Majority closed-end mutual funds face liquidation or conversion risk under new BSEC rules

A major shift is unfolding in Bangladesh's listed mutual fund sector following new regulations issued by the Bangladesh Securities and Exchange Commission (BSEC), putting most closed-end mutual funds at risk of liquidation or conversion into open-end schemes.

According to market sources, out of around 34 listed closed-end mutual funds, at least 22 are now exposed to either liquidation or mandatory conversion into open-end funds under the new regulation. 

The situation has emerged after BSEC introduced a revised mutual fund guideline aimed at restructuring the country's long-criticised closed-end fund segment, which has long suffered from weak performance, low liquidity, and large discounts between Net Asset Value (NAV) and market price.

New regulatory trigger for action

Under the updated rules, if the unit price of a fund falls more than 25% below its issue price or NAV within a six-month period, the trustee will be required to call a Special General Meeting (SGM).

At this meeting, unit holders will decide whether the fund should continue operations, be converted into an open-end structure, or be liquidated. The decision will be taken through a confidential voting process, and at least 75% approval from unit holders will be required to proceed with conversion.

The rules were initially published in the official gazette on 12 November last year. The latest directive issued by BSEC on Thursday outlines detailed procedures for conversion, including timelines, valuation methods, voting structure, cost limits, and investor rights.

Strict procedural framework

BSEC has introduced a structured conversion process involving trustees, asset managers, custodians, stock exchanges, and depository institutions, all of whom must comply with strict regulatory requirements.

BSEC Director and spokesperson Abul Kalam said the new guideline is primarily designed for funds that fall under liquidation or conversion criteria.

He said the final decision will rest entirely with unit holders through voting, ensuring investor participation in the restructuring process. To prevent market manipulation, trading of fund units will be suspended immediately after the record date announcement.

Asset transfer and oversight

If a conversion is approved, all assets, liabilities, and management control of the fund will be transferred to the trustee. Until the process is completed, the trustee will remain responsible for safeguarding and supervising the fund's assets.

Independent valuation has been made mandatory under the new rules. External auditors, who must not be affiliated with the fund, trustee, or asset manager, will assess the true value of assets, NAV, and financial positions and submit separate reports.

Formation of new open-end structure

Once converted, a new open-end mutual fund will be required to issue a fresh prospectus, trust deed, and management agreement. Units of the new fund will be held in dematerialised (demat) form and traded or redeemed through stock exchanges.

This shift is expected to improve liquidity significantly, allowing investors to redeem units more easily compared to the existing closed-end structure.

Cost and fee limits introduced

BSEC has also placed strict limits on conversion costs. Total expenses related to conversion cannot exceed 1% of the fund size. Asset managers will be allowed to charge a maximum fee of 0.50%, while trustees can receive up to Tk10 lakh per scheme.

Additionally, trustees must obtain approval from their board at least 150 days prior to the fund's maturity or planned conversion. After approval, Price Sensitive Information (PSI) must be disclosed through newspapers, online platforms, and stock exchanges.

Investor protection focus

According to Abul Kalam, investors will benefit from open-end structures as they allow easier redemption and better liquidity compared to closed-end funds.

He added that the reform aims to prioritise investor protection, noting that many closed-end mutual funds have long traded at significant discounts to NAV, raising concerns among investors about valuation and governance transparency.

The new framework is designed to address these long-standing inefficiencies by creating a more transparent and flexible exit mechanism for unit holders.

Sector-wide impact expected

Market analysts believe the new regulations could reshape Bangladesh's mutual fund landscape significantly. With nearly two-thirds of listed closed-end funds potentially affected, the sector may undergo consolidation, liquidation, or structural transformation over the coming months.

The changes are also expected to improve overall market discipline and bring mutual fund pricing closer to underlying asset values, a key concern raised by investors over the years.

However, fund managers may face short-term operational challenges as they adjust to stricter compliance requirements, valuation standards, and investor voting processes.