Chapter Two

Overview of Bond Market in Bangladesh

 Overview of Bond Market in Bangladesh
2.1 The Financial System of Bangladesh
The financial system of Bangladesh is comprised of three broad fragmented sectors:

● Formal Sector
● Semi-Formal Sector
● Informal Sector
Formal Sector
The sectors have been categorized in accordance with their degree of regulation. The formal
sector includes all regulated institutions like Banks, Non-Bank Financial Institutions (FIs),
Insurance Companies, Capital Market Intermediaries like Brokerage Houses, Merchant
Banks etc.; Micro Finance Institutions (MFIs).
1. Financial Market
The financial market consists of three types of markets namely the money market, the capital
market, and the foreign exchange market.
1.1 Money Market: The money market comprises banks and financial institutions as
intermediaries, 20 of them are primary dealers in treasury securities. Interbank clean and
repo-based lending, BB's repo, reverse repo auctions, BB bills auctions, treasury bills
auctions are primary operations in the money market, there is also active secondary trade in
treasury bills (up to 1 year maturity).
1.2 Capital market: The primary issues and secondary trading of equity securities of capital
market take place through two (02) stock exchanges-Dhaka Stock Exchange and Chittagong
Stock Exchange. The instruments in these exchanges are equity securities (shares),
debentures and corporate bonds. The capital market is regulated by Bangladesh Securities
and Exchange Commission (BSEC).
1.2(a) Dhaka stock exchange: The Dhaka Stock Exchange began in 1954 when Bangladesh
was still known as East Pakistan, and came into existence in its current form in 1976, five
years after independence from Pakistan. It is a public limited company.
Performance of DSE at a glance
Particular 2018 2019 2020
Listed securities 578 587 597
DSE Broad Index
Opening index 6,244.52 5,385.64 4,452.93
Closing index 5,385.64 4,452.93 5,402.80
% of change (13.85) (17.32) 21.31
Highest index 6,318.27 5,950.52 5,402.07

Lowest index 5,204.36 4,390.67 3,603.32

DSE 30 Index
Opening index 2,283.23 1,880.32 1,513.36
Closing index 1,880.77 1,513.32 1,936.63
% of change (17.63) (19.54) 29.78
Highest index 2,304.69 2,049.53 1,936.70
Lowest index 1,836.25 1,494.55 1,203.68
DSEX Shariah index
Opening index 1,390.27 1,232.70 999.54
Closing index 1,232.82 999.63 1,243.11
% of change (11.35) (18.90) 24.23
Highest index 1,433.17 1,331.62 1,242.11
Lowest index 1,200.43 981.52 834.87
Market capitalisation tk. in mn
Opening market 4,228,945.46 3,872,952.86 3,395,510.68
capital
 Closing market 3,872,952.84 3,395,510.68 4,482,300.52
capital
Turnover
Total turnover tk. mn 1,333,638.94 1,138,402.68 1,349,401.56
Volume
Total turnover in 33,563.60 32,758.57 48,970.56
Volume (mn)

