Rahman Add’l Managing Director, Bangladesh General

Insurance Company Ltd. 11-22 Participants in the Workshop on 30 May 2005, with whom I did not personally meet, but who provided answers on written questionnaires that I distributed and collected. In some cases, the persons who signed the attendance sheet may have been designees of the person invited who did not identify themselves as such. The questionnaires were anonymous to encourage candid answers. 11 Samson H Chowdhury Chairman, Square Group of Companies 12 Anis A. Khan CEO & MD, IDLC 13 S.M. Shamsul Arefin CEO & MD, Uttara Finance and Investments Limited 14 Name not stated MD, Modern Cement Bangladesh Ltd. 15 Name not stated MD, Heidelberg Cement Bangladesh Ltd. 16 Al Maruf Khan Director, Chittagong Stock Exchange 17 Salahuddin Ahmed Khan CEO, Dhaka Stock Exchange 18 Name not stated MD, British American Tobacco, Bangladesh 19 Name not stated MD, Monno Ceeramic Industries Ltd. 20 Name not stated MD, Dutch-Bangla Bank Ltd. 21 Name not stated MD, Prime Bank Ltd. 22 Name not stated MD, Eastern Bank Ltd.


Report on training and accreditation of market intermediaries



in association with



and


TA No. 4246-BAN: Preparing The Financial Markets Governance Program Report on training and accreditation of market intermediaries

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i September 2005

TABLE OF CONTENTS

EXECUTIVE SUMMARY....................................................................................................................1

TERMS OF REFERENCE....................................................................................................................3

INTERNATIONAL SCENE .................................................................................................................4

EXISTING LICENSING SYSTEM IN BANGLADESH ...................................................................4

EXISTING SYSTEM FOR ACCREDITATION OF BROKERS AND BROKER REPRESENTATIVES ...........................................................................................................................5

CURRENT TRAINING FACILITIES — PROFESSIONAL AND ACADEMIC INSTITUTIONS .....................................................................................................................................6

SUGGESTIONS FOR A SYSTEM AND PROCESS FOR CERTIFYING OR ACCREDITING SECURITIES PROFESSIONALS..........................................................................7

The Proposal ......................................................................................................................................7 The Process ........................................................................................................................................8 Licensing/Registration .......................................................................................................................8 Training and Examination .................................................................................................................8

WHEN MUST INTERMEDIARIES MEET THE QUALIFICATION STANDARDS (TARGET DATE)? ..............................................................................................................................11

WHO IS RESPONSIBLE?..................................................................................................................12 Option 1 ...........................................................................................................................................12 Option 2 ...........................................................................................................................................12 Option 3 ...........................................................................................................................................13

TRAINING PROVIDERS...................................................................................................................14

OUTLINE ACTION SEQUENCE FOR THE OVERALL ESTABLISHMENT OF THE INSTITUTE ..........................................................................................................................................14

Concept Development......................................................................................................................14 Pre-Launch Preparation ...................................................................................................................16 Launch .............................................................................................................................................16 Consolidation ...................................................................................................................................17

OTHER ISSUES...................................................................................................................................17 Consultancy Support........................................................................................................................17 Costs and revenue ............................................................................................................................17 Trainers ............................................................................................................................................18 Training facilities .............................................................................................................................18 Consultation .....................................................................................................................................18 Development of course workbook ...................................................................................................19

SUMMARY OF MAIN RECOMMENDATIONS ............................................................................19

APPENDIX A: LIST OF WORKSHOP PARTICIPANTS.........................................................22

APPENDIX B: INTERNATIONAL SCENE................................................................................25

APPENDIX C: TRAINING FACILITIES OF INSTITUTIONS IN BANGLADESH.............39


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APPENDIX D: LETTER OF CHAIRMAN, SEC ON TRAINING INSTITUTE..........................50

APPENDIX E: SYLLABUS FOR QUALIFICATION EXAMINATIONS FOR MARKET INTERMEDIARIES .........................................................................................................53

APPENDIX F: REVISED DRAFT TERMS OF REFERENCE OF STEERING COMMITTEE ......................................................................................................................................60

APPENDIX G: LIST OF PEOPLE MET ..........................................................................................62 Table 1: Breakdown of registrants......................................................................................................5 Table 2: Summary of educational level and compliance schedule...................................................11


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ISC Strictly Private & Confidential

1 September 2005

EXECUTIVE SUMMARY

1. In Bangladesh, the categories of market participants requiring licensing from the SEC include:

• Broker. • Dealer. • Merchant Banker, which include underwriter, issuing Manager, portfolio Manager. • Investment Advisor. • Authorised representative.

2. There is no professional qualification requirement imposed by the SEC or the exchanges.

Professional qualifications need to be introduced as a pre-requisite requirement for licensing by the SEC. The current licensing system should be reviewed in light of market developments, with a view to streamlining the system, introducing fit and proper test requirements and appropriate financial requirements.

3. A national capital market institute for professional development of a full spectrum of market

professionals should be established. This institute is to have as its principal focus the development of training standards for the financial markets through provision of industry courses and where appropriate through the conduct of examinations leading to conferring of diploma or certificate.

4. The SEC should be the driving force for establishing and overall management of the institute,

with support from the stock exchanges and other market professionals and academic sectors through board participation.

5. The institute should be autonomous (not independent). Its governing body should be chaired by SEC Chairman. The governing body should have representation from the two stock exchanges as well as other market actors. The governing body should have an academic committee to advise on the preparation of syllabus for various courses and their updating. The academic committee should have representation from market actors as well as the academic community.

6. A steering committee should be formed to assist in the establishment of the institute. 7. The Committee will comprise members who are experienced in securities or in other professional

and vocational areas relevant to the project. Members will be chosen for their personal expertise, or they can be nominated to represent selected organisations. It must be clear whether a member is offering personal or representational views.

8. The Committee is to concentrate on issues like structure of the institute (particularly the

composition of the governing board, the minimum number and qualifications of full time faculty and other staff and their qualifications, composition of committees to advise the governing board on various aspects including required courses), budgetary requirements and sources of funding.

9. The committee should be dissolved after the institution itself comes into being. 10. The institute will be governed by a board and will be managed by a small, very professional,

executive staff. Functional areas, such as membership and examinations, will require dedicated staff who interact with practitioner committees, made up of members with experience of value to the development of the Institute's work in that area.

11. The institute could be a membership body for qualified and experienced individual practitioners

of good repute, drawn from a range of securities and investment businesses. (Note: The Securities


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Institutes in UK, Hong Kong, and Australia are membership structured.) Membership will demonstrate commitment to professional competence, good practice and personal integrity in business. To be a member will be prestigious and sought after; entry standards will therefore be quite demanding and any members who fail to live up to the required standards will face disciplinary action, even expulsion.

12. The institute should act as training standard setter and examination body. It should not be the sole

training provider. 13. The institute will become the approved examination awarding authority for the securities and

investment industry, acting for and with regulatory authorities, exchanges and other interested organisations. It is likely also to provide training, and to organise professional events and activities, which contribute to the knowledge and skill of the membership and others in the industry. It is, however, generally recognised that the institute may the sole institute providing training at the early stage of introducing training programmes for market participants.

14. To begin with the institution is to provide professional training to market participants under the

regulation of the SEC. Indeed training and accreditation process can commence without having to wait for the setting up of the institution, using facilities of existing institutions. The objective must be to start the process of certification and accreditation as soon as possible.

15. All persons engaged or to be engaged in securities, and the various related activities must be registered as such with the Securities and Exchange Commission. Before the registration can become effective, they shall be required to pass a Qualification Examination as specified by the SEC. Anyone failing to take the required qualification-training programme shall have his registration suspended. The person concerned cannot conduct his business until the required qualification test has been completed. Existing registrants will be given a period to comply.

16. The SEC may consider whether in certain cases and where good cause is shown, there could be variation or waiver of the applicable Qualification Examination and accept other standards as evidence of an applicant’s qualifications for registration. This could be in the form of extension of compliance date.

17. All intermediaries must satisfactorily complete approved training courses at a level appropriate to the complexity of their activities and clients’ needs: the basic foundation level or the advanced level. On satisfactory completion of the course and passing of the examination the candidate will be awarded a certificate or diploma as appropriate. The certificate and diploma will be accepted by the SEC for registration purpose.

18. Candidates are expected to complete the training courses and pass the examinations on two papers: generic knowledge paper, and specialist papers at foundation level or advanced level. All candidates must pass his own specialist paper at the appropriate level. Examinations should relate to the work actually being done in each securities environment by the individuals to be tested.

19. Syllabuses need to be developed. 20. Study guides designed to assist individuals in preparing for the qualification examination must be

prepared based on the syllabus. 21. Examination outlines and questions need to be prepared. This will require a considerable amount

of work since the experts developing the questions must have an in-depth knowledge of the Bangladesh market. It is also important that there are review sub-committees formed to review the appropriateness of the questions for each specialist subject.

22. There needs to be consultation on the exact drafting of workbooks and consultation (on a very restricted and confidential basis) on examination questions.


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TERMS OF REFERENCE

23. The terms of reference of Component 5 of this TA include:

(i) Review the status of implementing accreditation of brokers and broker representatives developed under TA-2913 and develop a system and process for certifying or accrediting securities professionals other than brokers who deal with the investing public such as mutual funds solicitors, portfolio managers, etc.

(ii) Recommend how to link the accreditation system to the existing training facilities, and the

national training institute proposed by the Financial Sector Reform and Strengthening (FIRST) Initiative.1

24. Consultant arrived in Dhaka on 23 April 2005 to work on the task and to include

recommendations in the interim report to ADB, which was due on 5 May, 2005. Consultant had discussions with the SEC and the academic sector. Consultant did not meet with the CEOs of the two exchanges then as both of them were out of the country.

25. Consultant subsequently met with the CEOs to discuss the proposals and both were in support of

the recommendations, in particular the setting up of the capital market training institute. 26. On 9 July 2005, SEC and the consulting team conducted a workshop on “Enhancement of

professional standards of market intermediaries”. The workshop was attended by representatives from different market sectors, the stock exchanges and academics. A list of participants is at Appendix A. At the workshop, there were active exchanges of views on the subject. Participants fully recognised the urgent need for improvement of professional standards of market practitioners, and endorsed the view that the setting up a capital market training institute is the appropriate way to achieve this. It is acknowledged that while current institutions may have the capacity to provide training in certain capital market related subjects, mainly those of general knowledge, they are not equipped to provide training on specific specialist subjects as outlined in this report.

27. This paper seeks to:

• provide an overview of existing system for accreditation of brokers and brokers’ representatives;

• identify securities professionals other than brokers who deal with the investing public; • identify current training facilities for brokers and other securities professionals; • develop a system and process for certifying or accrediting securities professionals. This will

include: — recommending a system for training, examination and registration; and — establishing standards;

• suggest a way to link the accreditation system to the existing training facilities as well as the national institute proposed by the First Initiative; and

• provide an international perspective on the professional qualification requirements and professional development programmes for the industry.

1 Refer to as ‘previous report’ in subsequent paragraphs.


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INTERNATIONAL SCENE

28. It is common for financial sector regulators to require those engaged in the business of securities trading, related business to be registered and for obtaining the licence, to have completed training courses and or passed qualification examinations relevant to their jobs. • Training and accreditation is the key to any properly running financial markets. • The passing of examinations may be an integral part of an overall licensing scheme (which

also includes capital aspects). Therefore it is a legal requirement to have passed an examination. The training for the examination may be given in specific courses or for example by self-study.

• Training may be given for continuous professional training reasons, which may also be a legal

requirement. • Training may be given for general vocational purposes or for obtaining international

recognized professional qualification e.g. CFA or membership of a securities Institute. This type of training and examination taking is not necessarily linked to specific legal requirements.

29. The purpose of this part is to provide some background information on accreditation and

qualifications in securities markets, with reference to the procedures and systems in place in a number of selected countries. It is not a world-wide survey; it serves to indicate the diversity of solutions that have been adopted by a number of different countries, whilst emphasizing some broad, common principles. In the interests of clarity this report contains some generalizations and simplifications. No single solution can be suitable for all countries and markets, and the best solution for one country today will have to change to meet that same country's needs tomorrow.

30. Information on the professional qualification requirements and professional development

programmes for the investment services industry of the United Kingdom, Australia, USA, Hong Kong and Canada are at Appendix B.

EXISTING LICENSING SYSTEM IN BANGLADESH 31. In Bangladesh, the SEC Law and associated regulations, including the capital formulas for each

of the activities, determine the market structure. 32. The categories of market participants requiring a licence from the SEC include:

• Broker – Provide trading services to clients. • Dealer – Only permitted to trade on his own account. • Merchant Banker – Licenses are structured by activity and by capital requirements as

described below. — Underwriting – Licensed to structure and participate as a principal in underwriting

financing. — Issuing Manager – They facilitate the issuance of Initial Public Offers (IPOs). — Portfolio Investment – A management firm that manages client assets. ‘Portfolio

Manager’ ‘arranges with clients to advise and direct or undertake on behalf of


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5 September 2005

clients the management or administration of the portfolio securities of the funds of the client’.

• Investment Advisor is a person defined in the law to provide investment advice to clients. There is no investment advisor currently licensed.

• Authorised representative is a person engaged in a broker’s office to trade on the exchange on behalf of a broker or dealer.

33. Table showing breakdown of registrants.

Table 1: Breakdown of registrants DSE CSE Total Brokers Total Licensed 195 129 324 Active Brokers 145 60 205 Dealers Total Licenses 0 0 0

Authorised Representatives 227 51 278

Underwriting Issue Manager Portfolio Services Merchant Banker Permitted to do all three activities

22 22 22

Only “Issuing Manager” 6 Only “Portfolio Management”

1

Licensed Total 22 28 23 In reality, Actively in the business

Very Few Very few 2 to 3

(Note: currently there are 30 members who are members of DSE and CSE.)

EXISTING SYSTEM FOR ACCREDITATION OF BROKERS AND BROKER REPRESENTATIVES

34. There is no professional qualification requirement imposed by the regulator or the exchanges.

Professional qualifications need to be introduced as a pre-requisite requirement for licensing by the SEC.

35. The Securities and Exchange Commission (Stock Dealer, Brokers, and Authorised representative)

Rules 2000, section 4(2), specifies that authorised representatives are required to receive training conducted by the SEC regarding securities or courses conducted by institutions recognised by the SEC. No recognition has been conferred to any institutions.

36. Currently, for licensing 2 of an authorised representative (AR), management of a member firm of

the exchange presents an application to the exchange for an individual to become an AR. This person then takes the SEC two-day seminar. The Exchange then reviews the application and, if found acceptable, recommends the candidate to the SEC for license.

2 In this paper, the words ‘registration’ and ‘licensing’ are used loosely. Registration is the mere process of filing returns,

licensing embraces fit and proper test, financial fitness etc.


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6 September 2005

37. There is a need to prescribe the Fit and Proper criteria containing standards for professional and financial integrity, successful past track record, minimization of conflict of interests, and standards for academic and professional qualification for securities professional. There is a need for licensing of both corporations and individuals. For corporations, the executive directors and managers actively involved in the business need to be registered and subject to professional qualification requirements. The current licensing requirements of the SEC as contained in the existing rules need to be reviewed and revised, with a view to streamlining the system, introducing fit and proper test requirements and appropriate financial requirements.

38. Consultant supports the recommendation in previous report that changes to current SEC

registration of market intermediaries be made. This should however, be preceded by a complete review of the licensing regime, in light of market developments rather than by piecemeal approach. It is recommended that SEC conducts the review with technical assistance from outside experts, with a view to introducing an effective system appropriate for Bangladesh, in line with international practices where appropriate. In this respect, The Chairman SEC has stressed the need to take into account the issue of conflict of interest which are inherent in the Bangladesh market.

CURRENT TRAINING FACILITIES — PROFESSIONAL AND ACADEMIC INSTITUTIONS

39. There are some institutions which are catering to the needs of banking and financial studies. 40. Institutes that run courses for their members (who may be employed in the securities and NBFI

sectors) include:

• Bangladesh Institute of Bank Management (BIBM). • Bangladesh Institute of Management (BIM). • Institute of Chartered Accountants of Bangladesh (ICAB). • Institute of Cost & Management Accountants of Bangladesh (ICMAB).

41. Similarly, universities have subjects in their curriculum which help prepare their students for

work in the financial and securities fields e.g. Department of Finance, University of Dhaka (DOF, DU), Institute of Business Administration,(DU), Department of Accounting and Information Systems, DU.

42. Besides offering courses for students, Department of Finance have conducted a number of

training courses and workshops for the professionals and are also catering to the needs of different practitioner groups e.g. bankers, professionals of development institutions, and executives of sector corporations.

43. On the other hand, BIBM and BIM are not only running courses for their members, but also

organise courses on banking and personnel management studies respectively. 44. An overview of the institutions and courses offered are provided in Appendix C.


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7 September 2005

SUGGESTIONS FOR A SYSTEM AND PROCESS FOR CERTIFYING OR ACCREDITING SECURITIES PROFESSIONALS

The Proposal

45. The First Initiative report recommends the establishment of a securities training institute. The proposals in this report build on the recommendations, expand or modify the suggestions as deemed appropriate, taking into account the views of SEC as contained in the Chairman, SEC’s communication to CSE. (See Appendix D.) The proposals are further developed/refined to reflect the comments of the Chairman, SEC on the mid-term report, as well as the views of participants at the workshop.

46. A national capital market institute for professional development of a full spectrum of market professionals should be established. This institute is to have as its principal focus the development of training standards for the financial markets through provision of industry courses and where appropriate through the conduct of examinations leading to conferring of diploma or certificate. Indeed, both the SEC and the workshop have emphasized the urgency for its establishment,even in a modest from as a start.

47. To begin with, the institution is to provide professional training to market participants under the

regulation of the SEC. These include: • securities brokers/dealers; • securities agents (authorized representatives); • merchant bankers; • underwriters; • issue managers; • portfolio managers; and • investment advisors. (Note that training and accreditation process can commence without having to wait for the setting up of the institution, using facilities of existing institutions. The objective must be to start the process of certification and accreditation as soon as possible.)

48. All staff in an intermediary’s office that: • have contact with the public; • deal with public funds; • are responsible for compliance with SEC or SRO requirements; • are responsible for the operations of the firm, research or giving advice; and • should be subject to the training requirements and, where appropriate, to pass the relevant

examinations.

49. Merchant bankers currently require licensing by the SEC and hence will be subject to the proposed qualification requirement. Whilst it may be adequate for them to attend non-certification seminars as proposedin previous report, they should be subject to the training and examination requirements as securities brokers and representatives as soon as possible.

50. The need for training and examination of investment advisors does not exist currently as no IA has been registered.

51. Individuals need to be trained and for corporate entities, both the directors and employees. Back office staff, and compliance officers should also be required to attend training courses


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52. The proposed Institution should also provide non-certification courses for company secretaries

and members of the boards of companies who have issued securities in the past or may issue securities in the future and many of whom directly or indirectly participate in the secondary market trading as well.

53. The need for training should not just be focused on those identified above. The objective should be to build capacity within the securities industry and its customers. Related stakeholders including groups such as staff working in provident funds, bank custodial services, as well as commercial and corporate bankers, lawyers, accountants, auditors, company secretaries, credit rating agencies, insurance sectors, NBFI sectors, treasury management, economists and journalists should be included in the list of training targets for the institute. Indeed, the SEC as well as participants at the workshop fully endorse the recommendation.

54. The role of the institute is enhancement of professional standards of market participants in the

financial field, including securities, NBFI, insurance, credit rating sectors.

The Process

55. The system includes the following processes:

• Licensing/Registration. • Training. • Examination.

Licensing/Registration

56. Effective regulation of the industry to pave the way for enhancement of professional standards should be achieved through minimum registration standards. All persons engaged or to be engaged as market intermediaries must be registered as such with the SEC. Before the registration can become effective, they shall be required to pass Qualification/Certification Examination as specified by the SEC. This should be made a legal requirement.

Training and Examination

(a) Educational Level

57. All intermediaries must satisfactorily complete approved training courses at an educational level appropriate to the complexity of their activities and clients’ needs: two levels are proposed the basic foundation level and the advanced level.

58. There should be advanced-level courses and examination for management/supervisory staff, as

well as for directors of companies emphasizing on management issues, high level applications of regulatory, technical and ethical standards, risk management and control issues and so on.

59. The other staff and the agents may attend programmes at more basic levels.


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60. The examination regime might be extended to some categories of market professionals who do not fit within the trader and representative definitions. Compliance staff, in firms and self-regulatory organisations, should be considered for mandatory examinations.

