BSEC ignored own report on RACE playing with investors' assets

Bangladesh RACE Management PCL listed one of its core missions as "safeguarding our clients' wealth, big or small, through the dedicated use of sophisticated risk management tools." Since its inception in 2008, its leap was unmatched and soon it emerged as the country's largest private-sector mutual fund manager.

But the growth was not fair all along. It faces allegations of flaws that suggest the funds did not live up to its announced mission of safeguarding clients' assets.

A Bangladesh Securities and Exchange Commission (BSEC) inspection in 2023 detected severe irregularities, including discrepancies involving Tk270 crore in cash and over 17 crore shares that could not be traced.

The inspection committee report, obtained by The Business Standard, also pointed to over Tk1,100 crore in suspicious bank transfers, Tk200 crore in excess payments for a company's shares, non-transparent disclosures, and inflated asset valuations to increase fees.

But the BSEC then took no action despite the inspection committee's recommendation for further inquiry.  

Instead, Mizanur Rahman, the then BSEC commissioner responsible for overseeing mutual funds, allegedly questioned the inspection methods and delayed actions for nearly a year. Just before leaving office in May this year, he submitted a report clearing RACE of any wrongdoing.

He now faces allegations of overlooking RACE's irregularities and has been summoned by a BSEC-formed investigation committee recently in a different investigation.

Attempts to puzzle the inspection team

In early 2023, after over Tk200 crore embezzlement of investors funds by Universal Financial Solutions Ltd (UFS) and Alliance Capital Asset Management, the BSEC started inspections of all the 12 mutual funds under RACE, alongside the ones in the hands of two other big asset managers LR Global Bangladesh and ICB Asset Management Company Ltd.

The report stated RACE, managing over Tk3,000 crore in investor assets, did not fully cooperate, it rather provided incomplete information and redundant data with the intention to "puzzle the inspection committee."

Still, the BSEC inspection team found serious compliance issues and recommended a thorough inquiry for further details of alleged irregularities committed at least on nine counts under securities law.

Former BSEC chairman Faruq Ahmad Siddiqi, like many other experts, expressed his surprise at how an inspection report raising so many red flags for investors' safety could be completely dismissed without further investigation or any enforcement action.

After Mizanur Rahman departed from BSEC, the commission launched inquiries to look into RACE-managed funds deeply to get the true picture as inquiry committees have more access to information than inspection committees.

To stop the inquiry and unfreeze its accounts, the asset manager filed two separate writ petitions on 18-19 August and secured stay orders for six months.

BSEC lawyers, however, appealed to get the stay orders vacated so that the regulator can resume its inquiry and they are waiting for the next hearing.

RACE tried to gag The Business Standard through a legal notice by its law firm Law Valley.

Other lawyers, however, opined there has been no court order to bar news publishing.

The quick leap

RACE, founded by banker turned businessman Chowdhury Nafeez Sarafat and Bangladeshi-US investment professional Hasan Taher Imam, obtained an asset management licence in September 2008 from the BSEC.    

Its rise then was unmatched in terms of getting approval for managing new funds. In 2009 and 2010, it was managing six closed-end mutual funds and four more by 2013 alongside a special purpose vehicle fund.

Noted banker Khondkar Ibrahim Khaled's report on the 2010 stock market debacle mentioned the regulator's favour for a handful of asset managers including RACE.

Of the over 4,870 crore assets under management of the 37 listed closed-end mutual funds as of 27 October, the RACE-managed 10 mutual funds' share is 48%.

RACE-managed funds on average are being traded at the lowest 38% of the disclosed net asset value, while the sector average is 52.5%.

Analysts interpret the discount as a reflection of weaker investor confidence.

What was in the inspection report? 

The committee reported that out of the cash and cash equivalent assets disclosed in the RACE-managed mutual funds' financial statements, the committee did not find over Tk270 crore in bank accounts.

RACE did not furnish all the bank statements of the mutual funds.

The asset manager was arguing that the gap was due to a time lag between the entitlement of dividends on the record date and their receipt at a later date.

However, examining the prior and post-year-end transactions "the balances were not reconciled to the nearest amount."

"There might be significant misconduct that resulted in substantial discrepancies," reads the inspection report.

"Since there exists a huge difference for the five years, there would be significant differences since inception," it added.

The committee also reported that more than 17.43 crore shares of invested securities disclosed in the 10 RACE-managed funds' statements were not found in the central electronic securities depository-related documents by the Central Depository Bangladesh Limited.

The committee recommended further inquiry to reveal the actual status of the disclosed assets in mutual funds.

Tk1,193 crore suspicious payments from mutual funds

The committee was suspicious of Tk1,193 crore payments from the bank accounts of seven mutual funds.

Due to the non-submission of all the sought documents, the committee could not identify the real beneficiaries of the payments from the mutual funds' bank accounts.

"The transfers might have happened between related parties to the people running RACE," said the committee.  

A thorough enquiry was recommended "to reveal the actual beneficiaries of the suspicious transfers. "

Alongside non-submission of all the sought information and documents, the contravention included violating Mutual Fund Rules by transferring cash from one fund to another fund managed by the same asset manager.

Questioned investments in private securities

When asked for complete details of all invested non-listed securities, RACE only provided partial data for the preceding 2–3 years, without supporting documents.

The committee noted that most of the RACE-managed funds' investments in non-listed securities were made before 2017.

The trustee informed the committee that four funds had invested Tk19.4 crore in a private company Regent Spinning Mills' corporate bond and the investment was deemed non-performing in 2022 and there was a likelihood of writing off the investments.

