ISSN : 1998-1597
Volume : XIII
Issue : 2
April - June 2011
N O I T A L F N I
Institute of Chartered Secretaries of Bangladesh (ICSB) A
S t a t u t o r y
B o d y
U n d e r
a n
A c t
o f
P a r l i a m e n t
CONTENTS Institute of Chartered Secretaries of Bangladesh (ICSB) Institute of Chartered Secretaries of Bangladesh (ICSB), established under an Act of Parliament i.e. Chartered Secretaries Act 2010, is the only recognized professional body in Bangladesh to develop, promote and regulate the profession of Chartered Secretaries in Bangladesh.
2
THE COUNCIL 2010-2013
3
EDITORIAL
5
FROM THE PRESIDENT
7
INSTITUTE NEWS
The affairs of the Institute of Chartered Secretaries of Bangladesh (ICSB) are managed by a Council consisting of thirteen elected members and five nominees of the Government. The major contribution of a Chartered Secretary is in the corporate sector. Chartered Secretary is a requisite qualification to become a Company Secretary. Company Secretary is an important professional, aiding the efficient management of the corporate sector. Company Secretary is a statutory officer under the Companies Act 1994. According to Securities and Exchange Commission (SEC) all the listed companies should have a Company Secretary. Company Secretary is the compliance officer of the company, who has to interact, coordinate, integrate and cooperate with various other functional heads in a company.
THE COUNCIL : 2010-2013 Mohammad Sanaullah FCS
17 23 26 29
FINANCE ACT 2011 & ITS IMPACT Mohammad Sanaullah FCS POWER CRISIS IN BANGLADESH: PROBABLE SOLUTIONS Md Shahid Farooqui FCS SIMPLIFYING TAXATION A. F. Nesaruddin FCA, FCS SHOULD THERE BE A DEFINITION FOR “PRICE SENSITIVE INFORMATION”? Bipul Kumar Bhowmik ACMA, FCS
: President
Md. Shahid Farooqui FCS
: Senior Vice President
M. Naseemul Hye FCS
: Vice President
Md. Monirul Alam FCS
: Treasurer
A. K. A. Muqtadir FCS
: Councilor
Mohammad Asad Ullah FCS
: Councilor
Itrat Husain FCS
: Councilor
N.G.Chakraborty FCS
: Councilor
Md Abdus Salam FCS
: Councilor
Safiar Rahman FCS
: Councilor
Md. Selim Reza FCS
: Councilor
Gopal Chandra Debnath FCS
: Councilor
Md. Shawkat Ali Waresi Joint Secretary, GoB : Councilor Moinul Islam Joint Secretary, GoB
: Councilor
Nasreen Begum Joint Secretary, GoB
: Councilor
Prof. Md. Helal Uddin Nizami Member, SEC : Councilor Ahmedur Rahim Registrar, RJSC, GoB : Councilor
EDITORIAL BOARD
ARTICLES
33 42
DEMUTUALIZATION OF STOCK EXCHANGES IN BANGLADESH Shah Md. Safiul Hoque Md. Awal Al Kabir NOTIFICATION
The views and opinions expressed in the articles published in this Journal are those of the writers only Published by the Institute of Chartered Secretaries of Bangladesh (ICSB) 107 Kakrail, 1st Floor G.P.O. Box : 3100, Dhaka-1000, Bangladesh Phone : Fax : E-mail : Web :
880 2 934 9578 & 933 6901 880 2 933 9957 secretary@icsb.edu.bd http://www.icsb.edu.bd
Editor Itrat Husain FCS Members Mohammad Sanaullah FCS Md. Shahid Farooqui FCS M. Naseemul Hye FCS Md. Monirul Alam FCS Dr. A. K. M. Delwar Hossain Design & Production
ROOT
(A Concern of Tradex BD)
Subscription Rate For Students : per copy Tk. 100; per year Tk. 350 Others : per copy Tk. 150; per year Tk. 560
The Council
THE COUNCIL : 2010-2013
President Mohammad Sanaullah FCS
Senior Vice President Md. Shahid Farooqui FCS
Vice President M. Naseemul Hye
Immediate Past President & Councilor Past President & Councilor Mohammad Asad Ullah FCS A. K. A. Muqtadir FCS
Councilor Md Abdus Salam FCS
Councilor Md. Shawkat Ali Waresi Joint Secretary, GoB
Councilor Safiar Rahman FCS
Treasurer Md. Monirul Alam
FCS
Past President & Councilor Itrat Husain FCS
Councilor N.G. Chakraborty FCS
Councilor Md. Selim Reza FCS
Councilor Gopal Chandra Debnath FCS
Councilor Moinul Islam
Councilor Nasreen Begum
Councilor Prof. Md. Helal Uddin Nizami
Joint Secretary, GoB
Joint Secretary, GoB
Member, SEC
Secretary of the Council
02
FCS
THE CHARTERED SECRETARY APRIL - JUNE 2011
Dr. A. K. M. Delwar Hossain
Councilor Ahmedur Rahim Registrar, RJSC, GoB
EDITORIAL CURBING INFLATION Inflation is a burning issue in the country these days. In school days we learnt the definition of inflation as “Too much money chasing too few goods”. This is true today as it was many decades back. Inflation is caused basically by a demand-supply gap and the greed for higher profits. In both cases it leads to increase in prices of goods and services - sometimes justified and sometimes not. Costs are increased due to many factors such as governmental actions of increase in import duties, taxes, surcharges, VAT, fuel, energy, etc. These costs are passed on to trade and industry and ultimately to the consumers. In the absence of proper infrastructure and energy crisis the production is being hit resulting in the increase in costs. Sometimes there is no demand-supply gap. The problem is that there are weaknesses in the distribution infrastructure which pushes up costs. Transportation costs have increased giving rise to increase in food prices despite good harvests and production. Lack of proper storage is leading to wastage of food products such as potatoes, tomatoes, etc. thereby leading to an increase in the costs. The costs of commodities have also increased in the international market which really does not help the situation at home. Food inflation fuels the overall inflation in the country. The supply chain management can be improved so that costs and therefore the final prices can be brought down. Inflation is one of the causes of slowing down the economic development of the country. The government should increase investment in development of infrastructure, initiate income generating schemes and also encourage and facilitate the private sector to sustain and expand their existing businesses and also create job opportunities by investing in new productive sectors, so that high inflation can be tackled. Unfortunately many industries are sitting idle, counting losses and some have already shut down due to the energy crisis and escalating costs. The net outcome is loss of production; hence “too
few goods”. Improvement in the law and order situation and tackling the energy crisis effectively will contribute to higher levels of production and economic development which in turn will contribute to lower costs and control of inflation. Expenditure in unproductive sectors should be avoided as far as possible. Improvement in the law and order situation and tackling the energy crisis effectively is essential which will lead to higher levels of production and economic development. This in turn will contribute to reduction in costs and ultimately control of the rising trend of inflation. The elimination of duties and taxes on some selected imported food items in the recent past was a good decision and we have noticed that the prices of some items have fallen. The government can consider further reduction in import duties, taxes, surcharges and VAT for more selected items, including capital machinery to boost production, which can be compensated by increase in the tax and VAT net and better collection. By increasing the level of economic activity more revenue earnings and therefore tax will be generated which will offset the initial losses in tax due to the reduction. Every fiscal thousands of crores of taka remains uncollected by NBR due to tax evasion. If this area can be addressed seriously and improved, then the need to borrow from the banking system will be reduced further. These actions can lead to higher economic activities and development of the country resulting in control of inflation. The recent news that in fiscal 2010-2011, the National Board of Revenue collected revenues which were Tk.166.5 billion (26.84 %) higher than the collections of fiscal 2009-2010 is a very positive sign. Monetary expansion during the past two years, when financial institutions disbursed significant loans to various sectors, also contributed to an inflationary pressure due to too much money in the system. The government is concerned about the increase in the money supply.
THE CHARTERED SECRETARY APRIL - JUNE 2011
03
The government is also trying to control inflation by limiting the credit growth in the private sector by making loans costlier. This is being done by increasing the rates of the repo and reverse repo. A repo rate is the interest rate at which the Central Bank lends money to the Commercial Banks while the reverse repo is the interest rate at which the banks lend money to the Central Bank in return for government securities. Increase in the interest rates and the import duties, taxes, surcharges and VAT is not the only solution to curb inflation. Alternative solutions must be considered for control of the money supply and a way to regulate the prices has to be worked out. Some new forms of indirect taxes can also be considered. More effective ways can be considered to monitor the prices of food items in the kitchen markets. Tackling inflation is a tricky business. In the national interest more discussions and brain storming by the policy makers and experts are essential. The devaluation of the Taka is increasing the cost of imports and this is not helpful in the control of inflation. There has been a depletion of the foreign exchange reserve recently and the government should initiate necessary steps to ensure that there is sufficient foreign exchange reserve to ease the pressure on the taka. Every year foreign aid, at nominal interest rates, remains unutilized and returned. This is very unfortunate! The government should plan its activities better and use more of such funds for the development activities rather than obtain the funds from the banking system, which pushes up the interest rates, costs of production and therefore inflation. This will also help the foreign exchange position. The unusual delays in implementation of development projects lead to inflow of funds in the market for a longer period of time without creating any wealth or services. This is also another reason for fuelling inflation. Hence such projects should be planned for quick execution and completion.
04
THE CHARTERED SECRETARY APRIL - JUNE 2011
As a result of high inflation it is the consumers - mainly the lower income and the fixed income group, who are the main sufferers as the purchasing power of the taka is eroding every day. They can do nothing but hope and pray that the government will be more proactive and initiate steps to mitigate their sufferings. We also feel that it is high time that the problem of inflation is addressed more seriously so that the situation can be brought under control. The inflation rate was around 10.17 % in June, 2011.In the new Budget for fiscal 2011-2012 the government has set a target of 7.5 % for inflation. Although the target is very optimistic it can be achieved with will and determination and in order to do so the actions of the government for control of inflation must be well planned and monitored carefully. The development of the country and the welfare of the people depend on it. It is not an impossible task - where there is a will there is a way!
Itrat Husain FCMA, FCS Editor
FROM THE PRESIDENT Dear Professional Colleagues, Before I began my term as President, I spoke with the Council members, members and colleagues to make myself acutely aware of the challenges being faced by our profession. Although the profession of Chartered Secretaries is about to face many challenges we also got some opportunities with which to face these challenges. We all are aware of “striking while the iron is hot” and I believe at this moment that our profession is hot and we need to strike. Response from admission seekers was quite satisfactory. Consequently, 2nd Quarter of 2011 (April-June 2011) was quite a busy schedule. Several events and activities took place during this quarter. 1st Anniversary of ICSB I am very excited to witness the growth of ICSB. Happy 1st Anniversary to ICSB! June 16, 2010 was an historic day of Corporate Governance in Bangladesh. On this day Chartered Secretaries Act 2010 was included in Bangladesh Gazette after the enactment of Chartered Secretaries Act 2010 in the National Parliament. We have celebrated the day with enthused participation of our Members at Senate Bhaban, University of Dhaka. Status of Permanent Address for ICSB It is a matter of great concern that the institute is yet to receive any financial assistance from the government, although we have passed half of 2011 without assistance. The Institute is still funding its activities from student fees, various training fees, etc. Due to constraint of funds, we have had to defer the procurement of much needed equipment for the Institute. In this connection, we are giving our best efforts in solving the aforementioned issues. We have had meetings with Hon’ble Commerce Minister, Hon’ble State Minister for Housing & Public Works and several concerned government officials for allocation of land and budget enlistment. In a professional institution there is no such thing as them and/or us; there is only we – all of us working together. I request all our members to join hands together for maximization of our efforts to speed up the process of budget enlistment and allotment of land for our permanent ICSB Complex. Campus Concern Presently we are operating from a small rented premises and it is not sufficient for accommodating the increasing number of students. We are getting good response but cannot cope with the ever increasing demand. Besides, the present location of ICSB is not suitable for communication. Therefore, your Council has decided to open a 2nd campus at Dhanmondi area for the convenience of the students and we are working on it.
