Despite a delayed start, efforts to popularize bonds as a financing instrument are gaining momentum as more lenders, corporations, a few municipalities and non-governmental organizations issue bonds and the listing of a large number expands the possibility for financial market investors to diversify their portfolios.
However, the secondary bond market is miles away from its necessary status to be called popular or vibrant, experts observe, for several reasons.
The very high cost of listing and trading bonds here tops the list of hurdles and investment bankers are now pushing the Dhaka Stock Exchange (DSE) to streamline costs, while the securities regulator discusses the need for favorable tax policies and other issues with the National Revenue Council.
On behalf of market intermediaries, investment bank City Bank Capital Resources, an industry champion in managing and arranging bond issuance, recently wrote to the First Exchange to address the high costs that hamper the development of the bond market.
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A comparison of initial listing fees on regional stock exchanges such as the National Stock Exchange (NSE) in India, Colombo Stock Exchange in Sri Lanka, SGX in Singapore or Bursa Malaysia, reveals that making a corporate bond publicly tradable costs its issuer an unusually high amount in Bangladesh. .
The Dhaka Stock Exchange (DSE) charges 0.25% of the total size of a corporate bond until the size of the bond exceeds Tk10 crore, and for larger bonds it charges 0.15 % of total as initial listing fee.
The minimum initial listing fee of Tk50,000 is equivalent to $589 while the maximum of Tk1 crore is over $1.17,000 in the DSE and as bonds tend to be much larger than bond issues shares in terms of size, bond issuers must pay the maximum fee when listing.
The maximum initial registration fees are around $404 in NSE, $11,000 in SGX, $5,900 in Bursa Malaysia and $499 in Sri Lanka, according to City Bank Capital’s study based on exchange rates more early this year.
Singapore and Malaysia’s stock exchanges charge more than India and Sri Lanka, but issuers don’t mind paying this as the two mature exchanges do not charge annual listing fees for the bonds.
Again, Bangladesh charges higher annual fees than India and Sri Lanka.
A high cost of issuance and listing will deter issuers from entering the capital market to raise funds through listed debt securities, City said in its letter to the DSE.
Since the current listing fees for stocks and debt securities are set at the same rate, and the size of bonds is much larger than that of stocks, the listing fees rate for debt securities should be significantly lower than that of stocks. shares, says the letter.
DSE Managing Director Tarique Amin Bhuiyan told The Business Standard: “Along with all other issues, we are also working on bond listing fees so that the bond market becomes popular in the country.
Trade so expensive
Listed bonds are barely traded on the DSE.
The low appetite of retail investors for bonds is one reason, but even institutional investors do not find bond trading profitable enough in Bangladesh.
In India, the NSE charges 5 rupees for trading listed bonds worth 1 crore rupees, which is at least ten times higher in Bangladesh because the DSE has set 50 Tk per trade as a minimum fee.
For wholesale trades that might be overlooked, but for small investors who want to trade a 5,000 Tk lot of bonds at the DSE, the brokerage cost of buying may be as high as 1% and the total cost of trading may rise to 2%. if the cost of selling the same on the stock exchange is included.
Bonds are not instruments that offer a lot of capital gains like that of stocks, said Bangladesh Merchant Bankers Association (BMBA) President Md Sayadur Rahman.
“High trading costs keep investors away from bond trading, but that’s not the only reason for poor trading in the corporate bond secondary market,” said DSE Brokers Association President Richard D. Rozario.
“From the industry, we have discussed the issues with regulators and they are working on solutions,” he added.
“We need to encourage bond issuance and investments to popularize long-term debt instruments as an alternative to bank loans,” Sayadur said.
Financing long-term projects from short-term deposit funds puts pressure on the banking system in Bangladesh.
In recent years, Bangladesh has made significant progress in developing the bond market, and this should continue to remove remaining hurdles, Rahman said.
Like zero-coupon bonds, income from all kinds of bonds should be tax-free for individual investors, helping to increase individuals’ appetite for bonds.
The costs of registering trust deeds have been brought down to a rational level, transaction costs have also dropped significantly, especially for large transactions, following the tax rationalization on bond transactions.
Another reason for not developing the bond market in the country is the lack of on-exchange trading of treasury bills in the DSE, according to experts, as treasury bills dictate the pricing of corporate bonds.
The DSE has made treasury bills free to trade while reducing their trading costs to a lower level and the exchange is preparing to start trading treasury bills soon.
Currently treasury bills are traded within Bangladesh Bank’s market infrastructure module and only banks are involved in the buying and selling of government securities mainly in their accounts while FX trading would open Treasury instruments to all local and foreign investors.
City Bank Capital predicts that many corporate issuers will raise significantly more funds through various bonds, of course, if they find it profitable.