1.2(b) Chittagong stock exchange: The Chittagong Stock Exchange is a stock exchange
based in the port city Chittagong, Bangladesh. It is one of the twin financial hubs of the
country, alongside the Dhaka Stock Exchange. Established in 1995, the exchange is located
in the Agrabad business district in downtown Chittagong. It has a combined market
capitalization of over US$ 38 billion as of 2020.
2. Foreign Exchange Market: Towards liberalization of foreign exchange transactions, a
number of measures were adopted since 1990s. Bangladeshi currency, the taka, was declared
convertible on current account transactions (as on 24 March 1994), in terms of Article VIII of
IMF Article of Agreement (1994). As Taka is not convertible in capital account, resident
owned capital is not freely transferable abroad. Repatriation of profits or disinvestment
proceeds on non-resident FDI and portfolio investment inflows are permitted freely. Direct
investments of non-residents in the industrial sector and portfolio investments of non-
residents through stock exchanges are repatriable abroad, as also are capital gains and
profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior
Bangladesh Bank approval, which is allowed only sparingly. Bangladesh adopted Floating
Exchange Rate regime since 31 May 2003. Under the regime, BB does not interfere in the
determination of exchange rate, but operates the monetary policy prudently for minimizing
extreme swings in exchange rate to avoid adverse repercussion on the domestic economy.
The exchange rate is being determined in the market on the basis of market demand and
supply forces of the respective currencies. In the forex market banks are free to buy and sale
foreign currency in the spot and also in the forward markets. However, to avoid any unusual
volatility in the exchange rate, Bangladesh Bank, the regulator of foreign exchange market
remains vigilant over the developments in the foreign exchange market and intervenes by
buying and selling foreign currencies whenever it deems necessary to maintain stability in the
foreign exchange market.
3. Regulators of the Financial System
(a) Central Bank
Bangladesh Bank acts as the Central Bank of Bangladesh which was established on
December 16, 1971 through the enactment of Bangladesh Bank Order 1972- President’s
Order No. 127 of 1972 (Amended in 2003).
The general superintendence and direction of the affairs and business of BB have been
entrusted to a 9 members' Board of Directors which is headed by the Governor who is the
Chief Executive Officer of this institution as well. BB has 45 departments and 10 branch
offices.
In Strategic Plan (2010-2014), the vision of BB has been stated as, “To develop continually
as a forward looking central bank with competent and committed professionals of high
ethical standards, conducting monetary management and financial sector supervision to
maintain price stability and financial system robustness, supporting rapid broad based
inclusive economic growth, employment generation and poverty eradication in Bangladesh”.
The main functions of BB are (Section 7A of BB Order, 1972) -
1.to formulate and implement monetary policy;
2.to formulate and implement intervention policies in the foreign exchange market;
3.to give advice to the Government on the interaction of monetary policy with fiscal and
exchange rate policy, on the impact of various policy measures on the economy and to
propose legislative measures it considers necessary or appropriate to attain its objectives and
perform its functions;
4.to hold and manage the official foreign reserves of Bangladesh;
5.to promote, regulate and ensure a secure and efficient payment system, including the issue
of bank notes;
6.to regulate and supervise banking companies and financial institutions.
(b) Insurance Authority
Insurance Development and Regulatory Authority (IDRA) was instituted on January 26, 2011
as the regulator of insurance industry being empowered by Insurance Development and
Regulatory Act, 2010 by replacing its predecessor, Chief Controller of Insurance. This
institution is operated under Ministry of Finance and a 4 member executive body headed by
Chairman is responsible for its general supervision and direction of business.
IDRA has been established to make the insurance industry as the premier financial service
provider in the country by structuring on an efficient corporate environment, by securing
embryonic aspiration of society and by penetrating deep into all segments for high economic
growth. The mission of IDRA is to protect the interest of the policy holders and other
stakeholders under insurance policy, supervise and regulate the insurance industry
effectively, ensure orderly and systematic growth of the insurance industry and for matters
connected therewith or incidental thereto.
(c) Regulator of Capital Market Intermediaries
Securities and Exchange Commission (SEC) performs the functions to regulate the capital
market intermediaries and issuance of capital and financial instruments by public limited
companies. It was established on June 8, 1993 under the Securities and Exchange
Commission Act, 1993. A 5-member commission headed by a Chairman has the overall
responsibility to administer securities legislation and the Commission is attached to the
Ministry of Finance.
The mission of SEC is to protect the interests of securities investors, to develop and maintain
fair, transparent and efficient securities markets and to ensure proper issuance of securities
and compliance with securities laws. The main functions of SEC are:
1.Regulating the business of the Stock Exchanges or any other securities market.
2.Registering and regulating the business of stock-brokers, sub-brokers, share transfer agents,
merchant bankers and managers of issues, trustee of trust deeds, registrar of an issue,
underwriters, portfolio managers, investment advisers and other intermediaries in the
securities market.
3.Registering, monitoring and regulating of collective investment scheme including all forms
of mutual funds.
4.Monitoring and regulating all authorized self regulatory organizations in the securities
market.
5.Prohibiting fraudulent and unfair trade practices in any securities market.
6.Promoting investors’ education and providing training for intermediaries of the securities
market.
7.Prohibiting insider trading in securities.
8.Regulating the substantial acquisition of shares and take-over of companies.
9.Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of
securities, the Stock Exchanges and intermediaries and any self regulatory organization in
the securities market.
10.Conducting research and publishing information.
(d) Regulator of Micro Finance Institutions
To bring Non-government Microfinance Institutions (NGO-MFIs) under a regulatory
framework, the Government of Bangladesh enacted "Microcredit Regulatory Authority Act,
2006’" (Act no. 32 of 2006) which came into effect from August 27, 2006. Under this Act,
the Government established Microcredit Regulatory Authority (MRA) with a view to
ensuring transparency and accountability of microcredit activities of the NGO-MFIs in the
country. The Authority is empowered and responsible to implement the said act and to bring
the microcredit sector of the country under a full-fledged regulatory framework.
(e) Institutions: There are two types of banks in Bangladesh i.e. scheduled Banks and non-
scheduled banks. Within 60 scheduled banks - there are 6 state owned commercial banks,3
specialized banks, 42 private banks (conventional commercial banks and Islamic banks) and
9foreign banks. There are 5 nonscheduled banks namely, Ansar VDP Unnayan Bank,
Karmashangosthan Bank, Grameen Bank, Jubilee Bank and Palli Sanchay Bank. Further,
there are 34 NBFIs, which are controlled by the Bangladesh Bank. Out of these NBFIs, two
are state owned, one is a subsidiary of state owned commercial bank, and there are 15 private
NBFIs initiated by joint ventures.

Semi-Formal sector
The Semi-Formal sector includes institutions, which are regulated but do not fall under the
jurisdiction of either the central bank or the insurance authority or any other financial
regulators. Institutions such as Grameen Bank, Samabag Bank and House Building Finance
Corporation (HBFC) mainly represent the sector.
Informal sector
The Informal sector includes private intermediaries, which are unregulated.

2.2 Long-term debt market in Bangladesh

Introduction to Long-term debt market

Bangladesh capital markets are not conducive to the issuance of debt instruments viz.
debentures and bonds. There remain major structural issues in the long-term debt market such
as low investor base, absence of yield curve, lack of investor awareness, and high issuance
cost. Consequently, the long-term debt market still remains largely under developed to
support capital- intensive projects in the country. The commission has been undertaking steps
to support the market participants (issuers and investors) and to develop the capital market.

Issuance of Corporate Bonds

The corporate bond market is still at a nascent stage as compared to the Treasury bond
market. Only two corporate bonds i.e. Islami Bank Bangladesh Ltd (IBBL) Mudaraba
perpetual bond, Ashuganj Power Station Company Limited (APSCL) bond have been listed
so far
Details on Corporate Bonds listed on Bangladesh Stock Market
Name APSCL Bond IBBL Bond
Opening Price 5000 1009
Closing Price 5000 1009
Last Trading Price 5000 1009
Market Capitalization 1000 3034.50
Authorized Capital 30000 000
Paid-Up Capital 1000 3000
Face Value 5000 1000
Total No. Of Outstanding 200000 3000000
Securities

The table shows the opening, closing and listing price of the corporate bonds that are now
available in Bangladesh. Here IBBL’s total number of securities are higher than APSCL
Bonds.
Issuance of Govt. Securities
The government offers Treasury bills and bonds.
Treasury Bills (T-Bills) are free of credit risks and tradable in the secondary market. The
government issues T-Bills with different maturity periods: 91 days, 182 days and 364 days.
The investors purchase T-bills at a discounted rate and then redeem at face value after
maturity.
Details of Cut Off Yield of accepted govt. T-bills
Day 91 day 182 day 364 day
Yield in Percentage 0.51 0.75 3.5

Treasury bills are free of credit risks and tradable in the secondary market. The Govt. issues
T-bills with different maturity periods: 91 days, 182 days, 364 days. The investors purchase
T-bills at a discounted rate and then redeem at face value after maturity. The cut off yield for
T-bills increased from 0.51 to 0.75 in 182 days. The volume of issuance of T-Bills is directly
linked to its yield rate. The share of 364 days T-Bills increased to 3.5% yield.
Treasury Bond-221 treasury bonds issued by the Bangladesh Bank (Central Bank of
Bangladesh) are listed with DSE but not tradable at present. The common maturities are 5,
10, 15 and 20 years. Coupon rate varies depending on when the bonds were issued. Par value
of each treasury bond is Tk. 100,000.
 Details of Cut off Yield accepted on T-bonds
Year to Maturity 1.92 year 4.83 year 10 year 14.41 year 19.41 year
Yield in
3.17 4.25 6.01 6.56 6.95
Percentage

Bangladesh Government Treasury Bonds are available with maturity periods of around 2
years, 5 years, 10 years, 15 years and 20 years. The T-Bonds are tradable in the secondary
market. In 1.92 years, the percentage of yield is 3.17. The cut off yield of govt. T-Bonds has
increased over the years. In 19.41 years, the percentage of yield is 6.95.