61. In developing this professional level of qualifications, consideration should be given to

attainment of international recognition, and membership of international organisations in the future.

62. It should be recognised that the purpose of the training and examination system is not to fail

candidates. The objective is the gaining of knowledge and professional skills. As a start, the standard should not be set too high. The raising of standard should be achieved by progression.

(b) Scope

63. It is recommended that all intermediaries should demonstrate an understanding of:

• generic knowledge relevant to the products they deal in and the markets in which they operate; and

• Specialist knowledge about the specific products they deal in and the markets in which they operate.

64. Based on the above principle, the proposed combination of examination papers required to pass

the Qualification Examination is listed below. Candidates are expected to complete the training courses and pass the examinations on the two papers:

• generic knowledge paper: including knowledge / understanding, skills, behaviour and business

ethics that are common to a wide range of roles and commensurate with consumer needs – this paper is to be taken by all candidates, and

• specialist papers at foundation level (certificate course) and advanced level (diploma course) – this covers knowledge/understanding, skills and behaviours related to products or groups of products, specific markets or styles of activity, and regulatory issues – all candidates must pass their own specialist paper at the appropriate level.

(c) Syllabus

65. The syllabus designed must meet the particular needs of the market in Bangladesh. It should cover regulatory issues which address the particular environment of the country. It should as far as practicable, be in line with the syllabuses developed by institutions in other market place. This would enable future courses run in Bangladesh to be recognized by overseas institutions in due course.

66. It should be noted that the syllabus requires regular review and changes to reflect new market

developments. Study guides and teaching guides will need to be developed. It is important that the study guides contain examples and cases studies in Bangladeshi context.

67. It is recommended that the training programs be phased in, given the wide scope of training to be

conducted. Priority should be accorded to areas where training needs are urgently required. The priority is proposed as follows:

• Authorised representatives. • Brokers/dealers, management of securities companies. • Asset management personnel.


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• Asset management staff at supervisory level. • Merchant bankers.

68. Training programmes for the above are suggested below:

Paper 1: Financial Markets - Generic knowledge paper (Core)

Paper 1 is designed for new entrants and current staff in the securities and related financial services including underwriting; portfolio investment; and corporate finance. It provides a practical introduction to finance and financial systems generally and in particular in Bangladesh. This paper provides a foundation for the study of the other specialist practical papers.

Paper 2: Fundamentals of Securities trading (specialist knowledge paper for securities

trading at foundation level)

This paper is designed for new entrants and current staff working as agents and authorised representatives in the securities industry, as well as other persons with an interest in financial services. The paper provides an overall introduction to the securities industry in Bangladesh.

Paper 3: Regulation of securities (specialist knowledge paper for securities training at

advanced level)

Paper 3 is designed for persons who hold supervisory positions in securities business, including members of stock exchanges, executive directors and managers of securities companies. This paper will give supervisors an understanding of the laws and regulations that govern the Bangladesh securities market.

Paper 4: Fundamentals of Investment Management (specialist knowledge paper for

investment management and investment advisory services at foundation level)

Paper 4 is designed for those participating in, or with an interest in asset management, and investment advisory services. Participants will gain the technique for sound investments.

Paper 5: Regulation of Investment Management and Investment Advisory Services

(specialist knowledge paper at advanced level)

Paper 5 is designed for persons who hold supervisory positions in asset management, investment advisory services. This paper will provide an understanding of the regulatory framework within which investment management and investment advisory services are conducted in Bangladesh.

Paper 6: Corporate Finance

This paper is designed for persons working in the areas of underwriting, IPO’s and other corporate finance related areas.

69. Suggested outline of training syllabus is provided at Appendix E.


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WHEN MUST INTERMEDIARIES MEET THE QUALIFICATION STANDARDS (TARGET DATE)?

70. SEC should set a start date(s) for intermediaries to meet the standards. As the work involved for implementation will be substantial, it may be appropriate to phase in the requirement.

71. After the applicable compliance date, an intermediary must not provide service to clients in any

area where he does not meet the training standards. 72. SEC should monitor compliance with the qualification standard policy and, if SEC becomes

aware of non-compliance, it should consider all available enforcement options. This may include imposing license conditions or suspending or cancelling licenses, depending on the nature of the breach.

73. Regulations should be drafted to authorise disciplinary sanction against those who fail to maintain

the registration standards. This will involve: • Allocate reporting and investigative responsibilities. • Draft rules which confer authority to subject transgressors to disciplinary procedures. Table 2: Summary of educational level and compliance schedule Level Who Start Date

Securities agents (authorized representatives) 6 months Merchant bankers representatives 1 year Underwriters representatives 1 year Issue manager representatives 1 year Portfolio managers representatives 1 year

Foundation (certificate course)

Investment Advisors representatives No registrant Manager, supervisor, director, compliance officer of Securities brokers/dealers

1 year

Manager, supervisor, director, compliance officer of Merchant bankers

2 year

Manager, supervisor, director of Asset management companies

1 year

Manager, supervisor, director of underwriters 2 year Manager, supervisor, director of Issue manager 2 year

Advanced (Diploma course)

Manager, supervisor, director of Portfolio management companies

2 year

74. It should be noted that the start dates for meeting training standards is intertwined with the

establishment of the proposed institute or the possibility of organizing relevant courses through any existing institutions. In this connection, it is apparent from the discussions at the workshop that existing institutions may not be in a position to offer the courses required for capital market professionals, though they may be able to offer generic knowledge courses. SEC has expressed that even if these institutions are willing/able to offer relevant courses by modifying their existing courses or introducing new ones, their terms and conditions for doing so have to be examined.


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WHO IS RESPONSIBLE?

75. Who should be the supervisory body? Who is to run courses and conduct examinations? Who is

to manage the certification process?

Option 1

76. SEC as the licensing body recognizes education and training programs, and licences all participants in the industry.

• The SEC, as the licensing authority for the securities markets could legitimately take on the

role of co-ordinator and standard setter for this part of the industry, using its licensing system to ensure a high quality standard of market entrant. It could also address the issue of mutual recognition with its counterparts in Asia and internationally.

• While this would result in a balanced programme, some issues would not be addressed:

— The need to develop a standard which would provide a broader-based education

system, and would include segments outside those areas for which it has responsibility – e.g. NBFI, insurance, bank employees who trade in securities, etc.

— The benefits of having the involvement and support of bodies accountable for

market standards to ensure that practical training and competency needs are met.

— A significant level of resources would be required, and a skills base, not currently found within the SEC, developed.

Option 2

77. Exchanges form a joint body to co-ordinate training for those industry sectors, and develop a joint accreditation system.

• This alternative would have some of the shortcomings outlined above, and not solve the

major issue of providing a standard across a broader base. • As the exchanges are not educational bodies:

— There is a strong likelihood that the courses would be focused predominately on the

very specific and practical needs of those trading solely in those markets, and not the development of participants with a strong base across a wide range of financial skills.

— Additional resources would have to be applied, and skills developed which are not mainstream functions of the Exchanges.


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Option 3

78. An independent institute, representing the full cross-section of financial services industry, is formed to establish and maintain a standard for finance sector training and education.

• This option would require a high degree of co-ordination and sensitivity to ensure that the

needs of all the stakeholders are met. The issue of coverage of all key financial sectors would be addressed by ensuring that the key stakeholder group is appropriately comprised, and has a reasonable level of influence in the operation of the Institute.

• Clearly there would be a number of benefits to this approach:

— one standard across all sectors (or such sectors as are determined appropriate) of the finance industry;

— a more effective application of resources applied to education and training; and — a streamlined approach to ongoing professional training, which would ensure an up-

to-date skills set for all participants.

79. Consultant has recommended that it is appropriate in the Bangladesh context, a mixture of the three options be adopted. The SEC should be the driving force for establishing and overall management of the institute, with support from the stock exchanges and other market professionals and academic sectors through board participation.

80. The SEC should take the lead for the setting up of the Institute, the main reason being:

• The SEC is the licensing authority for the securities professionals and related securities

professionals including merchant bankers, credit rating agencies. And it will be made a pre-requisite requirement that all market intermediaries registered by the SEC must pass the certification qualification examination.

• The training to be offered by the Institute will be broader based, it will be more effective for

SEC to command the support and co-operation of other market groups. 81. The SEC has expanded on this proposal. SEC feels that a variant of option 3 is most desirable.

The institute should be autonomous (not independent). Its governing body should be chaired by SEC Chairman. The governing body should have representation from the two stock exchanges as well as other market actors. The governing body should have an academic committee to advise on the preparation of syllabus for various courses and their updating. The academic committee should have representation from market actors as well as the academic community.

82. Quite independently at the workshop on 9 July, participants have also advocated that the institute

should be autonomous, under the lead of the SEC, given the environment in Bangladesh; and that the stock exchanges, market participants and the academic community should be represented on the board.


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TRAINING PROVIDERS

83. The institute should act as training standard setter and examination body. It should not be the sole training provider.

84. There are various debates internationally about whether any one organization should have the

monopoly on giving courses - it can be a profitable business on one hand and competition may force up standards of teaching. Given the scope of the courses, ranging from securities trading to other topics, it is appropriate that other institutions be permitted to act as training providers for qualification courses as long as the courses meet the criteria laid down and that the training providers are institutions with good track record and appropriate professional staff competent to conduct the training. The existing provision in the Securities and Exchange Commission (Stock Dealer, Brokers, and Authorised Representative) Rules for SEC to recognise courses conducted by institutions for authorised representative should be expanded to cover courses for other market intermediaries.

85. In other words, the proposed capital market institute would compete with existing training

providers on an equal basis. This is in line with the principle of fair competition. The proposed institute as stated above should, however, be the only body setting training and examination standards.

86. SEC has commented, and consultant agrees, the question of competition is probably premature at

the present stage. To begin with, the proposed institute may have to be sole provider of training with resource persons drawn from other institutes. At the workshop, representatives from the institutions have also come to this view. They have expressed full co-operation with and support to, the SEC in successful establishment and operation of the proposed institute. OUTLINE ACTION SEQUENCE FOR THE OVERALL ESTABLISHMENT OF THE INSTITUTE

87. A national system for training industry professionals and for examination and licensing of those

to be accredited, with all the associated integral systems and procedures, is necessarily quite complicated. In order to start to draw together all the components of the system, a clear vision of the overall plan is essential.

Concept Development

88. In this phase the idea of what is being done and why, is fully developed. The first main product of this phase is:

• agreement on the structure of the institute (accepting the membership structure like

membership of Institute of Chartered Accountants and Institute of Cost and Management Accountants). The step by step action plan is developed on the assumption that the membership structure is adopted; and

• exploratory business plan and leads to a detailed business plan.

89. Work will include:

• Agree aims and objectives, and prepare outline action and business plan.


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• Establish a Steering Committee to form core of the Board. • Brief key industry figures and institutions, seeking suggestions and support. • Secure initial funding, office space, systems. (These can be facilities of an existing institute). • Form project team executive. • Establish an Advisory group, representing key financial institutions. • Decide outline policies on membership scope, benefits and admission criteria. • Decide on the outline policies on professional education activities. • Prepare policies, plans and documentation:

— Articles of Association. — Membership. — Constitutional and organisational matters.

90. The draft Terms of Reference of the Steering Committee attached at “Appendix E of the Mid-

Term Report” was reviewed by the SEC. An outline of the TOR is reproduced here for ease of reference:

“

— The purpose of the Committee is to offer informed and experienced advice and guidance to executive staff tasked to implement the training, qualifications and accreditation strategy. The Committee has a secondary role as a focus for liaison between institutions and organisations in the industry.

— The Committee will comprise members who are experienced in securities or

in other professional and vocational areas relevant to the project. Members will be chosen for their personal expertise, or they can be nominated to represent selected organisations. It must be clear whether a member is offering personal or representational views.

— The chairman of the Committee will be appointed by the chairman of the

SEC, either from amongst the members of the Committee or from another source.

— (Comment: The SEC chairman should take the chair initially). — CEOs of DSE and CSE should serve as members of the Committee and

eventually be appointed to the Board. — The senior member of SEC staff responsible for implementation of the

training and accreditation strategy will be a member of the Committee. This executive will also provide administrative and clerical resources and support, and will appoint a Committee secretary who will be responsible for convening meetings and making all necessary arrangements.

— The Committee may offer advice and guidance on any aspect of the

implementation plan. Amongst the subjects likely to be of particular will be:

• Structure of the Institute. • Appointing a staff member of the SEC for coordination. • Budgetary requirements and sources of funding. • Development of advanced training opportunities. • Educational publications. • Disciplinary procedures. ”


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91. In light of the comments of the SEC and the views expressed at the workshop, the TOR of the Steering Committee should be revised:

• The Committee should have a narrower focus than proposed by consultant. It is to

concentrate on issues like structure of the institute (particularly the composition of the governing board, the minimum number and qualifications of full time faculty and other staff and their qualifications, composition of committees to advise the governing board on various aspects including required courses), budgetary requirements and sources of funding.

• The steering committee should be chaired by the Chairman, SEC.

• The committee should be dissolved after the institution itself comes into being.

92. A revised TOR for the Steering Committee is at Appendix F. 93. Public announcement has been made by the SEC on 29 September 2005 of the establishment of

the Steering Committee.

Pre-Launch Preparation

94. Pre-launch preparation: • Recruit and train staff. • Formally constitute organisation and governing body. • Further round of one-to-one and small group briefings to gain commitment and support from

key industry figures, major institutions and, if appropriate government ministers and ministry officials.

• Prepare membership communications plan. • Prepare media plan. • Prepare launch documentation, including:

— Prospectus with key policy statements; role, objects, benefits — Membership admission criteria and application form — Description of training and qualifications plans.

• Plan one or more open seminars to present the idea to securities industry participants, to gain widespread support and momentum.

• Confirm launch schedule. Launch

95. This will be the formal launch of the institute. Before this can take place all the actions detailed under the preceding sections must have been satisfactorily completed: • Distribute a detailed brochure widely within industry to potential members and activate staff

plans to handle response. • Activate media plan and maintain press interest. • Establish membership enquiry desk for fax, telephone and personal callers. • Activate membership application procedures. • Launch training programme. • Launch professional journal and other membership communications.


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Consolidation

96. After the formal launch it is important that the Board and the staff of the Institute continue to build on the firm base that has already been established: • Create a strong and professionally respected body of members. • Develop membership benefits. • Active communications and liaison within industry and to wider selected target audiences. • Expand range of professional topics covered in training provision. • Expand members' professional programme, providing a platform for debate and discussion on

industry topics.

97. There are of course many variations of sequence and timing, and The Steering Group must be alert to the need to make changes to the plan at any stage. OTHER ISSUES Consultancy Support

98. It is appropriate that technical assistance be enlisted from the very start of the project to ensure that the project will be a success. Work should include assistance in the following phases: • Conceptual stage. • Pre-launch. • Launch. • Consolidation.

99. More specifically, there are three levels at which the project will require to make use of consultant support to: • prepare the exploratory and actual business plans; • give advice at senior level working closely with The Steering Committee and, when selected,

the CEO of the Institute through the build up to the launch of the Institute; and • delivery of technical and professional training to Institute staff in functional areas, such as

membership, exams, and event organisation. The skills required in these areas should not be underestimated, and the institute will benefit greatly from having well trained staff from the beginning. The amount of support needed will depend very largely on the calibre and experience of staff selected.

Costs and revenue

100. Consultant has yet no basis to disagree with the budget forecast in the previous report save the assumption on donor grant/SEC training fund of USD650,000 which may be unrealistic.

101. Before costs and revenue estimates can be finalised, detailed discussions will have to take place by the Steering Committee and a number of fundamental decisions taken. The views of the Chairman, SEC on funding resources will need to be taken into consideration in the discussions.


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It is imperative that the figures are adequate and indicate the financial dimensions of the initiative.

102. The Institute should eventually be self funding and should also aim to establish some kind of

financial reserve as soon as practicable. This is an important issue for the Steering Committee to deliberate on. Trainers

103. It should be noted that whilst it may be possible to get competent trainers for generic knowledge topics, it is difficult to find trainers competent to give training on regulatory topics. It will be necessary for the SEC and the stock exchange to provide staff to conduct such training. The lack of expertise in conducting training regulatory training is recognised at the workshop. This is a common phenomenon in other markets as well.

Training facilities

104. It is recommended that existing universities be utilised and that the location should be in Dhaka. Given the small community of securities and securities related firms in Chittagong, the need for a second training centre does not seem to exist. Again, this will be another issue on the agenda of the Steering Committee.

Consultation 105. Representatives of the industry, their associations, the stock exchanges and potential teaching

institutions need to be consulted. This is for four main reasons: • Practitioners need to take some ownership of the system. Existing practitioners may have to be

encouraged to take part in education. There will however need to be a system of exemptions as mentioned above.

• Most countries encounter some challenges when introducing industry–wide training. Seasoned

practitioners tend to resist examinations. People complain about the bureaucracy and cost of training. It does take time for a new system to settle in and for it to be accepted. Standards can be increased over a period of time.

• Practitioners, current professional bodies and academics can give valuable input to the context

and approach to courses and examinations. • Since training can be a commercially attractive activity, plans should be well disseminated so

that interested parties have a chance to express an interest in participation.

106. There would be an enormous advantage in involving key stakeholders in the process from an early stage, and in ensuring that the consultation mechanism is perceived by the industry as collaborating from the beginning.


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Development of course workbook 107. The Chairman SEC has indicated the need for technical assistance in the drafting of workbook,

teaching guide and examination questions, including processes for marking examination papers and related issues. Consultant supports the request.

108. An Academic Committee/Qualification Committee should be appointed under the Steering Committee, that will: • approve the course and examination outlines to make sure they meet the competency

requirements; • supervise the overall standard of the courses; • review the questions in the examination bank to make sure that they comply with the

specifications of the examination outline. It will also review the questions for degree of difficulty; and

• have the right to engage or to dis-engage any institution for conducting the courses and/or examinations.

109. The Committee may comprise members from SEC and different business associations,

professional and academic institutions. It is important that the members must be people with vast experience in the industry and that they are familiar with training issues. SUMMARY OF MAIN RECOMMENDATIONS

110. A national capital market institute for professional development of a full spectrum of market professionals should be established. This institute is to have as its principal focus the development of training standards for the financial markets through provision of industry courses and where appropriate through the conduct of examinations leading to conferring of diploma or certificate.

111. The SEC should be the driving force for establishing and overall management of the institute,

with support from the stock exchanges and other market professionals and academic sectors through board participation.

112. The institute should be autonomous (not independent). Its governing body should be chaired by SEC Chairman. The governing body should have representation from the two stock exchanges as well as other market actors. The governing body should have an academic committee to advise on the preparation of syllabus for various courses and their updating. The academic committee should have representation from market actors as well as the academic community.

113. A steering committee should be formed to assist in the establishment of the institute. The

Committee will comprise members who are experienced in securities or in other professional and vocational areas relevant to the project. Members will be chosen for their personal expertise, or they can be nominated to represent selected organisations. It must be clear whether a member is offering personal or representational views.

114. The Committee is to concentrate on issues like structure of the institute (particularly the

composition of the governing board, the minimum number and qualifications of full time faculty and other staff and their qualifications, composition of committees to advise the governing board on various aspects including required courses), budgetary requirements and sources of funding.

115. The committee should be dissolved after the institution itself comes into being.


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116. The institute will be governed by a board and will be managed by a small, very professional,

executive staff. Functional areas, such as membership and examinations, will require dedicated staff who interact with practitioner committees, made up of members with experience of value to the development of the Institute's work in that area.

117. The institute could be a membership body for qualified and experienced individual practitioners

of good repute, drawn from a range of securities and investment businesses. (Note: The Securities Institutes in UK, Hong Kong, and Australia are membership structured.) Membership will demonstrate commitment to professional competence, good practice and personal integrity in business. To be a member will be prestigious and sought after; entry standards will therefore be quite demanding and any members who fail to live up to the required standards will face disciplinary action, even expulsion.

118. The institute should act as training standard setter and examination body. It should not be the sole

training provider. 119. The institute will become the approved examination awarding authority for the securities and

investment industry, acting for and with regulatory authorities, exchanges and other interested organisations. It is likely also to provide training, and to organise professional events and activities, which contribute to the knowledge and skill of the membership and others in the industry. It is, however, generally recognised that the institute may the sole institute providing training at the early stage of introducing training programmes for market participants.

120. All persons engaged or to be engaged in securities, and the various related activities must be

registered as such with the Securities and Exchange Commission. Before the registration can become effective, they shall be required to pass a Qualification Examination as specified by the SEC. Anyone failing to take the required qualification-training programme shall have his registration suspended. The person concerned cannot conduct his business until the required qualification test has been completed. Existing registrants will be given a period to comply.

