Bangladesh University of Professionals
EMBA , Legal Environment of Business. Dr. Ridwanul Hoque: ridwancu@yahoo.com

Regulation of business

What is regulation?: t o say what to do and what not to do; to draw a periphery of corporate powers.

And, is regulation anti-thesis to financial regulation thought to be generative of economic progression?: It is in no way a hindrance to economic performance by corporate entities.

Absence of regulation leads to non-environment for business and the dilution of shareholders’ interests.
Importance of regulation can be understood with a reference to the benefits of state control in the banking sector. One can take, for example, the case of the recent saga of Oriental Bank Ltd., in the morbid-situation of which the state intervened to protect the public’s money from being further lost. To note one author:

“ Depositors entrust their savings to a bank, based on faith that thus money will be duly safeguarded and returned to them when they need it, The banks, in turn, lend their depositors money to borrowers … based on a trust that he borrowers will return the money ….”.[1]

In order to protect the public interest and the business trust as depicted in the above paragraph, there needs to be legal protection in place. This is where state regulation comes into play in the marker arena.

Two ways of regulating market are: legal regulation and corporate governance regime (which may be based on both private initiates and public regulations).

Securities and Exchange Commission

Laws: Securities and Exchange Ordinance 1969;[2] and the Securities and Exchange Commission Act 1993.

Bangladesh’s securities market dates back to the Pre-Independence era. It has, however, yet to make any remarkable progress. Lack of proper regulatory role of the Securities and Exchange Commission, there are some amount of erosion of confidence amongst the investing people.

The SEO provides for a number of rules relating to the dealing in securities fairly, including rules relating to issue of capital,[3] public issues,[4] and so on, in order to increase the confidence of the public in the market.[5] E.g., the Ordinance provides for the disclosure of certain compulsory information (price sensitive).A bye-law [The SEC (prohibition of Insider Trading) Rules 1995][6] prohibits insider trading: penal[7] and civil consequences are there: see. Article 5 of this Regulation. According to this and others laws, companies need to disclose price-sensitive information to the public,[8] in order that no insider trading takes place.
Yet, insider trading is a major factor ailing the Bangladeshi companies. Citing Sobhan and Werner who wrote in 2003, Kutubi writes:[9]

There are several examples of directors themselves being engaged actively in underhand dealings and insider trading for personals gains in both corporate and banking sectors in Bangladesh.

Also, s. 14 of the Ordinance provides that if a any director or officer of an issuer of a listed equity security [or any person who is directly or indirectly the beneficial owner of not less 10% of such securities] makes any gain by the purchase and sale, or the sale and purchase of securities, s/he must make a report within 6 months and tender the amount of such gain to the issuer.

Prohibition of short-selling: to sell securities which a person does not own at the time of selling. He sells in anticipation that the market price will later fall when s/he will actually own the shares/securities.[10]

Fraudulent activities:
S. 17 of the SEO provides that it is unlawful for anyone to engage in any fraudulent activity cornering the selling and buying of securities. Acts of fraud in this regard are defined to be acts inducing, affecting, dissuading, or influencing the sale or purchase of any securities to the benefits of the offender. The law provides for both civil and criminal consequences: see. S. 24.

Securities and Exchange Commission:[11]

A statutory body of five members with the Chairman as its head, the SEC is the premier capital market watchdog. It can impose penalty, can conduct inspection, and can require any person to supply any documents. It has recently been given the power to regulate some newly introduced companies like the credit rating companies along side its old role of regulating securities, issuers,[12] or companies.

The SEC regulates the companies, among others, by approving prices of shares, initial public offering, and issue of capital.

S. 2A of the SEO provides that every issuer must take previous approval of the SEC before it can make an issue of capital in or outside Bangladesh, or make in Bangladesh any public offer of securities for sale, or renew or postpone the date of maturity or repayment of any security maturing for payment.