Council Meeting
During the 2nd quarter the Council met on June 20, 2011 and the following important decisions were taken: • The Council expressed concern about the absence of some Council Members in the meetings. The Secretary has been advised to proceed as per Chartered Secretaries Act 2010 and initiate necessary action in this respect. • The Council approved the appointment of Prof. Md. Helaluddin Nizami to the Council as a nominated member of Securities & Exchange Commission (SEC). • Consent was given for purchase of equipment for the institute, which are required urgently. • Student fee structure was reviewed and implemented, effective from July 1, 2011. • Reviewed the membership position, financial position of the Institute, coaching classes & examination, etc. • Initiative has been taken to introduce ID Card for the Members. • Reviewed all pending issues with GoB i.e. allotment of land, enlistment in budget, Chartered Secretaries Regulation 2011, ICSB Service Rules, etc. The Secretary was asked to expedite the matters. Admission - Summer 2011 The admission process for Summer 2011 (28th Batch) has been opened on June 23, 2011. With an objective to focus on quality education, ICSB has gone for screening system for the first time. We believe in quality not in quantity though numbers help us in managing a good financial position. CPD Programme As members of ICSB and leaders of our profession, we are respected by those who use our services. In order to maintain and grow this spirit, ICSB offers CPD Programme. The Institute scheduled to have a CPD programme on July 1, 2011. Due to unavoidable circumstances this could not take place. However, the Institute is going to organize a CPD programme on current topics again on July 29, 2011 at BIAM at 3.30 p.m. Institute Logo The Council believes in “Branding” for the Institute and is therefore positively considering re-designing the Institute’s logo as part of branding of the Institute. I will be relying on feedback, support and guidance from colleagues and members in this connection. Future Plan We look forward to seeing continued success in the future. In order to have long wish list, we are concentrating on the following issues: • Chartered Secretaries Regulation 2011 • Institute’s own campus • Government funding for the Institute • Finalisation of the Service Rules Conclusion In conclusion, I would like to thank all members for placing confidence in your Council. As always, we like to listen to your ideas, suggestions and thoughts on ICSB profession and ways to make it better. I wish you all a very Happy Ramzanul Mubarak. Mohammad Sanaullah FCS PRESIDENT
THE CHARTERED SECRETARY APRIL - JUNE 2011
05
Institute News
INSTITUTE ACTIVITIES April - June 2011 The 2nd quarter was quite eventful which included both internal and external meetings, training programmes, etc. These were as follows : Meetings - Internal Council Meeting
The Council Meeting in Progress
During the 2nd quarter, the council met only once on June 20, 2011. Mohammad Sanaullah FCS, President of the Institute presided over the meeting. Most councilors attended the meeting. Various issues were discussed and a summary is as follows: 1. 2. 3. 4. 5.
The inclusion of Prof. Md. Helal Uddin Nizami as a Council Member of ICSB. Discussion on the CPD Program scheduled to be held on July 1, 2011. To review the audit report from June 16, 2010 to December 31, 2010. To approve the Budget of the Institute for July 2010 to December 2011. To review the service rules of the Institute.
Meeting of the Office Bearers of ICSB A special meeting of all the Office Bearers of ICSB was held on April 12, 2011 at 7:00 p.m. at the Council Room of the Institute. Mohammad Sanaullah FCS, President of the Institute chaired the meeting. Md. Shahid Farooqui FCS, Senior Vice President, M Naseemul Hye FCS, Vice President, Md. Monirul Alam FCS, Treasurer of the Institute
and Dr. A K M Delwar Hossain, Secretary of the Institute attended the meeting. Discussions took place on the agenda and the President expressed his satisfaction over the issues raised on the meeting. The second meeting of the Office Bearers of ICSB was held on May 15, 2011 at 6:30 p.m. at the Council Room of the Institute. Mohammad Sanaullah FCS, President of the Institute presided over the meeting with the presence of all the Office Bearers and the Secretary of the Institute. Issues relating to the progress of forming CS Regulations, Service Rules of the Institute, Budget Allocation etc. were discussed. The meeting ended with satisfactory remarks by the President. The third meeting of the Office Bearers of ICSB was held on June 18, 2011 at 4:00 pm at the Council Room of the Institute which was presided over by Mohammad Sanaullah FCS, President of the Institute with the presence of all the other Office Bearers and the Secretary of the Institute. The discussion were held on the upcoming Examination, CPD Programme, Publication of the Journal and the preparation for AGM. Meeting between Office Bearers and Past Presidents A meeting was organized at the Institute’s Council Room on May 26, 2011 among Office Bearers of the Institute and its Past Presidents which was attended by Mohammad Sanaullah FCS, President of the Institute, Md. Shahid Farooqui FCS, Senior Vice President, M. Naseemul Hye FCS, Vice President, Md. Monirul Alam FCS, Treasurer and Past Presidents and present Council Members Mohammad Asad Ullah FCS and Itrat Husain FCS. Miscellaneous issues relating to C.S Regulations, Service Rules, proposed Budget for the next fiscal year and the new campus of the Institute were discussed at length as well as reviewed and consequentally a number of decisions were made in the meeting which are as follows: THE CHARTERED SECRETARY APRIL - JUNE 2011
07
Institute News
1.
The Secretary has been advised to pursue the progress of Service Rules which is under the scrutiny of Ministry of Public Administration.
2.
Agreed to bring the necessary amendment in Annual Report.
3.
Mr. Secretary and Mr. Treasurer has been instructed to start working immediately on drafting council report
4.
Topics for CPD Programme was finalized.
5.
Finalized topics for training programme for 2nd & 3rd quarter.
6.
Exam dates for Summer 2011 session has finalized.
Meetings - External Meeting with State Minister for Housing & Public Works
building with integrated facilities for the Institute in Dhaka City for continuous progress of the Institute. The President of the Institute requested the Minister for allotting a piece of land for ICSB. The Hon’ble State Minister assured the delegation of providing all possible help to the Institute. The team members also met with Md. Khondoker Shawkat Hossain, the Secretary of the concerned Ministry in the same connection. They exchanged views, thoughts and experiences on various issues relating to the land allotment for ICSB. Meeting With Hon’ble Commerce Minister A team of six members including the President of ICSB, Senior Vice President, Vice President, Treasurer, Mohammad Asad Ullah FCS, immediate Past President and Councilor and the Secretary of the Institute called on Hon’ble Commerce Minister Muhammad Faruk Khan MP at his office on June 1, 2011. The delegates thanked the Hon’ble Minister for his continuous support as well as guidance for the upgradation and modernization of the Institute.
A delegation of ICSB called on Honourable State Minister for Housing & Public Works Advocate Abdul Mannan Khan at his office.
A delegation of ICSB comprising Mohammad Sanaullah, FCS President of the Institute, Md. Asad Ullah FCS, Immediate Past President, Md. Shahid Farooqui FCS, Senior Vice President, M. Naseemul Hye FCS, Vice President, Md. Monirul Alam FCS, Treasurer of the Institute and Dr. A K M Delwar Hossain, Secretary of the Institute called on the Hon’ble State Minister for Housing & Public Works Advocate Abdul Mannan Khan at his office on April 7, 2011. They informed the State Minister about the enactment of Chartered Secretaries Act 2010 and the subsequent developments of the Institute. They also emphasized the importance of a separate
08
THE CHARTERED SECRETARY APRIL - JUNE 2011
The delegates of ICSB met the Honourable Minister for Commerce Muhammad Faruk Khan MP, at his office.
The Hon’ble Minister expressed his satisfaction at the efforts made by the members to build up the Institute as a leading professional Institute in the country. He also assured his support for the welfare and development of ICSB. The Minister was informed about a number of proposed projects and their implementation status. Co-operation was also sought from the Hon’ble Minister regarding allotment of new land for the new campus of the Institute. The Hon’ble Minister
Institute News
was invited to attend the CPD Programme organized by the Institute as the chief guest The Hon’ble Minister consented to attend the programme. Meeting of the Staff and Management Team
the course coordinator praised the trainees for their participation. Internal Audit and Control Environment (2nd batch)
A meeting among office staff of ICSB was held on June 4, 2011 at the Institute’s Council Room. The meeting was presided over by the President of the Institute. The President was informed about various activities initiated and performed by the staffs individually. The President issued necessary instructions to perform their assigned tasks efficiently and within deadlines Training Programmes As part of Management deveopment programme ICSB continues to conduct training programmes for the development of company executives. During the second quarter of 2011 the following training programmes were held: Management of Company Meetings
Participants shown in “Internal Audit and Control Environment” training programme
The Institute organized its second training programme on ‘Internal Audit and Control Environment’ at the training room of the Institute from April 24, 2011 to April 27, 2011 with a good number of participants from different Companies, Banks, Financial Organizations, and other Corporate bodies. The course was designed and co-ordinated by Mohammad Sanaullah FCS, President of the Institute. The Course coordinator informed the participants that the more they participate in the training programmes the more they can be benefited and acquire skills to contribute significantly in their respective service sector. Effective Audit Committee
Course coordinator is seen with the participants.
A day-long programme on the ‘Management of Company Meetings’ took place at the training room of the Institute on May 9, 2011. This was the first programme of the 2nd quarter of the year. The course was conducted by Mohammad Sanaullah FCS, President of the Institute. A good number of professionals from different corporate bodies participated in the training course. The participants exchanged views and shared their thoughts with the course coordinator on training issues. At the end of the programme,
Participants shown in “Effective Audit Committee” training programme
The third training programme of the quarter was a day-long workshop on ‘Effective Audit
THE CHARTERED SECRETARY APRIL - JUNE 2011
09
Institute News
Committee’. A good number of participants, mostly from Audit Departments of various organizations, took part in the programme. Mohammad Sanaullah FCS, President of the Institute was the Resource person who answered the questions of the participants. It was an effective and fruitful programme which was appreciated by the trainees. Tax Management
Member’s feeling for ICSB
To celebrate the 1st anniversary of that epoch-making day the Institute organized a grand celebration programme on June 16, 2011 at Dhaka University Senate Bhaban which was attended by a large number of members. There were discussions on various aspects of the profession which was followed by a cultural programme and dinner.
Course coordinator is inaugurating the session
The last training programme of the quarter was a week-long training programme on ‘Tax Management’ which was held from June 26, 2011 to June 30, 2011 with a good number of participants from different corporate bodies at the Institute’s Training Room. Mohammad Sanaullah FCS, President of the Institute inaugurated the session. The President at the final session or review session summarised the total course in brief and answered different questions raised by the trainees. Celebration of 1st Anniversary of ICSB
Anniversary cake was sponsored by Mr. Mohammad Asad Ullah FCS, Immediate Past President of ICSB and Cultural Programme sponsored by Mr. Itrat Husain FCS, Past President of ICSB Admission of Summer Session (28th Batch) The admission notice of Chartered Secretary (CS) Course of ICSB was published in the National Daily Newspapers on June 23, 2011 and June 25, 2011. The deadline for collection and submission of admission forms was July 5, 2011. Last date of admission is July 20, 2011 and inaugaration is into take place on July 29, 2011. Elevated Associate Members
A-0242
Md. Rafiqul Islam
Assistant Company Secretary International Leasing
Elevated Fellow Members
F-0116 Nur-E-Alam
Company Secretary Marie Stopes Bangladesh
1st Anniversary is celebrating by the ICSB delegates by cutting a Cake
Probably the most memorable day in the history of the Institute was June 16, 2010, when Chartered Secretaries Act 2010 was passed by an act of the Parliament.