121. The SEC may consider whether in certain cases and where good cause is shown, there could be variation or waiver of the applicable Qualification Examination and accept other standards as evidence of an applicant’s qualifications for registration. This could be in the form of extension of compliance date.

122. All intermediaries must satisfactorily complete approved training courses at a level appropriate to the complexity of their activities and clients’ needs: the basic foundation level or the advanced level. On satisfactory completion of the course and passing of the examination the candidate will be awarded a certificate or diploma as appropriate. The certificate and diploma will be accepted by the SEC for registration purpose.

123. Candidates are expected to complete the training courses and pass the examinations on two papers: generic knowledge paper, and specialist papers at foundation level or advanced level. All candidates must pass his own specialist paper at the appropriate level. Examinations should relate to the work actually being done in each securities environment by the individuals to be tested.

124. Syllabuses need to be developed.

125. Study guides designed to assist individuals in preparing for the qualification examination must be prepared based on the syllabus.

126. Examination outlines and questions need to be prepared. This will require a considerable amount of work since the experts developing the questions must have an in-depth knowledge of the Bangladesh market. It is also important that there are review sub-committees formed to review the appropriateness of the questions for each specialist subject.


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127. There needs to be consultation on the exact drafting of workbooks and consultation (on a very

restricted and confidential basis) on examination questions.


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APPENDIX A: LIST OF WORKSHOP PARTICIPANTS


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SEC-ADB Workshop on:

“Enhancement of Professional Standards of Market Intermediaries”

ADB Project: Preparing the Financial markets Governance program TA 4246 BAN

Date: Saturday, 09 July 2005, Time: 10.00 am to 2.00 pm, BIAM Auditorium, Dhaka.

LIST OF WORKSHOP PARTICIPANTS

No.

Organization

Name of Participants

1

Securities And Exchange Commission

Dr. Mirza Azizul Islam (Chief Guest) Chairman

2 3

Investment Corporation of Bangladesh

Mr. Ziaul Haque Khandokar Managing Director, Mr. Wahiduzzaman Khandaker Deputy General Manager

4 5

Bangladesh Institute of Bank Management

Mr. Mohd. Ruhul Amin Director General Dr. Sujit Saha Director (Training)

6 CDBL

Mr. Md. Habibus Samad MD & CEO

7 Presidency University

Mr. M.A. Baqui Khalily Pro-Vice Chancellor

8 9

Dhaka Stock Exchange Ltd.

Mr. Imtiyaz Husain (Proprietor Imtiyaz Husain & Company) Mr. Salahuddin Ahmed Khan Chief Executive Officer

10 11

Union Capital Ltd.

For Mr. S. A. Chowdhury Managing Director SMA Rahman Manager Corporate Finance

12 Institute of Chattered Secretary and Managers of Bangladesh

Mr. A. K. Muqtadir (FCS) President

13 Credit Rating Agency of Bangladesh

Mr. H.S. Sahahrawardi Senior Financial Analyst

14 15

Industrial Development Leasing Company of Bangladesh Limited (IDLC)

For Mr. Anis Uddin Ahmed Khan Managing Director Representative Mahmudul Bari


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16. Chittagong Stock Exchange (& Capital

Market Service Limited) Mr. Al Maruf Khan (FCA) Representative of CSE & also Managing Director of CMSL

17 Arab Bangladesh Bank

Mr. Mufakharul Islam Executive Vice President

18 AAA Consultant & Financial Advisor

Khwaza Arif Ahmed Managing Partner & CEO

19 20

Uttara Finance and Investment Ltd

S. Arefin CEO & MD Md. Jakir Hossain Company Secretary

21 HB Consultants Ltd.

Shireen Lutfunnessa DGM Mr. Abbas Uddin Khan Member Mr. Mohammad Ali Khan Member Mr. Saleh Ahmed Chowdhury Member Mr. Munsur Alam Executive Director Mr. Farhad Ahmed Executive Director Mr. Abdul Hannan Zoarder Executive Director Mrs. Roksana Chowdhury Executive Director Mr. Mohammad Rezaul Karim Deputy Director Mr. Mir Mosharof Hossain Deputy Director Mr. Mohammad Jahangir Alam Deputy Director Mr. Khaled Mahmud Deputy Director

22 23 24 25 26 27 28 29 30 31 32 33

Securities and Exchanges Commission

Mr. Mahmoodul Hoque Deputy Director


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APPENDIX B: INTERNATIONAL SCENE


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PROFESSIONAL DEVELOPMENT – INTERNATIONAL SCENE 1. It is common for financial sector regulators to require those engaged in the business of securities

trading, futures trading, insurance, asset management, investment advisory services and related business to be registered and for obtaining the registration, to have completed training courses and or passed qualification examinations relevant to their jobs.

2. This note provides information on:

• Licensing of market intermediaries; and • Professional developments; In: • USA • UK • Australia • Canada • Hong Kong

USA Overview

3. In the USA, the responsibility for licensing and examination of personnel of broker – dealers rests

with the National Association of Securities Dealers (NASD) and the stock exchanges. Because each of these organizations is a registered self regulatory organisation (SRO) subject to the Securities and Exchange Commission (SEC) oversight, all their licensing and examination requirements are subject to SEC approval.

4. NASD has two levels of accreditation:

• Registered representatives; and • Principals.

5. To become either a representative or a principal, a person must pass examinations that cover:

• Federal Securities Laws; • Securities and Exchange Commission and NASD rules and regulations; • Securities Products; • The operation and inter-relation of financial markets; • Economic theory and kinds of risk; • Corporate financing; • Accounting and balance sheet analysis; • Portfolio theory and analysis; • Fair sales practices, including solicitations and presentation; • Types of customer accounts; and • Tax treatment of various investments.

6. In addition, principals must pass additional examinations that test knowledge of supervising rules

in the areas of: • Investment banking; • Trading; • Market making; • Retail sales activity; and • Financial responsibility rules.


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7. Financial and operational principals must further demonstrate a thorough knowledge of the requirements regarding record keeping, net capital, customer reserves, financial reporting and credit.

8. NASD provides a wide range of examinations as follows:

• Series 3 – National Commodity Futures; • Series 4 – Registered Options Principal; • Series 5 – Interest Rate Options; • Series 6 – Investment Company Products/Variable Contracts Representative; • Series 7 – General Securities Representative; • Series 9 – General Securities Sales Supervisor Options Module; • Series 10 – General Securities Sales Supervisors General Module; • Series 11 – Assistant Representative – Order Processing; • Series 12 – Branch Manager (NYSE); • Series 14 – Compliance Officer (NYSE); • Series 15 – Foreign Currency Options; • Series 16 – Supervisory Analyst NYSE (one or two parts depending on NYSE

requirements); • Series 17 – Limited Registered Representative; • Series 22 – Direct Participation Programs Representative; • Series 24 – General Securities Principal; • Series 26 – Investment Company Products/Variable Contracts; • Series 27 – Financial and Operations Principal; • Series 28 – Introducing Broker/Dealer Financial and Operations Principal; • Series 30 – Branch Managers Examination – Futures; • Series 31 – Futures Managed Funds Examination; • Series 32 – Limited Futures Exam-Regulations; • Series 33 – Financial Instruments Examination; • Series 37 – Canada Module of S7 (Options Required); • Series 38 – Canada Module of S7 (No Options Required); • Series 39 – Direct Participation Programs Principal; • Series 40 – Registered Options Representative; • Series 47 – Japan Module of S7; • Series 52 – Municipal Securities Representative; • Series 53 – Municipal Securities Principal; • Series 55 – Limited Representative – Equity Trader Examination; • Series 62 – Corporate Securities Limited Representative; • Series 63 – Uniform Securities Agent State Law Examination; • Series 65 – Investment Advisors Law Examination; • Series 66 – Uniform Combined State Law Examination; • Series 72 – Government Securities Representative; and • Series 82 – Limited Representative – Private Securities Offerings.

Series 7

9. Probably the best well known of the NASD examinations is Series 7 – General Securities

Representative. This examination topics are listed below:

• Seeks business for the broker-dealer through customers and potential customers: (a) Requirements for registration of individuals; and (b) Standards for public communications.

• Evaluates customers in terms of available investment capital, current holdings, and financial

needs and helps them identify their investment objectives.


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• Provides customers and prospective customers with information on investments and makes suitable recommendations.

• Opens, transfers, and closes customer accounts and maintains appropriate records:

(a) Requirements for opening customer accounts including approvals; (b) Rules governing the conduct of accounts; and (c) Margin accounts.

• Explains the organisation, participants and functions of various securities markets and the

principal factors that affect them: (a) Self regulatory organisations (SROs); (b) The primary marketplace; (c) The secondary marketplace; and (d) Principal factors affecting securities markets and prices.

• Obtains and verifies the customer’s purchase and sale transactions, enters orders, and follows

up on completion of transactions: (a) Securities orders and confirmations; (b) Delivery and settlement of transactions; and (c) Record keeping.

• Monitors the customer’s portfolio and makes recommendations consistent with changes in

economic and financial conditions as well as the customer’s needs and objectives. • The above categories do not explicitly identify laws and regulations that affect the activity

but appended to the syllabus is a list of relevant laws and regulations, with which the candidates are expected to be familiar.

Series 24

10. Series 24 – is General Securities Principal Qualification Examination which covers:

• Supervision of Investment Banking Activities: (a) New Issue Market; (b) Securities Acts of 1933 and SEC Rules Hereunder; (c) Securities Exchange Act of 1934 and the SEC Rules Hereunder; (d) National Association of Securities Dealers – Regulations; (e) Investment Company Act of 1940 and the SEC Rules Hereunder; (f) Trust Indenture Act of 1939; and (g) Investment Advisor Act of 1940 and the SEC Rules Hereunder.

• Supervision and Trading and Market Making Activities:

(a) OTC Markets; (b) Domestic Exchange Markets; (c) International Markets; (d) Regulation M – Anti manipulation Rules Concerning Securities Offerings; (e) National Association of Securities Dealers – Regulations; (f) Trading and Market Halts; and (g) Anti-competitive Trading Practices.

• Supervision of Brokerage Office Operations:

(a) Client Accounts; (b) Extension of Credit in the Securities Industry; (c) Broker-to-Broker Clearing Procedures; (d) Securities Exchange Act of 1934 and SEC Rules Hereunder; and


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(e) National Association of Securities Dealers – Regulations.

• Sales Supervision; General Supervision of Employees, Regulatory Framework of NASD: (a) Securities Exchange Act of 1934 and SEC Rules Hereunder; (b) Insider Trading Regulations; (c) National Association of Securities Dealers – Regulations; and (d) MSRB (Municipal Securities).

• Compliance with Financial Responsibility Rules:

(a) Securities Act of 1934 and SEC Rules Hereunder; and (b) SIPC Fund (Investor Compensation Scheme).

UK The Financial Services Authority (FSA)

11. The Financial Services Authority (FSA) became the single regulator for financial services in the

UK on 1 December 2001, when the Financial Services and Markets Act 2000 (FSMA) came into force.

12. FSA is responsible for:

• Supervision of deposit takers – It supervises the prudential soundness of banks and building

societies. • Supervision of insurance firms:

(a) undertake prudential supervision of all insurers; (b) Undertake conduct of business regulation for those like insurers and friendly

societies undertaking investment business; and (c) supervise certain aspects of Lloyd’s.

• Regulation of investment firms:

(a) It regulates 7,500 investment firms. These range from global fund management operations, investment banks, large UK stock brokers and major networks of independent financial advisers, to the smallest corporate finance boutique operations and one-person financial advisers.

• Supervision of market intermediaries:

(a) A firm may not carry on a regulated activity unless it is authorized by FSA or is exempt. FSA is required by law to ensure that firms satisfy the necessary criteria (in relation to status, location, close links, adequacy to resources and suitability) before FSA can give them permission to carry on a regulated activity. Similarly FSA must be satisfied that persons applying to carry on controlled functions are fit and proper (that is, they meet honesty, competence and financial soundness criteria).

• Supervision of markets and exchange:

(a) Supervision of exchanges, clearing and settlement houses and other market infrastructure providers; and

(b) Conducting market surveillance and transaction monitoring. Qualification Examinations

13. FSA began the Examination Review in 2001 after inheriting a plethora of 500 approved

examination routes and multitude of designations from previous regulatory bodies. However, this task did not sit comfortably with its role as industry regulator. So, when the Financial Services


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Skills Council was formed in 2003, the FSA asked the Skills Council to complete the Examination Review and to determine examinations appropriate to certain regulated activities. The Skills Council has subsequently changed the emphasis from ‘Approved’ exams to ‘Appropriate’ exams.

14. Appropriate means ‘fit for purpose’. The FSA’s remit is to protect consumers by ensuring that

firms employ competent people. The Financial Services Skills Council supports this remit, and intends that all examinations and qualifications used in the sector will represent sound business investment. Securities and Investment Institute (formerly known as Securities Institute)

15. The Securities and Investment Institute was established by members of the London Stock

Exchange and currently provides a range of recognised training and examinations:

• Securities Institute Diploma is a senior professional examination showing a practitioners mastery of particular aspects of the financial services industry; and

• a range of lower level certificates and qualifications, include: (a) Securities Industry Certificate; (b) Investment Advice Certificate; (c) Investment Administration Certificate; (d) International Markets Capital Markets Qualification; and (e) International Investment Advice Certificate.

16. Within the Securities Industry Certificate there are a range of papers, these are:

• Certificate in Securities; • Certificate in Derivatives; • Certificate in Securities and Financial Derivatives; • Certificate in Investment Management; • Certificate in Corporate Finance.

Syllabus for Securities and Regulatory Certificate Regulatory Paper

17. Unit 1 – The Regulatory Environment

• The role of the FSA • The regulatory Infrastructure

18. Unit 2 – The Financial Services and Markets Act 2000

• Regulated and Prohibited Activities • Performance of Regulated Activities • Information Gathering and Investigations • Regulated Activities

19. Unit 3 – Associated Legislation and Regulation

• Insider Dealing • Market Abuse • Money Laundering • Regulations governing package products

20. Unit 4 – European Union Legislation

• The EU Investment Services Directive (ISD) • EU Capital Adequacy Directive • Second Banking Co-ordination Directive (2BCD)


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21. Unit 5 – The FSA Handbook

• The FSA Handbook • The Collective Investment Scheme (CIS) Sourcebook • Recognised Exchanges and Clearing Houses

22. Unit 6 – The FSA Conduct of Business Sourcebook

• The application and general provisions of the FSA Conduct of Business Sourcebook • Rules applying to all firms • The requirements of financial promotion rules • Accepting customers • Advising and selling • Dealing and managing • Reporting to customers • Client Assets

23. Unit 7 – Complaints and redress

• Customer Complaints • Breaches of statutory duty

Certificate in Securities

24. Unit 1 – Special Regulatory Requirements

• Takeover and Merger processes • FSA Conduct of Business Rules – Rules which apply to all firms conducting designated

investment business; • FSA Conduct of Business Rules – Product disclosure and the customers right cancel or

withdraw • FSA Conduct of Business Rules – Dealing and managing • FSA Conduct of Business Rules – Reporting to Customers • FSA Conduct of Business Rules – Client Assets • The Companies Act 1985/89 • Overseas Regulation affecting UK Institutions

25. Unit 2 – Securities and Markets 26. Unit 3 – Dealing for UK and International Equities, Gilts, Fixed Interest and Eurobonds 27. Unit 4 – Settlement in the UK and International Equity, Gilt and Fixed Interest and Corporate

Debt Markets 28. Unit 5 – New Issues 29. Unit 6 – Custody 30. Unit 7 – UK Accounting Analysis 31. Unit 8 – Investment Advice 32. Unit 9 – Taxation

Certificate in Derivatives

33. Unit 1 – Introduction to Derivative Instruments


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34. Unit 2 – Special Regulatory Requirements • FSA Conduct of Business Rules – Financial promotion • FSA Conduct of Business Rules – Advising and selling • FSA Conduct of Business Rules – Dealing and managing • FSA Conduct of Business Rules – Reporting to customers • FSA Conduct of Business Rules – Client Assets • Principal differences between UK and US Regulations

35. Units 3–11 are concerned with general principles and market operation, not specifically with

regulation. Certificate in Securities and Financial Derivatives

36. Unit 1 – Special Regulatory Requirements

• Takeover and merger processes • FSA Conduct of Business Rules – Rules applying to all firms conducting designated

investment business • FSA Conduct of Business Rules – Product disclosure and the customers right to cancel or

withdraw • FSA Conduct of Business Rules – Dealing and managing • FSA Conduct of Business Rules – Reporting to customers • FSA Conduct of Business Rules – Client assets • The Companies Act 1985/89 • Overseas regulations affecting UK institutions

37. Unit 2 – Securities and Markets 38. Unit 3 – Dealing for UK and International Equities, Gilts, Fixed Interest and Eurobonds

• London Stock Exchange Dealing Rules • UK Equity Markets • London Stock Exchange – Domestic Equity • SEAQ and SEATS • Other UK Exchanges • The London Stock Exchange International Market • The UK Gilt Edged Market • Fixed Interest Market • Eurobond Market

39. Unit 4 – Settlement in the UK and International Equity, Gilt, Fixed Interest and Corporate Debt

markets 40. Unit 5 – New Issues 41. Unit 6 – Custody 42. Unit 7 - UK Accounting Analysis 43. Unit 8 – Investment Advice 44. Unit 9 – Taxation 45. Unit 10 – Introduction to Derivative Instruments


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46. Unit 11 – Special Regulatory Requirements • FSA Conduct of Business Rules – Financial promotion • FSA Conduct of Business Rules – advising and selling • FSA Conduct of Business Rules – Dealing and managing • FSA Conduct of Business Rules – Reporting to customers • FSA Conduct of Business Rules – Client Assets • US – Principal differences between UK and US regulations

47. Unit 13 –Financial Futures and Options Exchanges 48. Unit 14 – Principles of Trading Futures and Options 49. Unit 15 – Principles of Clearing 50. Unit 16 – Margin 51. Unit 17 – Delivery and Exercise 52. Unit 18 – Trading, Hedging and Investment Strategies

Certificate in Investment Management

53. Unit 1 – Economics 54. Unit 2 – Financial Mathematics and Statistics 55. Unit 3 – Regulation

• Trustee Act 2000 • Industry Trade Associations • UCITS Directive • Corporate Governance • Mergers and Acquisitions

56. Unit 4 – Securities 57. Unit 5 – Financial Markets 58. Unit 6 – Accounting 59. Unit 7 – Investment Analysis 60. Unit 8 – Taxation and Trusts 61. Unit 9 – Portfolio Management 62. Unit 10 – Performance Measurement 63. Unit 11 – Marketing

Certificate in Corporate Finance

64. Unit 1 –The Regulatory Environment in the UK

• The Financial Services & Markets Act 2000 • The Companies Act 1985/89 • The Criminal Justice Act


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• Money Laundering Regulations • Associated Bodies • European Union Legislation

65. Unit 2 – FSA Conduct of Business Rules 66. Unit 3 – Other Rules

• Fit and Proper Test for approved persons • Market Abuse • Price Stabilisation Rules

67. Unit 4 – City Code on Takeovers and Mergers, Rules Governing Substantial Acquisition of

Shares 68. Unit 5 –Listing Requirements 69. Unit 6 –Accounting Analysis

AUSTRALIA

70. The Australian Securities and Investments Commission (ASIC) enforces and regulates company

and financial services laws to protect consumers, investors and creditors. 71. ASIC regulates Australian companies, financial markets, financial services organizations and

professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit.

72. ASIC administers the following legislation (or relevant parts of it), as well as relevant regulations

made under it: • Corporations Act 2001; • Australian Securities and Investments Commission Act 2001; • Insurance Contracts Act 1984; • Superannuation (Resolution of Complaints) Act 1993; • Superannuation Industry (Supervision) Act 1993; • Retirement Savings Accounts Act 1997; • Life Insurance Act 1995; and • Medical Indemnity (Prudential Supervision and Product Standards) Act 2003.

73. ASIC requires that firms employ staff that have completed recognised training courses and been

individually assessed as competent. The Australian Securities Institute provides a range of training and assessment courses. In particular they provide a Compliance Program in accordance with the ASIC requirements. The contents of the programme are given as: • Generic knowledge; • Financial planning; • Securities; • Derivatives; • Managed investments; • Superannuation; and • Insurance.

74. Australia has a large mortgage finance industry. The Mortgage Industry Association of

Australasia (MIAA) has consulted with the Securities Institute since 1995 in the initial accreditation and 2002 re-accreditation of the Diploma of Mortgage Lending. The Mortgage


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Industry Association of Australasia endorses this course to provide a formal educational qualification for those wishing to build a career in the mortgage industry.

