The two companies lent to their associated concerns breaching securities rules
Golden Harvest Agro Industries, the pioneer in Bangladesh’s frozen food business, has run afoul of the securities regulator for lending to its sister companies free of interest over a five-year period while bearing the Tk 379 crore of interest on the sum itself.
Between 2016 and 2020, the company had lent Tk 28.09, Tk 89.31 crore, Tk 75.17 crore and Tk 43.18 crore to its associated companies at free of interest or at lower interests of 6 to 10 per cent, said the letter from the Bangladesh Securities and Exchange Commission dated November 18.
Meanwhile, Square Pharmaceuticals, the country’s leading drug maker, also got the rap from the BSEC for providing about Tk 305.9 crore as loan and guarantee of another Tk 1,455.70 crore to its associated/concerned companies by charging interest at 9 per cent or less in the last five years, breaching securities rules.
Subsequently, the BSEC sought an explanation from the two companies for their transgressing actions that violated its notification on September 10, 2006.
The notification barred any listed company from providing loans to its associate companies, which are usually owned by its sponsor-directors.
Earlier this month, the BSEC sought an explanation from Aramit Cement for the same anomaly and also ordered a refund of the principal amount of Tk 77 crore from its sister companies along with 9 per cent interest.
“We are going to be particularly tough on those companies that are lending at free of interest to their sister concerns,” BSEC Chairman Shibli Rubayet Ul Islam told Dhaka Tribune yesterday.
Those who have lent to their associated concerns and are charging some form of interest will be dealt with leniently.
“We are taking actions against those who are not charging any interest. And we are doing this to protect the shareholders’ interests,” Islam added.
The securities regulator has asked Golden Harvest’s associated concerns to return the non-interest-bearing loans along with the accumulated interest for those years at the borrowing rate prevailing then within seven days of receipt of the letter.
The company was also asked to give its justifications for its actions.
Contacted, Ahmed Rajeeb Samdani, managing director of Golden Harvest, acknowledged receiving the letter from the BSEC.
He told Dhaka Tribune that the company had sent in its response to the BSEC within the allotted timeframe.
Samdani, however, declined to elaborate further.
Contacted, Khandaker Habibuzzaman, company secretary of Square Pharma, said the amount was lent from the drug maker’s surplus funds and not from borrowing from elsewhere.
“And we charged at least 100 basis points more in interest than the average market rate for fixed deposits."
Square Pharma’s board and shareholders had given their nod to the transaction at its annual general meeting.
"The loans made a win-win proposition for both the listed and non-listed companies,” Habibuzzaman added.
Md Shakil Rizvi, director and former president of the Dhaka Stock Exchange, welcomed the BSEC move to send out letters to companies that have lent to their associated concerns.
“Providing loans to associated companies may serve the interest of the companies’ connected people while damaging the interests of the general investors. Plus, they are not charging the interest rate at the market rate.”
The listed companies are lending money to their subsidiary companies at a lower interest. These companies are giving unethical benefits to their sister concerns when the sponsor directors are the same for both, said Abu Ahmed, honorary professor of the Dhaka University’s economics department and a stock market expert.
“The commission is doing the right thing now to protect the investors’ interest.”
But from now onwards, the BSEC will have to be more vigilant in stopping these kinds of anomalies, he added.
Earlier in September 2018, MI Cement had provided interest-free loans to its sister concern, a transgression that led to each director getting slapped with Tk 10 lakh fine.