Amran Hossain, a private service provider, invested around Tk 8 lakh in the stock market through Dawn Securities in 2009.
One morning in 2010, he suddenly learned that the brokerage firm’s trading had been halted for fraud. He rushed to the company’s office to find that his shares had been sold without his consent and the money had been embezzled.
Rahman turned to the Dhaka Stock Exchange (DSE) and Central Depository Bangladesh Limited for his hard-earned money.
After much effort, the DSE reimbursed him 2 lakh Tk in 2021. But he was frustrated with the handling of the case by the stock exchange and its regulators.
Hossain is not alone.
Many investors have lost money over the past 12 years due to the closure of at least five brokerage houses for selling investor stocks and failing to execute buy orders despite the acceptance of funds. Embezzlement has intensified in recent years.
Three brokerage houses – Banco Securities, Crest Securities and Tamha Securities – have been closed in the past two years for allegedly embezzling around Tk 200 crore from general investors.
The financial crime took place due to the absence of a lack of strict oversight by the DSE and the Bangladesh Securities and Exchange Commission (BSEC) as well as the low released capital and lack of governance of enterprise-level, market participants and analysts say.
Brokerage licenses have been granted to many people who do not have enough fundamental knowledge and financial strength, said KAM Majedur Rahman, former chief executive of the DSE.
In Bangladesh the number of brokerage houses is larger than necessary for the size of the market, so fraud is common.
The number of holders of trading rights certificates (TREC) or brokerage firms of the DSE is now 283, according to the first exchange.
“Investors are rushing to see the license that has been given by the regulator,” Rahman said.
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BSEC had previously issued guidelines that brokerage firms must have paid-in capital of Tk 15 crore. However, not all businesses have this amount of paid-up capital.
Many stock brokers do not follow the directive, said a senior official at a stockbroker, preferring anonymity. The DSE and BSEC do not monitor them properly either.
Many brokers have kept a deficit in their clients ‘consolidated accounts, where investors’ funds are stored, but they are not punished as an example for breaking the law.
“In most cases, the owners of brokerage firms have been involved in the embezzlement, so ownership and management should be kept separate,” said Mohammed Rahmat Pasha, managing director of UCB Stock Brokerage.
Brokerage owners can withdraw funds deposited by an investor, so the BSEC can analyze how the process can be changed, he said.
“If the owners have signing authority, such anomalies can occur.”
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The issue arose after the DSE halted trading in Tamha Securities in December after receiving allegations of embezzlement from investors. BSEC discovered a deficit of Tk 87 crore in the Consolidated Customers Account.
In mid-2021, Banco Securities’ trading activities were suspended following an allegation of Tk 66 crore siphoning.
The DSE suspended trading in Crest Securities in 2020 for embezzling Tk 48 crore.
In 2005 and 2006, the DSE suspended the activities of five brokers for similar irregularities and sold their licenses to others to reimburse investors. The brokers were Capital Roops, JR Capital Company, MR Company, T Mushfu & Company, and SPM Ltd.
Despite the cancellation of licenses and growing irregularities, new licenses are still being issued. At least 33 licenses have been granted in the past year and many applications are pending.
“An exemplary punishment should have been inflicted on dishonest people,” said Faruq Ahmad Siddiqi, former president of the BSEC.
“Brokerages should provide corporate governance when dealing with people’s funds.”
Richard D’Rozario, president of the DSE Brokers Association of Bangladesh, said BSEC is now quick to punish culprits and recover money, which is a positive thing. “
“Whenever an anomaly appears, the DSE must take it seriously. “
However, he claims that brokerage houses are limited liability companies, so their ownership and management cannot be demutualized.
“Only if they are listed, separation can be expected.”
On mandatory paid-up capital, Rozario said, BSEC has extended the deadline until June to keep the minimum paid-up capital of Tk 15 crore for a full-fledged brokerage firm.
With the exception of some older and smaller brokerage firms, many companies have the ability to maintain paid-in capital, he said.
He said there are 250 TREC holders who are also DSE shareholders.
So, in October 2019, BSEC halted Shah Mohammad Sagir & Co’s trading when it discovered that the company had embezzled investors’ money. In addition, the regulator reimbursed the investors concerned by selling its shares in the DSE.
But the new TREC holders are not stock market shareholders. So these companies could deteriorate the situation, Rozario said.
Majedur Rahman said that with brokerage houses dealing with public money, there should be a strong accountability mechanism, internal audit and corporate governance.
“Many brokerage firms are short of it. Therefore, BSEC and DSE should monitor them closely. If an abnormality is found, strict measures must be taken. “
Shaifur Rahman Mazumdar, chief operating officer of DSE, said the conditions for obtaining TREC have been tightened.
Applicants must now have at least Tk 5 crore in paid-up capital, compared to Tk 1 crore previously under TREC rules.
In addition, the BSEC has capital adequacy guidelines under which a full-fledged securities broker must keep at least Tk 15 crore in paid-up capital.
“Some stock brokers report their activities to us that are not appropriate. So we focus on uniform software so that we can easily follow them,” Mazumdar said.
“In addition, we have stepped up our oversight of weak stock brokers.”
Laws have been tightened to eliminate anomalies, said Mohammad Rezaul Karim, spokesperson for BSEC.
“We have also taken steps so that brokerage firms can increase their capital base. But we also need to give them time to comply.”