75. The Securities Institute of Australia is designing a Certificate Course in Financial Services

(Finance/Mortgage Broking). The course has been developed to provide participants with knowledge of the Mortgage Broking Industry. The increasing number of people employed in the sector has highlighted the need for education and training to encourage consistent standards of professional practice and quality customer service.

76. The course will provide experienced practitioners with an opportunity to formalise the knowledge

and skills they have gained on the job and enable new entrants to develop the competencies they need to succeed in their roles.

77. The course structure involves three modules of study that cover essential industry knowledge and

the lending process. Importantly, they also develop the client relationship skills a broker needs to communicate effectively with a wide range of clients and work with them to achieve their specific goals. On completion of this course, students will be able to identify: • roles and responsibilities of a mortgage broker; • the characteristics of mortgages; • features of various mortgage products; • relevant industry legislation; • skills required to develop and maintain relationships with clients and business colleagues; • appropriate products to meet client needs; and • prepare and present the loan proposal.

CANADA

78. The Ontario Securities Commission Rule 31-502 lays down the proficiency requirements for

registering dealers and advisors. For brokers, investment dealers and securities dealers it requires completion of specified courses run by the Canadian Securities Institute (CSI) and the passing of a New Entrants Examination, which is also operated by the Canadian Securities Institute.

79. The CSI provides both basic and advanced investment education courses to industry professionals

and to the investing public. 80. The Canadian Securities Course (CSC) is the essential first step for a career in financial services

that requires a practical understanding of investment markets and products. This foundation course, developed and conducted exclusively by the CSI, is the only Canadian investment course that qualifies graduates to sell mutual funds and also leads to registration to deal in stocks, bonds and other securities.

81. Concepts covered in the Canadian Securities Course include:

• Micro-and macroeconomic overview of the economy and capital markets; • Corporate financing, listing and regulation; • Market securities (stocks, bonds, money market instruments); • Corporate, industry and market performance and analysis; • Mutual funds, hedge funds, derivatives and managed products and services (segregated

funds, income trusts and exchange-traded funds); • Managing investment portfolios; • Financial planning and taxation; and • Ethical client relationships in delivering financial services and advice.

82. In addition to the Canadian Securities Course that is required in all Canadian provinces for

registration to sell securities, they must pass exams on rules and regulations, as well as on ethics and conduct, and must take an internal 90-day training program at their firm before they can be


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registered. Those registered to give advice must also pass one of two advanced courses on professional financial planning or investment management techniques within the first 30 months of registration.

83. There are also proficiency courses and exams for:

• those holding specific offices within the firms, including branch managers, partners, senior officers, and chief financial officers;

• those trading or supervising trading in options and commodity futures; and • portfolio managers, who are approved to manage client accounts on a discretionary basis,

84. Apart from the Canadian Securities Course discussed above, the Canadian Securities Institute

offers a wide range of courses, including: • Financial Management Advisor; Gain a mastery level of wealth management strategies

beyond the scope of basic financial planning; • Canadian Investment Manager; Canada’s premier portfolio management program; • Derivatives Program; the leading-edge program in derivatives; and • Derivatives Market Specialist; gain advanced knowledge, specialised skills and recognised

expertise. HONG KONG

85. The Securities and Futures Ordinance (SFO) provides for the implementation of the licensing

regime, including: • a single licensing system to cover the following specified regulated activities:

(a) Dealing in securities; (b) Dealing in futures contracts; (c) Leveraged foreign exchange trading; (d) Advising on securities; (e) Advising on futures contracts; (f) Advising on corporate finance; (g) Providing automated trading services; (h) Securities margin financing; and (i) Asset management;

• the setting of fit and proper criteria for issuing licences; and • the issuing of two types of licences, one to corporations and the other to individuals.

86. There are certain criteria to be met when a person applies for a corporate or representative

licence. The most important of these criteria is that the SFC has to be satisfied of the applicant’s fitness and properness to be licensed. In determining such fitness and properness, the Securities and Futures Commission (SFC) takes into account the applicant’s financial status, qualifications, experience, reputation, character, reliability, financial integrity, and ability to perform functions efficiently, honestly and fairly.

87. For corporations, SFC’s requirements are that the licensed corporation should have training

policies and programmes for new as well as existing staff. 88. Competence requirements for corporations include proper business structures, sound internal

control and risk management systems, and competent personnel. The employees should be appropriately qualified to perform their assigned responsibilities, with supervisory staff in the front and back offices having at least three years’ relevant experience plus relevant academic qualifications; and the licensed corporation should have training policies and programmes for new as well as existing staff.


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89. Supervising / Management staff are required to have:

• a good understanding of the regulatory framework from a supervisory standpoint, be thoroughly familiar with ethical standards, and be fully knowledgeable regarding the products and services offered by the corporation; and

• a mix of relevant tertiary qualifications passes in local regulatory papers at a general level and in the regulated activity for which they seek a licence, plus three years’ recent industry experience with not less than two years at a senior/managerial level within the last five years.

90. The representatives are required to have suitable educational qualifications, including a pass in a

recognized industry qualification within the last three years and passes in a local regulatory paper also within the last three years (a pass in the Hong Kong Securities Institute (HKSI) core regulatory paper and the relevant technical paper in the Licensing Examination will meet the requirements).

91. One of the ongoing obligations of a licensed person, which includes licensed corporations,

licensed representatives and responsible officers are compliance with the continuous professional training requirements. Hong Kong Securities Institute (HKSI)

92. The HKSI was officially formed in 1997 as a professional body to raise the standards of securities

and finance practitioners in Hong Kong including stock broking, fund management, corporate finance and derivatives markets. Licensing Examination

93. In March 2003 the Academic and Accreditation Advisory Committee (AAAC) of the Securities

and Futures Commission appointed the Institute as an independent examination body to run the industry and local regulatory framework examinations. The move was designed to maintain impartiality and ensure the standard of examinations, as well as to facilitate negotiation and development of mutual recognition of qualifications with both local and overseas counterparts.

94. The Licensing Examination comprises 12 papers. Candidates will need to select a combination of

regulatory and practical papers, depending on the regulated activities they wish to conduct.

Regulatory Papers Practical Papers Paper 1 Fundamentals of Securities and Futures Regulation (Core)

Paper 7 Financial Markets (Core)

Paper 2 Regulation of Securities

Paper 8 Securities

Paper 3 Regulation of Derivatives

Paper 9 Derivatives

Paper 4 Regulation of Leveraged Foreign Exchange

Paper 10 Leveraged Foreign Exchange

Paper 5 Regulation of Corporate Finance

Paper 11 Corporate Finance

Paper 6 Regulation of Asset Management

Paper 12 Asset Management


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CONCLUSION

95. It is important that the syllabus designed for Bangladesh must meet the particular needs of the market in Bangladesh. It should cover regulatory issues which address the particular environment of the country. In the meantime, it should as far as practicable, be in line with the syllabuses developed by institutions in other market place. This would enable future courses run in Bangladesh to be recognized by overseas institutions.

TA No. 4246-BAN: Preparing The Financial Markets Governance Program Report on Training and Accreditation of Market Intermediaries

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APPENDIX C: TRAINING FACILITIES OF INSTITUTIONS IN BANGLADESH


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Training facilities of Institutions in Bangladesh • Bangladesh Institute of Bank Management (BIBM) • Bangladesh Institute of Management (BIM). • Department of Finance, University of Dhaka (DOF, DU) • Institute of Chartered Accountants of Bangladesh (ICAB). • Institute of Cost & Management Accountants of Bangladesh (ICMAB). • Department of Accounting and Information System (DAIS, DU) • Institute of Business Administration (IBA, DU) (a) Bangladesh Institute of Bank Management (BIBM) Bangladesh Institute of Bank Management (BIBM) is a unique educational, training and research institution in Bank Management supported and supervised by the Bangladesh Bank (Central Bank), almost all of the leading banks and financial institutions of Bangladesh. Established as a national level training institute in the banking sector in 1974 under the Societies Act, XXI of 1860, BIBM caters primarily to the requirements of training of the mid and senior level officers/ executives of banks and financial institutions. It also offers a few excellent outreach-training courses in different regions of the country. Besides, it conducts workshops, seminars, roundtable discussions on a continuous basis annually and undertakes research projects on banking and allied fields regularly. In addition, BIBM provides consultancy services to banks and other organization on request.

BIBM is managed by a Governing Board that comprises of a chairman and 24 members. The chairman of the governing body is the Governor of Bangladesh Bank and members are mostly the Managing Director/CEO of the different banks and do represent different Nationalized Commercial Banks (NCBs), Private Commercial Banks (PCBs), and Development Financial Institutions (DFIs). Director General, who acts as a Member-Secretary, is the head of the institute. There are four directors to look after Training; Administration & Accounts; Research, Development & Consultancy and Center for Post Graduate Studies. The major objectives of the institute as set out in its charter are:

• To impart training and education in banking operations and management; • To conduct research on issues relating to banking operations and management; and • To provide consultancy services relating to banking and allied fields.

With the passage of time, BIBM has broadened its horizon to cover other areas of activities such as providing in the form of a post-graduate degree, Masters in Bank Management (MBM), and a diploma, Post Graduate Diploma in Computer Applications (PGDCA), carrying out research in banking, holding seminars and roundtable discussions or aiding the banks in their recruitment. Introduced in 1997, the MBM program, being affiliated with National University and managed by a separate special governing body, is a two-year professional post-graduate program for bank officers and others who plan to career in banking and allied fields. The MBM program equips the students with the skills and analytical abilities needed for the efficient handling of affairs of banks and financial institutions. On the other hand, the main objective of the PGDCA is to equip individuals with the specific skills and broaden their horizon of judgement capacity required of effective IT executives in banking and business. Even with these activities, which are somewhat complementary with one another, training still occupies the focus and modus-operandi of BIBM operation. Up to 2004 a total of 41,800 officers of banks and financial institutions of the country have had training in BIBM. Among many, some of the notable training courses include Asset Liability Management in Banks (ALMB), Credit Management(CM), Financial Analysis for Bankers(FAB), Foreign Exchange and Money Market Products(FEMMP), International Trade Payment and Foreign Exchange (ITPFE), Loan Structuring and Documentation (LSD), Managing Risks for Banks (MRB), Merchant Banking (MB), and Strategic Management and TQM (SMTQM). A number of training workshops, such as on Bond Market (BM), Credit Risk Grading (CRG), Factoring Services in Bangladesh (FSB), Lease Finance and Securitization (LFS), Legal Framework for Loan Recovery (LFLR), Management of Non-Performing Advances (MNPA), Marketing of Bank Products (MBP), have already been planned in the academic calendar 2005 to be held. The methods—lecture, group discussion,


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case study, project visit, panel discussion, experience sharing etc.— vary with the duration of the training and nature of target group to be trained.

BIBM is equipped with quite a large number of highly resourced full time faculty members and has an adequate number of logistic supports and facilities. Besides its own premises, it has also a six storied hostel dormitory with an accommodation of 150 persons. BIBM has a rich library having about 24,000 books and the institute subscribes to about 200 domestic and foreign journals and magazines. BIBM publishes a quarterly journal “Bank Parikrama” in the area of banking and finance.

(b) Bangladesh Institute of Management (BIM)

The origin of Bangladesh Institute of Management (BIM) can be traced back to 1961 when its precursor, the Management Development Centre, East Pakistan, was established to assist the process of human resources development through imparting training to the managers of various levels from the different industrial sectors of the country. In 1970 the East Pakistan Government Educational and Training Institutions Ordinance, 1961 (East Pakistan Ordinance No. XXVI of 1961) was made applicable for Management Development Centre with effect from 1-7-1970 thereby providing the centre with autonomous status. With the gradual shift in development focus and liberalization of the economy, there was distinct shift in focus of the activities of BIM. It became a hub of management training with participants being drawn from public, private and NGO sectors. During the early nineties, in the context of opening up of the market, structural changes and private sector driven growth strategy for rapid development, Bangladesh Management Development Centre was converted into an institute—Bangladesh Institute of Management (BIM) to cater to the need for qualified human resources. Currently BIM is under the administrative control of the Ministry of Industries.

BIM is administered and managed by a Board of Governors that consist of members drawn from the government, sector corporations, trade associations, and academics. The Board of Governors is the highest policy making body of BIM. The Board provides the policy framework for the Institute to operate, lays down operational procedures and oversees and monitors its activities. The Secretary of Ministry of Industries, Government of the People’s Republic of Bangladesh is the chairman of the board. Six members are the chairmen of the different sector corporations. One member not below the rank of Joint Secretary in Finance Division, being nominated by the Finance Secretary, does represent Ministry of Finance and Dean, Faculty of Mechanical Engineering, Bangladesh University of Engineering and Technology is the ex-officio member of the board. The other members are the presidents of Federation of Bangladesh Chamber of Commerce and Industry, Metropolitan Chamber of Commerce and Industry, and Bangladesh Employers’ Association. Director General, who is also a member of Board of Governors and is assisted by three directors, is the head of the institute. There are ten specialized divisions, viz., Accounting and Financial Management, Computer Services, General Management, Marketing Management, Personnel Management, Production Management, Productivity and Consultancy, and Social Service Sector, Evaluation and Publication, and TOT and Behavioral Management. The objectives of the institute are:

• To train and develop managers at all levels engaged in commercial, industrial and service organizations of public & private sector and NGO’s.

• To help improve productivity in different sectors of the economy through Training, Research and

Consultancy services.

• To carry out publication work to disseminate new, modern knowledge and information in the fields of management development, training, economics, business and other relevant areas.

• To co-operate with similar institutions at home and abroad in promoting exchange of knowledge

and experience.


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Every year BIM organizes more than 80 courses and seminars of varying duration ranging from one to four weeks. The short courses offered by BIM include, among many, Office Management, Project Management, Financial Management, Supervisory Skills and Leadership Development, Managerial Negotiation, TQM, Human Resource Management, Effective Marketing, Sales Promotion and Salesmanship, Human Resource Development and Good Governance, Industrial Engineering, and Financial Analysis for Decision Making. BIM also conducts various tailor–made courses designed specially to suit the requirement of the client organizations. Till the year ending June 2003, the total number of short courses organized by the institute has been 2,332 and the total number of executives trained numbered over 34,000.

Apart from offering short term, subject specific training programmes, presently BIM offers five post-graduate diploma courses of one-year duration each:

(i) Personnel Management, (ii) Business Management,

(iii) Marketing Management, (iv) Financial Management, and (v) Computer Science.

More than 3,500 participants are graduated in different diploma courses till date.

While Training, Research and Consultancy are three mandated activities of BIM; the major thrust during the last decade has been on training and Post-Graduate Diploma Programmes. BIM has multi-disciplinary faculties who have been trained both at home and abroad. Most of the faculties have had some experience in the industry, which enables them to better empathize with the participants.

The main campus of BIM is located on five acre of land at Sobhanbag, Mirpur Road, in the centre of Dhanmondi, Dhaka. It has sixteen fully equipped classrooms, two auditoriums and hostel accommodation for 50 participants. BIM has similar, though smaller facilities in the other two major cities of Bangladesh — Chittagong and Khulna. BIM has computer labs equipped with the latest state of the art microcomputers numbering over 100. The fully air conditioned library at Dhaka has a rich collection of books on various aspects of management and modern business practices as well as a large number of national and international journals.

(c) Department of Finance, University of Dhaka

The Department of Finance, under the Faculty of Business Studies, was established in 1974 with the vision to develop skilled human resource with specialized education and training in finance. It is committed to provide quality education, training and expertise services to meet the challenging needs of the business community. The Department has been catering to the needs for executive and trained manpower development with strong skills in financial economics. It offers undergraduate and graduate programs in finance leading to the Bachelor of Business Administration (BBA) and Master of Business Administration degree in finance. It also offers M.Phil. and Ph.D. programs to meet the needs for researchers, capital market specialists, finance teachers, and financial analysts. Because of the long demand in market, it launched also MBA program in the evening for the professionals and practitioners to enrich their horizon of knowledge and to broaden their analytical abilities in order to cope with the changing economies warranted by globalization and liberalization. The Department, apart from its academic programs, is strongly committed to provide environment and facilities for conducting research, imparting executive training offering consultancy services to the government, and the non-governmental organizations, national and international organizations.


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The Department has highly skilled, well-qualified and dedicated faculties trained in the universities of the North American, the European and other developed countries having specialization in capital market, IPO pricing, corporate finance, financial and social reporting, corporate governance, rural financial markets, central banking etc. A large number of the academic staffs are actively engaged in conducting research, providing executive training and expertise (consultancy) services to national and international organizations, participating in different national committees as well as in national and international seminars and symposia in their areas of specialization. The expertise of teaching, research and training activities and the dynamic curriculum have made the department a center for excellence and a unique institution not only in the university but also in the country.

The Department has executive development program under which short training programs and seminars/workshops are organized for the executives of private organizations, public sector corporations, banks and other financial institutions with the objectives of dissemination of knowledge and skill in managerial training on finance. Till now, a few hundred executives of many organizations participated in short training programs. The major areas of training programs were (i) Finance for Non-Finance Executives, (ii) Working Capital Management, (iii) Financial Management, and (iv) Industrial Finance and Entrepreneurship Development. The Department has so far organized quite a large number of workshops and seminars including national seminars on Industrial Finance and workshop on national budget, credit market and entrepreneurship development.

The department has physical and technical facilities for training, such as the computer lab, air-conditioned classrooms each with microphone, multi-media projector and overhead projector, and a seminar library. The computer lab is equipped with over 35 microcomputers that are network connected having 24-hour on-going Internet facilities. The Department publishes a half-yearly refereed journal “Finance and Banking”.

Structure/intensive courses

(i) Financial Markets and Institutions (ii) Management of Financial Institutions

(iii) Corporate Finance (iv) Financial Statement Analysis (v) Capital Investment Decision

(vi) Investment Analysis. (vii) Portfolio Management

(viii) Lease Finance and Investment Banking (ix) Project Appraisal and Management (x) Strategic Management

(xi) Regulations of Securities Market (xii) Analysis of Fixed Income Securities

(xiii) Financial Derivatives (xiv) Development Finance and Banking (xv) Corporate Governance and Restructuring

(xvi) Financial Engineering (d) Institute of Chartered Accountants of Bangladesh (ICAB)

The Institute of Chartered Accountants of Bangladesh (ICAB) is the National Professional Accounting Body of Bangladesh established under the Bangladesh Chartered Accountants Order 1973 (Presidential Order No. 2 of 1973). The Ministry of Commerce, Government of the People's Republic of Bangladesh is the administrative Ministry of ICAB.


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To meet the ever-changing global economic demands dominated by WTO regime, the ICAB is fast becoming a body of professionals whose expert services will be highly sought after:

• To anticipate, meet and exceed the rising expectations of all concerned

• To better use of opportunities to face the challenges of fiercer global competition

• To recognize the changes in economy/ business and recognize the path to success by adopting changes in knowledge management and acquiring skills

• To recognize the Institute's role as a regulation body to equip Chartered Accountants with top-quality education and values.

• To recognize the needs known as world Class Advisors.

In order to materialize the above vision, ICAB will:

• Generate Chartered Accountants of high competence through rigorous but useful education and training, who will be able to meet the challenges of the new millennium

• Uphold professional integrity and honesty of its members

• Maintain superiority in respect of professional competence

• Advise government on taxation, business law and related matters

• Meet the growing demand for qualified Chartered Accountants in Bangladesh

• Create the environment of mutual cooperation

• Carry out continuous research and make in-depth study of related subjects and apply findings of research and study in the fields of accountancy profession.

The mission of ICAB is to provide leadership in the development, enhancement and coordination of the Accountancy Profession in Bangladesh in order to enable the profession to provide services of consistently high quality in the public interest. To achieve the above mission To achieve the above mission, The objectives of the institute are:

• To regulate the Accountancy Profession and matters connected therewith in the country

• To administer its members and students

• To ensure sound professional ethics and code of conduct by its members

• To provide specialized training and professional expertise in Accounting, Auditing, Taxation, Corporate Laws, Management Consultancy, Information Technology and related subjects

• To impart Continuing Professional Education (CPE) to its members

• To foster acceptance and observance of International Accounting Standards (IAS) and International Standards on Auditing (ISA) and adopt the same as Bangladesh Accounting Standards (BAS) and Bangladesh Standards on Auditing (BSA) respectively.

• To keep abreast of latest developments in Accounting techniques, Audit methodology, Information technology, Management consultancy and related fields.

• To link with international and regional organizations to influence the development of efficient capital markets and international trade in services.


