The securities regulator has stepped up enforcement against several listed firms over the misuse and diversion of funds raised through initial public offerings (IPOs), imposing hefty penalties on the issuers and their directors.
In the latest action and probably the most significant, the Bangladesh Securities and Exchange Commission (BSEC) penalised Regent Textile Mills last week, slapping an aggregate fine of Tk 1 billion on five directors. They failed to return misused IPO proceeds despite repeated directives from the regulator.
The regulatory action brings one of the country’s longest-running cases involving the diversion of IPO funds closer to a conclusion, more than a decade after the textile company entered the capital market in 2015.
Market operators said the record penalty sent a strong message that company directors would be held personally accountable for the misuse of public money, a practice that undermined investor confidence and weakened market discipline.
Regent Textile and several other issuers engaged in a recurring pattern of irregularities in the use of IPO proceeds. Some of them failed to utilise IPO funds within the timeframe stipulated in their prospectuses, while others allegedly diverted money to related parties, used it as security for loans taken by sister concerns or submitted misleading information to the securities regulator.
BSEC Executive Director and spokesperson Md Abul Kalam told The Financial Express that the new commission had been working to ensure sustainable development of the capital market and bring those involved in irregularities to justice to strengthen financial transparency and investor protection.
Regent Textile case
The BSEC last week fined each of the five directors of Regent Textile Mills Tk 200 million. They are Md Yakub Ali, Md Yasin Ali, Tanvir Habib, Mashruf Habib and Salman Habib.
They have not returned Tk 900 million in misused IPO proceeds despite repeated orders. The directors have been given 20 working days from August 22 to pay the fines. Failure to comply will result in an additional penalty of Tk 10,000 per day for each director until the fines are paid, according to the BSEC directive.
Regent Textile raised Tk 1.25 billion from the capital market in 2015 through the fixed-price method for business expansion.
A subsequent regulatory investigation, however, found that around Tk 801.1 million, including accrued interest, was used to acquire a 99 per cent stake in Legacy Fashion, a company owned and controlled by the same sponsor family behind Regent Textile, in violation of securities rules.
The latest action is not the first regulatory penalty against the directors. In January 2020, the BSEC fined each of them Tk 0.2 million for the company’s failure to submit financial statements for 2016 and 2017 on time and for providing false information to the regulator.
A recurring problem
Regent Textile is not an isolated case. Over the past several years, the BSEC has taken action against a number of listed companies and their directors for not using IPO proceeds for approved purposes, diverting funds to related concerns or providing misleading information about fund utilisation.
Aman Cotton Fibrous, which raised Tk 800 million through an IPO in 2018 to purchase machinery and repay loans, is another prominent example.
A BSEC special audit found that around Tk 730 million of the IPO proceeds had been misused. The money was placed in fixed deposit receipts and pledged as security against credit facilities taken by two non-listed sister concerns.
In January 2022, the BSEC fined each director Tk 30 million and penalised the company’s auditor Tk 1 million.
Kattali Textile also faced regulatory action in July 2020 for failing to utilise IPO proceeds in line with the approved plan and for submitting what the regulator said were fake bank certificates.
Pacific Denims is among the notable cases tied to alleged misuse of IPO funds. In December 2018, the BSEC asked the company to return Tk 209.8 million after finding that it had provided false information regarding the use of IPO proceeds.
The regulator subsequently fined the company’s managing director and directors Tk 0.3 million each.
Aman Feed raised Tk 720 million through an IPO in 2015 for business expansion and repayment of long-term loans.
The regulator found that Aman Feed had submitted false information to the commission regarding the utilisation of the funds and imposed fines of Tk 2.5 million on each of the directors.
Apart from the firms mentioned above, at least five listed companies—ACME Pesticides, JMI Hospital Requisite Manufacturing, Sikder Insurance, Associated Oxygen and Techno Drugs—failed to utilise IPO funds within the timeframe mentioned in their prospectuses, delaying the expected returns for general shareholders.
The regulator has not yet taken any action over the matter.