Details of Standard Tenor Yield of Govt. T-bonds

Year to maturity 2 year 5 year 10 year 15 year 20 year
Standard Tenor
Yield in 3.20 4.31 6.01 6.59 6.98
Percentage
 Cut-off and Standard Tenor Yield of T-bonds
(on 10 Feb, 2021)

Auction Tenor & Yield Standard Tenor & Yield

Year Cut off yield (%) Year Yield (%)
1.92 3.17 2 3.20
4.83 4.25 5 4.31
10 6.01 10 6.01
14.41 6.56 15 6.59
19.41 6.95 20 6.98

Investor Base
The growth of bond market depends highly on the length & strength of its investor base.But
in our country it's not turned to a acceptable level yet. In current debt security market, bank &
other financial institutions are the most important Institutional investor. In our country, the
development of bond market depends on the development of investor base to a greater extent.
● Commercial banks
According to the Bangladesh Bank regulation, current statutory liquidity ratio (SLR) of
commercial banks is 13% & cash reserve ratio (CRR) is 4%. Commercial banks prefer to
purchase debt instrument from government on the basis of SLR rate. For these banks form the
investors base contributing to 77% of total amount invested on government securities.
Besides the commercial banks also invest in private subordinated bond.
● Insurance Sector
In the long-term government security, insurance sector is a potential investor. According to
insurance act 1938, insurance companies are entitled to invest at least 30% of their fund in
debt instruments. Approximately 48% of total investment of insurance industry is held on
government sector as these investment are secured and can be withdrawn at any time. On the
other hand, the investment of insurance industry in private sector is very low.
● Pension and provident fund
The participation of pension fund is very rare in the capital market of Bangladesh.According
to recent statistics, approximately 40% of the pension funds are invested in government
securities. Bangladesh government is trying to create an authoity to manage the provident and
pension funds. As like as other public schemes, the government plans to introduce mandatory
pension schemes in the private sector.
● Mutual Funds
Presence of mutual fund in government sector of Bangladesh is still in growing stage. There
are only 37 close-ended mutual funds and 46 open-ended mutual funds in the country. The
Investment Corporation of Bangladesh (ICB), a public mutual fund, dominates the mutual
fund market. ICB provides five Islamic mutual funds- UFS Padma life, Islamic Finance and
Investment Limited (IFIL), Al-Arafah Islami Bank Limited and Islamic Bank Bangladesh
Limited. The government’s initiative to onboard private sector players has led to more than
25 private mutual funds schemes operating in the country.
● Individuals
Rate of individual participation in private sector is high. On the other hand this rate is very
low in public sector like security market of Bangladesh because risk is slightly negotiable in
case of personal investment.

2.3 Market Infrastructure

A company usually finance its vast operations from long term financing sources. And one of
the most vital tools for long term financing is Bond. Bonds are known as fixed income
securities. Unlike stocks, bonds offer a fixed coupon over the maturity period and principal
payment at maturity. As every company is not like google which actually has 100% equity
and zero external financing. For Bangladesh, development in bond market is a crying need.
There are three forces viz. external forces, internal forces, and intermediate forces, which
influence the Bangladesh bond market infrastructure. They are:
External forces:
● Country Profile: Over some years Bangladesh has been in stability after a long shock
in the economy. It has gained its reputation as a developing country certification over
the world. Which actually introduced consistent policies and improved trade with
partners across multiple countries with great opportunities. In 2018, Moody’s Investor
Service affirmed the country’s long-term issuer and senior unsecured debt rating at
Ba3 and has maintained a stable outlook.
● Macroeconomic Situations: In FY 2018, the Bangladesh economy achieved a record
growth of 7.9%. Bangladesh Bank has projected a GDP growth in the range of 7.5%
to 7.7% in FY 2019. The growth will additionally be supported by exports from the
competitive RMG industry. Further, the country witnessed an increase in remittance
inflow by 36% from USD 11.0 billion in FY 2010 to USD 15.0 billion in FY 2018.
High remittance inflows act as a catalyst to the economic growth. The country’s
economic growth is additionally supported by an increase in private sector investment
by 14.6% to USD 54.8 billion and in public sector investment by 26.8 % to USD 17.6
billion in FY 2017. The inflation rate has reduced from 5.7% in December 2017 to
5.5% in December 2018. Foreign reserves reduced from USD 32.3 billion in FY 2018
to USD 31 billion as of January 2019. To stabilize the foreign exchange market, the
central bank sold USD 1.2 billion in January 2019 and USD 2.3 billion in FY 2018 to
various banks.

Intermediate forces:
● Government Securities: The government issues debt instruments. They are T-Bonds,
T-Bills and NSCs to reduce its budget deficit. The central bank on behalf of the
government issues and monitors these securities. But debt securities market in the
country is dominated by the government debt instruments, which offer higher returns
 as compared to returns provided by the bank deposit products. Further, even higher
returns on NSC schemes incentivize individuals and companies, who have a low
appetite for risk, to invest in them.
● Secondary Market: As a result of inactive secondary market, there has hardly been
any public issue of corporate bonds in the bond market. The reason is absence of a
benchmark yield curve and lack of debt instruments. Recently, Bangladesh Bank
undertook an initiative to introduce the concept of repo and reverse repo rate in order
to activate the secondary market. Additionally, Bangladesh Bank has issued multiple
guidelines and increased the primary dealer base to promote trading of government
securities in the secondary market. That said, the secondary bond market in
Bangladesh is still non-existent and the bonds are considered as non-tradable assets.