10
THE CHARTERED SECRETARY APRIL - JUNE 2011
F-0115
Tariquzzaman Khan
Audit Manager/Consultant K. M. Hasan & Co.
Institute News
SUCCESS GREETING
NEWSPAPER CLIPPING
A-0176 Sharmi – Noor – Nahar ACS has recently been promoted to the position of Company Secretary of United Leasing Company Ltd. Prior to that she was the Deputy Company Secretary in the same Company.
A. K. M. Nurul Islam has recently promoted to the position of Company Secretary at NCC Bank Limited Mr. Islam is a student of Intermedate Level-III of our Institute.
CS-1303 Darul Awam Tuhin has recently been appointed as Assistant Company Secretary of RAK Ceramics (Bangladesh) Ltd. Earlier Mr. Tuhin served as Assistant Manager-HR in Peninsula Group.
WE MOURN With deep sense of grief and profound shock we express our deep condolence at the sad demise of Muzammel Hoque. He was a fellow Member of our Institute who breathed his last on Tuesday, June 21, 2011(Inna-Lillahe-Wa-Inna-Ilaihe-Rajeoon). On behalf of all the Members of the Institute, we express our heartfelt condolence to the bereaved family and pray to the Almighty Allah for eternal peace of the departed soul in heavenly abode. Let us all pray for the salvation of the departed soul.
THE CHARTERED SECRETARY APRIL - JUNE 2011
11
Institute News
ESTABLISHMENT OF ICSB: ITS IMPACT, EXPECTATIONS AND RESPONSIBILITY Abridged version of speech by Mr. Mohammad Asad Ullah, FCS Being the Chairman of former Enactment Committee of ICSMB for a continuous period of ten years and as the founder President of the new Institute of Chartered Secretaries of Bangladesh, I feel extremely privileged to welcome you all to the 1st Anniversary celebration of the enactment of the Chartered Secretaries Act 2010 and the establishment of ICSB on this day 16th June. The Chartered Secretaries Act was passed by the Parliament on 7th June, 2010. Hence the date 7th June is also an important day for us. The first Chartered Secretaries Ordinance 2008 was promulgated by the Caretaker Government on 16th June 2008, which is another coincidence. The victory day of Bangladesh is 16th December and the victory day of ICSB is 16th June. So the number 16 is very significant to us. Another significant number is 13. 13 members formed the ICSMB in 1997 and struggled for 13 years for the Act of Parliament.
Mr. Mohammad Asad Ullah, FCS delevering his welcome address
On this day I would like to express my gratitude to Almighty Allah for His blessings that the Chartered Secretaries Act 2010 was passed by the Parliament a year back. I on behalf of the Institute and on my own behalf also express our gratitude to all those who supported our cause and took several initiatives for the enactment. I personally feel honoured that I was able to contribute towards the enactment
12
THE CHARTERED SECRETARY APRIL - JUNE 2011
and the establishment of the “new� Institute of Chartered Secretaries of Bangladesh, along with other members of the Institute.
Cultural programme Enchanted by our members
To commemorate the occasion the council of the Institute, under the leadership of Mohammad Sanaullah, FCS has organized this programme for all the members to celebrate in a befitting manner and to exchange views with each other. I hope from now on ICSB will celebrate the anniversary every year. Today we are all proud members of a recognized institution in parallel with the other professional institutes of the country. After the enactment of the Chartered Secretaries Act, Chartered Secretary is a self reliant and independent profession in the country. The enactment of the Chartered Secretaries Act is not an end in itself; rather it is the beginning of a new Institute with high hopes and aspirations. We all have to bear the responsibility for materializing the dreams and expectations of the founders, the members, students and the society as a whole. Therefore the struggle ahead will be much more intense. The Council has undertaken a lot of programmes on a priority basis for the development of the Institute. The present Council has been working relentlessly to implement our agenda. For materializing our dreams we need united efforts and active co-operation and support from all the
Institute News
members; otherwise it will be very difficult to compete with the other professions of the country. To run the Institute efficiently we need a lot of regulations, formation of Committees and our own campus, the funds for which should be incorporated in the revenue budget of the government as assistance to the Institute. Within a short period of time the Council has achieved significant progress and I am confident that with the support from all of you they will achieve their objectives during their tenure of office. We have to create awareness and spread the message of this national Institute and its professional impact to every nook and corner of the country. In order to establish a prestigious Institute we have to bring about some revolutionary changes in the corporate field of the country by educating the officials of the corporate sector. They must be made aware of the activities of the Institute and the role of the Chartered Secretaries in the corporate governance and the development of the corporate sector and the country. I call upon all of you to come forward to actively
participate in the activities of the Institute by creating mass awareness about the profession. You are the ambassadors and the future leaders of the Institute; so it is your duty to act fast. I would like to mention here that more than 100,000 companies have been incorporated with the Registrar of Joint Stock Companies and firms; but we have produced only 300 members from the Institute so far. The Securities and Exchange Commission in their Corporate Governance Guidelines issued on 20 February, 2006 imposed a condition that all listed companies should have a Company Secretary. Presently there are more than 300 companies which are listed with the Stock Exchanges of the country. Therefore we need more qualified members. In conclusion I hope that all my dear members will participate in all the activities of the Institute for establishing a world class Institute. I pray to Almighty Allah for the success of the profession of the Chartered Secretaries in Bangladesh.
Mr. Mohammad Asad Ullah, FCS is the Executive Director and Company Secretary of BEXIMCO Group. He is also the immediate Past President of the Institute and present Council Member.
QUOTATIONS The ink of the scholar is more holy than the blood of the martyr. - Hazrat Muhammad (SAW) Who are the learned? They who practice what the know. - Hazrat Muhammad (SAW)
Live as if you were to die tomorrow; Learn as if you were to live forever. - Mahatma Gandhi Tell me and I’ll forget; Show me and I may remember; Involve me and I’ll understand. - Chinese proverb
THE CHARTERED SECRETARY APRIL - JUNE 2011
13
Article
FINANCE ACT 2011 & ITS IMPACT Mohammad Sanaullah FCS
The recent Finance Act 2011 has brought about some changes to the Income Tax Ordinance 1984. The salient features of the changes are as follows:
5. Corporate tax rate
1. Tax free limit for individual
(a) In case of a company which is a publicly traded company (excluding Bank, Insurance & Financial Institution)
The maximum limit of income not liable to tax in the hands of a resident (Bangladeshi non-resident) individual will be increased to TK. 180,000, TK. 200,000 and TK. 250,000 for a male, female and senior citizen of over sixty-five years of age and retired individual, respectively.
Corporate tax rate for the assessment year 2011-2012 will be as follows:
Provided that rebate at the rate of 10% of income tax shall be allowable if such a publicly traded company gives more than 20% dividend.
2. Ceiling of minimum tax for individual
Provided further that if such a publicly traded company declares less than 10% dividend or does not give the declared dividend within the time determined by the Securities and Exchange Commission, the rate of tax for the said publicly traded company shall be 37.5%.
The ceiling of minimum tax for an individual remains at Tk 2,000. 3. Personal/Individual tax rates Change has been made in personal Income tax rates for the Assessment Year 2011-2012 Applicable tax rates for personal / individual other than a woman and for those who are 65 years and more, for the assessment year 2011-2012 will be as follows : Taxable income slab (i) (ii) (iii) (iv) (v)
Tax rates
On first Tk 180,000 of total income Nil On next Tk. 300,000 of total income 10% On next Tk. 400,000 of total income 15% On next Tk. 300,000 of total income 0% On the Balance of total income 25%
(b) In case of every such company not being a publicly traded company (excluding bank, insurance and financial institutions).
37.5% of such income
(c) In the cases of tobacco manufacturing companies
42.5% of such income 42.5% of such income 45% of such income 35% of such income
4. Withdrawal of Tax of rebate for the individual highest tax rate payers
(d In the cases of bank, insurance and financial institutions.
Earlier, it an individual assessee was paying taxes at the highest rate of 25% and discloses at least 10% higher income than that of the previous assessment year, he/she was allowed 10% tax rebate on the tax payable on that higher income. The Finance Act 2011 has withdrawn this tax rebate facilities.
(e) In the case of mobile phone operator companies
Therefore the higher income groups will be the sufferer by the restructuring of the new tax rates.
27.5% of such income
(f)
If it becomes a publicly traded company subject to fulfillment of few condition.
(g) In the case of dividend income for Companies
20% of such income
THE CHARTERED SECRETARY APRIL - JUNE 2011
17
Article
6. Re enforced Section 16CC- Charge of minimum tax • Minimum corporate tax will be 0.50% of company’s gross receipts from all sources for that year i.e., from sale of goods, fees, charges, benefits, including commissions or discounts, and all receipts from any other heads of income. • A liaison office, having no generation of income, as stated above, will be exempt from this minimum corporate tax. The Finance Act 2011 has reinforced Section 16CC which was withdrawn in Finance Act 2008. 7. Reduction of Individual allowance limits U/S 44(3)
Investment
The maximum allowable limit for individual investment has been reduced from 25% to 20% (excluding employer’s contributions to recognized provident fund and any income u/s 82C) of total income or Tk. 10,000,000. 8. Withdrawal of Investment in Shares for 10% tax rebates Investment in shares listed with any of the stock exchanges and debentures will not qualify as investment in approved scheme entitled for 10% income tax rebate. 9. Amendment of Section 19: Un-explained investment to be taken as income • Initial capital disclosed under Universal Self-Assessment will be considered as “income from other sources” if that is transferred before the expiry of five years’ limitation period. • Any loan received by a company from another company, other than by a crossed cheque, will be considered as “income from other sources”. • 50% of the value of motor car or jeep purchased or taken on lease over 10% of the paid-up capital of a company will be
18
THE CHARTERED SECRETARY APRIL - JUNE 2011
considered as “income from other sources”, if that value exceeds 10% of its paid-up capital. 10. Insertion of New Section 19D: Special tax treatment in respect of investment in the purchase of Bangladesh Government Treasury Bond Investment made through purchase of Bangladesh Government Treasury Bonds by an individual on payment of income tax @ 10% will be accepted without any question. 11. Amendment of Section 31:Capital Gains The provisions relating to exemption from tax of capital gains from transfer of shares of a Public Limited Company in the hands of a non-resident entity, on the basis of similar exemption of tax in the country of its residence, is deleted. 12. Amendment of Section 46: Exemption from tax of newly established industrial undertakings Tax holiday benefits will continue for industrial undertakings set up between 01 July 2011 and 30 June 2013 outside Dhaka, Narayanganj, Gazipur, and Chittagong districts for five (5) or seven (7) years, depending upon their location, and for physical infrastructure facilities set up between the same period, tax holiday period will be for ten (10) years on fulfillment of conditions similar to the existing ones. But the minimum amount of paid-up capital will have to be Taka 2,000,000 for industrial undertakings and physical infrastructure facilities specifically mentioned in the newly replaced/inserted sections 46B and 46C. Existing tax holiday facility to tourism industry will be considered withdrawn from 01 July 2011. 13. Amendment of Section 49: Widening the scope of Income subject to deduction at source (zw) deduction of tax for services from convention hall, conference centre, room or, as the case may be, hall etc.; and
Article
(zx) deduction of tax from residents for any income in connection with any service provided to any foreign person. 14. Amendment of Section 52AA:Deduction from the payment of certain services • withholding income tax (WHIT), in all applicable cases, has to be effected on the date of payment or credit of such payment to the account of the payee. • besides professional or technical services, payments to “any other services applying professional knowledge” will also attract WHIT @ 10%. • payment to any person for rendering any services not specified in Chapter VII will attract WHIT @ 10% under section 52AA. 15. Amendment of Section 52D: Deduction from interest on Government saving instruments WHIT on interest on savings instruments will be reduced to 5% from 10%. But interest on Pension Shanchayapatra, so long exempted from WHIT, will also be subject to WHIT @5%. 16. Amendment of Section 52N: Collection of tax on account of Rental Power The maximum tenure of three (3) years for effecting WHIT on rental Power Company for purchase of rental power is deleted. 17. Insertion of new Section 52P: Deduction of tax for services from convention hall, conference centre, etc WHIT will be applicable on rental or for use of any space of convention hall, conference centre, room, hall, hotel, community centre, or any restaurant, excluding payment of such amount directly to Government. 18. Insertion of new Section 52Q: Deduction of tax from resident for any income in connection with any service provided to any foreign person
Any person, responsible for paying or crediting the account of a resident by any amount remitted from abroad on account of services rendered to a foreigner as consulting fee, commission, remuneration or any other fee called by whatever name, will collect WHIT @ 10%. 19. Amendment of Section 53 BB: Collection of tax from export of certain items Export proceeds of goods will attract WHIT @ 0.60% in place of existing 0.40% and 0.50%. 20. Amendment of Section 52BBB: Collection of tax from Members of Stock Exchanges Value of shares, debentures, mutual funds, bonds or securities transacted by a member of any stock exchange will attract WHIT 0.10% in place of existing 0.05%. 21. Amendment of Section 53C: Collection of tax on sale price of goods or property sold by public auction Private Limited Companies, so long not required to collect income tax on sale price of goods or property sold by public auction, will now be required to collect tax @ 7.5%. 22. Amendment of Section 53D:Deduction from payment to actors and actresses The existing provision for WHIT on a film actor or actress will be extended to any payment for purchasing a film, drama, a television or radio programme or payment to any person for performing in a film, drama, advertisement, or any television or radio programme. The rate of WHIT is 10%. 23. Amendment of Section 53E: Deduction or Collection at source from Commission, Discount or fees WHIT on commission or discount for distribution or marketing of goods will be applicable in all cases, irrespective of whether the goods were manufactured by the person
THE CHARTERED SECRETARY APRIL - JUNE 2011
19
Article
paying commission or discount, at the enhanced rate of 10% from the existing rate of 7.5%. 24. Amendment of Section 53FF: Collection of tax from persons engaged in real estate or land development business Collection of tax from real estate business engaged in construction of (1) Residential building or apartment in Gulshan, Banani, Baridhara, Motijheel and Dilkusha Commercial Areas will be applicable @ Taka 2,000 per square metre, (2) In Dhanmandi, DOHS, Mohakhali, Lalmatia, Uttara, Bashundhara, Dhaka Cantonment, Karwan Bazar C/A of Dhaka, and Panchlaish, Kulshi, Agrabad and Nasirabad of Chittagong @ Taka 1,800 per square metre and
Any non-government organization registered with NGO Affairs Bureau will be required to file its annual income tax return. 29. Insertion of New Section 75A: Return of withholding tax Quarterly return on withholding income tax in prescribed proforma is required for filing by 15 October, 15 January, 15 April and 15 July. 30. Insertion of New Section 75B: Obligation to furnish Annual Information Return
(3) In other areas @ Taka 800 per square metre.