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The Council of ICAB is the supreme authority responsible for the administration and management of the Institute. The Council is composed of 20 (twenty) members elected by the members of the Institute from its two regional constituencies in Bangladesh every three years. The Council is headed by an elected President who is the Chief Executive of the Institute. The President and the Vice-Presidents of the Institute are elected by the Council every year to manage the affairs of the Institute. The Council is assisted by various Standing and Other (non-standing) Committees. For the purpose of assisting the Council in matters concerning its functions, the Council is empowered to constitute Regional Committees. At the moment there are two Regional Committees in Dhaka and Chittagong and one UK- based Chapter in London.

As on 01 July 2003, the Institute had 710 members (including 09 females) of whom 585 were resident in Bangladesh and 125 were resident abroad. Associate and Fellow memberships are offered by the Institute. Persons passing the qualifying Final Examination of the Institute are offered Associateship (ACA) while fellowship (FCA) is offered to members having at least five years post-associateship experience and fulfilling relevant other requirements. Out of 710 members, 270 are practicing as public accountants and the rest 440 are serving in various key positions in public and private organizations-both at home and abroad.

The Institute is an active member of the International Federation of Accountants (IFAC), the apex body of the Accounting Professionals in the world, the International Accounting Standards Board (IASB). The institute is also a member of the Confederation of Asian and Pacific Accountants (CAPA) and the South Asian Federation of Accountants (SAFA). In order to maintain the professional standards, all members of the Institute are imparted training through continuing professional development (CPD) program, post qualifying education works, chapter meetings and group discussions on a continuous basis. Apart from organizing CPD program throughout the year, the institute conducted a number of workshops, seminars and discussion sessions. (e) Institute of Cost & Management Accountants of Bangladesh (ICMAB)

The institute of Cost and Management Accountants of Bangladesh (ICMAB) is a statutory organization constituted by the Government under the Cost and Management Ordinance, 1977 (Ordinance No. LIII of 1977) and regulated under the Cost and Management Accountants Regulations, 1980 (as amended upto date). The institute, an autonomous professional body under the administrative control of the Ministry of Commerce, Govt. of the People's Republic of Bangladesh, is the only national institute dedicated to cost and management accounting education and research in the country. The institute’s mission is to develop, equip and promote Cost and Management Accounting profession by maintaining highest professional standard of its members in order to enable them to provide better services to the society. The Institute spearheads the formulation and implementation of national cost accounting standards. The objectives of the institute are:

• To regulate and develop the Cost and Management Accounting profession in Bangladesh.

• To provide and confer the highest professional degree in Cost and Management Accounting.

• To impart training and education to the members, corporate managers and intending students of CMA for enhancing their capability in the fields of Cost and Management Accounting.

• To develop knowledge, skills and competence of the CMAs needed for economic development of the country and, to prepare capable manpower needed for various national and international development activities according to the requirements of the millennium.


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• To implement statutory Cost Audit as provided in the Companies Act, 1994

• To conduct research in the field of Cost and Management Accounting in order to promote and develop the profession to meet the requirement of the time.

The institute is entrusted with the formulation and implementation of National Accounting as well as Cost Accounting Standards and takes other necessary steps with a view to regulating the Cost and Management Accounting profession commensurate with global standard with the ultimate objective of developing Bangladesh’s human and natural resources to ensure common welfare.

The Institute is governed and managed by a National Council constituted under the Cost and Management Accountants Ordinance, 1977. The Council consists of twelve Fellow Members elected by the members and four nominees of the government, not bellow the rank of Joint Secretary/Professor, representing the Ministry of Commerce, Ministry of Finance, Ministry of Industries and University of Dhaka for a three-year term. The Council elects one President, two Vice-Presidents, one Secretary and one Treasurer on annual basis to manage and run the affairs of the Institute. The Council is assisted by fourteen functional committees formed by the Council.

The Institute is a member of various International and Regional accounting bodies like:

• The International Federation of Accountants (IFAC), the apex body of the Accounting Professionals in the world.

• Executive Committee and Strategic Committee of the Confederation of Asian and Pacific Accountants (CAPA).

• The South Asian Federation of Accountants (SAFA).

• The International Accounting Standards Committee (IASC). Two types of memberships are offered by the Institute – Associate and Fellow. Persons passing in the CMA final examination and having three years practical experience are eligible for Associate membership (ACMA) while Fellow membership (FCMA) is offered to one having at least five years post associateship experience in responsible position in the relevant professional fields and fulfilling other professional requirements. As on 31st December, 2004 there are 739 members of which 316 are Associates and rest 423 are Fellows. A total of 105 members are working abroad. Most of the members are in employment in different senior and mid-level positions in public, private, multinational and government organizations. In order to maintain the professional standards, all members of the Institute are given training through continuing professional development (CPD) program, post qualifying education works, chapter meetings and group discussions on regular basis. The post qualifying education is compulsory for the members. Credit of 40 hours attendance in the CPD over a period of 5 years time is necessary to become a Fellow member of the Institute. The Institute organizes CPD programs throughout the year. In the last year, ICMAB conducted a number of discussion meetings and workshops, among many, on the followings:

• Prospect for Corporate Social Reporting in Bangladesh.

• Study Report on Damages caused by Flood-2004.

• Cost Reduction and Profit Improvement Plan and Scheme – A Practical Approach.

• Leasing as an Alternate Sources of Financing – Problems and Prospects in the Context of Bangladesh.


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• Ramifications of WTO and the Role of Cost and Management Accountants in a Developing Economy.

• Cost Accounting Standards.

• Cost Audit in Pharmaceutical Industries. In addition, the council of the institute examined the report of the Company Law Reforms Committee and Draft Companies Act, 2004 and proposed few amendments to the Government regarding various sections of Companies Act, 1994. Seven Cost Accounting Record Rules in respect of (i) Sugar Industry, (ii) Jute Industry, (iii) Textile Industry, (iv) Edible Oil and Vegetable Ghee Industry, (v) Fertilizer Industry, (vi) Fuel and Power Industry and (vii) Pharmaceutical Industry were submitted to the Commerce Ministry and after discussion it was decided that these rules would be sent to the Ministry of Law, Justice and Parliamentary Affairs for vetting and gazette notification. The institute published Cost Audit Manual and Code of Conduct and Ethics and fee structure for the convenience of Cost Auditors. In addition to the primary resolve of graduating the CMAs, the Institute also provides inputs in order to help develop the human resources which go a long way in establishing the mid, top and executive management base. The Research and Development wing of the institute continuously upgrades and conducts in-depth analysis on broad economic issues (both national and international) at macro level that helps the end user update their performance level. Numerous seminar and conferences organized by the institute at home and abroad are also directed towards the same end in view. ICMAB also takes pride itself in advising the government on various issues relating to national budget, company law, VAT, taxation, privatization etc. on its own initiative and through representation in different committees of the government. (f) Department of Accounting and Information Systems, University of Dhaka (DAIS, DU) The Department of Accounting and Information Systems (earlier known as The Department of Accounting) commenced its academic pursuits with 8 teachers and 140 students in 1970 and has swelled to over 1500 students and 42 teaching faculties in the present time with the department upholding its commitment to first rate teaching quality and teaching staffs. The Department offers undergraduate and graduate programs leading to BBA and MBA degree in accounting with a clear philosophy to develop in students the required knowledge and understanding of theoretical concepts and practical techniques for accounting profession and managerial discipline. The degree programs are conducted by a number of highly qualified and foreign trained teaching facilities with suitable academic background. Distinguished scholars through their laudable efforts have made the programs the most covered one. Most of the trained and well-qualified faculties are specialized in the area of corporate reporting and disclosure, accounting and audit standards, integrated accounting systems, social reporting, strategic management accounting etc. A good number of faculty members are actively engaged in research and have pioneering research publications to their credit. In addition to their commitment to teaching and research, faculty members play an important role in the affairs of the university and the community at large. The diversified academic background of the teaching faculties, their research activities, and the dynamic curriculum of the Department has it one of the foremost departments in the University of Dhaka. The department is equipped with a modern computer lab with a view to catering to the needs of computational and computer skill of the students in the informational technology age. The computer lab has 40 personal computers of latest configurations with networking system, internet connections, and multi-media system. The department has physical facilities for training, such as air-conditioned classrooms that are fitted with multimedia projectors, overhead projector, microphone and other state-of-the-art facilities. In view of the growing demand for business graduates, there is a need for creating more opportunities for higher studies in business for the existing executives as well as for the potential entrants. The Department


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of Accounting and Information Systems has created such opportunities through new business graduate program leading to the degree of MBA in Accounting in the evening session for these practitioners. The Department organizes guest lectures/seminars inviting eminent personalities both from the public and private sectors on a regular basis. Structure/intensive courses

(i) Corporate Financial Reporting.

(ii) Accounting for Government and Non-Profit Organization.

(iii) Analysis of Financial Statement.

(iv) Public and Social Accounting.

(v) Asset/liability Accounting.

(vi) Computerized Accounting and Information Systems.

(vii) System Analysis, Design and Data base. (g) Institute of Business Administration, University of Dhaka (IBA, DU) The Institute of Business Administration, University of Dhaka was established in 1966 in collaboration with the Indiana University, Bloomington, USA under a Ford Foundation Financial Assistance Program with the objective of providing professional training in business administration. The Institute carries the distinction of being the pioneer of all the business schools of Bangladesh. The Institute offers under-graduate and graduate programs leading to BBA and MBA degree. The graduate program at IBA inculcates an active learning process so that the potential business executives can work in their specialized areas equipped with the necessary tools of conceptual, interpersonal and problem-solving skills. The knowledge the students gathered, the skills they obtained, the practical orientation they received enables the graduates to work effectively and efficiently in any business situation. IBA’s efforts at management development in Bangladesh are augmented by continuing education activities under the Management Development Program, Women Development Program, and IBA Computer Center. Since its inception, IBA has accepted the role of not only increasing the supply of professional trained managers, but also of developing management as an academic discipline. The Institute has the Ph.D. program for preparing management researchers and educators. The Institute has expanded its activities to cater to the country’s special needs and has established a number of centers. A Center for Management Research and Publications has been established for organizing research funds and allocating research grants to faculty member for undertaking quality research and for nurturing knowledge through publications. To cater to the growing demand for more professional services, a Management Consultancy program has been set up. In addition, recognizing the role of small business and entrepreneurs, IBA has set up a Center for Entrepreneurship and Small Business Development. The Institute has received financial capabilities as well as increasing physical facilities. It has a rich and dedicated faculty. The IBA computer centre is equipped with over 36 PCs. Structure/intensive courses

(i) Capital Budgeting and Investment Analysis.

(ii) Management of Banks and Development of Financial Institutions.

(iii) Strategic Management.


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(iv) Project Management.

(v) International Financial management.


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APPENDIX D: LETTER OF CHAIRMAN, SEC ON TRAINING INSTITUTE


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28 February 2005 Chief Executive officer Chittagong Stock Exchange Ltd. 1080, Sk. Mujib Road Chittagong Dear Maroof, Subject: Securities Institute - Consultant’s Report. My comments on the report “Bangladesh Securities Trading Needs Assessment” prepared by the First Initiative Consultant Mr. Jim Chester are as follows:

(1) Given the Short time available to consultant, the report is, by and large, well-preferred. (2) I am in broad agreement with the major thrust of the report in terms of (a) positive assessment of

the need for a training institute; (b) identification of the fields/areas of training; (c) identification of the client group who need training and (d) classification of training courses, In case of (d), however some order of priority may have to determined.

(3) As regards the institutional character of the proposed Institute, I feel that it should be (i) an

entirely new institution (ii) co-sponsored by SEC and the two exchanges (iii) managed by a governing body whose composition needs to be discussed. However, SEC Chairman should be the ex-officio Chairman of the institute’s governing body and the two CEO’s of the exchanges should be ex-officio members. It will, of course draw upon academic institution, industry and other relevant bodies to meet its needs for trainers and others resource person as well as for predetermined number of members of the governing body.

(4) The most important issue relates to financing .Donor funding in the form of grant will be

essential, particularly for meeting the initial capital cost and at least part of recurring cost for, may be, couple of years.

(5) It will not be possible for SEC to contribute to the capital costs of the proposed institute. SEC

should be able to meet part of recurrent costs by providing resource persons and funding preparation and publication of training materials. It is difficult at this stage to estimate money equivalents.

(6) I am not quite convinced that the minimum capital conditions imposed on market intermediaries

constitute a major impediment to the provision of services. Perhaps a more important problem is that there are too many licenses relative to the present market size, e.g. 29 merchant banks.

(7) SEC would be open to seriously consider any regulatory changes conductive to the development

of healthy and vibrant capital market. However, any recommendation must be specially sensitive to “conflict of interest” consideration in an environment where collusive arrangements between even legally independent market actors are rampant.

(8) Regulatory changes are an important component of Asian Development Bank‘s project “financial

market governance program” presently under implementation. However, I strongly feel that the establishment of the institute should not wait for regulatory changes the implementation of which is inevitably a time –consuming process.


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(9) The above comments do not preclude some early actions, such as, certification requirement for some market actors. At the moment, there is a chicken-egg-chicken problem: no certification requirement because there exist no certifying institute and very little demand for certification in the absence of any legal requirement.

I an endorsing a copy of these comments to our R&D department with the request to prepare and collate other comments, if any, by SEC and send them to you in due course.

Regards. Mirza Azizul Islam CC : Member (R&D), SEC He will please follow up on the last paragraph of this letter. Member (Admin) Member (Law)

They will please send their comments, if any, to Member (R&D)


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APPENDIX E: SYLLABUS FOR QUALIFICATION EXAMINATIONS FOR MARKET INTERMEDIARIES


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TABLE OF CONTENTS

SYLLABUS SUMMARY.....................................................................................................1

SYLLABUS OUTLINE .......................................................................................................2

PAPER 1: FINANCIAL MARKETS - GENERIC KNOWLEDGE PAPER (CORE) ..2 Topic 1: The Global Financial System .....................................................................2 Topic 2: Financial System in Bangladesh.................................................................2 Topic 3: The Equity Market......................................................................................2 Topic 4: The Debt Market ........................................................................................3 Topic 5: The Foreign Exchange and Derivatives Markets .......................................3 Topic 6: Insurance ....................................................................................................4 Topic 7: Financial Sectors ........................................................................................4 Topic 8: Accounting and Financial Statement Analysis...........................................4

PAPER 2: FUNDAMENTALS OF SECURITIES TRADING (SPECIALIST KNOWLEDGE PAPER FOR SECURITIES TRADING AT FOUNDATION LEVEL)..........................6

Topic 1: Overview of Securities Investments ...........................................................6 Topic 2: Regulatory framework for the securities market in Bangladesh ................6 Topic 3: The Stock Exchanges in Bangladesh - Primary and Secondary Markets ...6 Topic 4: Stock Market Administration .....................................................................7 Topic 5: Accounting and Financial Statement Analysis...........................................7

PAPER 3: REGULATION OF SECURITIES (SPECIALIST KNOWLEDGE PAPER FOR SECURITIES TRADING AT ADVANCED LEVEL)......................................................9

Topic 1: Regulatory framework for the securities market in Bangladesh ................9 Topic 2: Licensing and Registration .........................................................................9 Topic 3: Relevant Financial and Related Requirements .........................................10 Topic 4: Stock Market Administration ...................................................................10 Topic 5: Business conduct of intermediaries ..........................................................11 Topic 6: Management and Supervision of Securities Business ..............................11 Topic 7: Trading .....................................................................................................11 Topic 8: Misconduct and Offences .........................................................................11

PAPER 4: FUNDAMENTALS OF ASSET MANAGEMENT (SPECIALIST KNOWLEDGE PAPER FOR FUND MANAGEMENT AT FOUNDATION LEVEL) .........................12

Topic 1: Overview of Fund Management Industry.................................................12 Topic 2: Regulatory framework for the funds industry in Bangladesh 12 Topic 3: The Products 12 Topic 4: Basic Theoretical Aspects of Asset Management 13 Topic 5: The Investment Management Process 13 Topic 6: Evaluating Performance 14 Topic 7: Accounting and Financial Statement Analysis 14 Topic 8: Analyzing products 14 Topic 9: Technical Analysis 15 Topic 10: Business Valuation 15

PAPER 5:REGULATION OF ASSET MANAGEMENT (SPECIALIST KNOWLEDGE PAPER FOR ASSET MANAGEMENT AT ADVANCED LEVEL) 16

Topic 1: Regulation of investment products 16 Topic 2: Business conduct of intermediaries 16 Topic 3: Misconduct and Offences 17 Topic 4: Accounting and Financial Statement Analysis 17


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Topic 5: Analyzing products 18 Topic 6: Technical analysis 18 Topic 7: Industry Analysis 18

PAPER 6: CORPORATE FINANCE 19 Topic 1: Principles of Corporate Finance 19 Topic 2: Equity Financing 19 Topic 3: Debt Financing 20 Topic 4: Business Valuation 20 Topic 5: Listing of Securities 20 Topic 6: Disclosure, Take-overs and Mergers 20 Topic 7: Mergers and Acquisitions 21 Topic 8: Accounting and Financial Statement Analysis 21 Topic 9: Analyzing products 21 Topic 10: Technical analysis 22


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SYLLABUS SUMMARY

Paper 1: Financial Markets - Generic knowledge paper (Core)

Paper 1 is designed for new entrants and current staff in the securities and related financial services including underwriting; asset management; and corporate finance. It provides a practical introduction to finance and financial systems generally and in particular in Bangladesh. This paper provides a foundation for the study of the other specialist practical papers.

Paper 2: Fundamentals of Securities Trading (specialist knowledge paper for securities trading at foundation level)

This paper is designed for new entrants and current staff working as agents and authorised representatives in the securities industry, as well as other persons with an interest in financial services. The paper provides an overall introduction to the securities industry in Bangladesh. Paper 3: Regulation of securities (specialist knowledge paper for securities trading at

advanced level) Paper 3 is designed for persons who hold supervisory positions in securities business, including members of stock exchanges, executive directors and managers of securities companies. This paper will give supervisors an understanding of the laws and regulations that govern the Bangladesh securities market.

Paper 4: Fundamentals of Asset Management (specialist knowledge paper for asset

management and investment advisory services at foundation level)

Paper 4 is designed for those participating in, or with an interest in asset management, and investment advisory services. Participants will gain the technique for sound investments.

Paper 5: Regulation of Asset Management and Investment Advisory Services (specialist

knowledge paper at advanced level)

Paper 5 is designed for persons who hold supervisory positions in asset management, investment advisory services. This paper will provide an understanding of the regulatory framework within which asset management and investment advisory services are conducted in Bangladesh.

Paper 6: Corporate Finance

This paper is designed for persons working in the areas of underwriting, IPOs and other corporate finance related areas.

It should be noted that the syllabus requires regular review and changes to reflect new market developments. Study guides and teaching guides will need to be developed. It is important that the study guides contain examples and cases studies in Bangladeshi context.


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SYLLABUS OUTLINE

PAPER 1: FINANCIAL MARKETS - GENERIC KNOWLEDGE PAPER (CORE)

Topic 1: The Global Financial System

1. The role of the financial system in the global economy

• Supply and demand • Economic sectors • Flow of funds • International capital and investment flows • Participants in the global financial system • Money and the banking system

2. The financial system and markets

• Central banks • Characteristics of an effective financial market • Types of financial markets • Participants in financial markets • Prudential regulation and supervision.

3. Factors affecting global financial markets

• Economic factors and indicators • Changes affecting global economies • Globalization and technology • Lessons from the 1997 Asian financial crisis

Topic 2: Financial System in Bangladesh 4. Role of the government and regulators

• The Ministry of Finance • Ministry of Commerce • The Securities and Exchange Commission • The Bangladesh Bank • Privatisation Commission of Bangladesh

5. Factors affecting the Bangladesh market

• Government objectives and policy • The government budget • The US economy • Other global and regional influences • Regulatory, political and social trends • The impact of technology

Topic 3: The Equity Market

6. Overview

• What is equity? • Why raise equity finance? • Methods of raising equity finance?


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• Why invest in equity?