Internal forces:
● Issuers: Though Bangladesh has recognized itself as a fast-growing economy across
the world, it still lacks both quality and quantity of issuers of debt securities.
Credibility of the issuers is one of the main reasons for this kind of circumstances.
Another main reason is, in the past, some companies defaulted on debenture payment.
At present, only eight debentures and one corporate bond exist in the Bangladesh debt
market. Moreover Issuing debt securities is costly here which is almost 1.5%-2% of
the face value.
● Invesors: There are large number of institutional investors like insurance companies,
mutual funds and other private financial institutions, but they do not invest in the
private bond market. The reason is they want to invest in high returns and low risk
government securities. Pension and provident funds on the other hand are used by the
government to fund ADP and to reduce budgetary deficiencies. On the other hand
individual investors prefer to invest in common stock of listed companies, as the
yields from the bond market are not attractive enough for them. Moreover, owing to
past incidents of defaults in payment, the investors have poor confidence in the
issuers, the legal and regulatory framework and the market.
● Intermediaries: There are two capital markets in BD. They are the CSE and the DSE.
Further, there are 63 merchant banks, eight credit agencies, and 16 funds managers,
five trustees for asset back securities, eight trustees for mutual funds and 83 trustees
for debt securities. The BSEC regulates these intermediaries. However, the
intermediaries are not robust enough to support the bond market.

2.4 Current market procedures for issuing a bond

When corporations or government bodies need to raise money, they may sell bonds to the
public. Because this is a highly technical and complicated process, the issuing organizations
usually hire special parties to do this work for them.

Bangladesh Securities and Exchange Commission coordinate the activities of capital market
like issuance of bonds and securities. In that case some rules and regulations are being
followed. Such as:
 ⮚ Securities and Exchange Commission (Public Issue) rules, 2001: For raising capital
public and private companies needed to follow the rules.
⮚ Securities and Exchange Commission (public issue) rules, 2015.
⮚ Securities and Exchange Commission (private placement of debt securities) rules,
2012: Applicable for companies issuing privately placed debt securities.
⮚ Securities and Exchange Commission (asset-backed Securities) Rules, 2008:
Applicable for a company issuing asset backed securities.

In addition, BSEC having different rules and regulations for intermediaries like Marchant
bankers, credit rating agencies, asset management companies, trustees and fund managers
who are capable of providing various services with respect to the capital market.

For issuing debt securities an issuer or originator needs to make an application to the
commission by fulfilling some conditions. Those conditions include:

⮚ The issuer or originator has a good track record of profitability and liquidity or its
forecasted financial position indicates a significant profitability, liquidity.
⮚ The issue is rated by a credit rating company and its periodical surveillance rating
shall be done by the said rating company.
⮚ The issuer or originator has a valid enforceable interest over its assets.
⮚ The issuer or originator has appointed a trustee for the issue.
⮚ The financial statements of the issuer are prepared as per International Financial
Reporting Standards (IFRS) as applicable in Bangladesh and audited as per
International Standards of Auditing (ISA)and other applicable legal requirements.
⮚ The issue has been approved by the Board of Directors or governing body.

Additional conditions to be fulfilled before filing an application under public issue:

⮚ The issuer or originator other than statutory body or trust shall be a public limited
company and minimum existing paid up capital of Tk. 15 (fifteen) crore.

⮚ For issuer other than Bank, Financial Institutions, Insurance company or trust, total
debt of the issuer including the proposed issue along with preference share, if any,
does not exceed 80% (eighty percent) of its total tangible assets.

⮚ The issue shall not be rated below investment grade.

⮚ The issuer has to utilize at least 50% of the fund raised through the issue of capital
previously.

Requirements for Application:

⮚ An issuer needs to submit the application to the Commission for consent of issuance
of securities.
⮚ The applicant shall pay an amount of taka ten thousand (non-refundable) for private
offer or public issue as application fee through payment order and demand draft.
⮚ With application the issuer needs to submit information memorandum for further
information disclosure.
 ⮚ In case of issuance of an Investment Sukuk issuer needs to fulfill the requirement of
Bangladesh Securities and Exchange Commission (Investment Sukuk) Rules, 2019
and the relevant requirements of these rules.
⮚ In case of issuance of an asset backed securities (ABS), the issuer needs to fulfill the
requirement of Securities and Exchange Commission (Asset Backed Securities)
Rules, 2004 and the relevant requirements of these rules.
⮚ The issuer Shall have special resolution of general meeting for issuance of debt
securities with conversion feature under public issue and No debt securities shall be
converted before maturity of the issue or five years of maturity, whichever
comes later.

Consideration of the application

⮚ After receiving application form issuer BSEC will check the relevant information. If
all the information is okay then BSEC will consent to the issue of debt securities
within 7 working days otherwise within 15 working days will direct the issuer
regarding fulfillment of relevant information.

Review of application

⮚ If the application is rejected by BSEC, then the issuer may apply for review within 30
days from the date of rejection by BSEC.

Approval of Information Memorandum and Publication of information memorandum

⮚ After examination of the draft information memorandum and relevant documents, the
Commission, if satisfied, shall issue consent for issuance of securities to the investors
and approve the information memorandum.

⮚ After publication of Information Memorandum (IM) the subscription shall remain

open for maximum 15 (fifteen) working days and approved IM shall be made
available in the website by the issuer till the closure of the subscription list.

Consent fee

⮚ On approval of the application, the issuer shall pay a fees equivalent to 0.05% of the
total face value within 15 days to BSEC.

⮚ If the issuer fails to pay the fees, the application will be rejected by BSEC.

Conditions to be fulfilled after getting consent for issuance of securities

⮚ The issuer will execute a deed of trust in favor of trustee and register the same under
registration act, 1908.
⮚ The issuer will create charges over the assets only for issuance of secured bond,
through execution of Charge Document in favor of the trustee. The trustee then will
 submit to the commission a report to the effect of all charges and guarantees as per the
deed to of trust executed properly.
⮚ The issuer should submit a report on the issue of debt instruments to BSEC within 30
days.
⮚ The consent for issuance of debt securities shall remain valid for 6 (six) months from
the date of consent.

After obtaining the Consent to Issue and making the appointment of a trustee, the issuer can
issue debt securities to eligible investors viz. banks, insurance companies, financial
institutions, mutual funds, provident and pension funds, corporates, primary dealers, and
individuals.