Annual Information Return, in prescribed form and manner, may be required in respect of specified financial transaction from any person or group of persons responsible for registering or maintaining books of account, etc of any specified financial transaction(s).
25. Amendment of Section 53H: Collection of Tax on transfer, etc. of property
31 Amendment of Section 82BB: Universal Self Assessment
• Transfer of property situated within Dhaka, Gazipur and Narayanganj districts, and Chittagong, Khulna, and Rajshahi Development Authorities, a City Corporation, Municipality and Cantonment Board will attract collection of tax @ 2%.
Manual or electronic filing of income tax return under Universal Self-Assessment procedure will be entertained, acknowledgement of which will also be either in manual or electronic form.
•
Collection of tax from transfer of property in any other areas will be @ 1%.
26. Amendment of Section 62A: Procedure of deduction or collection of tax at source This section has been abolished. 27. Amendment of Section 73: Interest payable by the assessee on deficiency in payment of advance tax Earlier simple interest was supposed to be calculated on the difference amount of tax paid and assessed tax; now interest will be calculated on 75% of the difference amount of tax paid and assessed tax.
20
28. Amendment of Section 75: Return of Income
THE CHARTERED SECRETARY APRIL - JUNE 2011
Income tax return filed under Universal Self-Assessment procedure disclosing 20% higher income than the immediate preceding year’s assessed income, will not be selected for tax audit provided (i) no exempted income is included in it, (ii) no gift is received, (iii) no private loan other than from a bank or financial institution is received, and (iv) net accretion to wealth and expenditure are covered by disclosed income. 32. Amendment of Section 82 C: Tax on income of certain persons The existing section 82C is replaced by the newly drafted section 82, mainly to arrange
Article
the items entitled to tax assessment under this section alphabetically. However, as per this replaced section, income taxes withheld under section 52 from a contractor to an oil company or a subcontractor to the contractor to an oil company will not be considered as in discharge of final tax liability and, hence, will remain outside the scope of tax assessment under section 82C. 33. Amendment of Section 117: Power of search and seizure The authorized officer for search and seizure will be empowered to break open password protection, etc., to extract data, images or inputs stored in the electronic records and systems. 34. Amendment of Section 124: Penalty for failure to file return, etc Penalty up to 10% of tax imposed on last assessed income or to a minimum of Taka 1,000 and Taka 50 for each day of continuing default, applicable for default in filing income tax return, will also be applicable for non-filing of quarterly withholding income tax returns by a company. 35. Insertion of Chapter XVIIIB (From Section 152F to152S) Alternative Dispute Resolution (ADR) will be introduced to resolve any dispute lying with any income tax authorities, Taxes Appellate Tribunal or Supreme Court with prior permission of the relevant tax authority. The application in prescribed form will be accompanied with fees prescribed by NBR. ADR facility will not be entitled to an assessee if return of income for the relevant year or years was/were not filed and due tax under section 74 was not paid. Resolution of dispute under ADR will be through negotiation between the assessee or his authorized representative and Commissioner’s representative under the facilitation and supervision of a Facilitator. The Facilitator will communicate, in case of an agreement (wholly or in part) reached, to the assessee
and to the concerned Deputy Commissioner of Taxes with the time and mode of payment which will be binding on them. In case of any disagreement, the Facilitator will communicate it to the applicant-assessee,. NBR, the concerned Court, Tribunal, appellate authority and the Deputy Commissioner of Taxes. The assessee will be entitled to file an appeal with the appropriate appellate authority in case no agreement, wholly or in part, is reached in ADR. 36. Amendment of Section 158: Appeal to the Appellate Tribunal The requirement for payment of income tax for filing an appeal with Taxes Appellate Tribunal has been increased from 5% to 10% of the difference in income tax on the basis of appeal order of the Appellate Joint/Additional Commissioner of Taxes or Commissioner of Taxes (Appeals) and tax payable on the basis of returned income under section 74. The Commissioner of Taxes’ power to reduce the requirement of such payment for filing an appeal with the Tribunal will be restored. 37. Amendment of Section 160: Reference to the High Court Division The requirement for payment of income tax for filing a reference to the High Court Division has been increased from 10% to the following rates: a)
25% of the difference between the tax as determined on the basis of the order of the Taxes Appellate Tribunal and tax payable under section 74 where tax demand does not exceed one million taka; and
b) 50% of the difference between the tax as determined on the basis of the order of the Taxes Appellate Tribunal and tax payable under section 74 where tax demand exceeds one million taka; and 38. Insertion of New Section 165B: Punishment for obstructing an income tax authority.
THE CHARTERED SECRETARY APRIL - JUNE 2011
21
Article
Any person refusing to furnish information requisitioned by notice in writing, by any concerned income tax authority, may be punished with imprisonment for a term up to one (1) year or with fine or with both. 39. Amendment of Section 184B : Tax payers identification number Government fee of Taka 1,000 will not be required for obtaining a TIN. A TIN may be issued without an application where a person is found having taxable income during the year. A new TIN may also be issued on an application filed by the concerned person. 40. Amendment of THIRD SCHEDULE of ITO 1984 Rates of depreciation on an infrastructure undertaking’s bridge, road, or flyover projects will be increased from 1% to 2%. 41. Amendment of SIXTH SCHEDULE of ITO 1984 • Income from interest on government securities up to Taka 5,000 and interest on debentures approved by Securities and Exchange Commission up to Taka 20,000, in the hands of an individual, so long exempted from tax, will now be taxable. • Any income of the mutual fund of the person issuing such mutual fund will now be taxable.
• Tax exemption period for income from Information Technology Enabled Services (ITES) is extended up to 30 June 2013. Explanation to ITES is also changed. • Contribution up to Taka 60,000 to any deposit pension scheme sponsored by a scheduled bank will be entitled to tax rebate @ 10%. • Contribution to any national level institution set up in memory of liberation war, donation to a national level institution in memory of Father of the Nation and donation to Prime Minister’s Higher Education Fund will qualify for income tax rebate. 41. Industries, set up in Export Processing Zone Industries, set up in Export Processing Zone from 01 January 2012, will be exempt from tax for ten (10) years. The existing industries in Export Processing Zones will continue to enjoy their tax exemption benefits allowed under the existing laws. 42. Others Corporate entities will be entitled to income tax rebate @ 10% on lower of 20% of their total income or Taka 80,000,000 on their donation to fields of Corporate Social Responsibility.
The writer is the Corporate Affairs Director & Company Secretary of Singer Bangladesh Ltd. He is also the Current President of the Institute.
Next Issue of Journal will supplement special on Corporate Governance and Practice. All Members, Students are requested to provide articles and write up.
