The Bangladesh Securities and Exchange (BSEC), as part of its ongoing drive against unlawful intercompany lending to subsidiaries, associates and sister companies, has asked the ACI Ltd to explain why it lent over Tk1,831 crore to its subsidiaries violating regulations.
Alongside the justifications of own lending, the listed conglomerate has been asked to also submit the breakdown of its interest income and expenditure within seven days.
ACI's total intercompany lending figure is the highest so far among those made by the listed companies, as the BSEC already found over 50 entities that violated a 2006 rule while lending to private entities controlled by their sponsor-directors.
Over a hundred of more than 320 listed companies are yet to report their balances of intercompany loans, BSEC officials told The Business Standard.
The regulator, in its recent letter to the ACI Ltd, said the company's outstanding loans and advances to its subsidiary companies was Tk1,831.89 crore at the end of last March, despite the fact that the company's own paid-up capital is only Tk57.37 crore.
The facts are contrary to the commission's 10 September 2006 notification meant to put a bar on listed companies' lending to private ones that benefit insiders at the expense of public shareholders.
"In no cases the total loan amount shall exceed 50% of the paid up value of shares held by such (common) directors in his own name," BSEC mentioned from the said notification.
Considering this, such a huge intercompany lending by ACI Ltd to more than a dozen subsidiaries is a violation of regulations, and some investors have been continually writing to the BSEC for the last 3 years in this regard.
"We are hopeful that we would be able to explain to the commission our business model, corporate structure and practices, the spirit of our intercompany lending and how it is helping to increase shareholders' value," said ACI Executive Director and the Chief Financial Officer Pradip Kar Chowdhury.
He was "yet to see the BSEC letter" until Tuesday evening.
At least 80% of the subsidiary companies' total shares are held by the listed company, and lending to the subsidiaries makes sense, especially these are significantly contributing to the consolidated sales and profit growth, believes the ACI CFO.
ACI has grown to a Tk10,000 crore turnover company from Tk500 crore one a decade ago.
It is easier for the listed parent company to borrow from banks than the growth-hungry subsidiaries themselves try to avail.
The listed company is charging subsidiaries almost the same rate which it pays banks against its own loans, and the parent company earned over Tk165 crore in the last fiscal year as interest against loans to subsidiaries, according to Chowdhury.
He said, "If we talk about spirit, ACI itself utilising its total funds and handing those over to the subsidiaries that are maintaining separate accounts under different management teams for the sake of a modern corporate structure are almost the same."
The company's low capital high debt model of business expansion has been drawing an adverse analyst opinion over the last five-six years as consolidated interest expense heavily bites on profits often.
The giant company's extraordinary growth in terms of business areas, product portfolio, and turnover came at the expense of seven consecutive quarterly losses until the end of last June.
However, market leadership, ownership of strong brands in dozens of areas, and many of the expanding business units emerging to breakeven or profits helped the company to comeback to net profit in the July-September quarter.