City of London Investment Management (CLIM), a foreign investment firm, has sued the Bangladesh Securities Exchange Commission (BSEC) for allowing closed-end mutual funds to extend their tenure without the consent of majority unitholders.
The foreign institutional investor, as a unitholder of the EBL First Mutual Fund, last October, filed a writ petition against the securities regulator for allowing the listed fund to run for an additional 10 years, without the opinion of unitholders as suggested in the mutual fund rules and the fund's prospectus.
Following the lawsuit, the High Court bench of Justice Moyeenul Islam Chowdhury and Justice Khandaker Diliruzzaman issued a rule calling upon the respondents to show cause on why the decision should not be declared unlawful.
The show cause notice also asks why the respondents will not be ordered to liquidate the closed-end fund and distribute all the proceeds among unitholders.
The High Court also ordered the asset manager not to take any asset management fee until the ruling is disposed of.
The Investment Corporation of Bangladesh (ICB), as the trustee of the fund, and Bangladesh Race Management Private Company Ltd, as the asset manager of the fund, are included among the respondents.
The certified copy of the order was issued on November 13.
Md Saifur Rahman, the spokesperson and an executive director of the Bangladesh Securities and Exchange Commission (BSEC) told The Business Standard that taking legal action is a stakeholder's right.
"Our legal team is working on the issue," he added.
Lawyers representing the petitioners declined to comment beyond the legal documents.
According to the writ petition, the securities regulator failed to ensure compliance with the relevant securities law and the prospectus of the fund while allowing the fund to extend its tenure.
It mentioned that, rule 50B of the Bangladesh Securities and Exchange Commission (Mutual Fund) Rules 2001 dictates that the life extension of the fund is subject to a consent from owners of three-fourths of the units.
On the other hand, the prospectus of the fund declared a tenure of 10 years before its units were to be offered to the public.
Investors put their money into mutual funds with a hope to get their money back in time.
However, in September 2018, following a finance ministry recommendation to allow tenure extension of closed-end mutual funds scheduled to go off or convert into open-end ones within 2023, the BSEC said the funds may extend for another term for the same period, and the total tenure of any fund cannot exceed an aggregated life of 20 years.
But as it did not mention anything regarding unitholders' opinion before that, asset managers took the opportunity for extension just before their funds approached maturity.
Prior to the September 2018 order, the BSEC had fought and won a legal battle in the Supreme Court to uphold its strong regulatory stance for timely liquidation or conversion of closed-end mutual funds.
But the unexpected U-turn, for the sake of retaining the funds' money in the market, damaged the confidence of mutual fund investors, as they are forced to wait for another term to get their money back.
If investors are not ready to wait until the deferred maturity of the funds, they have to sell the units at a significantly lower price compared to the assets within the mutual funds.
Listed mutual funds are already trading at prices 44 percent lower than the average present value of their portfolio assets.
BSEC predicted it right
It is apparent that the BSEC had rightly predicted, a year ago, the aftermaths of allowing the closed-end mutual funds to extend their tenures.
The finance ministry, in June 2018, had written to the securities regulator to let listed mutual funds – which were scheduled to go off or get converted within 2023 – run for another term of the same period.
In a letter responding to the finance ministry recommendation for the said extension, BSEC had mentioned about its previous war against the culture of lacking timely redemption or conversion of listed mutual funds, which led to liquidation of four funds in 2016 and conversion of 10.
The BSEC letter had also expressed a fear of future legal challenges by investors as the extension contradicts with many things.
And this is exactly what is happening.