The Bangladesh Securities and Exchange Commission (BSEC) has now asked steel giant BSRM Steels Ltd, and hotel operator Unique Hotel and Resorts Ltd to explain and reverse their huge intercompany loans that violated rules.
BSRM Steels has been asked to reverse the entire loan of more than Tk893 crore within seven days, while Unique Hotel got 15 days to take back all the loans worth nearly Tk422 crore handed out to its associate or sister concerns with interest accrued over last five years.
The securities regulator, in a bid to stop non-compliant intercompany lending by listed companies that deprive public shareholders, recently began to enforce a 2006 regulation meant to control fund flow to private concerns from publicly listed companies.
To protect public investors' interest, the rule stated that no listed company can hand out loans to any of their associate or sister companies, while it strictly capped the limit for lending to any subsidiary.
Of the 326 listed companies, two-thirds already reported their intercompany loans data, and BSEC found more than 50 companies to have violated its order.
BSRM Steels Ltd
Till the end of last March, BSRM Steels – the top and pioneering steelmaker of the country – lent Tk893 crore to its associate companies where it owns minority shares or to sister concerns where BSRM itself does not own any share but its sponsor-directors own the company.
BSRM also issued guarantees against more than Tk2,702 core bank loans taken by its associate or sister companies, increasing risk for the public company.
"The figures are audited and have already been disclosed. We made the loans in a win-win way as the listed company charges the loan-receiving private companies not less than what BSRM pays the banks," said Chartered Accountant Shekhar Ranjan Kar, the chief financial officer of the BSRM Group.
When asked about the violation of the 2006 BSEC order, he said, "The order was practically a dormant one. The latest regulatory stance increased awareness among us and we are responding to what the regulator wants us to do."
Like all other companies being served similar letters from the capital market regulator, BSRM is also preparing its answers to justify its intercompany lending while it might seek time to reverse the loans, according to Ranjan Kar.
"Before that, we would eagerly wait for immediate refund of more than Tk500 crore of the group's refundable advance taxes from the National Board of Revenue (NBR), which are stuck for years," he said.
He also claims that intercompany lending to a nascent billet manufacturing associate saved the listed company itself a few years ago when the government suddenly hiked the import duty to as high as 40%.
The listed company used to import billet form India almost without any duty, but anticipating protection for local billet makers it invested Tk1,600 crore for its own billet plant in 2016.
To avert complexity in land acquisition, the new venture had to be an associate company and it was neither able to collect the entire project money from equity nor bank loans, and intercompany loans helped the project float.
The billet plant had to begin paying bank instalments even before it came into production, while intercompany loans filled the gap, which makes sense, said the CFO.
Unique Hotel and Resorts Ltd
The BSEC asked Unique Hotel to reverse its Tk422 crore loans made to associate or sister concerns.
For the last five years, the listed company charged the private concerns no interest against such loans which deprived public company shareholders. The BSEC also asked Unique Hotel to get the accrued interest over the last five years paid in 15 days.
Unique Hotel CFO Jone Kumer Gupta is "yet to see the BSEC letter" and declined to comment on the intercompany loans.
The company is expanding significantly in hotel business and power generation business as well.
One of the finance officials at an intercompany loan receiving entity of Unique group told The Business Standard that most of the mother company inputs is supposed to turn into the private companies' equity ultimately.
Companies seek more time
Square Pharmaceuticals Ltd, the top drugs maker of the country, was asked to reverse more than Tk305 crore loans to its associate or sister companies last month.
The company explained the justification of such interest earning lending to the BSEC and also requested the regulator to extend the deadline up to the end of next June to get back all the loans, according to Square Executive Director Kabir Reza.
Both Reza and Kar said companies need time to get the amounts back, as instructed by the BSEC. Because, the private companies have to secure alternative sources of funds, be it bank loans or equity.