7. Fundamentals of equity securities • Initial Public Offerings • Rights issues • Bonus issues

8. The stock market • Stock market indices • The stock exchanges • Bull and bear markets

9. Privatisation of government-owned companies

10. The Bangladesh equity market • Structure of the stock market • Types of equity securities • Participants in the equity market

11. The Exchanges

• Rules • Trading • Clearing and Settlement • Risk Management

12. The Central Depository and Clearing Company

• Operation • Duties, rules, checks and balances, reporting of default requirements • Risk management

Topic 4: The Debt Market

13. Overview

• What is debt? • Characteristics of debt • Interest rates

14. Categorization of bonds 15. Fundamentals of pricing debt securities 16. Role of the yield curve 17. The Bangladesh debt market

• Development of the Bangladesh debt market • Types of debt securities

Topic 5: The Foreign Exchange and Derivatives Markets

18. The foreign exchange market • Background and definitions • History of exchange rates • Exchange rate regimes • The foreign exchange market in Bangladesh


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19. The derivatives market • What are derivatives? • Function of derivatives • Classification of derivatives

Topic 6: Insurance

20. The role of insurance industry in the markets

Topic 7: Financial Sectors

21. Corporate finance • What is corporate finance? • Why corporate finance is important? • The work of corporate finance professionals

22. Portfolio management • What is portfolio management? • Why portfolio management is important? • The work of portfolio management professionals

23. Investment advisory service • What is investment advisory service? • Why is investment advisory service important? • The work of investment advisory manager.

24. Venture capital investment

• What is venture capital? • Why is venture capital important? • The work of venture capital

25. Insurance

• What is insurance? • Why is insurance important? • The work of insurance.

Topic 8: Accounting and Financial Statement Analysis

26. Background

• Accounting assumptions and principles • Accrual accounting • Accounting standards • Accounting guidance notes

27. Reading and understanding financial statements

(1) What is the reader looking for? (2) Statement of accounting principles (3) Balance sheet (4) Current vs. non-current (5) Classification of non-current assets (6) Spreading non-current assets over their useful life (7) Profit and loss statement and account (8) Notes to the accounts (9) Creditors, accruals, provisions and contingencies


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(10) Shareholders' funds: capital, reserves and undistributed profits 28. Analyzing liquidity

29 Analyzing debt

30. Analyzing profitability

31. Value ratios


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PAPER 2: FUNDAMENTALS OF SECURITIES TRADING (SPECIALIST KNOWLEDGE PAPER FOR SECURITIES TRADING AT FOUNDATION LEVEL) Topic 1: Overview of Securities Investments

1. Historical background

• Equity markets • Debt market • Derivatives market

2. Stock Exchanges in Bangladesh

• Major features • Market sectors

3. The global securities market

• US market • European markets • Asian markets

4. Key factors affecting the securities markets

• Interest rates • Exchange rates • Inflation • Economic cycles • Political factors

5. Market indices

• Domestic • International

Topic 2: Regulatory framework for the securities market in Bangladesh

6. Background to the industry

• Securities and Exchange Commission • Regulatory objectives • Functions and Powers • Duties

7. Legislation

• Principal Ordinances • Rules • Codes, Guidelines

Topic 3: The Stock Exchanges in Bangladesh - Primary and Secondary Markets

8. Primary market

• What is the primary market? • Why do companies go public (list)? • Advantages and disadvantages of listing • Initial public offering • Listing rules


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• Types of listing methods • Road show • Prospectus preparation

9. Secondary market

• What is the secondary market?

10. The Stock Exchanges in Bangladesh • Rules • Trading • Clearing and Settlement • Risk Management • The Central Depository and Clearing Company:

(a) operation, (b) checks and balances, (c) reporting of default requirements, (d) risk management

11. Market surveillance and impact on participant behaviour. 12. Reporting to investors and the market - keeping the market informed.

Topic 4: Stock Market Administration 13. Trading system 14. Clearing and settlement system

15. Transaction costs in stock trading • Brokerage house • Stock Exchange • The Government

16. Trading records management • Internal control procedures • Internal audit

17. Conduct of business


18. Background • Accounting assumptions and principles • Accrual accounting • Accounting standards • Accounting guidance notes

19. Reading and understanding financial statements • What is the reader looking for? • Statement of accounting principles • Balance sheet • Current vs. non-current • Classification of non-current assets


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• Spreading non-current assets over their useful life • Profit and loss statement and account • Notes to the accounts • Creditors, accruals, provisions and contingencies • Shareholders' funds: capital, reserves and undistributed profits


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PAPER 3: REGULATION OF SECURITIES (SPECIALIST KNOWLEDGE PAPER FOR SECURITIES TRADING AT ADVANCED LEVEL)

Topic 1: Regulatory framework for the securities market in Bangladesh 1. Background to the industry 2. Securities and Exchange Commission

• Regulatory objectives • Functions and Powers • Duties

3. Legislation


4. Other Regulatory bodies and self-regulatory organisations

• Other Regulators • The Exchanges

5. The Exchanges

• Rules • Trading • Clearing and Settlement • Risk Management

6. The Central Depository and Clearing Company

• Operation • Duties, • rules, • checks and balances • reporting of default requirements • Risk management

Topic 2: Licensing and Registration

7. Licensing

• Who needs to register? (a) corporations (b) Directors, management (c) agents, traders

8. Fit and proper tests

• The requirements • Continuing requirement • Industry Qualification • Continuous professional training


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Topic 3: Relevant Financial and Related Requirements 9. Financial Resources 10. Client Securities 11. Client Money 12. Contract Notes, Statements of Account and Receipts 13. Keeping of Records 14. Accounts and Audit 15. Insurance and Compensation Issues

Topic 4: Stock Market Administration 16. Transaction costs in stock trading

• Brokerage house • Stock Exchange • The Government

17. Trading records management

• Contract notes • Statement of accounts and receipts for clients • Firm’s internal control procedures • Internal audit • Compliance Officer

18. Risk management

• Overview — What is risk? — Risk versus expected return — Fundamental risk management techniques

• Types of financial risks — Credit risk — Market risk — Liquidity risk — Operational risk — Other risks

• The risk management process — Identifying risk — Measuring risk — Managing risk — Monitoring risk

• Financial risk management — Financial risk management systems and processes — Financial risk management techniques — Financial risk management in the future — lessons from the past

19. Technology

• Internet securities trading • On-line financial information • Future impact of technology


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Topic 5: Business conduct of intermediaries 20. General principles 21. Honesty and Fairness 22. Diligence 23. Capabilities 24. Information about clients –know your client 25. Client agreement 26. Discretionary accounts 27. Information for Clients 28. Client priority 29. Conflicts of interest 30. proprietary trading 31. employee dealing 32. disclosure of interest 33. segregation of duties and functions 34. Client assets 35. Compliance 36. Risk disclosure

Topic 6: Management and Supervision of Securities Business

37. Duties and Responsibilities of director, manager and supervisor

Topic 7: Trading

38. Short selling and stock lending 39. Unsolicited Calls 40. Margin trading 41. Internet Trading

Topic 8: Misconduct and Offences

42. Insider Dealing 43. False Trading 44. Price Rigging 45. Price Stabilization 46. Front running 47. Unauthorised trades and over trading 48. Disclosure of false or misleading information inducing transactions 49. Market manipulation 50. Misappropriation of clients’ assets 51. Money laundering and terrorist financing


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PAPER 4: FUNDAMENTALS OF ASSET MANAGEMENT (SPECIALIST KNOWLEDGE PAPER FOR FUND MANAGEMENT AT FOUNDATION LEVEL) Topic 1: Overview of Fund Management Industry

1. Background of the fund management industry in Bangladesh • Types of funds • The size and sectors in the fund management industry • International perspective • Benefits and costs of managed funds

2. Participants in the funds industry

• Investors • Promoters • Fund managers • Trustee companies • Distributors • Other supporting participants

Topic 2: Regulatory framework for the funds industry in Bangladesh

3. Background to the industry

• Securities and Exchange Commission (a) Regulatory objectives (b) Functions and Powers (c) Duties

4. Legislation


Topic 3: The Products

5. The main asset classes

• Equities • Fixed income securities • Cash • Property • Derivatives • Foreign exchange

6. Major types of managed funds

• Closed-end and open-end funds • Guaranteed funds • Equity funds • Fixed income funds • Money market funds • Property funds • Balanced funds • Other types of funds


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Topic 4: Basic Theoretical Aspects of Asset Management 7. Investment concepts

• What is risk? • Calculating the expected return • Risk and return concepts • The normal distribution curve The risk/return trade-off • Principles of Modern Portfolio Theory • Applications of MPT

8. Capital Asset Pricing Model

• The CAPM • The Security Market Line Systemic risk • Beta • Applications of CAPM Limitations of CAPM • Limitations of CAPM

9. Arbitrage Pricing Theory 10. Efficient Market Hypothesis

• Types of market efficiency • The Random Walk Hypothesis

Topic 5: The Investment Management Process 11. Overview of the investment management process 12. Setting the investment objectives and constraints

• Identifying the investment objectives and constraints • Setting the investment objectives and constraints

13. Formulating the investment strategy

• Asset modelling • Setting the strategic asset allocation • Implementing the strategic asset allocation

14. Asset allocation

• What is active asset allocation? • What is passive asset allocation? • Use of derivatives • The active return • Tactical asset allocation

15. Investment management styles

• Equity management styles Fixed income management styles

16. Selecting a manager

• Matching the investment objectives with manager skills • Qualitative analysis • Quantitative analysis • Role of the fund research house or rating agency • Monitor and review


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Topic 6: Evaluating Performance

17. Principles of performance measurement • What is performance measurement? • Measuring return • How performance is measured? • Peer group comparisons • Index benchmarks • Risk-adjusted performance measures

18. Reviewing and monitoring the investment management process



20. Reading and understanding financial statements • What is the reader looking for? • Statement of accounting principles • Balance sheet • Current vs. non-current • Classification of non-current assets • Spreading non-current assets over their useful life • Profit and loss statement and account • Notes to the accounts • Creditors, accruals, provisions and contingencies • Shareholders' funds: capital, reserves and undistributed profits • Dealings with associated companies

21. Are financial statements and financial accounts adequate? • Cosmetic accounting

22. Use of information • Ratio analysis • Cash-flow analysis

Topic 8: Analyzing products

23. Analyzing products • Overview • Factors affecting securities prices • Investing • Stock indices and averages


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Topic 9: Technical Analysis

24. Technical Analysis • Definition of Technical Analysis • Underlying Assumption of Technical Analysis • Challenges to Technical Analysis • Advantages of Technical Analysis • Technical trading Rules and Indicators

Topic 10: Business Valuation

25. Essential principles 26. Valuation techniques


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PAPER 5: REGULATION OF ASSET MANAGEMENT (SPECIALIST KNOWLEDGE PAPER FOR ASSET MANAGEMENT AT ADVANCED LEVEL) Topic 1: Regulation of investment products

1. Types • Private funds - Portfolio management • Public funds - Collective Investment Schemes (‘CIS’)

2. Authorisation and offering of CIS products General authorisation requirements

(a) Authorisation and disclosure requirements (b) Advertising (c) Investment requirements (d) Limitations and prohibitions (e) Pricing and redemption (f) Warnings (g) Fees and charges (h) Remuneration

Regulation of intermediaries • Intermediaries

(a) asset managers, (b) distributors (authorised financial institutions, securities dealers, financial planners,

etc.), and (c) others (trustees and custodians, etc.),

• Licensing and other regulatory requirements • Other Regulatory requirements for intermediaries

(a) record keeping, (b) capital requirements, (c) accounts and audit, and (d) client assets

Topic 2: Business conduct of intermediaries

3. General principles 4. Honesty and Fairness 5. Diligence 6. Capabilities 7. Information about clients –know your client 8. Client agreement 9. Discretionary accounts 10. Information for Clients 11. Client priority 12. Conflicts of interest 13. Proprietary trading 14. Employee dealing 15. Disclosure of interest 16. Segregation of duties and functions 17. Client assets 18. Compliance 19. Risk disclosure


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Topic 3: Misconduct and Offences

20. Insider Dealing 21. False Trading 22. Price Rigging 23. Price Stabilization 24. Front running 25. Unauthorised trades and over trading 26. Disclosure of false or misleading information inducing transactions 27. Market manipulation 28. Misappropriation of clients’ assets 29. Money laundering and terrorist financing 30. Business operations, internal controls and compliance

Problems and pitfalls in the finance industry Segregation of duties Internal controls Ethics Corporate governance

31. Corporate governance and its role in equity financing

• Definition of corporate governance • Asian corporate governance • Strengthening corporate governance



28. Reading and understanding financial statements • What is the reader looking for? • Statement of accounting principles • Balance sheet • Current vs. non-current • Classification of non-current assets • Spreading non-current assets over their useful life • Profit and loss statement and account • Notes to the accounts • Creditors, accruals, provisions and contingencies • Shareholders' funds: capital, reserves and undistributed profits • Dealings with associated companies

29. Are financial statements and financial accounts adequate? • Cosmetic accounting

30. Use of information • Ratio analysis • Cash-flow analysis


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• Overview • Factors affecting securities prices • Investing • Stock indices and averages

Topic 6: Technical analysis

• Definition of Technical Analysis • Underlying Assumption of Technical Analysis • Challenges to Technical Analysis • Advantages of Technical Analysis • Technical trading Rules and Indicators

Topic 7: Industry Analysis

• Definition and necessity of Industry Analysis • Estimating Industry Rates of Return


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PAPER 6: CORPORATE FINANCE

Topic 1: Principles of Corporate Finance

1. Basic principles • Uncertainty and risk • The time value of money • Risk and return • Interest and discount • Cost of capital • Financial leverage and capital structure • Taxation

2. Capital budgeting • The decision process • Initial screening of proposals • Capital budgeting process • Detailed analysis of projects under consideration • Working capital • Selection and approval

3. Application of principles • Structuring the finance • Building a corporate finance structure to suit a company's needs

4. Corporate collapse • Causes of corporate collapse • Warning signals of failure • Appropriate strategies for dealing with collapse

5. Infrastructure finance • Assessing potential infrastructure projects • Project participants • Types of infrastructure financing

Topic 2: Equity Financing

• Capital needs of companies • Forms of equity financing • Considerations in devising equity structure • The capital-raising process • Venture capital • Start-up and early-stage financing • Key characteristics • Linkages between cash flow analysis and venture capital financing • Other venture capital financing modalities • Sources of repayment • Corporate governance and its role in equity financing • Definition of corporate governance • Asian corporate governance • Strengthening corporate governance


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Topic 3: Debt Financing

• Characteristics of debt • Types of debt financing • Process of approval of loans • Determining the appropriate debt structure • International debt markets • Securitisation • Managing debt

Topic 4: Business Valuation

• Essential principles • Valuation techniques

Topic 5: Listing of Securities

• Issuers roles and responsibilities • Stock Exchange roles and responsibilities • Methods of Listing • offer for subscription; • offer for sale; • placing; • introduction; • rights issue; • open offer; • capitalisation issue; • consideration issue; • exchange or substitution; • others.

Listing procedures and criteria for different instruments

• equities; • options, warrants and similar rights; • overseas issuers; • investment vehicles; including mutual funds, other collective investment schemes and

investment companies; • debt securities • Others

Continuing obligations of a listed company SEC Code of Corporate Governance Suspension, cancellation and withdrawal of listing

Topic 6: Disclosure, Take-overs and Mergers

• Purpose and basic requirements • General principles • Voluntary codes versus prescriptive legislation • Roles and responsibilities of financial and other professional advisers


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• Restrictions on action during bid period • Disclosure of financial information • Disclosure of price sensitive information • Levels of control • Shareholder rights • Rationale for provisions • Bangladesh industries with potential sensitivities over control ownership (eg.

banking, insurance, television and communications).

Topic 7: Mergers and Acquisitions

• Overview: mergers and acquisitions • Ethical issues

• Structuring a takeover • The mechanics of a takeover • Takeover strategies • Legal issues


• Background • Accounting assumptions and principles • Accrual accounting • Accounting standards • Accounting guidance notesReading and understanding financial statements • What is the reader looking for? • Statement of accounting principles • Balance sheet • Current vs. non-current • Classification of non-current assets • Spreading non-current assets over their useful life • Profit and loss statement and account • Notes to the accounts • Creditors, accruals, provisions and contingencies • Shareholders' funds: capital, reserves and undistributed profits • Dealings with associated companies

• Are financial statements and financial accounts adequate? • Cosmetic accounting

• Use of information • Ratio analysis • Cash-flow analysis


• Overview • Factors affecting securities prices • Investing • Stock indices and averages


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Topic 10: Technical analysis

• Definition of Technical Analysis • Underlying Assumption of Technical Analysis • Challenges to Technical Analysis • Advantages of Technical Analysis • Technical trading Rules and Indicators


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APPENDIX F: REVISED DRAFT TERMS OF REFERENCE OF STEERING COMMITTEE


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REVISED DRAFT TERMS OF REFERENCE OF STEERING COMMITTEE

— The purpose of the Committee is to offer informed and experienced advice and guidance to executive staff tasked to implement the training, qualifications and accreditation strategy. The Committee has a secondary role as a focus for liaison between institutions and organisations in the industry.

— The Committee will comprise members who are experienced in securities or in other professional

and vocational areas relevant to the project. Members will be chosen for their personal expertise, or they can be nominated to represent selected organisations. It must be clear whether a member is offering personal or representational views.

— The Chairman of the SEC shall be the chairman of the the Committee.

— President and/or CEOs of DSE and CSE should serve as members of the Committee.

— The senior member of SEC staff responsible for implementation of the training and accreditation

strategy will be a member of the Committee. This executive will also provide administrative and clerical resources and support, and will appoint a Committee secretary who will be responsible for convening meetings and making all necessary arrangements.

— The Committee may offer advice and guidance on any aspect of the implementation plan. The

subjects of focus shall include, but not limited to:

• structure of the institute, • composition of the governing board, • the minimum number and qualifications of full time faculty and other staff and their

qualifications, • composition of committees; e.g. academic committee to advise the governing board on

various aspects including required courses: — budgetary requirements; and — sources of funding.


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APPENDIX G: LIST OF PEOPLE MET


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LIST OF PEOPLE MET Name Designation Organization

Dr. Mirza Azizul Islam

Chairman

Mr. Abdul Hannan Zoarder

Executive Director

Mr. Anwarul Kabir Bhuiyan

Executive Director

Mr. Farhad Ahmed

Executive Director

Mrs. Ruksana Chowdhury

Executive Director

Mr. Shuvra Kanti Chowdhury

Executive Director

Mr. Munsur Alam

Executive Director

Mr. Abbas Uddin Khan

Member

Mr. Mohammad Ali Khan

Member

Mr. Saleh Ahmed Chowdhury

Member

Securities and Exchange Commission

Mr Wali-ul-Maroof Matin

Chief Executive Officer

Chittagong Stock Exchange

Mr. Salahuddin Ahmed Khan

Chief Executive Officer

Dhaka Stock Exchange Ltd.

Mr. Imran Rahman

Associate Professor

Institute of Business Administration (IBA)

Mr. M.A. Baqui Khalily

Pro-Vice Chancellor

Presidency University

TA No. 4246-BAN Preparing The Financial Markets GovernanceProgram

Report on skills development for SEC staff and human resources management



in association with



and


TA No. 4246-BAN: Preparing The Financial Markets Governance Program Report on skills development for SEC staff and human resource management

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TABLE OF CONTENTS PART I: SKILLS DEVELOPMENT FOR SEC STAFF...................................................................................1

Current Situation – The Problems .......................................................................................................................1 The Proposal........................................................................................................................................................4 Skill Development of the SEC – the Approach ...................................................................................................4 Training Needs Identified....................................................................................................................................5 Recommendations on Medium Term Training Programmes ..............................................................................5

(i) General courses for all staff of SEC ......................................................................................................6 (ii) Specific courses for strategic level staff (Chairman, Members, Executive Directors) ..........................7 (iii) Specific Courses for Junior/Mid-level staff (Directors, Deputy Directors and Assistant Directors) 8 (iv) Specialised Courses (one month).......................................................................................................8

Other recommendations.......................................................................................................................................9 Delivery Mechanism ...........................................................................................................................................9

PART II: SEC HUMAN RESOURCE MANAGEMENT ...................................................................11

Introduction .......................................................................................................................................................11 Recruitment and Compensation.........................................................................................................................11 Observation........................................................................................................................................................11

Recommendations..........................................................................................................................................11 Performance Evaluation ....................................................................................................................................12

Recommendations..........................................................................................................................................12 Conclusion.........................................................................................................................................................13

APPENDIX A: LIST OF TRAINING AND CONFERENCES ATTENDED BY THE SEC ....................14 APPENDIX B: IOSCO OBJECTIVES AND PRINCIPLES........................................................................23 APPENDIX C: PAY SCALE FOR THE SEC OFFICIALS: AS PER GOVT. PAY SCALE 2005 ..........27 APPENDIX D: SALARY AND BENEFIT PACKAGE OF BANGLADESH BANK ................................29 APPENDIX E: COMPARISON OF BENEFITS FOR BANGLADESH BANK STAFF AND SEC STAFF ..................................................................................................................................................31 APPENDIX F: ANNUAL CONFIDENTIAL REPORT OF SEC STAFF ..................................................34 APPENDIX G: COMPETENCIES/SKILLS LIST........................................................................................36 Figure 1: SEC Organisational Chart as at April 2005 ............................................................................. 3 Table 1: Staffing position of the SEC...................................................................................................... 4


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PART I: SKILLS DEVELOPMENT FOR SEC STAFF

1. This paper deals with the following TOR:

• Review the skills inventory report on SEC staff prepared under TA—3533, determine skills required by the organization now and for the next level of market development, and recommend suitable long-term training programs for the existing staff.

