Financial Market Regulation
Securities markets in Bangladesh: Regulatory history until 1947
This is the third part of our special series on securities market. In the next instalment we will discuss contemporary regulatory challenges that is holding back the expansion of our securities market.
Barrister Tureen Afroz
Securities regulation in Bangladesh, then part of British India, initially started in the guise of corporate legislation. In 1913, the Indian Companies Act 1913 was enacted and it contained specific provisions (Sections 92-100) regarding the contents of prospectuses their filing procedure and liability for statements provided therein. From the late 19th century through the mid-20th century there was a steady growth of stock exchanges in British India. However, there was no effective central or uniform regulatory control over the stock exchanges for a long time. In 1865, the Government of Mumbai enacted Act XXVIII of 1865 to control speculative activities in the securities market. This Act is claimed to be the first and the earliest legislation relating to the Stock Markets in India. Later, the Act XIII of 1886 was enacted under British Raj to regulate the securities issued by the Government.
The Indian Securities Act 1920 was the first formal attempt to effectively regulate the overall securities market of the region. However, this Act again was only directed to regulate 'government securities', but not those of companies. In 1923, the Atlay Stock Exchange Enquiry Committee was set up to look into the matters of Mumbai Stock Exchange. It was followed by the enactment of the Bombay Securities Contracts Control Act 1925. This Act empowered the Government “to grant and withdraw recognition to a stock exchange” and provided that “rules of a recognized stock exchange could be made or amended only after prior approval of the Government”. It is found that all the stock exchanges in India functioned under the framework of Bombay Securities Contracts Control Act 1925. Therefore, it is stated that for a long time, the stock exchanges in British India actually operated under their individual contract regulations.
Until the Second World War, raising of capital in British India via non-governmental securities was free from any effective control. In 1943, the Defence of India Rules 1943 imposed restrictions for the first time on the issue of corporate capital in British India. Also, non-compliance with such restrictions was made an offence, punishable with “imprisonment for a term which may extend to five years or with fine or with both”. No company was allowed “except with the consent of the central government” either to make an issue of capital or to make any public offer of securities for sale in British India or anywhere.
Under the Defence of India Rules, the Government for the first time introduced some sort of prospectus regulation in the securities market of British India. Rule 94A(3) of the Defence of India Rules reads as:
“(subject to exceptions) … no person shall issue in British India any prospectus or other document offering for subscription or publicly offering for sale any security which does not include a statement that the consent of the Central Government has been obtained to the issue or offer of the securities.”
It is observed that the formation of the Defence of India Rules, so far it was related to the securities markets, was basically a wartime measure against speculation in such markets. Once the Second World War was over, it was realized that the control on capital issues was still necessary “to secure a balanced investment of the country's resources in industry, agriculture and the social services.” Hence, the said rules continued after the war and were later incorporated into the Capital Issues (Continuance of Control) Act 1947.
The Capital Issues (Continuance of Control) Act enabled the Central Government to have control over any kind of issues of corporate capital in British India. The office of the Controller of Capital Issues (the Controller, henceforth) under the Central Government administered this act. Companies were compulsorily required to make an application to obtain approval from the Controller for raising capital in the securities market, be it the local market or that of a foreign one. There was no specific need to register the prospectus with the office of Controller. There were also no clear-cut guidelines for standards or contents of prospectus to be distributed among prospective investors for attracting investment. The office of the Controller only required that the prospectuses and other advertisements should contain a statement to the effect that the relevant approval from the Controller had been obtained.
It is not at all clear from the Act as to what were the required formalities in getting an approval for capital issue from the Controller. However, it was observed in Narendra Kumar v Union of India (1989) that the Controller could withhold its consent to a project that was “ex facie impracticable and/or was deemed to be an impossibility and/or if ex facie and without any detailed investigation, it was satisfied that the project was too big for the company to handle or too risky and onerous to be permitted in public interest”.
Further, the Capital Issues (Continuance of Control) Act empowered the Controller to obtain any information from the applicant if it thought necessary before giving permission to a capital issue. The Controller could then order the applicant to provide accounts, books or other documents or to furnish further information. Also, according to section 8 and 13 of the Capital Issues (Continuance of Control) Act, applicants were generally prohibited from making any false statement to the Controller.
It is stated that investor's protection was never in the responsibility agenda of the Controller. As a matter of fact, the Controller did not have the time, the staff, the powers of enquiry, the benefit of public hearing, the experience, skill or expertise to assess the technical, commercial and financial aspects of the projects so as to provide guarantee to the investors. Until 1947, regulation regarding market manipulation and insider trading were completely underdeveloped in British India. Also, neither the Capital Issues (Continuance of Control) Act did enjoin the Controller to discharge such obligations, nor does the background of the Capital Issues (Continuance of Control) Act so encompasses. The Controller was only expected to act within the four corners of the Capital Issues (Continuance of Control) Act and the guidelines.
The author is an Assistant Professor of Law at BRAC University School of Law.
