A large number of Bangladeshi commercial banks need to strengthen their Tier-1 capital bases, which consist of equity and debt securities like perpetual bonds
Any perpetual bond issued by banks must be listed in the main platform of the stock exchanges, the Bangladesh Securities and Exchange Commission (BSEC) decided on its 731st commission meeting on Sunday.
The capital market regulator, in a press release, also said that it is going to enact necessary rules and regulations to ensure listing of perpetual bonds with the main platforms of the stock exchanges.
Over the last decade, a primary market for corporate bonds has grown with a significant concentration among banks as both issuers and investors.
Banks flooded the market with redeemable subordinated corporate bonds to strengthen their Tier-2 capital bases, as instructed in the Basel Guideline.
As the bonds are redeemable and the process of stock market listing and secondary trading of the bonds used to cost unusually high, they have long been stuck in the arena of private placement.
This year, a large number of Bangladeshi commercial banks are in need of strengthening their Tier-1 capital bases, which consist of equity and debt securities like perpetual bonds. They are preferring the second option as increasing paid-up capital is a challenging job under the current circumstances.
A listed bank must pay equal cash dividends against issued stock dividends to avoid a special tax that was imposed last year. Current profitability and condition of balance sheets do not allow too many banks to prefer this option.
On the other hand, the depressed capital market is not suitable for offering right shares that demand fresh capital from existing shareholders.
Perpetual bonds are the only remaining, and the easiest option, for banks. A number of them are applying to both the capital market and the banking regulator for issuing those.
The BSEC, in recent weeks, has approved two banks – Jamuna and The City Bank – to issue perpetual bonds. But it made the approvals for private placements instead of making it mandatory to go for stock market listing.
Experts had been pointing at some problems; non-listing would carry on bank dependency for subscription to the perpetual bonds as the diversified classes of investors have a bare hunger for perpetual bonds without a smooth exit route that the secondary market offers in stock exchanges.
Hence, the ongoing issuance of the new perpetual bonds would not help in building a long-sought vibrant bond market, according to experts.
However, the BSEC in its quickest response made listing mandatory for bank-issued perpetual bonds and that will help uphold the idea of banking industry's capitalisation alongside creating a secondary bond market.
Perpetual bonds are not redeemable at investors' wish as these have no pre-planned maturity.
Meanwhile, the cost of issuing and trading bonds has come down significantly in the six months due to some policy measures introduced by the government.
The central bank guideline, on the other hand, has kept some scope for issuers to call the debt securities after a decade in case of a significant deviation in interest rate between the bond and market rate at that time or some other acceptable reasons.
In Sunday's commission meeting, the BSEC approved One Bank and the Mutual Trust Bank's perpetual bonds, worth Tk400 crore each. Both the bonds will be issued through private placement to help the banks' in time capitalisation.
The EBL Investments Ltd, a local merchant bank, is the trustee and the City Bank Capital Resources Ltd, another merchant bank, is the mandated lead arranger for both the new perpetual bonds.