22
THE CHARTERED SECRETARY APRIL - JUNE 2011
Article
POWER CRISIS IN BANGLADESH: PROBABLE SOLUTIONS Md. Shahid Farooqui FCS Current civilization cannot run or exist without energy, power or electricity. All kinds of development, Industrialization, Agriculture, Communication and day to day life is mostly dependent on electricity or energy. Bangladesh is suffering from serious shortage of power supply as compared to the national demand; about 60% of 155 million population have no direct access to power. The power demand of the remaining 40% in the current intensive irrigation season is about 6000 MW against which in the year 2010 the highest ever power generation of about 4600 MW was recorded resulting negative effect upon industrial development and other spheres of life. As long as the Government relies on the state enterprises to generate the electricity there will be perpetual shortages; Government owned plants are inefficient, poorly managed and difficult to finance and construct. The alternative fuels besides Natural Gas may be reviewed as under: There are six alternative possibilities: Hydroelectricity, Heavy fuel oil, Coal, Nuclear, accessing neighbors’ surpluses and renewable methods such as wind and solar. Let us review briefly the advantages and problems of each. In the short run there is little that can be done. The only fuel that can be delivered immediately is heavy fuel oil in amounts needed to provide a significant increase of power. 1. Hydro electricity: In Bangladesh the very flat landscape means that there are few sites suitable for dams to generate hydroelectricity. Good hydro power plants require both a large flow of water and a large drop of the water over a short distance. While there are rivers with large water flows there is little fall in the level of the river and no really good dam sites. Major Hydro sites are found outside Bangladesh in the foothills of the Himalayas; but development of such sites
to benefit requires the agreement of the Indian, Nepalese and Bhutan Governments. So far it has proved impossible to utilize power from such sites. In the very long run one might expect the emergence of a regional management of the hydroelectric energy; but we are very far from achieving such an outcome. There is widespread opposition to hydroelectric project from the environmental movements in the world. This anti large dam movement is very strong in India and Nepal and is certainly alive and well in Bangladesh. Any serious attempts to develop major projects would immediately bring strong protests from such people. Realistically there is no possibility of significant hydroelectric energy over the next 15 years, other than the possibility of imports from India. But these will be limited as India’s Hydropower development is limited in the East. 2. Heavy fuel oil and diesel: This is being proposed and planned for use in Bangladesh as alternatives to natural gas. It has not been indicated whether careful homework was done on the cost implications of such an approach. There are tenders out for the dual fuel plants. Until these are available the cost implications of use of this fuel are uncertain. The cost increases arise from the use of heavy fuel oil or diesel as the fuel and the increased cost of equipment in order to provide for the ability to use both fuels. In addition storage facilities are needed for the heavy fuel oil or diesel. Finally, unlike the gas fired plants which are run off natural gas with a price controlled by the Government, using heavy fuel oil exposes the operator to changes in the market price. The use of heavy fuel oil or diesel in dual purpose facilities may be a sound approach for small facilities that can be completed in the near future, but large projects cannot be operated this way when there is much THE CHARTERED SECRETARY APRIL - JUNE 2011
23
Article
cheaper coal and natural gas available. One should only commission large gas fired plants when there is sufficient gas available for the lifetime of the plant. Large dual fuel plants present tricky operational problems. 3. Coal: Three approaches to using coal for power plants have been discussed: Import coal, mine coal using underground methods, mine coal using open pit methods. There are a few comments that have to be made: 1) Coal causes pollution from green house gas emissions; but Bangladesh should not be asked to increase its cost of electricity by not using coal when it is now one of the nations with the least pollution of the atmosphere. 2) Coal does not provide a short term solution; it will take 4-5 years to have plants running and either mines in operation or facilities for handling coal imports constructed and operating. 3) Domestic coal production from open pit mines requires very careful treatment of the resettlement problem and very careful treatment of the ground water management. a. Import coal: It is expensive and requires considerable handling facilities and cost varies with the international market. We estimate that the price will be $70/MT during the next few years and the transport cost to deliver to a power station in Bangladesh will add another $10/MT Hence I think imported coal will cost an average value of something of the order of $83/MT over the next five years. Indian coal is imported by truck and costs about $70/MT at the border. Storage and transport by road will be expensive and unless there is strict regulation the roads will be damaged. b. Domestic production through underground mining: This is also expensive and the amount that can be extracted from the ore body is only one
24
THE CHARTERED SECRETARY APRIL - JUNE 2011
fifth of what can be taken using open pit mining [given the geology of northwest Bangladesh]. Less disturbance of population compared to open pit mines. However, based on the existing mine at Barapukuria the cost is above $100/MT. [costs are hidden.] Within the limits one can make a fixed price, long term contract for domestic coal. c. Domestic production through open pit mining: A lot of coal will be available using this system and it will be relatively cheaper. With existing royalties the cost is about $50-55/MT; another dollar is needed to move the coal to the power plant assuming that the plant is near the mine. The open pit method must be carefully studied as it displaces about 8,000 households. The total cost of resettlement, rehabilitation, repair of damage to infrastructure etc. must be included in the cost of the project. Of the three ways to use coal for power, large open pit mines are the most efficient and provide the lowest cost fuel for the power system. 4. Nuclear: Nuclear plants for generating electricity are a tricky option for Bangladesh, given the high population density and the elaborate safety concerns that go with. Nuclear power electricity is rather expensive as the process of approvals and clearances is so slow that money is tied up in structures and fuel agreements for a long time. Electricity from a nuclear plant is not particularly cheap. While the fuel is cheap, the cost of the plant and all of the associated safety aspects lead to nuclear plants being perhaps twice the cost of a gas or coal plant per unit of capacity. The natural gas supply will be uncertain and it will be necessary to use nuclear as the base load unless the Hydro can be developed. Bangladesh has no more significant opportunity to build more hydro power plants. Starting to develop nuclear plants, learning the engineering and management skills that go with that, and developing the safety related skills is an important step forward. But the use of nuclear energy will
Article
not solve the problems of providing power over the next ten years. 5. Regional energy sharing: Small steps have been taken to obtain electricity from India. This is a good idea but one would like to know the price before building transmission lines! In any event South Asia is a power deficit area. It will take time to build up the generating capacity for a regional grid and long negotiation over prices. Significant supply from a regional grid is far away. Over the past six decades no significant cooperation has been achieved until the last few months. It is too early to conclude how this will work out. 6. Renewable energies: Solar driven electrical energy is certainly the rage. There is no doubt greater use of solar energy is an important step forward. However, the full costs are yet to be known. For example battery lifetime in Bangladesh climatic condition is not fully documented. Losses from hailstorms and other violent storms are unknown. Of course the basic investment is still rather high for the amount of energy that is produced. The large amounts of electricity needed in Bangladesh cannot come from renewable sources. A pragmatic calculation of energy requirements call for adding (Including replacement) 11,000-12,000 MWs of capacity over the next decade. During the next four years the only available fuels are gas, diesel, and heavy fuel oil. The country is stuck. Starting in the 4th year coal
can be available in sufficient volume to provide a secure baseline electricity supply with gas used partly for based and partly for peaking. Coal is probably cheaper than gas even after allowing for the environmental costs. After ten years new sources - Hydro and renewable will be needed in large amounts. Other than the above solutions subsidization of some power sources by the govt may be considered effectively: 1. Subsidy to NG/LPG Generators: Small imported generators run by natural gas and LPG are coming in the market. They are also costly. Govt. may allow emergency import of these generators and allow them to be operated by Natural Gas and LPG and also give duty waiver to the importers so that the price can be curtailed to half. 2. Subsidy to Energy Lamps: The so-called Energy saving Lamp has come in the market with a high price i.e Tk.80/ for an un-guaranteed lamp to Tk.270 for a guaranteed lamp. It takes away energy from the buyers, although it saves electricity. Govt. may consider giving incentives in terms of waiver of duty etc. so that its price may come down to 1/4th of present price. This will encourage people to use it more and in turn, help relieve the national grid. For development and to meet the growing needs of Bangladesh more proactive actions have to be initiated by the government. We are hopeful that something will happen-we do not have a choice.
The writer is the Company Secretary & General Manager of The Ibn Sina Pharmaceuticals Industry Ltd. He is also the Senior Vice President of the Institute.
THE CHARTERED SECRETARY APRIL - JUNE 2011
25
Article
SIMPLIFYING TAXATION A. F. Nesaruddin FCA, FCS In his budget speech, the finance minister said certain steps have been taken for simplification and modernisation of taxation system. When this budget speech is read in conjunction with Finance Bill 2011, the scenario or the reality is different in certain cases. Changes proposed for different categories of taxpayers deserve further review and reconsideration of the matters since the statement made in the budget speech does not match the reality. Let us discuss more specifically the two major issues. Major changes have been proposed in the existing systems of “Universal Self Assessment” and also assessment under section 82C where tax deducted at source would have been the final discharge of tax liabilities. However, let me elaborate those issues. If we revisit the background of the “Universal Self Assessment” system introduced way back in 2007 and as seen from the budget speech, this was introduced “to motivate and encourage taxpayers to pay tax voluntarily”. This year also, in the budget speech, the finance minister has said tax proposals are made for augmentation of income tax collection, simplification and modernisation of system of filing of income tax return and collection of tax. The system was so far going fine including audit of selected files as decided by the tax department. According to the present system, all tax returns filed under section 82BB as “Universal Self Assessment” system are subject to audit and in reality, some of them are picked up by choice for audit although presumably at random. But this year, steps have been taken to keep some of the returns out of audit putting few conditions as mentioned below. The conditions attached to “Universal Self Assessment” are that the return will not be selected for audit if it shows 20 percent higher income than preceding year and a) Does not have any income which is exempted from tax; or
26
THE CHARTERED SECRETARY APRIL - JUNE 2011
b) Does not have receipt of gifts; or c) Does not have loan other than from a bank and financial institution; or d) Sum of accretion of net wealth and shown expenditure is not covered by the income. First of all, the condition of 20 percent higher income is obviously too stiff. Moreover, in the current scenario, most of the taxpayers will have capital gain from trading of shares in the stockmarket (especially this year) and many of the taxpayers will have interest income from Sanchaya Patra (not exceeding Tk 25,000), receipts of pension, gratuity, superannuation and provident fund which are tax exempt. So majority of the taxpayers will not be able to take the facility of audit exemption within the system of “Universal Self Assessment” under the proposed Finance Bill. As a result, it is not likely to make any significant impact in any quarter. The aforesaid conditions could be liberalised more to extend the facility of audit exemption to a large section of taxpayers. In fact, the power to audit the tax returns is being misused by tax authorities in many cases causing unnecessary harassment to taxpayers. Accordingly, the change proposed in the system is a welcome move but the conditions attached to keep the tax returns out of audit are not enough to bring expected benefits. Lack of sufficient manpower is also one of the prime considerations. It was expected that if the taxation systems can be simple and modern, the existing limited manpower can devote more attention for capturing potential new taxpayers into tax net. If the existing manpower is bogged down with existing taxpayers, the tax evaders will get the advantage of it or entire efforts for improving the direct tax collection will be less rewarding and failing to meet the government's ultimate revenue collection target. Similarly, under section 82C, tax deducted at source would have been the final discharge of tax liabilities. This year, some significant changes have been proposed. In addition to
Article
income covered under 82C (base income), the difference of actual income and 82C base income will be taxed at normal rate. This is, in fact, a contradiction to the spirit of section 82C. Further, any disallowances in the assessment process under section 30 would be added to income and impliedly subjected to tax at normal rate. It may be recalled that section 82C was added to the tax laws through Finance Act 1998 and introduced to our tax systems the concept of final discharge of tax liability. This provision was introduced in the cases, among others, where there is no value addition in the hands of importers. Subsequently, in 1999, the National Board of Revenue issued clarification, saying that a notional amount would be worked out through back calculation as income U/S 82C and added to assessee's total income but that would not affect his tax liability. But it is reiterated that new proposal has significantly deviated from the basic idea of final discharge of tax liability. Further, in addition to income tax, surcharge is also applicable in this case. However, if these conditions prevail, the existence of 82C for simplification of tax filing and revenue collection is meaningless and the very purpose of introducing the special provision is obviously defeated. If the finance minister, according to his judgment, thinks that these systems of “Universal Self Assessment� and special provision of assessment under section 82C are not workable and not bringing the expected results, then these systems should be completely deleted. Keeping the systems in force with unrealistic and stringent conditions will make the process more non-transparent and cause unlimited sufferings for taxpayers, might encourage corrupt practices and ultimately, will not be conducive to development of a taxpayer-friendly environment.