Subscription Procedure and Compliance

⮚ The subscription for private offer shall be made as per the consent letter and The
subscription for public issue shall be made as per the public issue application
process mentioned in the consent letter.

Appointment of Issue manager

⮚ The issuer shall appoint one or more issue manager(s), registered with the
BSEC, for the purpose of making the public issue and appointment of issue manager
for private offer is optional. The Issue Manager will receive fees and be responsible
for the disclosure & preparation of Information Memorandum.

Appointment of Underwriters

⮚ The issuer may appoint underwriter(s), registered with the Commission, on an

optional basis shall send notice to the underwriter(s) within 3 (three)working days
of closure of subscription calling upon them to subscribe the securities and pay
for this in cash in full within 7 (seven) working days of the date of said notice
as per underwriting agreement.

Fees for public issue and private offer of securities

Type of fees Public issue Private Offer Issue

Management fee Maximum 0.5% (half percent) As per agreement, if any.

of the public issue amount.
 Other fees As per legal deed and as approved by the Commission.

Approval, rejection and review

⮚ Application towards commission for seeking the permission of bond issuance to the
public will be accepted after proper examination of information in application.
Otherwise the Commission shall inform the issuer in writing, to remove the
incompleteness or deficiencies, within 30(thirty) working days, after examination of
the said application.

⮚ The application shall stand canceled if issuer fails to fulfill the requirements.
Otherwise the commission will send consent towards the issuer within 30 working
days after the application being accepted to the commission.

⮚ If the application is not acceptable to the Commission, it shall issue a rejection letter,
stating the reasons for such rejection, within 10 (ten) working days of receipt of the
last correspondence.
⮚ The Commission reserves the right to accept or reject any issue proposal in its
own discretion in the greater interest of the investors and the securities market as well.
The issuer shall comply with method and conditions of withdrawal.

References

⮚ Study of Bangladesh Bond market retrieved from: https://www.pidg.org/wp-

content/uploads/2019/04/Study-of-Bangladesh-Bond-Market.pdf
⮚ Bangladesh Securities and Exchange Commission ( debt securities ) rules, 2020
retrieved from: https://sec.gov.bd/crequest/BSEC(DS)Rules,_2020.pdf
⮚ http://news.morningstar.com/classroom2/course.asp?docId=5458&page=1

2.5 Market Participants of Bond Market

An efficient bond market requires the existence of large number of market participants and
these can be divided into issuers, investors and intermediaries.

Issuers

Issuers refer the organizations that register, distribute and sell bonds on the primary market.
A bond issuer can be a private company or a government.

The bond market of Bangladesh has an only fewer number of potential, good-quality issuers.
Bangladesh economy is mainly agriculture based and the average size of industrial and
commercial enterprises is rather modest. Most private sector enterprises are small and owner-
run and largely depend on short-term bank loans for financing. Although they could benefit
from long-term funding but they are not large enough or well-known enough to issue bonds.
Most of the large-scale industrial units and commercial enterprises are state owned and
depend on government or state owned NCBs for their financing hence they do not offer
debentures.

Although Bangladesh has a debenture market, the number of well-known issuers and
investors are insignificant which hampers its liquidity.

Investors

Investors include person or company who invests significantly in municipal or corporate

bonds. They have the right to receive principal and interest on this debt.

The investor community of Bangladesh does not seem to find the bond market attractive due
to weak disclosure of the issuer, which reduces credibility and investor confidence. Due to
which few investors participate in this market. Among them, 80% are retail investors and
their primary concerns are the equity in the stock exchange or government savings certificate.
Most of the institutional investors who could support the market are either prevented from
investing in corporate bonds by restrictive guidelines or are not professionally managed. The
major institutional investors include the Investment Corporation of Bangladesh and the
insurance companies.

Intermediaries

Intermediaries are the third parties that put the buyers and sellers of bonds together.

Intermediaries in Bangladesh lack in many skills that are vital for fostering an active local
corporate bond market. Financial sector of Bangladesh is dominated by commercial banks
and not enough intermediaries are skilled in securities. Only a few have the ability to identify
and bring the buyer and seller of bonds in the market. Besides, the fee structure and pricing
are high enough to allow them to make profit. They do not feel motivated to be a market
maker for an issue which in turn leads to market illiquidity.

References

⮚ Development Of Bond Market In Bangladesh: Issues, Status And Policies

retrieved from: https://ideas.repec.org/a/rom/mrpase/v2y2010i3p299-313.html
⮚ https://financial-dictionary.thefreedictionary.com/Bond+Issuer
⮚ https://financialdictionary.thefreedictionary.com/Bond+Investors#:~:text=A
%20person%20or%20company%20who,some%20derivatives%20separate
%20the%20two

2.6 Benefits of Bond Market for Market Participants

All market participants make profit to varying degrees depending on technical skills, policies
and methods used by them. Taking advantages of the available opportunities by the market
participants and thereby achieving their goals have a positive influence on the economic
growth. Benefits that can be attained by the participants of bond market are as follows:
Issuers’ benefits

It is possible for issuers to obtain the following advantages from issuing bonds in the capital
market:

⮚ Raising long-term funds without collateral.

⮚ Lowering cost of debt and therefore lower capital costs for the company.
⮚ Alternative to bank finance.
⮚ Offering flexible funding for ongoing business needs and development projects.
⮚ Lowering effective interest rate, since it cannot be multiplied.
⮚ With the rise in the inflation rate, no change in the interest rate.
⮚ Decreasing the tax burden as interest is shown as expense.
⮚ Different types of bonds to satisfy different needs.
⮚ No need to give away ownership interest.

Investors’ benefits

Compared to other similar money and debt markets securities, investors can gain the
following advantages from investing in corporate bond.

⮚ Safer than stock investment

⮚ Interest earning is sometimes higher than dividend.
⮚ Provides legal protection
⮚ Less volatile than stock market.
⮚ Offers a routine income through the life of bond together with the return of initial
capital at maturity.
⮚ Smaller initial investment requires.
⮚ More liquid.
⮚ Interest earned is exempted from the payment of tax up to a certain limit.
⮚ Builds blocks by entering into derivative contracts-FRAs, Caps, Collar, and Floor,
Interest rate futures etc.

