SEC -- regulator or regulated?

Syed Mahbubur Rashid

THE Securities and Exchange Commission (SEC) of Bangladesh had a caesarean birth. In 1992-93 Mamunur Rashid, the then controller of capital issue (CCI) and also the additional secretary of the ministry of finance constituted a committee to prepare a draft on the SEC. Meanwhile, M Saifur Rahman, the then finance minister of Bangladesh, received a caveat from the donor agencies that he would have to bring with him the conclusive evidence of setting up of a SEC. The parliament was not in session. The finance minister was to attend the donors' meeting to be held in Paris.

A few months back, India passed an Act known as Securities and Exchange Board of India (SEBI). The Dhaka Stock Exchange (DSE) had a copy and on the instructions of the CCI, cobbled something similar, and an ordinance was promulgated. M. Saifur Rahman jetted to Paris with sufficient copies of it and this ordinance was transformed into an Act in the immediate next session of the parliament.

The SEBI Act contains a section which empowers the government of India to send any instruction to the SEBI, ostensibly for the greater interest of the common investors. This provision was bitterly criticised in the western press, apprehending that the freedom of the regulatory authority would be pruned. Bangladesh also has the same provision. From the inception of the SEC, it gives the notion that its main function is to appease and coddle stock exchanges. Of course, there are obvious reasons.

Ever since two generals dominated the political arena, there have been a heavy influx of businessman, industrialists and both civil and military bureaucrats in politics. Subsequent political governments could not check this trend. In the present parliament, businessmen constitute more than 50 per cent of the members of the House. As a result, the DSE, which is a confluence of businessmen, is represented in the parliament by a significant number of MPs belonging to both Awami League and BNP. So there was no problem for the DSE to play the power-game, as and when required.

It is needless to say that the SEC is well aware of this fact. In judging the present activities of the SEC, it seems that there has been a turn-around and it has started to issue a number of instructions to both the stock exchanges of the country. Some people think that this phenomenon is mysterious.

Among these instructions, the most controversial one relates to an order by the SEC, whereby a member of the DSE is to obtain a no objection certificate (NOC) from it, if he is to take part in the election for the post of director. The Board of Directors of the DSE consists of 24 members -- 12 are directly elected by the members of the DSE before the annual general meeting (AGM). According to the Companies Act, 1994, one third of its directors are to retire every year by rotation and are eligible for re-election. DSE moved one step forward and imposed an embargo that a member cannot seek re-election without a gap of two years. This time however the DSE amended and removed the embargo. Of course, this provision is well within the Companies Act.

But the provision of obtaining clearance for contesting the election from the SEC has been widely considered as undemocratic and anti corporate in nature. First of all, there are already 12 nominated directors from various elite trade bodies, educational institutions, ICAB etc. So the board of directors of the DSE is likely to be the most balanced one and there is the in-built system of adequate disclosure and transparency. So this kind of orders which is virtually the onward transmission of government instructions under Section 16 of the Securities and Exchange Commission Act, 1993, has created a bad precedent.

However, the latest order of the High Court on a writ petition has, at least, restored the status quo ante. The court handed down an order recently asking the DSE authorities to accept the nomination papers of the two members of the Exchange for elections to the DSE Board. These two members were earlier debarred by the SEC from contesting the elections. Until the final order of the High Court comes following the completion of hearing and related proceedings in connection with the writ petition, the status quo ante will, thus, remain in force.

There are some strong reasons to think that if such orders, as mentioned earlier, are allowed to be issued by the SEC, the same will boomerang for the incumbents. Nobody will believe that the present mandarins of the DSE could not resist this move. The incumbent president belongs to the ruling party; he could have, rather should have, staved off this order. The success of the present president of the DSE might have encouraged some quarters to work for his continuation. The DSE is primarily a business organisation and if its members are convinced that continuation of a particular person would make the DSE more bullish, they would not stand in the way. Unfortunately, this order (as it operated until the High Court passed the interim order) to obtain NOC prior to contesting in the elections of the stock exchanges, has raised a litany of issues. What are the additional qualifications required for becoming a director, apart from being a member of the DSE? Is there any Cassandra moving around the SEC to forecast about a probable candidate?

The net result of this system, if not changed, will be that in future there will not be any non-partisan president of the DSE. Because every government will then try to deftly exercise its power. We should remember that by doing this, the SEC has alienated the inherent and fundamental right of a shareholder, so to say, a member of the stock exchange. This will jeopardise good corporate governance. Regarding listing, the SEC has been sending instructions from time to time, based on expediency rather than any principle or moral. On condition of anonymity, a SEC official stated that this is being done after receiving signals from high-ups.

The SEC is the regulatory authority of the capital market as a whole. It may not be carte blanche, but at least it should act as an ideal autonomous body exercising its free conscience. Acts should be reasonable and transparent.

There is no denying the fact that the government provides various incentives to the stock exchange, even at the loss of public revenue for making it buoyant. The SEC must take care so that the aims of the government -- to help build the institutional strength of the share market and to promote its sound development -- are achieved. It cannot work for an individual or group.

The writer is a former Secretary General of the DSE