Now let me discuss the general procedures of tax assessments. In general, tax returns are filed together with audited accounts (in case of corporate taxpayers), evidence of tax payments and other relevant information and supporting evidence. If the return is selected for audit, more information, documents and evidences are asked from taxpayers to satisfy the assessing officer. If the audited accounts submitted are reliable in the judgment of assessing officer, assessments are completed (with approval of higher officials in applicable cases). But in most of the cases, what happens in reality is, the audited accounts are rejected under some pretext or other and the assessing officer by using his discretionary powers estimates the income at his will and deducts the expenditures also at his will and concludes the assessment raising a huge tax demand. The basic question is -how an assessing officer will understand the level of income a n d expenditures without being fully involved in business. Even sometimes the inspector of taxes has little role to play in such drives. Many officers argue that this is the general procedures and insist the taxpayers to resort to such practices. Then the negotiation starts for arriving at the conclusion putting the taxpayers in uncertainty. This is really unfair, unrealistic and not conducive to a friendly tax environment. Well, such a practice of estimating income and expenses can be resorted to when there is sufficient and clear-cut evidence of tax evasion and the assessee does not maintain any books and records. But unfortunately, tax assessing officers in many cases, except the Large Tax Payers Unit (LTU), have a tendency to resort to such undesirable practices at the cost of unlimited sufferings of the taxpayers. The possibility of involvement of corruptions cannot also be ruled out in any way. Unfortunately, some of the Income Tax Practitioners (ITPs) THE CHARTERED SECRETARY APRIL - JUNE 2011
27
Article
also extend their support to such practices distorting the spirit of fair and transparent assessment process. To be fair, in some cases, appeals results can make some remedies but sufferings of the taxpayers are still a lot. Now, the question is what is the solution? It has been observed recently that assessments made by LTU are backed by solid audit observations, based on documentary evidences and judicious conclusion of the issues so detected. If the tax assessment in general is to be completed in the cases, where audited accounts are rejected, the conclusion should obviously be done based on an extensive audit conducted by tax officials with or without external support. Inspector of taxes may also join the audit efforts when the issues involved are not judgmental. Based on the audit report, the assessing officer may
conclude the assessment giving adequate opportunity in writing for requisition of information and documents in specific -- not in general and impractical (like to instruct to produce all books and records). In essence, in order to reform the present tax systems, in line with LTU, a) every circle should have a dedicated audit team comprising specialist(s), b) findings of audit team should be discussed with taxpayers and c) thereafter, the concluding findings should be the basis of fresh assessment. Mere completion of assessment following a bureaucratic attitude without any basis and a logical conclusion will rather increase hassle for taxpayers and existence of corrupt practices. Such a situation will never help to grow a transparent and tax-payer friendly environment.
The writer is a practising Chartered Accountant and a partner of Hoda Vasi Chowdhury & Co. an affiliated firm of Deloitte. He is also a Fellow Member of the ICAB & ICSB.
For further information Please Contract : Institute of Chartered Secretaries of Bangladesh (ICSB) 107 Kakrail (Ground &1st Floor), Dhaka-1000. Phone : 880-2-934 9578, 933 6901, FAX : 880-2-933 9957 E-mail : secretary@icsb.edu.bd, icsb@icsb.edu.bd, Website : www.icsb.edu.bd
28
THE CHARTERED SECRETARY APRIL - JUNE 2011
Article
SHOULD THERE BE A DEFINITION FOR “PRICE SENSITIVE INFORMATION”? Bipul Kumar Bhowmik ACMA, FCS The prime objectives of regulating the securities market are – ensuring healthy growth of the market and safeguard the interest of the investing public. Building investors’ confidence is an important prerequisite for the healthy growth of the securities market. Provision of adequate, fair and timely information to the investors; looking into their grievances; and curbing the malpractices in the securities market are some of the important factors which enhance the confidence of the investors in the market and ultimately lead to its growth. As we know the principal function of bourses is to provide a fair, orderly and efficient market for the trading of the securities and to this end, it requires issuers to make among other things, timely public disclosure of price sensitive information. In order to promote fairness, transparency, accountability and responsibility, which is the core principle of god corporate governance, directors should consider the issuers’ own circumstances when deciding when any information is material and should be disclosed properly to the public. The regulatory framework seeks to secure as fair a distribution of information as is practicable. Dissemination by the issuer should be aimed at providing shareholders and the public with appropriate data and information on a timely and even basis and not a merely meeting the minimum regulatory requirements. Timely disclosure of accurate and quality information is in the issuers’ interest for investors often give premier rating to the most transparent companies. Generally, price-sensitive information (PSI) is data related to the listed company and its members which can affect share price and market activity. PSI is information that hasn’t been publicly disclosed is concrete and directly related to the company. While companies are the supplier so the securities, the buyers are the investors. The crucial factor
leading to the investment decision is the price of the security and the potential for growth. This is not a constant factor but moving up and down depending upon the fundamentals of a company which is reflected by the quarterly, half-yarely and annual financial and non-financial data disclosed in the annual reports of listed companies. This is popularly known as “Price Sensitive Information”. The PSI which is the cornerstone of the regulatory framework means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of the company. If the company related information which has no effect of the price of the security, it will not strictly come within the definition of “Price Sensitive Information”. According to Regulation 2(d) of Securities and Exchange Commission (Prohibition of Insider Trading) Regulations 1995, “price sensitive information means any such information which, if published, may influence market price of the concerned security and includes the following information:(i)
report in respect of the financial condition of the company or any basic information in respect thereof;
(ii)
information relating to dividend;
(iii) decision for giving right shares to security-holders, issuing bonus or giving similar other privilege; (iv) decision of the company for purchasing or selling any immovable property; (v)
information relating to BMRE or establishing of new unit of the company;
(vi) basic change in the field of the company’s activities (i.e. produced goods, preparation and implementation of plan or policy decision in respect thereof, etc.) THE CHARTERED SECRETARY APRIL - JUNE 2011
29
Article
(vii) any other information determined by the Commission by notification in the official gazette. According to Regulation 2 (k) of the Securities and Exchange Board of India (Insider Trading) Regulations 1992 the “unpublished price sensitive information” means any information which relates to the following matters or is of concern, directly or indirectly, to a company, and is not generally known or published by such company for general information, but which if published or known, is likely to material affect the price of securities of that company the market: (i)
financial results (both half-yearly and annual) of the company;
(ii)
intended declaration of dividends both interim and final;
(iii) issue of shares by way of public rights, bonus, etc.; (iv) any major expansion plans of execution of new projects; amalgamation, mergers and takeovers; disposal of the whole or substantially the whole of the undertaking; (v)
such other information as may affect the earnings of the company;
(vi) any changes in policies, plans or operations of the company. Such information is available only to a few privileged persons like directors, auditors or select band of senior officials and brokers. Price sensitive information can be defined to mean specific information about the company, a shareholder or officer of the company or the
30
THE CHARTERED SECRETARY APRIL - JUNE 2011
listed securities of the company or their derivatives, which is generally not known to the persons who are accustomed or would be likely to deal in the listed securities of the company but which would if it were generally known to them be likely to materially affect the price of the listed securities. ‘Specific’ means the content of the information must be precisely and unequivocally identified, defined and expressed. Mere rumors, vague hopes or worries and unsubstantiated conjecture are not sufficient. In other words, there must be sufficient particulars in the information. By ‘not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the company’, it means the information is not generally known to the ordinary reasonable inventors in the securities of the company. And by ‘likely to materially affect the price of the listed securities’, it means if the information is known to them, there will be significant impact on the price of the securities in question. Disclosing this information requires specific procedures which provide guidance to listed companies who have relevant information that, (1) is necessary to enable them and the public to evaluate the company's position, (2) is essential to avoid establishment of a false market in its securities, and (3) might reasonably be expected to materially affect market activity in, and the price of, its securities. However, it is important to note that in determining whether certain information is price sensitive or otherwise, one should look at the information set out in (1) to (3) independently rather that conjunctively.
Article
NON-EXHAUSTIVE LIST OF EXAMPLES OF INFORMATION AS BEING PRICE SENSITIVE INFORMATION (A) IMPORTANT FACTS WITH REGARD TO THE FINANCIAL POSITION AND/O R RESULTS Disclosure of periodical financial results Significant deviation from prior projections Development of new important products. Substantial changes to credit facilities and security granted under credit facilities, including breaking covenants Cancellation of important credit facilities by one or more banks Substantial changes to reporting system Negative shareholders’ equity Change in auditor (other than regular change) Important law suits/claims/product liabilities/environmental damage etc. (B) IMPORTANT FACTS WITH REGARD TO BUSINESS STRATEGY Purchase or sale participation/divisions
of
important
(C) IMPORTANT FACTS WITH REGARD TO CAPITAL /CONTROL Issue of any class of securities Split and reverse split of shares
Conclusion /termination of important alliances
Change to the rights attached to the various classes of shares
Major reorganizations
Forfeiture of shares
Strategic price changes; drastic changes to the business’s activities
Cancellation of right or bonus share or dividend
Dissolution of the business
Dividend announcement, including announcement or altering the exdividend changes to the dividend policy.
Request for suspension of payments or application for bankruptcy.
Important changes to the spread of the ownership and/or free float Any protection measure prepared or implemented.
Mr. P. R. Rammanathan, company secretary of Kothari Sugar and Chemicals Ltd. (India), refer price sensitive information to insider trading/dealings with a view to have a concern on its impact, in the following manner: “On the basis of unpublished inside price sensitive confidential insiders generally trade on the secondary market and they forecast future risk and return of shares and other securities of their company and end up with huge profit. Such opportunity is being denied to general common investors. Hence control and dissemination of price sensitive information is
considered as an important securities regulations”.
function
of
Company secretary of Borse Dubai, Mr. Claire Alves, while pointing out the impact of price-sensitive information to the capital market and its players with a view to assess as well to ensure good corporate governance observed: “Stock markets need a flow of relevant and timely information to function efficiently and most companies have the objectives of both actively seeking to inform the market and meeting their regulatory obligations. Of course, THE CHARTERED SECRETARY APRIL - JUNE 2011
31
Article
it has to be recognized that even when the information has been announced, some investors will receive and respond more quickly than others”. An issuer may face unexpected and significant events and there are many events which can affect prices and market activity. It is thus vital for the issuer to make a prompt assessment of the likely impact of these events on their share price/activities and decide consciously whether the relevant information would be piece sensitive and need to be disclosed. If necessary, issuer should request a suspension in the trading of its securities until a formal announcement can be made. Listing regulations of DSE and CSE provide only a minimum mandatory standard. Listed companies are expected to consider the particular circumstances of the company in determining the appropriate action regarding the disclosure of the relevant information. Nonetheless, the rules address when and how listed companies should disclose price-sensitive information and other issues and situations related to the dissemination of price-sensitive information. The guidelines regarding price-sensitive information pursuant to the Listing Regulations reflect the fundamental principles of transparency, fairness and responsibility and of good corporate governance generally. It should be noted that these recommendations serve as guiding parameters only and are not obligatory; ultimately, listed companies must use their own judgment when revealing price-sensitive information to the market. Therefore, directors or management of listed companies who may have questions regarding price-sensitive information should always seek independent advice or consult with the Stock Exchange as soon as practicable. The Stock Exchange also provides examples of specific situations that may arise when dealing with the price-sensitive information. While the overriding principle listed companies should follow is that of open communication both to the Stock Exchange and to the public, listed companies should resist any pressure to
prematurely comment on or provide information. Furthermore, any party that has access to the relevant information before it is revealed to the public must be strictly bound by confidentiality. With regards to the information itself, it is imperative that the information is accurate; any information that is incorrect or is subsequently incorrect as a result of new data must be rectified appropriately. In the above context, a definition of price sensitive information shall be captured within the regulatory framework considering the changing environment inclusively but no definitive list can be given. What may be price sensitive information to one party to a contract may be immaterial to the counterparty. A fund-raising that may be material to an issuer facing liquidity problems may be immaterial to the same company in better times. It is important to note that “price sensitive information” includes potentially price sensitive information. And price-sensitive information may include positive and negative information. Deciding on what information is price sensitive is a matter of judgment. In considering whether the decision or information is price sensitive, directors should make reference to deciding criteria mentioned earlier. REFERENCES (1)
Bahnson, P. R. “The Road to Board Room” (Homewood, Illinois: Richard Irwin Inc. 2004).
(2)
Kelly, William A., Jr. “The Plague of Insider Non-trading.” Wall Street Journal, 12 December 1996.
(3)
Purna, A.B., “Reflection of Board Dynamics”, Bharat Law House, New Delhi, 2008, p. 62-68.
(4)
Rich, Anne J. “Stock Market Overload-No Simple Solution” Financial Executives, September-October 2003, pp-54-56.