Intermediaries’ benefits

As an integral part of the capital market, intermediaries will benefit from the issue
management of bonds in the following forms:

⮚ Large spread can be used.

⮚ High commissions.
⮚ Cut down commercial lending policies provides an opportunity to broaden the bond
market base.
⮚ Poll small savings
⮚ Diversify the risk
 ⮚ Foster the bond market by fiscal effects and reducing interest rates in the money
market.
⮚ Phenomenal growth opportunities.
⮚ Help to monitor information and evaluating investment risks.
⮚ Low transaction costs as the size of transactions increase.
⮚ Large gap between funding demand and the supply of funds.

References

⮚ https://courseslumenlearning.com
⮚ Jahur M. S. and Quadir N. DEVELOPMENT OF BOND MARKET IN
BANGLADESH: ISSUES, STATUS AND POLICIES. MANAGEMENT
RESEARCH AND PRACTICE Vol. 2 Issue 3 (2010) pp: 299-313

2.8 Key benefits in bond issuance

To boost the amount of investments in bond market, the National Revenue Board (NBR) has
facilitated tax exemptions on income for individual investors despite the limitations of not
having secondary market for bond other than equity market but this is not availed to
institutional investors. The local companies are eligible to enjoy tax exemptions on capital
gain from the sale of government securities. In order to achieve Sustainable Development
Goals (SDG) the government needs to offer further financial incentives and create secondary
market as doesn’t exist in our country so that foreign investors be attracted.

The income derived from zero-coupon bonds by a person otherwise than institutional
investors, is subject to tax exemption as per The Income Tax Ordinance 1984. The tax benefit
is only applicable if the zero-coupon bond (if issued by the banks, financial institutions and
other companies) is approved by BSEC or Bangladesh Bank.

The details of the tax benefits to individuals are highlighted below:

● An individual is entitled to a tax rebate (as mentioned below) on any sum invested in
government T-bonds and Sanchayapatra;
● In addition to this, an individual is entitled to tax exemption on the income generated
from multi-currency oriented bond such as US dollar premium bond, US dollar
investment bond, wage earner bond, and Euro and Pound Sterling premium bond.

Total income Tax rebate

Less than $12,000 (BDT 1 million) 15%
Over $12,000 (BDT 1 million) to $36,000 15% on $3,000 (BDT 250,000) and 12% on the
 (BDT 3 million) balance amount
Over $36,000 (BDT 3 million) 15% on $3,000 (BDT 250,000) , 12% on next
$6,000 (BDT 500,000) and 10% on the balance
amount
Table 15: Tax rebate for individuals investing in Treasury bonds and
Sanchayapatra

2.8.1 Benefits of bond issuers

Bonds are issued as forms of tradable debt. The bond issuer is the borrower, while the
bondholder or purchaser is the lender. At the maturity of the bond, bond issuers repay the
bondholder the principal value. There are many types of bond issuers:

Firms

Governments

Supranational Entities

Regions and Municipalities

Projects and SPVs

⮚ Benefits of bond issuers

Raise capital: Bonds are allow to borrow money at a fixed rate for long term without
collateral for raising funds.

Safe investment: Bonds are generally safer investments than stocks because the volatility of
bonds is lower than stocks. When a corporation sells stock, it changes the ownership interest
in the firm, but bonds do not alter the ownership structure.

Debt security: Bonds are a debt security under which the issuer owes the holders a debt and,
depending on the terms of the bond, is obliged to pay them interest and repay the principal at
a later date, which is termed the maturity.

Meet customer's demand: Bond issuers issue a variety of bonds, with varying durations,
value, payment terms, convertibility, and so on to fit different needs of investors, including
fixed rated bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation
linked bonds.
Liquid investment: Bonds are highly liquid and less risky than many other types of
investment. It is often fairly easy for an institution to sell a large quantity of bonds without
affecting the price much. Liquid bonds include U.S. government bonds. Billions of dollars in
these bonds sell every day.

Credit Quality: The overall credit quality of a bond issuer has a substantial influence on
bond prices during and after bond issuance. Initially, firms with lower credit quality will have
to pay higher interest rates to compensate investors for accepting higher default risk. After
the bond is issued, a decrease in creditworthiness will also cause a decline in the bond price
on the secondary market. Lower bond prices mean higher bond yields, which offset the
increased default risk implied by lower credit quality.

Reduce cost of capital: Issuers issue callable bonds to take advantage of a possible drop in
interest rates in the future. The issuing company can redeem callable bonds before the
maturity date according to a schedule in the bond's terms. If interest rates decrease, the
company can redeem the outstanding bonds and reissue the debt at a lower rate. That reduces
the cost of capital and cost of debt.

Inflation protection: Bond prices are quite sensitive to changes in inflation and inflation
forecasts. Therefore no change in interest rate with the increase in inflation rate and also
lower effective rate of interest for not being able to be compound.

Reduce tax burden: Interest on municipal bonds is exempt from federal taxes, and may be
tax exempt at the state and local level. So it reduces tax burden since interest is shown as a
charge.

Reduce market volatility: Bonds are protecting firms from the exposition to the market
volatility. Not only does it reduce volatility, but it still allows the trader to bring in income. It
is exploiting benefits from uncertainty in bond market through issue of diverse types of bonds
or debentures.
2.8.2 Analysis of investor's benefits and their attitudes

⮚ Benefits of investors
Bonds provide income:
While many investments provide some form of income, bonds tend to offer the highest and
most reliable cash streams. Even at times, when prevailing rates are low, that investors can
use to construct a portfolio that will meet their income needs.

Pay higher interest rate than savings:

Interest rates on bonds often tend to be higher than rates at the banks, as CDs or in money
market accounts. Bonds also tend to perform well when stocks are declining as interest rates
fall and bond prices rise in turn.

Offer diversification:

Over time greater diversification can provide investors with better risk adjusted returns (in
other words, the amount of return relative to the amount of risk) than portfolios with a narrow
focus. More important bonds can help reduce volatility and preserve capital.

Safe return and preserve capital:

A diversified bond portfolio is much less likely to suffer large losses short term. As a result,
investors often increase their allocation to fixed income and decrease their allocation to
equities.

Less volatile and risky than stocks:

Bonds tend to be less volatile and risky than stocks and when held to maturity can offer more
stable and consistent return. While existing perhaps than stocks, bonds are an important piece
of any diversified portfolio.

