3.

Legal Framework of Capital Market Regulation In Bangladesh

3.1 The Securities and Exchange ordinance,1969

This ordinance includes provisions to address market fluctuations and prevent manipulative
practice such as short selling. Short selling means the sales of shares before purchasing it. In easy
terms, investors purchase shares when price is lower and sell them when price is high. This
practice disrupts market stability and therefore prohibited. This ordinance also prohibits insider
trading and requiring directors, officers and significant shareholders to report and return any
profit made from buying and selling company share within six months.

Secrecy maintenance is the most important for the listed company in the stock exchange. "No
person shall except with the permission of the Commission, communicate or otherwise disclose
to any person not legally entitled thereto any information which has been entrusted to him or
which he has obtained, or which he has access in the course of the performance of any function
under this ordinance"

For disclosure of any information, the law states:

[Link] disclosure of any information in contravention of sections 19 or 19A for the purpose of
making profit through insider trading shall be an offence.

2. Whoever contravenes subsection (1) shall be punishable with imprisonment for a team which
may extend to five years or with a fine not exceeding taka five lack or with both.

3.2 The Securities and Exchange Rules 1987

These rules outline the qualifications for members of the Securities and Exchange Commission
(SEC) They cover aspects like business transaction practices, maintenance of consolidated
customer accounts, submission of periodic returns and annual reports by both the stock exchange
and listed companies, and the listing both the stock exchange and listed companies, and the
listing of [Link] rules emphasize risk-based capital adequacy requirements. SEC
members must maintain a net capital balance of at least one hundred thousand tk. to ensure
sufficient funds for business operations. This implies a debt-to-equity ratio limit of 1:20 or 5%.
However, these rules may accidentally expose SEC members to increased liabilities. This could
create vulnerabilities that unscrupulous entities might exploit.

3.3 Bangladesh Securities and Exchange Commission Act 1993

The Bangladesh Securities and Exchange Commission (BSEC) was established on 8th June,
1993 as the regulator of the country's capital market under the provision of Bangladesh
Securities and Exchange Commission Acts,1993 The responsibilities and functions of the
Commission are to ensure proper issuance of securities, protect the interest of investors in the
Securities and develop and regulate the capital market on a much more manageable market
perform. No stock broker, sub-broker, share transfer agent, broker to the issue, manger to the
issue, underwriter, portfolio manager, investment adviser, mutual fund, trustee of trust deeds,
asset management company and such other intermediary organizations as may be associated with
the securities market sell or deal in securities except under and in accordance with the conditions
of a registration certificate obtained from the Commission.

3.4 Companies Act, 1994

The Companies Act,1994 is the primary law that governs companies in Bangladesh. It governs
the creation, operation, and dissolution of companies, as well as the rights of shareholders and
the requirements for audits and disclosures. This Act has several weaknesses to overcome as its
function is to check on the stock market's monetary bubble mainly created by unscrupulous
manipulations. These limitations are mainly related to the inadequacy of severity of penalty for
noncompliance with different sections of the Act. Sections 211 to 217 of this law deal with the
appointment of auditors as well as reading and inspection of the auditor’s report. If any default is
made by a company in complying with any of the provisions contained in section 211 to 217, the
company, and also every officer of the company who is in default, shall be punishable with a fine
which may extend to one thousand taka14 which seems to be absurdly insufficient for the
Commission such defaults.
3.5 SEC Merchant Banker and Portfolio Manager Act, 1996

The "Securities and Exchange Commission (Merchant Banker and Portfolio Manager) Rules,
1996" essentially outlines the regulations governing the operations of merchant banks and
portfolio managers in Bangladesh, requiring them to be licensed by the Securities and Exchange
Commission (SEC) and defining their responsibilities including underwriting IPOs, managing
new issues, corporate counseling, and portfolio management services, all while adhering to
specific standards for capital adequacy and investor protection. This act is related to the
registration certificate and responsibilities of a Merchant Banker and that of a Portfolio Manager.
There is a conflict between this Act and that of the Bank Companies Act 1994. Under the Bank
Company Act, section 14A, there was a clear prohibition to trade shares under unanimous
names. But using the omnibus type of accounts, the shares were traded in glaring contradiction to
this act. Although the amount was invested by the general investors as only dummy account
holders, however, the shares were in fact under the name of Merchant Banks not on behalf of the
account holders but under the banks' portfolios. Hence, there was no legal right of the investors
over the shares purchased.

3.6 Dhaka Stock Exchange Automated Trading Regulations, 1999

The regulations include provisions for matching orders, setting minimum bid and ask quantities,
and establishing markets for debt securities and buy-ins. This act deals with the trading rated
issues. It covers the regulations related to Trading day, Trading Period, Availability of
workstation, Types of Market, Trading Sessions, Exposure Limit and other closely related issues.
The regulation specifies four types of markets which are:

(a) Public Market - Matching in this market is automatic based on the touchline price which
follows normal settlement procedure.

(b) Spot Market - Matching in this market is also automatic, settlement of which follows
procedure for spot transactions.
(c) Block Market - This is the market for bulk selling and buying on automatic matching with
equal quantity and best price basis. Orders entered in this market are immediately flashed on all
trading workstations.

(d) Odd Lot Market - Odd lot shares are traded in this market on automatic matching with equal
quantity and best price basis.

There are five sessions of trading periods, namely: (a) Pre-opening session; (b) Opening session;
(c) Continuous or Regular trading session; (d) Closing session; and (e) Post-closing session.

The regulation also mentions on the exposure limit of a member of the stock exchange. It
empowers the DSE to regulate the net limit for its member. If a member exceeds the limit at any
point of time, such member shall be automatically suspended by the system under immediate
intimation to the SEC.

3.7 Settlement of Stock Exchange Transactions Regulations 1998

The Settlement of Stock Exchange Transactions Regulations of 1998 were regulations that
governed the process of transferring shares and funds between buyers and sellers on the stock
exchange. These regulations were repealed, but transactions carried out under them are still
considered valid. For the purpose of this regulation, two terms are important to understand.
These are: Clearing House and Settlement Day. Clearing means the facilities provided by the
DSE for the completion of transactions through receipts and deliveries of securities and/or
cheque/pay order/demand drafts. A Clearing House is set up for the purpose of settlement of the
stock exchange trading transactions.

3.8 Margin rules 1999

This rule empowers the members to provide margin loans to the investors. According to this
Rule, a member can extend credit facilities to his approved client for securities transactions
subject to the margin account requirements of these rules. Margin account arrangements must be
evidenced in the form of a written agreement executed between the member and the client. The
margin deposited by client with the member can be in the form of cash, securities issued by the
Government or its [Link], if any account of the client fails to maintain its margin
requirement, the member can recover the credit amount by selling those shares. For this nature of
margin accounts, the stock market crash is more likely to be triggered. Thus, a huge pressure is
created in the selling side of the share market. With the demand for shares being static, even
falling, a huge pressure for sale of shares leads the price to fall even more.

3.9 Securities & Exchange Commission (Stock dealer, Stock Broker and Authorized

Representative) Regulations 2000

According to this regulation, no stock dealer, broker or authorized representative can trade any
securities without a registration issued under this regulation. The issues covered under this
regulation specifically includes the qualification to attain registration, application for registration,
transfer of registration, duration of registration, issuance of a duplicate registration certificate,
duties of registration certificate holder, cancellation and withdrawal of registration and
maintenance of accounts of the stock broker and the stock dealer. The accounts so maintained
can be audited at any time by the SEC and the regulations related to such audit have also been
covered under this regulation.
 4. Organizational Structure and Mandate of BSEC