BSEC orders firms to report on lending to sister concerns

The stock market regulator has asked all listed companies to inform it whether they are lending to their associated and sister companies at the expense of general investors, in another bold step from the new top brass.

The Bangladesh Securities and Exchange Commission (BSEC) has found that some of the listed companies are extending interest-free loans to their associated or sister concerns, ballooning the profits of the companies of sponsors and directors.

What is more, some listed companies are borrowing from banks at a higher interest rate but are giving loans to sponsors' companies at cheaper rates.

This compelled BSEC to write to all listed companies on 13 August asking them to submit a report within 10 working days about such transactions with sister concerns where sponsor shareholders and directors are common.

"We have found that several companies are cheating general investors by lending to their own companies at a very negligible rate -- this is total dishonesty," said a top official of the BSEC.

Such lending reduces the listed companies' profits and dents general investors' confidence.

The regulator has recently taken steps against some companies on the grounds.

"Now, we want to investigate to find out how much has been given in such a manner by all listed companies," the official said.

Some of the companies have shown substantial amounts in the mode of loans or advances with sister concerns, ignoring instructions from the regulator, the letter said.

In 2006, BSEC issued a notice banning them from lending to associated companies and giving guarantees to loans secured by directors or sponsors.

However, if the board recommends, the lending can be offered subject to approval from general shareholders.

Moreover, the lending amount should be lower than the half of the paid-up capital of the listed companies, the notice said.

It appears that the loans were given to associated companies without any interest or at a nominal cost, whereas listed companies are bearing interest expenses for the fund in their books.

As a result, privately-owned companies of the directors and sponsors are gaining a huge undue financial advantage at the expense of the listed companies, by which the earnings of the listed companies are being siphoned off to the associated private companies, it said.

In its first-quarter report for the 2018-19 financial year, MI Cement, listed with the Dhaka Stock Exchange since 2011, extended interest-free loans of Tk 70.4 crore to its sister concerns, BSEC found.

It did not take approval from the general shareholders. The sister concerns were fully owned by the sponsors of the cement manufacturer.

The regulator slapped a Tk 10 lakh fine on each of the directors of MI Cement except independent ones.

"The sponsors are using listed companies to help their own companies benefit, which is unacceptable," said Kazi Mahfuzur Rahman, an investor active since 2006.

If the money were deposited with a bank, the listed companies would have got higher interest and thus higher profits, he said, adding that some sponsors are even using the employees of the listed companies to serve the purpose of the privately-held firms.

"But none raised questions about the cheating. The new commission has brought the issue to the table. This is welcoming," Rahman added.