Posses tax advantages:

Certain types of bonds can useful for those who need to reduce their tax burden. The interest
on municipal bonds is tax free on the federal level and for investors who own a municipal
bond issued by the state in which they reside.

The bottom line:

Bonds don't make conversation at dinner parties and they don't receive proportionate
coverage in the financial press relative to stocks. Still bonds can serve a wide range of uses
for investors of all stripes.

⮚ Investor's attitude:
For understanding the investor's attitude toward corporate bond in Bangladesh, a
questionnaire survey was conducted among 40 investors in several brokerage house of
Chittagong Stock Exchange.

Among total respondents 65.79% have the graduation and 21.05% have post-graduation; 65%
are the service holders; 76% of them within the age limit of 26-35 years; 78.95% have
knowledge on stock market, 52.63% depends on friends and families and 47.37% have own
financing for investment and none of them depends on bank borrowing or borrowing from
stock broker; 52.64% of the investors adopt technical analysis and 23.68% makes
fundamental analysis and 23.68% depend on others information for making investment
decision; 60.53% of the respondents have the preference for capital gain and only 39.47% are
interested for current income from investment. A few respondents have aggressiveness
towards risk but most of the respondents is little or moderate in risk taking attitude.

The study shows that common stock of listed companies is the best choice of investors and
one of the worst choices is corporate bond as investment alternative.

Figure: 1- Different Investment modes of respondent attitudes

In common stock of listed companies, 44% respondents are interested to invest and 24% are
interested in commercial bank deposit A/Cs and only 5% of them are interested to corporate
bond investment.

The study also reveals that most of the respondents believe that the corporate bond market is
not efficient in Bangladesh.

This figure shows that 97.37% that corporate bond market is inefficient and only 2.63%
consider as it is efficient.

2.8.3. Benefits of Intermediaries

Intermediaries being integral part of the capital market can get benefited from the issue
management of bonds in the following ways:

a) Large spread can be exploited: financial intermediaries typically hold financial assets as
part of an investment portfolio rather than as an inventory for resale. On top of making profits
on their investment portfolios, financial intermediaries make profits by charging relatively
high interest rates to borrowers and paying relatively low interest rates to savers.

b) High commission/fees: Bond markets are often more complex and opaque than stock
markets. They reduce transaction and information gap and risk reduction through portfolio
diversification. That’s why they can be able to demand high commission.

c) Phenomenal growth opportunity: Corporate bonds have long been a particularly stable and
reliable source of term finance for non-financial-services companies in the ‘real economy’.
Corporate bonds facilitate diversification from other types of investment - public sector
bonds, bank deposits, equities. They reduce vulnerability of savers, investors, and economies
to bank collapse. In bond market there has also international diversification and
diversification of maturity and types. And these advantages make phenomenal growth
opportunity for intermediaries.

d) Cut down policy of commercial lending brings opportunity for broadening bond market
base: Due to the cut down policy of commercial lending of the government, the lending of
commercial loans amount will decrease in market. It’s a great opportunity for bond market to
increase its volume as the market intermediaries will attach and try to trade funds through
bond market.

e) Encouragement of bond market through fiscal effect and lowering interest rate in the
money market: The bond market will shine by positive fiscal effect and it will decrease the
interest rate in money market. Bond market intermediaries are always focusing on positive
fiscal effect in economy. As a result the interest rate in money market cannot exceed the
limit.

f) Large gap between demand for funds and supply of funds: There is a large gap between the
demand of funds and supply of funds in capital market. Bond market intermediaries get the
opportunity to reduce the gap by creating new demands and providing supply of funds in
market. Intermediaries are always searching for fund holders to accelerate their activities.

2.9 Structural Issues associated with debt market of Bangladesh

Corporate bond market is an amplify sector for Bangladesh capital market. Bond levels to
increase efficiency in an economy and reduce vulnerability to financial crisis. But Corporate
bond market in our country experienced a low level growth as corporate to emerging stock
market in the world in general and in Asia in particular. The structural issues associated with
debt market of Bangladesh are given below.

● Lower demand for corporate bonds :

Government securities or treasury bills are risk free, have longer maturity periods ands
provide higher returns than bonds. It also provide tax incentives to individuals. Institutional
investors on the other hand it is easy to obtain loan from bank. It doesn’t take much time to
get a loan from bank, whereas the current bond ecosystem is such it will take at least 6
months to 1 year to raise fund by issuing bonds.

● Low investor base

Due to professional fund management, the investors of our country are unable to invest in
corporate bond. The participation of foreign investors is significantly lower. In the past,
issuers have failed to service their payment obligation on time, while the trustees have failed
to enforce the debt securities holder’s rights. Thus general investors loss confidence in the
private sector due to an absence of robust regulatory system.

● High cost of bond issuance

In our country, the issuance cost of new bond is approximately 1.5% to 2%. The cost include
registration fees, annual trustee fees on outstanding debt securities amount, listing fees,
printing of prospectus cost, application and certificate fees, central depository charges, legal
fees, audit fees, credit rating fees and underwriting fees. Relevant cost of bond issuance as
par private placement of debt securities rule 2012, public issue rules 2015. Due to these high
cost issue along with the time needed to raise fund from bond issuance, issuer’s loss their
interest in issuing bond.

● Weak regulations and market infrastructure :

A company takes minimum of six months to one year for issue bonds. Due to lack of
infrastructure like stock market, the approving authorities are not able to conduct due
diligence and compliance cheeks in short time. For this reason the companies who are wanted
to raise funds within three to six months would eventually borrow money from banks or
donor agencies.

● Inactive secondary market:

Benchmark yield is an indicator of the current structure of interest rates. Based on the yield,
the investor can predict the movement of future interest rates and associated risk. Due to the
absence of a credible long term yield curve, the corporate bond market is underdeveloped

● Absence of digital platform:

Now a day’s digital platform plays a very significant role in all types of financial deals. But
an absence of a centralized database management system hinders issues and investors for
accessing correct and authentic information associated with investment. This asymmetric
information prevents issuers and investors from entering into bond market. Old fashioned
trading techniques like trade over the phone by companies bring in transparency issues in the
bond market.