RACE-managed mutual funds' investments in private equities – acquisition of brokerage firm Multi Securities, Farmers Bank that later turned into Padma Bank after loan scams, or converting debt investment into equity of hospitality company Best Holdings – violated the Rules 55 and 56 of the Securities and Exchange Commission (Mutual Fund) Regulations 2001, said the committee.

Tk202cr overpayment for Best Holdings equity conversion

According to the inspection committee, RACE-managed funds converted 100% of their 2016-17 debt investments into "Best Holdings 25% Convertible Bond" into equity during the pandemic and the committee said RACE paid an unnecessary premium of Tk202 crore.

The bond's trust deed had left the option for investors to convert one-fourth of the bond investments into Best Holdings equity at the face value of Tk10 if the conversion is done before the company's stock market listing.

RACE paid Tk65 per share, without exercising its right to obtain the shares at Tk10 each, depriving the mutual funds of 20.4 crore Best Holdings shares.

"Furthermore, the equity conversion was done without regulatory approval," said the committee.

"So, it appears that RACE worked against the best interest of the unit holders of the 10 mutual funds," concluded the inspection committee.

Foggy disclosures

Analysing the financial statements of all 12 RACE-managed funds, the committee noted little or no segregation or detailed disclosure of dividend or interest income, preventing users from knowing how much the funds were earning from which investments. The cumulative interest and dividend income for the 12 funds was reported to be over Tk372 crore.

"The disclosure did not adequately distinguish between amounts already collected and those still receivable," said the committee.

Contraventions include non-submission of all the sought documents and noncompliance with financial reporting standards.

Overstating net assets for higher fees

Accounting standards demand that the value of non-listed securities must be reported in fair value while RACE did it at cost value. Fair value is the value of an investment at which both the buyers and sellers freely agree on the price at a specific time.

The committee believed that compliant reporting "would have significantly impaired" the funds' asset value.

On the other hand, investments in corporate bonds were reported at fair value which was "an upward revaluation of the bonds."

"There was a lack of clear basis of valuation of corporate bonds in financial statements of all the funds," the committee said.

Since the portfolio statement showed a higher number of securities than that found in the inspection, assets were overstated through the misconduct, the committee said.

"Overall, it appeared to the inspection committee that the financial statements of all the mutual funds under their management do not represent a true and fair view," it added.

An asset manager earns more fees against more assets under management disclosed in financial statements.

From the 10 listed mutual funds, RACE earned over Tk394 crore in management fees since inception, according to the report.

Mizanur still finds everything right

As a BSEC commissioner, Mizanur Rahman focused primarily on identifying what he considered methodological errors in the committee's inspection.

Surprisingly, he neither let the enforcement suggested by relevant officials several times, nor allowed the recommended inquiry for further investigation.

In a written reply to a TBS request for comments, Mizanur Rahman claimed that the observations of the inspection committee appeared to be "mostly incorrect, not based on facts and obtained using wrong methods; therefore, misleading for regulatory requirements."

According to him, after a series of meetings between the officials of BSEC and RACE, the asset manager in a regulatory filing on 10 March 2024, offered a full disclosure of the alleged findings and observations.  

He claimed that an extensive review of detailed evidence and original documentation filed by RACE indicated that the findings and observations of the inspection report were "substantially incorrect, erroneous and misleading."  

"It is imperative that regulatory enforcement is done on the basis of irrefutable material evidence," he said.

"I submitted a detailed report about the case to the commission before the end of my term. As the Commissioner concerned, I followed the regulatory due process," Mizanur added.

One anonymous BSEC official said, "The regulatory process allows parties' self-defence during the enforcement process and stopping enforcement was not necessary unless there had been a connivance."

"Since the matter is subject to an ongoing enquiry of the Commission, I shall not divulge further details for the interest of investors and market stability," Mizanur Rahman told TBS.

Former BSEC chairman Faruq Ahmad Siddiqi told TBS, "Inspection committee findings and recommendations, even if there are mistakes or wrong observations, should have been immediately taken into consideration for further enquiry as it involves investors' interest."

 RACE declines to comments

Citing the 18-19 August stay orders alongside a 6 June status quo order in a legal dispute between two partners of the asset management firm for its control, Law Valley recently requested TBS to refrain from "distributing sub-judice information."

"Violation of these may lead us to take legal actions," it said.

Regarding the requested comments from RACE, Law Valley said providing any comments, information, or documents related to these sub-judice matters to any party outside of the court, including members of the media, could subject all related parties to contempt of court.

However, Supreme Court Lawyer Barrister Sayed Mahsib Hossain told TBS that publishing news reports will not be contempt of court only because of the fact that litigation is pending.

"The fact that a litigation is pending in any court or tribunal does not debar a journalist from publishing any news about the dispute or the issue unless there is a specific direction from the court or tribunal restricting the journalist from publishing any news regarding the subject matter of the litigation," he said.

BSEC Executive Director and Spokesperson Rezaul Karim did not comment on the RACE-related matters terming it "sub judice."

Regulatory sources confirmed that, after Mizanur's departure, RACE-related matters with proven contraventions were forwarded for enforcement actions. 

Chowdhury Nafeez Sarafat in April-May this year wrote to BSEC alleging his partner and RACE MD Hasan Taher Imam of selling mutual fund assets to his "related parties" at lower than market prices and buying from them at higher than market prices in block market which referred to private gains at expense of unit holders.

Nafeez Sarafat, alongside raising several other money laundering allegations, also requested the BSEC to look into the RACE-managed funds' bank accounts undisclosed in financial statements, many of which were opened in bank branches in the district or upazila level.

Both of them are currently under the scanner of the Anti-Corruption Commission.