Current Situation – The Problems 2. The skills inventory report on SEC staff prepared under TA—3533 has commented that:

• almost all areas of the SEC suffer from shortage of professional staff; and • there is a strong need for training in all aspects of work of the SEC. Whilst the professional staff of

the SEC are generally well- qualified academically, they lack market experience and experience in regulatory work.

3. SEC has made continued effort in providing on the job training to staff. Arrangements have also been

made for a number of staff to attend overseas courses, including:

• Regional Seminar on Strengthening the Development of Domestic Debt Securities Market. • Enforcement Seminar. • Seminar on Investigation, Enforcement and Prosecution. • SECs Annual International Institute for Securities Market Development. • IOSCO Seminar Training Program. • Reforming Payment and Securities Settlement Systems. • Financial Information through Accounting and Risk Management. • On the job training at Thai SEC. • On the job training at Sri Lanka SEC. • On the job training at SEBI. • IOSCO Asia Pacific Regional Committee (‘APRC’) Meeting. • Course on Financial Market Analysis. • Study tour to Australia.

4. A list of training and conferences attended by the SEC is at Appendix A. 5. There is the need for continuous training to upgrade the professional standards of SEC staff in view of

the ever-evolving nature of the securities market. The need is augmented by the fact that SEC has not been able to attract professionals with appropriate skills and experience from the private sector due to its unattractive pay structure. It is important that SEC provide training to staff to equip them as much as possible to perform an effective job.

6. SEC has sought approval from Administration to create a new grade of Assistant Director recommended

by the UNDP Team in 1998. It is only recently that approval for the creation of AD posts was approved, but filling of the approved posts has yet to be completed, pending amendment to the civil service rules.

7. There has been hardly any increase in the last few years in the number of approved posts within the

SEC despite increased responsibility and workload. SEC has not been able to effectively discharge its


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regulatory functions. For example, regular inspection of brokers’ offices cannot be conducted as the examination staff of the SEC is badly under strength. The core of the problem is the need for SEC to operate within the civil service constraint. Staff increase and recruitment currently need to go through the government machinery. Autonomy should be given to SEC in this area with financing autonomy. The table and organizational chart below illustrates the points made.


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Figure 1: SEC Organisational Chart as at April 2005


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Table 1: Staffing position of the SEC.

Number of Approved Posts Number of Vacancies

1999 2005 6 Executive Directors 6 Executive Directors 3 Directors 6 Directors 16 Deputy Directors 16 Deputy Directors 5 7 Assistant Directors 7

The Proposal 8. Professional and skill development of SEC, stock exchanges and market intermediaries would be key to

success in terms of efficient and dynamic operation of the market and its infrastructure. 9. The needed professional and skill development for SEC staff through training should begin with a

broader perspective ensuring adequate stress on specific areas:

• regulation: its objective and scope; • regulatory bodies: its role, functions and powers; • implementation of regulation : enforcement, SRO; • market system, automation, market oversight and surveillance; • international practices; • best business practice, codes of conduct; and • research and development.

Skill Development of the SEC – the Approach 10. In constructing the overall design of a medium-term training program for the SEC staff, we will stress

the need for regulation and promotion in a developing market based on IOSCO standards and principles (see Appendix B) and laid particular emphasis on designing courses which deal with the functions, objectives and approaches to regulating and developing the financial market.

11. The suggested programs achieves to cater for:

• skills required by the SEC now; and • the next level of market development, particularly in the area of bond market and new instruments

(derivatives, futures etc.) 12. Training Need Assessment has been undertaken using the following methods:

• circulation of need assessment forms among the staff; • holding one-to-one discussion with individual staff; • gathering opinion of the supervising staff about the supervised staff; • reviewing previous TA reports; and • reviewing previous training and overseas conferences/seminars attended (A list is attached at

Appendix A).


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Training Needs Identified 13. Training needs identified include:

(i) Functions and Powers of SEC in Bangladesh. (ii) International practice on Code of Corporate Governance. (iii) Training on the application of Corporate Governance. (iv) International legal framework especially relating to SEC. (v) Financial Crimes, Forensic Accounting and Anti-money laundering. (vi) Market surveillance. (vii) Investigations and inspections. (viii) Training on the regulations of Stock Exchanges and Securities Markets. (ix) Training on International Accounting and Auditing standards. (x) IT courses in areas of Office Automation. (xi) Risk Management. (xii) New financial instruments (bond market operation and regulation, derivatives and futures). (xiii) Reading credit rating agency report.

14. In particular, effective risk management, enforcement and market surveillance plays an important part

in the overall regulation of the financial markets. It is of paramount importance that the SEC staff be trained intensively on risk management, surveillance and enforcement techniques, procedures and systems so that they are fully equipped to perform an efficient and effective job. The training for the SEC enforcement staff should concentrate on hands-on training including exposure to practical experience in actual cases.

15. Similarly the stock exchange management also requires training in this area. 16. For effective formulation of policies in line with international practices appropriate for Bangladesh, it is

necessary that the staff possess in-depth understanding of how specific policies are arrived at by other jurisdictions. Attachment to SEC counterparts in other jurisdiction would be beneficial.

Recommendations on Medium Term Training Programmes 17. A medium-term training curriculum based on IOSCO principles and standards, designed after

consultation with the various divisions of the SEC to cater for their needs is outlined below. 18. For overall professional development, SEC staff will require structured training courses as well as

attachment to overseas regulatory bodies, financial institutions and brokerage houses. 19. Structured Training Courses include:

(i) General courses for all staff of SEC. (ii) Specific courses for strategic level staff (Chairman, Members and Executive Directors). (iii) Specific Courses for Junior/Mid-level staff (Directors, Deputy Directors and Assistant

Directors). (iv) Specialised courses, including training programmes organised by IOSCO and Asia Pacific

Regional Committee of IOSCO (APRC).


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(i) General courses for all staff of SEC 20. The general course training will be delivered to all senior, mid-level and junior level staff of the

Commission. The programme will place emphasis on: • the objectives and approach to regulation, • market mechanism and market supervision, and • organizational management.

21. The objective is to help staff in the formulation of regulatory policy as well as the development of an

understanding of the practicalities of regulation; and in the formulation of strategy for effective market oversight and technique of general organizational and basic business management. The programme will cover the following subjects:

Phase 1: Regulatory • Regional and Global Financial markets. • Overview of financial market of Bangladesh. • Financial Market Structure and Regulatory Framework in Bangladesh. • Legal system of Bangladesh. • Major institutions in the Bangladesh financial markets. • Role of Government and SROs. • SEC Charter. • Roles and Functions of SEC. • Securities Laws/Regulations. • Selective Corporate Laws. • Stock Market Administration. • Market Supervision and Market Malpractice. • Enforcement and Handling of Complaints. • Misconduct and Offences.

Phase 2: Market Operations • Market Economic System and Capital Market Reforms. • Investment Environment. • Organization of Securities Markets. • Stock Market Operation. • OTC market operation. • Market Intermediaries and Products. • Margin financing. • Stock borrowing and lending. • Derivatives and futures trading. • Corporate bond. • Risk management. • Credit rating analysis. • Technology. • Internet securities trading. • On-line financial information. • Future impact of technology. • Underwriting and Investment Banking. • Business conduct of intermediaries.


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• Market surveillance and impact on participant behaviour. • Reporting to investors and the market-keeping the market informed. • Fund Management.

Phase 3: Organizational Management • General Management. • Decision making. • Team building and Team work. • Organizational functions and performance. • Job allocation. • Inter-departmental coordination. • Meetings and discussions. • Monitoring and supervision. • Business writing and communication. • Negotiation skills. • Basic Accounting and Finance. • Communication and Public Relations. • Dissemination of information. • Writing reports arts. • Media management. • Stakeholder’s relations. • Seminar/ Conferences etc. • Investor awareness. • Business, Financial and Organizational ethics. • Data Base and MIS. • Automation. • Codes of conduct and ethics.

22. The duration of each phase of the course should be 7-8 days.

(ii) Specific courses for strategic level staff (Chairman, Members, Executive Directors) 23. The objective of the course is primarily to help the senior level staff to understand the overall

organizational perspective, vision and requirement needed to be able to formulate strategic plans and to effectively implement: • Strategic Planning. • Market Development. • Research and Development. • Leadership. • Organizational Development. • Formulation of Rules/Regulations. • MIS. • Corporate Finance. • Valuation of Business Enterprises. • Market Oversight and Surveillance. • Interfacing with Stock Exchanges. • International Money and Capital Market. • Privatization.


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• Financial Derivative and futures markets • Corporate bond. • Corporate Governance. • Enforcement and Compliances. • Human resources management. • Macro Economic Issues and Environment. • International Accounting and Auditing Standards. • Work ethics.

24. The duration of the course should be 7-8 days.

(iii) Specific Courses for Junior/Mid-level staff (Directors, Deputy Directors and Assistant Directors)

25. The objective of the courses is to help the junior/mid level staff in developing overall perspective about

the financial market operations, and also to provide in-depth exposure on the techniques of market operations: • Corporate Finance Framework. • Financial Products. • IPO and pricing. • Prospectus Financial Analysis. • Understanding financial statements. • Credit rating report and credit rating analysis.. • Portfolio Management. • Trading. • Operations of Stock Exchanges. • Operation of OTC market. • Market Surveillance. • Inspection and Investigation Techniques. • Business conduct of market intermediaries. • Misconduct and offences. • Money laundering and terrorist financing. • MIS and automation.

26. The duration of the course should be 14 days.

(iv) Specialised Courses (one month) 27. It will be of great significance that SEC adopts a policy of selecting some staff for specialised courses in

areas relevant to SEC’s functions. These include: • Course on Investment Management. • Course on Securities Market Regulation. • Course on market surveillance and investigation, including international experience. • Course on risk management. • Course on policy formation. • Training programmes of IOSCO and APRC, in addition to attending IOSCO conferences.


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28. Some staff members of the SEC have expressed that in-depth exposure for specific subjects is lacking. Consultant suggests that this could be accomplished by attachment to regulatory bodies; e.g. SEBI of India, SEC in Thailand, institutions, brokerage houses in Asia Pacific countries as appropriate.

Other recommendations 29. Staff recruited into SEC at all levels (not just junior executives) should be given orientation to enable

them to have a good understanding of the functions of SEC. Posting should be done according to the expertise, strength and interest of the officer so that he/she could be fully effective.

30. An internal policy and procedure transparent to all needs to be in place for selection of staff for training

locally and abroad. The selection criteria should ensure that:

• Specialised skill programme are attended by officers in the appropriate department. Whilst senior management level officers should be trained in a broader field, encompassing different functions of the organization, it would be appropriate that mid-level staff is selected for specific courses/ visits to enhance their specific skills.

• Appropriate level of staff is selected for appropriate training programs for the right skills. It would

be wasteful to send junior staff abroad for training at highly technical or policy level programs which are beyond their capabilities to absorb and to be of benefit.

• Staff selected for training programs, particularly overseas visits, should be expected to be able to

share his experience and knowledge gained. Officers due to leave service should not be selected. Any amount of time or money invested by SEC in training should ideally be justified by the trained person remaining in their employment for a reasonable time.

• It should be made a requirement that an officer, upon completion of an overseas training program or

visit, made a presentation to other staff in the department and interested officers within the SEC. He/she should also present a report outlining training undertaken and knowledge gained. The report should be kept in the library for reference by all staff.

Delivery Mechanism

31. The delivery mechanism includes:

• In–house: some of the topics of the local training programs listed at (i) (ii) and (iii) above should be delivered through lecture sessions, workshops to be organized by an international training consultant.

• Overseas attachment to regulatory bodies and financial institutions (specialised courses at (iv)). It is

recommended that the international consultant should assist in selecting and making arrangements for overseas attachment. In this regard, it is considered that attachment to regulatory bodies, stock exchanges and financial institutions in Asia Pacific countries would be appropriate. Consultant believes that practical hands-on training in countries with similar system would be more effective than attending short courses organised by developed markets.

• Establishment of a ‘Training Unit’ within the SEC, to work with the international consultant in

organising the proposed training program and more importantly, to ensure training continues as an ongoing exercise. It is essential that training infrastructure at the SEC be set up to ensure continuity in the training process after the formal project is over. Continuous training throughout a


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professional career is a concept which is well established in most leading financial markets. It is therefore proposed that the SEC should set-up a small, dedicated Training Unit as soon as possible, whose principle mandate would be to build on the training and improvements in capacity undertaken by international consultants. Given the current shortage of staff in SEC, support from Administration in terms of staffing is required.

• It is recommended that the service of an international consultant be obtained for 9 months to

organise the in-country and overseas programs and to assist in setting up the proposed training unit.


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PART II: SEC HUMAN RESOURCE MANAGEMENT

Introduction 32. A small part of the terms of reference of component (V) is to review SEC recruitment policies, salary

structures, performance evaluation procedures, and overall incentive framework. Determine ways for key salary positions at SEC to be competitive with the private sector and to retain competent staff.

33. The above listed human resource management issues are discussed below:

Recruitment and Compensation 34. The staff of the SEC is employed on the basis of the Government's national public pay scale. The

revenues collected by the SEC are returned to the government treasury and expenses are paid from appropriated funds. The SEC salary scales are controlled through the public pay scale. The salary and benefit package of the SEC staff is listed at Appendix C.

35. Recruitment and career progression in SEC are restricted and constrained by government policy.

Observation 36. Remuneration packages are low compared to jobs in the private financial sector. Staff turnover is high

by local standards. As a result, the SEC does not have the capacity to effectively regulate and monitor current activities within its remit and in addition has limited resources to devote to development functions. The major problem for the SEC is the lack of independence in human resources management policy, particularly with respect to creation of new posts, determination of salary structure, development of a system of rewards and penalties etc. Any change in these areas requires multiple layers of approval to several Ministries. Fundamental changes in HR management are necessary if SEC is to become an effective regulator.

37. Compared with Bangladesh Bank, whilst the Bank staff is also subject to government salary, the Bank

staff enjoys more benefits than SEC staff. The benefit package of the Bank staff is at Appendix D. 38. A comparison of the benefit package of SEC and the Bangladesh Bank is at Appendix E. 39. The current organizational structure of the SEC does not provide an attractive career structure for staff.

Promotion prospect is limited. Despite the need for additional staff at managerial level to meet the increased responsibility from new developments, no additional posts at managerial level have been created in the last few years, as any increase is subject to government approval. The process is such that from the time of submission of request to approval, it may take over one year, if not longer. It is recommended that the entire organizational structure of the SEC be reviewed, taking into consideration new scope of activities and issues like staff retention and career development.

Recommendations 40. Staff salaries in any SEC internationally are rarely as high as those in the market so the training and

promotion scheme must also act as compensation to the job holder and as a motivation to stay in the post for several years.


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41. Alternative ways for reducing the gap of compensation package of professional staff at SEC as

compared with the private sector is through offer of attractive benefits like transport or conveyance allowances, housing allowance, entertainment allowance, leave assistance, medical care, gratuity and provident fund. There may be other types of compensation but these define the main items currently offered in the financial sector.

42. A full scale compensation programme should be worked out and a review of the current compensation

package as compared with the private sector be conducted. 43. A review of the organizational structure of the SEC should be conducted, taking into consideration new

scope of activities and issues like staff retention and career development. In this connection, it is noted that the SEC has accepted the recommendations of consultants under the UNDP project in 1998 to create a new grade of assistant director as the entry level to the professional grade to allow the SEC to recruit bright young graduate with relevant Masters Degree, and possess aptitude and motivation to join the SEC and build up their career with the regulatory body. The purpose is to provide a better career structure to staff of SEC and to enable SEC to train its own staff to meet its staffing requirements. The new grade of Assistant Director was approved by the Ministry early this year, the civil service rules, however, has yet to be amended to allow staff to be recruited into the posts.

44. The ultimate solution is for SEC to be given independence in HR Management as stated above.

Performance Evaluation 45. The purpose of the performance appraisal system is to:

• evaluate an employee’s performance in an objective manner according to the standards of the organization;

• recognize an employee’s contribution to the organization; • enhance the professional growth and development of an employee; and • provide direction and set goals for the employee’s performance in the future.

46. In terms of performance evaluation, standard appraisals should be used. The most popular appraisals on

the market are competency based. Discussions of career development are also critical in the performance evaluation process in terms of motivating and retaining key talent. Since most performance evaluations are subjective in nature, training on performance evaluation is critical to ensure fair evaluation methods.

47. The SEC being a government organization adopts the standard government performance evaluation

form, a sample of which is at Appendix F.

Recommendations 48. The SEC performance evaluation process and form can be improved by:

• Making the form more competency-based (A competencies/skills list commonly used internationally is at Appendix G for reference of SEC).

• Having a section on discussions with staff regarding career development and training needs. • Explain the performance ratings by introducing the following categories:

(a) Exceeds expectations – works consistently beyond expectations for position and/or has taken on extra responsibilities.


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(b) Meets expectations – meets all expectations according o standards, policies and practices and gives a solid performance.

(c) Requires development – has not had the training or the opportunity to practice in order to meet expectations.

(d) Requires improvement – is not performing to expectations after having had the training and the opportunity to practice required.

Conclusion 49. Implementation of the above recommendations, in particular, the independence of SEC in human

resources management policies, will solve problems of staff retention, employment and other HR issues thus allowing SEC to become an effective, efficient regulator.


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APPENDIX A: LIST OF TRAINING AND CONFERENCES ATTENDED BY THE SEC


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LIST FOR FOREIGN TRAINING ATTANDED BY SEC OFFICIALS (As on 5.05.2005)

Sl. Name and designation Subject of Training Country Date Days Sponsors

No. 01. Mr. Saleh Ahmed Chowdhury, ASIC Australia March 2003

Member Joining date: 08.09.2002

End study Workshop of the of thePakistan 3-4 March 2003 2 SAFE3rd AGM & 6th Theme Conference of SAFEThe 7th Tokyo Seminar on Securities Japan 21 Sep.-01 Oct. 11 Govt. JapanMarket Program 2004

02. Mr. Mohammad Ali Khan Tokyo Seminar of Securities Market Japan 11-21Nov.03 11 Member Regulations Joining date: 27.02.2003

Annual International Institute of Securities Market Development

USA 19-29 April 04 11

Fifth Annual General Meeting and Theme

Pakistan 13-14 May 2005 2

Conference of SAF (Proposed.)

- 03. Mr. Abbas Uddin Khan Third OECD/INPRS Conference on Philippines 30 March -01 3 ADB TA Project Member private pension in Asia April 2004 Joining date: 05.02.2204 Regional Seminar Strengthening the Sri Lanka 08-11 June 2004 4 World Bank Development of Domestic Debt

Market 4th Tokyo Enforcement Seminar Japan 13-17Nov.04 5 FSA, Japan


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04. Mr Mansur Alam Financial Managers Training UK 12 Sep.-08 Oct. 21 ODA, UK Executive Director 95 Joining date: 20.12:1993 Stud Tour to Thai SEC Thailand 03-21 June 96 19 ADB IOSCO Educational Training Program Canada 12-24 Se p> 97 13 World Bank Seminar on Securities Market

RegulationSouth Africa 21-25 June 99 5 UNDP

Securities Markets. IOSCO APRC Meeting. APRC Korea 19-25 Oct. 99 7 ADB Enforcement Conference and Visit to

Korea & Stock Exchange Seminar on Investigation, Enforcement Indonesia 26 Feb.-4 Mar. 7 ADB and Prosecution 2001 Asset Management and Establishment Manila 2 April 2004 1

Asset Reconstruction Companies SECs Annual International Institute for USA 18-28 April 05 11 SEC

Securities Market Development

05 Mr. Anwarul Kabir Bhuiyan, On the Job Training at Securities and India 8-25 March 99 18 UNDP Executive Director Exchange Board of India (SEBI) Joining date: 27.11.1997 IOSCO Seminar Training Program & Canada & USA O1-10Sep.99 11 ADB visit to US SEC & NSAD and NYSE ASIC Australia March 2003 Tokyo Enforcement Seminar on

Securities Market RegulationsJapan 01-05 Dec. 5 Govt. Japan

(Comments: Annual International Institute for USA 19-29 April, 04 11



FINAL REPORT


17 September 2005

06. Md. Abdul Hanana Zoarder, Annual International Institute for USA 12-28 April 99 17 UNDP Executive Director Securities Market Development and Joining date: 15.07.98 Internship program at US SED Seminar on Financial Markets & new Singapore 03-14 April 00 12 Singapore Govt. Financial Instruments Tokyo Securities Markets Regulation Japan 01-12, April 02 12 Japan Govt. Seminar 2002 Bond Study Tour to Australia & New Australia & New 04-10 Feb. 2002 7 FIDP Zealand Zealand Workshop for upgrading accounts and Philippines 12-16 April 5 ADBI auditing. 2004 Regional Seminar Strengthening the Sri Lanka 08-11 June 2004 4 World Bank Development of Domestic Debt Securities Market.