Along with thin problems, there are other hindrances such as investors’ high return, the stock
market, money market. Lack of action against market manipulation, violate political situation
time to time change rules and imposed condition by government, lack of familiarity as an
asset class.
 Chapter Three
Analysis and Findings

Analysis and Findings

3.1 Status of Bond market in Bangladesh

Descriptive Statistics
Minim Maxim Std.
N um um Mean Deviation
 IBBLPBON 1010.0 948.96
24 914.50 25.44442
D 0 92
APSCLBON 5043.0
14 4771.0 5386.0 130.9818
D 00

To test the data we used SPSS 13. The test results showed descriptive statistics in this study
had an average of 948.9692 for IBBLPBOND (Mudaraba perpetual bond) with a maximum
value of 1010.00 and minimum value of 914.50 for the closing stock price. Whenever an
average of 5043.000 for APSCLBOND (Non-Convertible and Fully Redeemable Coupon
Bearing Bond) with a maximum value of 5386.0 and a minimum value of 4771.0 for the
closing stock price. Finally, S.D for IBBLPBOND is 25.44442 and APSCLBOND is
130.9818 which indicates that the price of APSCLBOND is more volatile than the price of
IBBL.  

Correlations
 IBBLPBO APSCLBO
ND ND
 IBBLPB Pearson Correlation 1 .528*
OND Sig. (2-tailed) .052
N 24 14
APSCLB Pearson Correlation .528* 1
OND Sig. (2-tailed) .052
N 14 14

*10% level significant in the correlation between bonds.

It’s found from the above Pearson correlation value which is calculated using SPSS 13 that
closing price in DSE of IBBLPBOND is 52.8% positively related to the prices of
APSCLBOND non-convertible bond indicates that if the price of one bonds increase as to
100 Taka another one will increase at 52.8 Taka. As they are positively correlated, investors
do not invest there alternatively.
 Chapter Four
Summary of the Findings and Policy Implications
 Summary of the Findings and Policy Implications
4.1 Summary of the Findings
The study has been both theoretical and empirical one. Secondary data has been collected for
the study. Different techniques have been used to analyze the data. The study has found
following findings:

1. Long-term market is still far behind from development.

2. Growth of bond market depends on investor base, but in our country it's not turned to
a acceptable level yet.
3. Debt securities market in the country is dominated by the government debt
instruments, private bonds are less attractive.
4. Secondary bond market in Bangladesh is still non existent, and the bonds are
considered as non-tradable assets.
5. Issuers of debt securities lack trust and quality.
6. Eight debentures and one corporate bond exist, at present, in the debt market of
Bangladesh which is insufficient.
7. Cost of issue of debt securities is very high.
8. Bond market of Bangladesh is less attractive.
9. Investors have poor confidence in issuers, legal and regulatory framework, and
market.
10. Intermediaries (financial institutions) are not strong enough to support long-term debt
market.
11. The size of debt market of Bangladesh is very low as compared to other SAARC
countries.
12. Huge opportunities exist for growth and making money for bond market participants.

4.2 Policy Implications

Bangladesh is the second largest financial sector in the South Asia. She has strong base of
financial market which is mainly derived by Banking Industry. The condition of others
market such as Insurance, Bond and so on is not upto the mark.
The development of a country's economy is mainly based on the development of all the
parameters of financial sectors. Otherwise, it turns to centralized which trigger to the high
risk as other basis is not going well. In Bangladesh, bond market is one of the parts which is
neglected for our decision makers.
Bangladesh, for the development of financial sector, should consider on the bond market as it
has great potentialities in the near future.
For the development of this sector, we are highly recommending to the following policies
which are complied by us.

Formulate New Policies or Reshape Existing

The Regulators of financial Sector in our country, {such as Bangladesh Bank (BB), Ministry
of Finance (MoF), Bangladesh Security and Exchange Commission (BSEC), Insurance
Development and Regulatory Authority (IDRA), National Board of Revenue (NBR)} should
develop separate polices for the betterment of bond market. If they have, should polish the
existing policies relating to bond market.

Introduction of Diversified Products

The demand of customers is changing day by day. The bond market in Bangladesh lacks
several key fundamentals that are essential in order for the market to flourish.
Authorities have needed to design the bond products in according to customers wants. Here
include, changing the characteristics of existing products, develop new facilities and
innovative products for those customers who are eagerly waiting for getting these types of
products.

Introduction of Sharia'h based bond market

In our contry, IBBL Mudharaba Bonds are working well. There is a reason behind this. 90%
of people in our country are Muslim. They are not emotionally attached with fixed interest
basis of products. Muslim people are wanting a variety of Islamic Products which are free
from Riba. The IBBL Muadaraba bond has been floating since 2007 and recent reports have
been that another issue is likely to be underway. Therefore Islamic bonds such as Sukuk
should be encouraged in the market. Sukuk has been very successful in Malaysia as reported
by The Star in 2018, and Bangladesh being a Muslim majority can also have their fair share
in the Islamic bond market.

Government Intervention
The government has to offer a define fiscal benefits like investment in equity market for the
development of bond market in Bangladesh.The government should stop issuing securities
offering interest rate higher that market yield rate. Government should encourage state owned
enterprises for raising funds by issuing corporate bond from the market. It should stop
providing financial assistance to the SOEs.

Steps Relating to BSEC

SEC can undertake both education and training program for the market participants. This
creates awareness among the market participants.Actually, participants are aware about the
bond market. SEC has huge amount of participants. If they want, they can and create
awareness among bond stakeholders. People who are directly and indirectly related to bond
market must aware about the update regulations considering to bond market.

Along with aforementioned broad Policies, following simplifications can be adapted:

1. Amendment of the Insurance Rules, 1958
2. Amendment of the Mutual Funds Act
3. Incentives for the Foreign/Non-Resident Investors
4. Including Investment-Grade Instruments in SLR
5. Introduction of Inflation-Indexed Bonds
6. Establishment of Dhaka Inter-bank Offer Rate is one step ahead for the developing of
bond market
Moreover, the capital market regulators and the government are trying to reform our stock
market on a sustainable basis. Developing the bond market can be a handy option in
this regard. It is a matter of fact that investors, as well as general people, are less familiar
with the ethics as well as the etiquette of this market fundamental and they are also not
adequately familiar with the bond market trade.