Small brokers’ majority blocks market discipline, reforms

At the Dhaka Stock Exchange, shareholder directors are elected by a small-broker-dominated base — a structural flaw that has become a roadblock to enforcing global best practices and good governance.

According to DSE data, 59 of the exchange’s 292 active brokerage firms are institutional — subsidiaries of banks and non-bank financial institutions (NBFIs) — while the rest have converted from sole proprietorships into private limited companies.

The top 40 brokers by turnover belong to this institutional group and together account for more than 70 per cent of daily market turnover in FY26, said DSE sources. Yet they hold no seats on the DSE board, since they remain a numerical minority when it comes to electing board candidates.

“The syndicate of formerly sole-proprietorship firms supports candidates who can pursue their interests on the board of the Dhaka bourse,” said a senior executive of an institutional brokerage firm, wishing not to be named.

Standard Operating Procedures (SOP) and corporate governance of institutional firms differ from those of the formerly sole-proprietorship firms. So, the inclusion of their representatives on the board of the premier bourse would enhance discipline in the secondary market, alongside adding innovation to product diversification.

As per the demutualisation scheme, the DSE board comprises 12 members. Of them, six are independent, four are representatives of shareholding companies, one comes from a strategic partner, and the exchange’s managing director serves as the twelfth member.

Shareholder directors serve the interests of the majority who have elected them, while independent directors, according to market insiders, are equally ineffective in enforcing rules and discipline, because they mostly join the board for honorarium and to elevate their corporate status. Some even lack practical knowledge about the market.

The Central Counterparty Bangladesh Limited (CCBL), a separate clearing company, is a prime example of this resistance from DSE shareholder directors. The company is yet to begin operations six years after its formation.

The DSE, which holds a 45 per cent stake in the CCBL, has not proceeded to register the company, and other stakeholders have consequently shown indifference. The CCBL must get registered with the BSEC before launching operations.

According to sources at the Bangladesh Securities and Exchange Commission (BSEC), CCBL’s proposed board structure, which would include two representatives — both independent directors — from the DSE, was not acceptable to the DSE’s shareholder directors.

The establishment of a clearing company is urgently needed to speed up settlement and to enable the introduction of new derivatives. The main function of the CCBL would be to clear and settle transactions executed on the exchanges’ platforms without any failure.

The company will be able to trace investors’ funds kept in their bank accounts. Hence, it will be able to implement restrictions on purchases in margin accounts.

On the other hand, if the CCBL is established, Dhaka bourse’s TREC (trading right entitlement certificate) holders will no longer be able to avail of the free limit in trading. Brokers are currently allowed to conduct trades up to a free limit set at Tk 100 million, without depositing any margin.

A majority of brokers also have not yet met capital adequacy requirements. As per the risk-based capital adequacy rules, the minimum regulatory capital for brokers varies from Tk 50 million to Tk 150 million, depending on their operational landscape.

The exchange’s shareholder directors have remained consistent in their position that small brokers are not capable of meeting capital adequacy requirements.

Capital adequacy for brokers is necessary to absorb operational and market losses, prevent broker defaults during rapid trade settlements, and protect general investors’ funds.

Saiful Islam, president of the DSE Brokers Association, Bangladesh (DBA), said the representatives of the top five or even the top 10 brokers, in terms of transactions they execute, did not bother to participate in elections to come to the exchange’s board.

“It’s not possible for professional brokers to lobby to win elections. That’s why we remain busy with our business,” said Mr Islam, also a director of BRAC EPL Stock Brokerage.

He, however, stressed the importance of including professional brokers on the DSE board.

Wishing to remain anonymous, the chief executive officer (CEO) of a leading brokerage firm said the finance ministry and the regulatory body had often influenced the election of shareholder directors to the DSE board.

When asked, the managing director of Midway Securities, Md. Ashequr Rahman, said directors’ ideas and knowledge were important for the development of the stock exchange and the market, but they could not overcome their tendency to work for the sake of boosting their own portfolios.

While talking to the FE, a senior executive of the DSE emphasised the need for training DSE board directors.

Before sitting on the board of the central bank, directors need to attend training programmes. “The DSE directors should also be trained before they take charge, and the securities regulator has a responsibility there,” he said, adding that at least two representatives from top institutional brokers should be included in the board.

The DSE executive wanted to keep his identity undisclosed since he was not authorised to talk to the media.

Source: The Business Standard