IOSCO Seminar Training Program -Spain 15-19Nov. 005 5 SEC

07. NIr. Farhad Ahmed, Executive IOSCO Seminar Training Program and Canada & USA 26 Oct.-6 Nov. 12 ADBVisit to Depository Company Pakistan 12-14 April 99 3 UNDPVisit to Depository Company India 16-20 April 99 5On the Job Training At Monetary Authority of Singapore (MAS)

Singapore 17-21 My 99 5 UNDP

Visit to Depository Company & Sri Lanka SEC

Sri Lanka 24-27 May 99 5 UNDP

IOSCO APPRC Enforcement Institute Korea 29 Nov.-03 Dec. 99

4 World Bank

CDS Study Tour I\•Ialaysia & Thailand

12-16 Mar.00 ADB

Tokyo Seminar of Capital Market Regulations

Japan 2-13 April 01 15 Japan Go-\t.

Reforming payment and Securities Settlement Systems

USA 3-7 Nov. 2003 5 ADB

Financial Information through Accounting and Risk Management

Philippines 18-24 Nov. 04 7 ADBI


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18 September 2005

08. Mrs. Ruksana Chowdhoury, Executive Director Joining: 03 07 1994

Workshop on Capital Market Activity Pakistan 02-07 Dec. 95 6 SEC

On the Job Training at Thai SEC. Thailand 03-21 June 2003 19 ADBOn the Job Training at Sri Lanka SEC Sri Lanka 7-16 June 96 10 UNDP- and Market Symposium Sri Lanka 06-08 Oct. 99 3 World bankTraining on Decision Support System ofFinance

India 15 May-10 June 00

27 Common wealth Secretariat

Bond Study Tour to Hong Kong Hong Kong 11-15 March 02 5 FIDP/WBThe 7 Tokyo Seminar on Securities Market Regulations

Japan 21 Sep> -01 Oct. 04

11 Govt. Japan

09 Mr. Shuvra Kanti Chow. Executive Director Joining: 13.11.1997

IOSCO Seminar Training on Price Manipulation

Poland 31 March-03 April 98

4 UNDP

On the Job Training at SEBI India 08-23 March 99 15 UNDP IOSCO APRC Meeting. APRC Korea 19-25 Oct. 99 7 ADB

Enforcement Conference and Visit toS1FSS Korea & Stock Exchanges

Conference on Emerging Markets in the USA Mar. 31-Apr. 20 ADD & WB New Financial System : Managing 19,2000 Financial & Corporate Distress and US- organized international Institute for Securities Market. Development & internship Program.

Tokyo Enforcement Seminar on Japan 25-29 Nov. 2002 6 FSA< Japan Securities Market Enforcement


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19 September 2005

10 Mr. ATAM Tariquzzaman, On the Job Training at SEBI India 5-19 April 99 15 UNDP Director, Joining: 21.12.1997 IOSCO APRC Meeting. APRC Korea 19-25 Oct. 99 7 ADD Enforcement Conference and Visit to

S\FSS Korea & Stock Exchanges APEC Regional Seminar on Philippines 26-30 Nov. 2001 5 ADD Investigation, Enforcement and Prosecution Course on Financial Market Analysis Singapore 13-24 October 12 IMF 2003 Tokyo Seminar on Securities Market Japan 11-21Nov.2003 11 Japan Govt.

Regulations SECs Annual International Institute for USA 18-28 April 05 11 SEC


11 Mr. Sirajul Huq On the Job Training at Thai SEBI Thailand 01-12 Ma 99 12 UNDP Director Joining: 19.10.1998 IOSCO Seminar on Price Manipulation Mauritius 15-17 March 3 UNDP 2000 IWF Seminar on Financial Markets & Singapore 12-22 March 12 IMF New Financial Instruments 2002 Tokyo Enforcement Seminar on Japan 25-29 Nov. 2002 6 FSA> Japan Securities Market Enforcement


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20 September 2005

12. Mr. Ashraful Islam,

Director Joining: 19.10.1998

On the Job Training at SEBI India 05-19 April 1999

15 UNDP

13. Mr. Mizanur Rahman Director Joining: 05.11.98

On the Job Training at SEBI Thailand 05-19 April 99 15 UNDP

Workshop on Pension Systems Reform in South Asia

India 27 Nov.-02 Dec. 00

6 ADB Institute

Tokyo Securities Markets Regulation Seminar, 2002

Japan 1-12 April 2002 12 Japan Govt.

Emerging Market Program Malaysia 3-8 Oct. 2004 6

14. Mr. Anworul Islam Director Joining : 19.01.00

On the Job Training at Sri Lanka Sri Lanka 7-17 June 99 10 UNDP (Availed the training- as Consultant)

Tokyo Enforcement Seminar Japan 25Feb.-01 March 2004

Japan Govt.

MAS Capital Market Seminar Singapore 17-20 August 2004

4 SEC


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21 September 2005

15. Mr. Md. Saifur Rahman

Director Joining: 01.03.2000

Tokyo Enforcement Seminar Japan 25 Feb.-01 1\/larch 200

5 Japan Govt.

Financial Market Analysis ST-04.11 Singapore 17-28 May 2002 12

16. Mr. AK Ziaul Hasan Khan Director Joining: 31.07.2000

Bond Study Tour Hong Kong 1 I-15 March 2002

5 FIDP?WB

MAS Capital Market Seminar Singapore 17-20 August 2004

4 SEC

17. Mr. M Hasan Mahmud, DD Joining: 17.9.3001

Promotion of Modern Financial Markets India U2-13 Dec. U2 12 Colombo Plan/ Govt. India

Study Tour to Australia New Zealand/Australia

1-13 Feb. 05 13 FIDP


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22 September 2005

18. Mr Md. Mahabubul Alam,

DD Tokyo Enforcement Seminar on Japan 01-5 Dec. 2003 5 Govt. Japan

Joining: 01.11.2001 Securities Market Regulations

19. Mr. Mahbuber Rhaman Chow.

Modem Financial Markets with Emphasis

India Sep 6-16,2004 11 India

DD (Law) on Urban Instructure Financing Joining: 23.01.2003

20 Mr Kamrul Anam Khan, DD Regulation and Supervision of Islamic Malaysia 6-10 June 2005 Joining: 26.02.2003

Banks (Proposed')

21. Mr. Mohammad Rezaul Karim

4th Tokyo Enforcement Seminar Japan 13-17Nov.04 5 FSA, Japan

DD, Joining: 04.3.2003

22. Mr. Safiul Azam- DD Joining: 10.04.2003

23. Mrs. Farhana Faruque, P. S Joining: 23.09.2001


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23

APPENDIX B: IOSCO OBJECTIVES AND PRINCIPLES


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IOSCO objectives and principles of securities regulation

The 30 principles of securities regulation are based upon three objectives of securities regulation. These are:

• The protection of investors. • Ensuring that markets are fair, efficient and transparent. • The reduction of systemic risk.

The 30 principles need to be practically implemented under the relevant legal framework to achieve the objectives of regulation described above. The principles are grouped into eight categories. A. Principles Relating to the Regulator

1. The responsibilities of the regulator should be clear and objectively stated. 2. The regulator should be operationally independent and accountable in the exercise of its

functions and powers. 3. 4. The regulator should have adequate powers, proper resources and the capacity to perform its

functions and exercise its powers. 5. 6. The regulator should adopt clear and consistent regulatory processes. 7. 8. The staff of the regulator should observe the highest professional standards including

appropriate standards of confidentiality. B. Principles for Self-Regulation

9. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

10. SROs should be subject to the oversight of the regulator and should observe standards of

fairness and confidentiality when exercising powers and delegated responsibilities. C. Principles for the Enforcement of Securities Regulation

11. The regulator should have comprehensive inspection, investigation and surveillance powers.

12. The regulator should have comprehensive enforcement powers. 13. The regulatory system should ensure an effective and credible use of inspection, investigation,

surveillance and enforcement powers and implementation of an effective compliance program.


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25

D. Principles for Cooperation in Regulation

14. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

15. Regulators should establish information sharing mechanisms that set out when and how they

will share both public and non-public information with their domestic and foreign counterparts.

16. The regulatory system should allow for assistance to be provided to foreign regulators who need

to make inquiries in the discharge of their functions and exercise of their powers. E. Principles for Issuers

17. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

18. Holders of securities in a company should be treated in a fair and equitable manner. 19. Accounting and auditing standards should be of a high and internationally acceptable quality.

F. Principles for Collective Investment Schemes

20. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

21. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

22. Regulation should require disclosure, as set forth under the principles for issuers, which is

necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

23. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

G. Principles for Market Intermediaries

24. Regulation should provide for minimum entry standards for market intermediaries. 25. There should be initial and ongoing capital and other prudential requirements for market

intermediaries that reflect the risks that the intermediaries undertake. 26. Market intermediaries should be required to comply with standards for internal organization and

operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

27. There should be procedures for dealing with the failure of a market intermediary in order to

minimize damage and loss to investors and to contain systemic risk.


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26

H. Principles for the Secondary Market

28. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

29. There should be ongoing regulatory supervision of exchanges and trading systems which should

aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

30. Regulation should promote transparency of trading. 31. Regulation should be designed to detect and deter manipulation and other unfair trading

practices. 32. Regulation should aim to ensure the proper management of large exposures, default risk and

market disruption.

33. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.


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27

APPENDIX C: PAY SCALE FOR THE SEC OFFICIALS: AS PER GOVT. PAY SCALE 2005


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28

Pay scale for the SEC officials: As per Govt. Pay scale 2005 Sl. No

Name of Post Total Post

Pay scale

1 Chairman (Grade:1) Tk.23,000/-(Fixed) 2 Member (Grade:2) Tk.19300-700X4-22100 3 Executive Director (Grade:3) Tk.16800-650X6-20700 4 Director (Grade:4) Tk.15000-600X8-19800 5 Commission Secretary (Grade:4) Tk.15000-600X8-19800 6 Deputy Director (Grade:5) Tk.13750-550X10-19250 7 Assistant Director (Grade:9) Tk.6800-325X7-9075-EB-365X11-13090 8 Accounts Officer (Grade:9) Tk.6800-325X7-9075-EB-365X11-13090 9 PS to Chairman (Grade:9) Tk.6800-325X7-9075-EB-365X11-13090 10 Personal Officer (Grade:10) Tk.5100-280X7-7060-EB-300X11-10360 11 Accountant (Grade:12) Tk.3700-230X7-5310-EB-250X11-8060 12 Telephone Operator (Grade:16) Tk.3000-150X7-4050-EB-170X11-5920 13 Receptionist (Grade:16) Tk.3000-150X7-4050-EB-170X11-5920 14 Driver (Grade:16) Tk.3000-150X7-4050-EB-170X11-5920 15 Dispatch Rider (Grade:19) Tk.2500-110X7-3270-EB-120X11-4590 16 MLSS (Grade:20) Tk.2400-100X7-3100-EB-110X11-4310 17 Sweeper (Grade:20) Tk.2400-100X7-3100-EB-110X11-4310


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29

APPENDIX D: SALARY AND BENEFIT PACKAGE OF BANGLADESH BANK


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30

Salary and Benefit Package of Bangladesh Bank

Other Benefits Who is eligible Amount Scale : 1,500-1,600 Tk.11,00,000/- 1,750-2,100 Tk.14,30,000/- 2,250-2,350 Tk.16,50,000/-

2,550- Tk.17,60,000/- 3,400- Tk.19,80,000/- 4,300- Tk.23,10,000/-

House Building Loan Scheme

9,500- Tk.26,40,000/- Motor cycle Loan Officers after confirmation of Service.

Tk.1,25,000/-

Car Loan From Assistant Director Level

(After 5 years job duration) Tk.4,00,000/-

Incentive Bonus All Staffs 2.5 times of Basic

Salary Medical Yearly benefit Tk.1,000.00 A certain portion of Medical expenses may be

borne by the BB upon request by employee by submitting proof of the medical expenses. Maximum 50% amount may be reimbursed.

Others Canteen Facility, runs by the BB authority Cooperative society etc.


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31

APPENDIX E: COMPARISON OF BENEFITS FOR BANGLADESH BANK STAFF AND SEC STAFF


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32

Comparison of benefits for Bangladesh Bank Staff and SEC staff (Salary Scale As per Govt. Pay scale) Benefits Bangladesh Bank SEC Remarks

Who is Eligible

Amount Who is Eligible

Amount

Scale : 1,500-1,600

Tk.11,00,000/- Tk.1,25,000/-

1,750-2,100

Tk.14,30,000/-

2,250-2,350

Tk.16,50,000/-

2,550- Tk.17,60,000/- 3,400- Tk.19,80,000/- 4,300- Tk.23,10,000/-

01 House Building Loan Scheme

9,500- upward

Tk.26,40,000/-

02 Housing/

Quarter facility

Available to both staff and Officers

-- Not Available

--

03 Motor

cycle Loan

Officers after confirmation of Service.

Tk.1,25,000/- Officers after confirmation of Service.

Tk.60,000/-

04. Car Loan From

Assistant Director Level (After 5 years job duration)

Tk.4,00,000/- No. Car Purchase Scheme

--

05. Computer

Loan All officers Tk.60,000/-

06. Incentive

Bonus All Staffs 2.5 times of

Basic Salary

No such scheme

--

07. Medical All Staffs Yearly benefit

Tk.1,000.00 No such scheme

--

A certain portion of Medical expenses may be borne by the BB upon request by employee

-- No such facility

--


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33

by submitting proof of the medical expenses. Maximum 50% amount may be reimbursed on discretion of the management.

08. Others Canteen

Facility, runs by the BB authority

-- No such facility

--

Cooperative society etc.

-- No such facility

--


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APPENDIX F: ANNUAL CONFIDENTIAL REPORT OF SEC STAFF


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Annual Confidential Report of SEC Staff

Areas of Evaluation 1st and 2nd parts

(Personal particulars and instructions on completion)

(Reporting Officer will Complete 3rd and 4th part with initial signature)

3rd Part-Personal Characteristics Scale of Attainment

Subject of Evaluation 4 3 2 1 2.1 Discipline 2.2 Sense of proportion 2.3 Intelligence 2.4 Initiative and Effort 2.5 Personality 2.6 Cooperation 2.7 Punctuality 2.8 Reliability 2.9 Responsibility 2.10 Interest in work 2.11 Initiative to implement orders 2.12 Security alertness 2.13 Behavior with general people

4th part-Completion of works

3.1 Professional Knowledge 3.2 Quality of work 3.3 Volume of completed works 3.4 Ability to supervise and direct 3.5 Relationship with colleagues 3.6 Efficiency in decision making 3.7 Ability to implement decisions 3.8 Interest and efficiency to train sub-ordinates

3.9 Ability to express (writing) 3.10 Ability to express (speaking) 3.11 Ability to write and counter sign Annual Confidential Report

3.12 Dutifulness Total Marks Obtained

Excellent Very Good Good As usual Below Standard

95-100 85-94 61-84 41-60 40 and below


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APPENDIX G: COMPETENCIES/SKILLS LIST


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Competencies/Skills List

RELATIONSHIP BUILDING: Developing and maintaining a network of contacts, both inside and outside the organization, with people who may be able to supply information, assistance or support for work related goals. This includes building and maintaining friendly, warm relationships or a network of contacts with people who are, or might someday be, helpful in achieving work related goals. NEGOTIATION: Demonstrating strength and competence in bargaining for proposals and/or resources (e.g. budgets, people, and technology) and finding 'win-win' compromises. WRITING: Communicating in writing in a clear, concise and effective manner. TEAM PLAYING: Effectively filling necessary roles that others are unable or unwilling to perform; showing strong listening, summarizing, facilitating and 'bridge building' skills. TEAM LEADERSHIP: Developing and maintaining cooperation and teamwork while leading a group of people. Seeking the input of group members; valuing ethnic and cultural diversity on the team for the perspectives it provides; keeping team members informed; finding ways to reduce conflict within the group; and, articulating a mission or 'vision' which motivates others towards the accomplishment of goals and objectives. CUSTOMER FOCUS: Taking the initiative in understanding the needs of others (internal and external 'customers') and acting to do something helpful. VOLUME: Handling a large amount of work efficiently and effectively. BREADTH: Handling a wide assortment of work duties that demand significantly different skills or knowledge bases. DEPTH: Demonstrating a significant degree of knowledge in a particular area. THOROUGHNESS: Ensuring that work accomplished is complete in all relevant aspects; avoiding lost productivity due to excessive working of peripheral details. ACCURACY: Ensuring that work accomplished is accurate in all relevant aspects. ABILITY TO LEARN: Acquiring and retaining knowledge/understanding through study, instruction or experience. FORECASTING/VISIONING: Emphasizing corporate values, mission and long term goals rather than short term objectives or perspectives. GOAL SETTING: Setting objectives which are realistic but aggressive. PLANNING/STRATEGIZING: Developing plans, strategies and methods for accomplishing objectives and for measuring results against plans. COORDINATING/SCHEDULING: Working with and coordinating the activities of persons over whom the incumbent may have no direct authority; attention and energy are focused on bringing various activities together to meet timetable(s). REVENUE/EXPENSE MANAGEMENT: Stewarding revenues and/or expenses in accordance with budgets; estimating future possibilities, managing revenue/expense controls, and providing informed analyses.


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ORGANIZATION BUILDING: Shaping the organization, in terms of structure and/or activity, to fit external realities (e.g. markets, politics, and competition) and human resources (e.g. personality traits, skills, potentials). CULTURAL AWARENESS: Making decisions and/or taking action that recognizes the organizations unique integrated pattern of behaviours and characteristics. POLICY DEVELOPMENT/INTERPRETATION: Interpreting, explaining and implementing organization and unit policies, procedures, guidelines and programs; working within the spirit and the intent of policy for the organization's success. TIME/PRIORITY MANAGEMENT: Effectively adapting to tight deadlines, heavy workloads, and sudden or frequent changes in priority in order to accomplish objectives. SENSE OF ANTICIPATION: Looking forward and taking action to maximize opportunities and/or minimize potential problems. CRISIS MANAGEMENT: Managing crises so there is minimal cost to the organization and minimal detriment to personal well-being (e.g. health, family). PERSEVERANCE: Maintaining motivation even in the face of inevitable delays, setbacks, policy shifts and disappointment. TAKING RESPONSIBILITY: Taking the dominant role in most situations (e.g. steering, managing, instructing, controlling, leading) and being personally accountable for failure or shortfall. DELEGATION: Effectively utilizing the skills of subordinates to accomplish work objectives; providing a degree of supervision, support and accessibility that is tailored to the subordinate’s level of maturity and ability. EMPLOYEE DEVELOPMENT: Counselling employees to optimize performance and motivation; determining training and development needs; reviewing and setting performance standards for work assigned; providing advice and direction for the employees career and personal development so that their potential is realized. RATIONAL PROCESS: Applying reasoning and analytical abilities to accomplish work objectives; emphasizing logic and data when assessing situations and identifying possible courses of action and/or opportunities. DECISION MAKING: Evaluating alternatives and assessing advantages/risks in making decisions which are timely, decisive and effective; tailoring decisions to unusual or ambiguous situations; having the courage and conviction to make important decisions in the face of conflicting or incomplete information. CREATIVITY/INNOVATION: Identifying and evaluating unique opportunities for improving the organization (e.g. cost reductions, use of resources, policies / procedures, products); generating new ideas, approaches or techniques having useful application. INITIATIVE: Demonstrating self-motivation; effective performance is driven from within rather than being conditional on pressure from external factors (e.g. boss, peers, subordinates, deadlines, crises). BUSINESS CONDUCT: Demonstrating an acceptable standard of personal behaviour in the work place.

Technical Assistance Consultant’s Report7. The East Pakistan Stock Exchange Association Ltd. was...

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