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After the banks, the Bangladesh Bank (BB) has also allowed nonbank financial institutions to calculate their stock market exposures at cost prices instead of market prices.
“From now on, a financial institution can calculate its stock market exposure at cost prices instead of the market prices of shares, corporate bonds, and mutual funds," said the central bank in a circular on Sunday.
On August 4, the central bank allowed the banks to calculate their stock market exposures at cost prices. The decision took effect immediately.
The Bangladesh Securities and Exchange Commission and the stakeholders had been trying for the change for a long time.
The decision came within a month after Abdur Rouf Talukder took over as the Bangladesh Bank governor and weeks after the finance ministry suggested the BB allow the banks to do so.
"As per the Bank Company Act, 1991, the bank’s exposure to the stock market can be calculated at cost prices instead of the market prices of stocks," said the ministry in a letter sent to the Bangladesh Bank earlier. The move was apparently made to increase the greater flow of money to the market.
The central bank and securities regulator have locked horns over the issue several times in the past. The decades-old debate over the banks’ exposure to the stock market comes to the surface whenever the indexes keep sliding or going up.
Last year, the BSEC proposed that the BB calculate the bank and NBFIs' exposure at the cost prices of the shares to help boost the cash flow to the market. In response, the BB said the BSEC’s proposal went against the Bank Company Act fearing that banks’ exposure to the stock market may cross the regulatory limit, deviating from their core banking, which was evident in the past.
The DSE Brokers Association of Bangladesh (DBA) had also earlier written to the BB to consider the calculation of the exposure limit at the cost prices instead of market prices of shares.
Currently, banks and NBFIs are allowed to invest 25 per cent of their capital in the capital market, which is called the exposure limit. The calculation of the exposure limit is based on the cost price instead of the market price.
Earlier, on February 15, this year, the Bangladesh Bank specified the non-bank financial institutions’ investment components which would be considered their capital market investments.
The Financial Institutions Act, 1993 specifies the NBFIs’ investment limit in shares of other companies, but it does not specify which investment components would be considered their capital market investments.
Under the act, the NBFIs can usually use 25 per cent of their paid-up capital and reserve to acquire shares of financial entities, agricultural business entities, or industry-related entities.
However, the NBFIs can use up to 50 per cent of their paid-up capital and reserve for the acquisition of such shares based on approval from the central bank.