(5)
The Companies Act-1994, The Government of Peoples’ Republic of Bangladesh.
(6)
Relevant Acts, Rules and Regulations of Securities and Exchange Commission of Bangladesh, DSE & CSE Listing Regulations etc.
The writer is the Manager Accounts & Finance of Rahimafrooz Ltd. He is also a Fellow Member of ICSB and Associate Member of ICMAB.
32
THE CHARTERED SECRETARY APRIL - JUNE 2011
Article
DEMUTUALIZATION OF STOCK EXCHANGES IN BANGLADESH Shah Md. Safiul Hoque Md. Awal Al Kabir 2
1
Abstract Demutualization refers to the change in legal status of the exchange from a mutual association into a company limited by shares. Demutualization as a concept is neither a very new concept nor sophisticated. This paper analyses the demutualization of stock exchange as a mechanism to enhance the corporate governance, increased flexibility in decision-making, and responses to globalization and international alliances in the context of Bangladesh. The study also identifies few challenges in the way of demutualization such as conflicts of interests, ownership structure, regulatory issues, financial stability etc. An overall structure and a corporate structure are proposed in this paper to implement demutualization in Bangladesh. To face the challenges and make the demutualization viable a regulatory framework is necessary which will ensure appropriateness of organization structure, develop risk management strategy, corporate governance model to govern and managed the stock exchange efficiently and fairly.]
Stock markets all over the world lend a hand the investors to analyze the condition of an economy in order to get maximum yield on their investment. Its operational efficiency is important for the betterment of the financial system. The economies of the world rely on the stock exchanges to facilitate trade in the stocks. Stock exchanges mainly perform three major functions: regulator, development of market and operational side (Ranong, 2002). It works as front line regulator for market participants because of the intimate involvement in trading activities. Figure 01: Market Capitalization FIBV Stock Exchange Demutualized Not Demutualized 24% 76%
Key words Demutualization, Mutual exchange, Stock exchange, corporate governance, Globalization, conflict of interests
Figure 01: Stock Exchange in Asia
Introduction Stock markets around the world are going through various changes to be proficient and to provide their stakeholders with better facilities. One of the major changes is demutualization. Researchers have explored this subject and its potential benefit for the stock markets around the world as most of the exchanges have gone through this process. Many emerging markets are also considering demutualization.
Demutualized Not Demutualized 48%
52%
Source: International Federation of Stock Exchange (FIBV)
THE CHARTERED SECRETARY APRIL - JUNE 2011
33
Article
As in emerging economies like Bangladesh, a mutual stock exchange is seen as an institution, serving national interest. But to avoid instability, liquidity and other financial ratios it is the demand of time to implement demutualization of stock exchanges in Bangladesh. To be more secured and risk averse, it may act as a buffer against any financial shocks. The four-member investigation committee on the recent stock market crash already submitted its report to the finance minister suggesting some recommendations to improve transparency in the operation of the nation's two stock exchanges: Dhaka Stock Exchange (DSE), and, Chittagong Stock Exchange (CSE). The investigation report revealed the alleged manipulation of the market operation through issuing of illegal placement and preference shares, loan settlement through shares, asset re-evaluation, share split, and a series of ill-motive transactions. The recommendations they put most emphasis on is the demutualization of stock exchanges. Demutualization in its many forms has become an extensive reality, one with growing demand in emerging market countries (Elliott, 2002). The concept is initially used to refer explicitly to conversion process adopted by insurance companies. Because of the positive aspects of this process demutualization is now common in savings and loan industry, stock exchanges and agricultural cooperatives around the world. Demutualization is not a new term for stock markets, as in 1993 world’s first exchange, Stockholm Stock Exchange went through the process of demutualization very fruitfully. Until the early 1990s, most financial exchanges were non-profit, “mutual� organizations owned by their members. But from the figure 01 and 02 it is obvious that most of stock exchanges in Asian region have implemented demutualization. Demutualization has generally concerned conversion of an exchange from a not-for-profit member owned organization to a for-profit shareholder-owned corporation. Background of Stock Exchanges in Bangladesh Bangladesh capital market is one of the smallest in Asia but the third largest in the south Asia region. Bangladesh has two Stock
34
THE CHARTERED SECRETARY APRIL - JUNE 2011
Exchanges, Dhaka Stock Exchange (DSE), established in 1954 where trading is conducted by Computerized Automated Trading System and Chittagong Stock Exchange (CSE), established in 1995 which is also conducted by Computerized Automated Trading System . All exchanges are self-regulated, private sector entities which must have their operating rules approved by the SEC. It also consists of a dedicated regulator, the Securities and Exchange Commission (SEC), since, it implements rules and regulations, monitors their implications to operate and develop the capital market. It consists of Central Depository Bangladesh Limited (CDBL), the only Central Depository in Bangladesh that provides facilities for the settlement of transactions of dematerialized securities in CSE and DSE. DSE & CSE comprises of 25 members of whom 12 are elected through direct election from the 235 and 134 shareholders respectively. Another 12 members representing distinguished personalities from different key economic and social arena of the country. The CEO of the Exchange is also a Director of the Board. Currently, our stock exchanges are non-profit cooperative organizations, owned by the exchange members who are usually stockbrokers. They do not distribute earnings as dividend. Rather, any profits are returned to members in the form of lower trading costs or access fees and investment for growth. Demutualization and Challenges Demutualization is a process in which nonprofit organizations turn to for profit organizations (Hughes and Zargar, 2006). The essence lies with the separation of ownership and management. Traditionally, stock exchanges operate as mutualized, non- profit organizations. According to Scullion (2001) demutualization is not merely converting into for profit organization owned by its members. An exchange is genuinely demutualized when it maximizes its potential of market capitalization to the fullest and alongside it also increases its shareholders value. The expression demutualization means the transition from a mutual company, in which there are no shares, and every member has
Article
one vote, to a company limited by shares and one vote per share. Demutualization of exchanges is a response to global competition and technological innovation that is restructuring the securities markets. The trend to demutualize is being driven largely by changes in technology and increased competition. Competition from electronic communication networks (ECNs) and other alternative trading systems offering anonymity and alternative or lower cost structures is drawing volume away from traditional exchanges. The other important forces that drive to demutualization are:
Incessant trends of Integration and merger Responses to international competition Blurring of product distinctions Opening Up of Markets Pressure from Investors and Financial Services Sector for bringing efficiency Huge competition on Trading
The process of demutualization starts from changing an organization from its mutual ownership structure to a share ownership structure. The process entails first converting memberships into shares, which step may or may not be followed by a public issue of those or treasury shares. In this manner, a quasi-governmental institution transforms itself into a profit-oriented, publicly traded company.
Figure 03: The Demutualization
process
LISTED COMPANY LISTED COMPANY PRIVATE COMPANY
of
Exchange
Widely Held Shares No Restrictions
Restricted Shares Owned by Members and Non-Members
Private Placement to Members, Listed Companies, and Institutional Investors
FOR-PROFIT PRIVATE COMPANY Member Owned MUTUAL SOCIETY
Member Controlled
Source: Reena Aggarwal, Demutualization and Corporate Governance of Stock Exchange
Ownership and trading privileges are effectively separated. Stockbrokers are no longer owners but customers of the exchange. Directors are elected by shareholders and answerable to them. Today some exchanges have been transformed into for-profit shareholder-owned companies and many more are considering such a demutualization. Some demutualized exchanges have become public companies and listed on their own or other boards. Others have remained privately held companies but intend to go public in the future. The company can take different shapes and forms, that is, it could be either a listed or unlisted company which may be closely held or publicly held. This process involves the segregation of members' right into distinct segments, viz. ownership rights and trading rights. The shareholders in a corporatized stock exchange may be a diverse group, as members may decide to retain their shares or to sell them. Table 03 shows us the differences in corporate structure between mutual and demutualized exchanges.
Table 01: Corporate Structure of a Mutual and a Demutualization Exchange AREA
MUTUAL EXCHANGE
DEMUTUALIZED EXCHANGE
Ownership
Member who trade on the exchange.
Public shareholders. These may include members, but trading rights and ownership are separated.
Aims of the Exchange
Usually, to maintain: 1.An efficient, low –cost, trading environment; 2.Risk-minimized settlement and 3.Quality regulatory framework
1.Maximum gains from shares 2.Improve product range and distribution and 3.Protect brand quality(including by having a quality regulatory framework
THE CHARTERED SECRETARY APRIL - JUNE 2011
35
Article
Composition of board and decision making
1. The board usually comprise mostly or solely member representatives 2. Decision are made on one member, one vote 3.Decision making power is vested with the board Acquisitions and alliances Not usually a priority. Capital management Not usually a priority. Mutual exchange may maintain high levels of capital backing on the basis of better safe to meet statutory requirements.
1. The board is usually more diversified 2. Decisions are usually made on a one share, one vote basis. 3. Decision making power is vested with the board, Priority , given a desire to maximize growth A key priority as management attempts to maximize share holder value.
Source: Own analysis
The literature in demutualization shows the numbers of benefits we can yield. These are: a) b) c) d) e) f) g) h)
Improvements in Corporate Governance Increased Customer Focus Increased Flexibility in Decision-Making Restructuring and Alliances of Exchanges Expansion of Activities Raise capital for strategic affiliations, technological improvements or new systems Access to human capital International alliances etc
Demutualization is a multifaceted process and to implement and retain this process efficient, several challenges have to face. Conflict of interest is the biggest challenge as management takes decisions which are not in conflict with their position in the organization whereas directors do not want any compromise on compromise on maximum revenue. Ownership structure is another challenge since it is hard to find the actual value of ownership right. Financial stability is a big challenge which needs to be covered. Regulatory framework is another challenge for the demutualized stock exchange because exchanges incur costs to develop and apply regulatory framework. As after the demutualization, stock exchange will become a for-profit organization; so there remains a possibility that regulatory functions may be compromised with the goal of maximizing profit. Demutualization: Context Bangladesh Bangladesh has started its way to demutualize the stock markets. The present government is determined to complete the demutualization process within its tenure. Recent delegates from IMF also stated demutualization as a
36
THE CHARTERED SECRETARY APRIL - JUNE 2011
pre-condition for its sanction of $1 billion loan. On February 02, 2011, the DSE formed a 10-member committee in this regard conferring the Term of Reference of reviewing the process maintained for demutualization of Asian stock exchanges. Based on their opinion the demutualization process for both stock exchanges of Bangladesh will be initiated. Demutualization requires doing the valuations, structures, laws and governance which is very time-consuming. We may wait for next couple of years to complete the process. The demutualization implementation committee has prepared an action plan to demutualize the stock exchange. The 11-memebr committee, headed by managing director of Investment Corporation of Bangladesh Mr. Md Fayekuzzaman, has been formed in February in suggestion of the government that had declared to demutualize the stock exchange within its tenure. Under the action plan, the committee will prepare a plan to build up a consensus on exchange demutualization and its broader modalities among members of the exchange, which will require holding road-show. A demutualised exchange is way different from a mutual exchange; the three functions of ownership, management and trading are intervened into a single Group in a mutual exchange. The broker members of the exchange over here are both the owners and the traders on the exchange and they further manage the exchange as well. To implement demutualization in Bangladesh all these three functions must be precisely segregated. A comprehensive structure of demutualized exchange is proposed (figure: 04) to operate the demutualized exchange in Bangladesh. Members of FIBV all over the world have established this organogram to make the demutualization effective and efficient.