While according consent to the issue of capital, the SEC can attach conditions u/s. 2CC of the SEO. The Commission by virtue of an order [No. SEC/CMRRCD/2006-158/Admin/02-08; Dated the 20th February, 2006] has issued corporate governance guidelines to be followed by listed companies on a ‘comply or explain’ basis. These guidelines are indeed ‘conditions’ attached to the issue of capital by the companies listed (or to be listed in future) with any stock exchange in Bangladesh. The Guidelines proclaim that they intend to enhance corporate governance in the interest of investors and the capital market. Non-compliance with these ‘conditions’ (?) is punished only by ‘naming and shaming’ the company, as these are indeed Code of Ethics.

The SEC has a quasi-judicial power, i.e., to hear appeals filed by investors against any corporate unfairness.

Although, it is the function of a Stock Exchange to enlist companies for the puspose of public trading, The SEC may order the compulsory listing of any company with any Stock Exchange in the public interest. S. 10 of the SEO 1969 provides that where the SEC is of the opinion that it is necessary or expedient in the public interest so to do, it may, after consulting a Stock Exchange and giving the issuer of such security an opportunity of being heard, direct the Stock Exchange to list the security.

Stock Exchanges (established under licenses from the SEC).

Dhaka[13] and Chittagong Stock Exchanges: These are private entities but have n important public function of regulating companies by requiring them to observe certain rules and regulations or business standards.[14] The Listing Rules of DSE and CSE provide for both conditions precedent to the enlistment with them and continuing obligation rules that a listed company is to observe as a condition subsequent. For the breach of a continuing obligation, a company may face suspension of trading in the market or even expulsion (delisting).

CSE listing rules[15], e.g., provide rules relating to prospectus, a and allotment, issue and transfer of shares. These regulations apply to all companies and Securities applying for listing and those listed on the Exchange.

Contractual (along with legal-abidingness):
Under regulation no. 5 (1), it is a condition for seeking permission that the Company or the Securities has provided as undertaking to abide by these regulations.

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[1] Kutubi, Shawagt S. 2006., as in note 9 below, at p. 2.
[2] Supplemented by the Securities and Exchange Rules 1987.
[3] See Securities and Exchange Commission (Issue of Capital) Rules 2001, as framed by the SEC.
[4] See the Public Issue Rules 2006, as framed by the SEC.
[5] The preamble to the Ordinance proclaims that its objective is to “provide for the protection of investors, regulations of capital markets and issue] and dealings in securities”.
[6] See the website of the SEC:
[7] See rules 2(e) and 3 of the Rules of 1995, and s. 8 (2) of the SEC Act 1993. Insider Trading can also be prosecuted under s. 17 of the SEO 1969. See M. Zahir, at p. 284.
[8] Financial reporting requirement and disclosure obligations are basically provided from the Banking Companies Act 1991, the Companies Act 1994, and the SEC Rules 1987.
[9] Kutubi, Shawagt S. 2006. Bank regulation and corporate governance under financial liberalization: A case study of private commercial banks in Bangladesh. London: School of Oriental and African Studies (Unpublished MSc Dissertation at the Department of Economics), at p. 24.
[10] See s. 13 for short-selling. However, Bangladeshi law does not specifically provide for the prohibition of market manipulation (by buying out securities of a particular company).
[11] See for a impressionistic view, Solaiman, M. /Securities market in Bangladesh: Problems and Suggestions’, 3 (1998) Chittagong University Journal of Law, pp. 41-67.
[12] See, e.g., s. 11 of the SEO 1969: “An issuer of a listed security shall furnish to the Stock Exchange, to the security holders and to the Commission an annual report of its affairs […]”.
[13] Visit: http://www.dsebd.org/
[14] For Corporate Governance Guidelines provided by the DSE see: http://www.dsebd.org
[15] See THE LISTING REGULATIONS OF THE CHITTAGONG STOCK EXCHANGE LIMITED.