Article
Figure 04: Overall structure of Demutualized Stock Exchange
Source: Demutualization of Philippine Stock Exchange, Maria Larrie Alinsunurin
In a demutualized exchange owner and management are different. There will have several management groups who will perform different activities for the betterment of the shareholders and other stakeholders of the exchange. Table 02: Role of Stock Exchange Committee
GROUP Office of the President Corporate Services Integrity Group
Capital Market Group Clearing & Settlement Group Technology Services
COMMITTEE (FUTURE ROLE) Management Audit & Finance Social Committees ( social Club) Business Development ( Strategic Advisory ) Financial Exchange (Strategic Advisory ) Business Conduct & Ethics ( Broker Disciplinary ) Floor Trading & Arbitration ( Broker Appeals ) Policy Committees ( Business rules) Membership Committee ( Broker Advisory ) Listing Committee ( listing Appeals) Securities Clearing ( Strategic Advisory ) Technology ( Strategic Advisory )
Source: Demutualization of Philippine Stock Exchange, Maria Larrie Alinsunurin
THE CHARTERED SECRETARY APRIL - JUNE 2011
37
Article
Before implementing demutualization we should revisit the commercial strategy to improve viability and enhance business prospects. If the demutualization does not become financially viable it will become the burden in the long run and will lose the attention of all concerns. Over the last five years, given the exchanges’ move towards for-profit structures there has been a steady rise in revenues of FIBV member exchanges (growing at a rate of 12.3% per annum) that outpaced their costs (growing at a rate of 10% per annum-Figure: 05). Figure 05: Revenue Breakdown by legal Status (2006) Listed
Other
1% 2%
Private
Association of Mutual
Demutualized
So demutualization may open the new era of excellences of stock exchanges because a for-profit exchange strives to keep its cost within manageable level, charges fees to recover its operational costs, and earn a profit margin on top of the costs to replenish reserves, pay for new investments to improve services, and provide dividends to investors. However, these exchanges need to continue to strive to ensure the financial viability is sustainable. Implementation of demutualization of exchanges may establish a new milestone in the history of financial restructuring. Exchanges of our country will enjoy the following benefits by implementing the demutualization. These are:
12% 6%
79%
Source: World Federation of Exchanges, 2007. WFE Annual Report & Statistics ,2007
The Cost and Revenue Survey 2000, undertaken by the FIBV confirmed that the mutual exchanges and associations were relatively less cost competitive and profitable. Demutualized exchanges, with a new strategic mandate, were the most profitable bourses and earned an average return of 41%. So from the experiences of other countries it is apparent that demutualization will be financially viable in the context of Bangladesh. Because trade volume and investors are sharply increasing day by day in bourses of Bangladesh. Last 2-3 years, investors in the stock exchanges of Bangladesh increased by more than 50 times.
Table 03: FIBV Member Stock Exchanges Analysis of Costs and Revenues, 2000
Source: International Federation of Stock Exchange (FIBV)
38
THE CHARTERED SECRETARY APRIL - JUNE 2011
Demutualization will help the stock exchanges in Bangladesh to improve corporate governance. Demutualization would restructure governance at the stock exchanges on a sustainable manner. Another advantage of demutualization is access to economic capital. After demutualization stock exchanges of Bangladesh can raise capital from many sources as normal for profit organization. A demutualized exchange can borrow from conventional lenders such as banks. Whereas mutualized stock exchanges have to look up to their guarantor for finances. Better management would also increase the efficacy of the exchange by introducing better practices and policies. It will help to broaden Exchange ownership and allowing Members the ability to realize the value of their assets Spreading ownership risk and making the Exchange less susceptible to Members’ vested interests Demutualization would also enhance the profit motive for growth and development of exchanges in Bangladesh. After demutualization exchanges have to earn their own bread and butter. This will have a constant pressure on the exchanges to grow and develop their businesses which will increase profitability. Demutualization would also help an exchange to attract listings. Better and
Article
efficient system of a demutualized exchange would increase the confidence of other companies and this would result in greater listings. Then Bangladesh can go for international alliances and such alliances provide openings for investments and cross border listings. One of the most important changes that will accompany demutualization is much greater flexibility in its decision-making. The Exchange is therefore better equipped to make timely decisions for market users, and to respond to changing circumstances. Responses to Globalization and Consolidation. Through alliances, exchanges seek to attract more investors by harmonizing distinct trading environments and by offering greater product variety. Enhance their global specialization strategy through strong brand management and by becoming a more entrepreneurial organization. Actively pursue strategies that contribute to the growth of the capital market; provide facilities to trade equities, debt, derivatives and commodities futures and options; promote a corporate culture that encourages commitment, creativity and teamwork; Maintain a balanced and responsive regulatory framework that will enhance market integrity and investor confidence; and focus on customer orientation, strive for organizational excellence and promote professionalism within the industry. It will broaden investor base concentrating on building the local institutional investor base, improving the dissemination of information and investor confidence; Demutualization enhances the efficiency and effectiveness of the stock exchange and the Central Depositary System by restructuring CSE to a more commercially focused organization; It will develop the stock broking industry by promoting the emergence of full service brokers and enhancing professionalism within the industry; Demutualization will harmonize strategy with statutory and other government institutions of Bangladesh through better
interaction and coordination with related capital market institutions; and pursue international initiatives through alliances and other strategic linkages. Although demutualization has many benefits, it is not without risk specially a developing country like Bangladesh where there is absence of financial stability. To implement and run demutualized exchange, Bangladesh will have to face many challenges. One is that once ownership and use are decoupled, brokers may not feel any loyalty in the market and may easily turn to alternatives. They may develop alternative trading systems to internalise their order flow rather than send it to the exchange. The second is the exchange’s ability to transform itself. Once it demutualises, it must become a profit-oriented, competitive organization 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. Third, the exchange can become a potential take-over target, although this can be managed through ownership limits. Fourth, the conflicts of interest that exist in a self-regulatory organization 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. Other risks associated with demutualization of exchanges in Bangladesh are as follows:
rules governing primary and secondary market qualification, operative and ethical practices of market Transparency of market transactions, etc Exchanges’ costs might rise as pressure increases to supply existing and additional services at international quality levels. Furthermore, exchanges may end up spending more on regulatory oversight, particularly if they retail these services out to independent subsidiaries Absence of Corporate culture
THE CHARTERED SECRETARY APRIL - JUNE 2011
39
Article
Conclusion and Recommendations In today’s competitive environment, a stock exchange must be responsive to the needs of its many stakeholders, including participating organizations, listed companies, and institutional and retail investors. Separating exchange membership from ownership may be a politically and economically feasible in the context of Bangladesh. Unlike a mutual structure where often only broker-dealers may be members, a demutualized exchange affords both institutional investors and retail investors the opportunity to become shareholders. A demutualized exchange will have greater flexibility to accommodate the needs of institutional investors as customers, and potentially, as owners. Demutualization is typically but one component of an exchange gearing itself up for survival in the face of frantically paced globalization. Exchanges in Bangladesh must get things in shape domestically as part of steeling themselves for a more global focus. Shareholder-owned market-oriented corporations are more capable of rapid change, allowing for the implementation of various steps necessary to become and stay competitive. To be competitive, exchanges must be transparent, fair and efficient. Demutualization in our country may facilitate the changes necessary to improve standards of self-regulation and increase investor confidence. However demutualization is not necessarily a panacea for poor self-regulation by existing stock exchange in our country unless the new owners of a demutualized exchange are committed to consistent and effective selfregulation, the regulatory benefits of demutualization are likely to be illusory. To enjoy the benefits of demutualization we must try to remove the challenges associated with stock exchanges. So, it is recommended that one committee should watch over the whole process both pre and post demutualization to make it a success. A regulatory framework will help to reduce conflict of interest, unethical practices, and would help to make rules for the primary and secondary market, investors’ protection and transparency in stock exchanges. The securities market regulations will ensure efficiency, integrity and fairness of the markets that together lend credibility to markets and safeguard investor interest and confidence. it must plan the appropriate organization
40
THE CHARTERED SECRETARY APRIL - JUNE 2011
structure, risk management strategy, corporate governance model, business model, and ownership structure. Effective structure of the exchanges in Bangladesh can only make a difference if the outfit is well governed and managed efficiently and fairly, while ensuring high standard market surveillance and trade practices monitoring, and effective checks and balances on market participants. However, demutualization itself cannot solve all problems. We need to educate investors, owners, management and as such all stakeholders to adjust to the changed scenario and make best out of this. We need to keep in mind specific issues pertaining to the overall economic and political environment in Bangladesh when implementing demutualization and give it time for transition and settle into the system. References 1)
Agarwal R (2002). Demutualization and Corporate Governance of Stock Exchanges. J. Appl. Corp. Financ, 15(1): 105-113.
2)
Akhtar S (2002). Demutualization of Asian Stock Exchanges—Critical Issues and Challenges. Demutualization of Stock Exchanges: Problems. Solutions and Case Studies, Asian Development Bank. pp. 3-32.
3)
Alexander G, Jones, J. and Nigro, P, (1998) Mutual Fund Shareholders: Characteristics, Investor Knowledge and Sources of information, Financial Services Review, Vol 7. Issue 4: 301-316.
4)
Chaddad FR (2003). Waves of demutualization: An analysis of the economic literature. J. Econ. Lit., 18(4): 1481-1521.
5)
Chesini G. (2001), “Changes in the ownership structure of Stock Exchanges: from demutualisation to self-listing”, paper presented at the X International “Tor Vergata” Conference on Banking and Finance, Rome, December 5th -6th.
6)
Delany, G. (2005). Recent trends in the exchange landscape, (http://www.exchange handbook.co.uk/index.cfm?section=articles&a ction=detail&id=54128
7)
Elliott JA (2002). Demutualization of Securities Exchanges: A Regulatory Perspective. IMF Working Paper, 02/119.
Article
8)
IOSCO 2000, Demutualization”, December.
Exchange Paper,
15) Mendiola A, O’Hara M (2003). Taking stock in stock markets: the changing governance of exchanges. Working Paper. Cornell University.
9)
IOSCO 2006, “Regulatory Issues Arising From Exchange Evolution”, march.
16) Otchere, I. & Abou-Zied, K. (2007). Stock exchange demutualization, self listing and performance: The case of the Australian stock exchange, Journal of Banking & Finance Vol. 32, Issue April 4’ 2008, Pages 512-525
“Stock Discussion
10) Faina A, Lopez RJ (2006). Market access and human capital accumulation: The European Union Case, Appl. Econ. Letters, 13(9): 563-567. 11) Fleckner AM (2006). Stock Exchanges at the crossroads, Fordham Law Rev., 74:2541-2620. 12) Galper, J. (1999). Three business models for the stock exchange industry, a working paper, International Federation of stock exchanges. 13) Hart O, Moore J (1996). The governance of exchanges: member’s cooperatives vs. outside ownership. Oxford Rev. Econ. Policy,12(4): 53–69. 14) Karmel R (2000) Turning seats into shares: implications of demutualization for the regulation of stock and futures exchanges. Working paper
1 2
17) Ranong K (2002). How Can NBFIs play a greater role in a bank-based economy? A Regional Seminar on Non-Bank Financial Institution in East Asia. Sep 5, 2002, Thailand. 18) Scullion M (2001). The Compaq handbook of world stock, derivative and commodity exchanges chap, demutualisation: The challenges facing global exchanges, (pp. 25-32). Mondo Visione. 19) Steill B (2002). Changes in Ownership and Governance of Securities Exchanges: Causes and Consequences. Brookings-Wharton Papers on Financial Services. 20) World Federation of Exchanges.(2000). Annual Report and Statistics. Paris: World Federation of Exchanges.
The writer is an Assistant Professor, School of Business Studies, Southeast University. The writer is a Lecturer, Dept. of Management Studies, Jahangirnagar University.
THE CHARTERED SECRETARY APRIL - JUNE 2011
41
Notification
THE CHARTERED SECRETARY APRIL - JUNE 2011
42