BSEC in legal standoff over mutual fund conversion order despite High Court stay

The Bangladesh Securities and Exchange Commission (BSEC)
has entered a complex legal standoff with the judiciary after issuing a fresh
directive requiring the conversion or liquidation of closed-end mutual funds,
despite a standing High Court status quo order on the matter.
The regulator's latest move, issued
yesterday (9 June), has unsettled the asset management industry and left fund
trustees in a difficult position as they weigh the risks of regulatory
non-compliance against the possibility of contempt of court.
The dispute stems from a regulatory
framework introduced in May 2026, under which any closed-end mutual fund
trading at a discount of 25% or more to its Net Asset Value (NAV) must either
convert into an open-end fund or be liquidated.
On 7 May, the BSEC instructed trustees of non-compliant
funds to begin preparations for the process after 12 May, citing the need to
protect small investors from persistent inefficiencies and illiquidity in the
sector.
The directive was subsequently
challenged in the High Court by petitioner Rashidul Islam, who argued that the
regulator was unlawfully altering the tenure of existing funds.
HC issues 2-month status quo
The High Court, on 24 May, issued a
two-month status quo order on the conversion or liquidation of the affected
funds. It also issued a Rule Nisi, asking the finance secretary, the BSEC
chairman, the managing directors of the stock exchanges, the Investment
Corporation of Bangladesh (ICB), and other respondents to explain why the
regulatory order should not be declared illegal.
The court also questioned the
BSEC's authority to enforce premature conversion or liquidation of funds whose
tenures had already been extended under a 2018 government notification.
Despite the court order, the BSEC
yesterday issued a new directive reiterating that trustees should proceed with
the conversion process, placing market intermediaries in a difficult position.
A senior ICB official, speaking on
condition of anonymity, said complying with the latest BSEC order could be
interpreted as a direct violation of the High Court's status quo. To protect
itself, the ICB sent a formal letter to the commission today (10 June) seeking
urgent clarification and said it would not proceed until the legal uncertainty
is resolved.
The commission's internal legal
discussions also appear to be under scrutiny.
BSEC's emergency meeting tomorrow
According to a senior BSEC
official, yesterday's directive was issued following advice from the
commission's legal experts, who believed the order would not amount to contempt
of court.
However, after receiving multiple
letters from concerned trustees highlighting potential judicial consequences, the
regulator has reportedly sought a second legal opinion.
The commission is expected to
review the matter in an emergency meeting tomorrow (11 June) in an effort to
avoid a direct confrontation with the High Court.
Currently, 22 of the 36 listed
closed-end mutual funds are trading at discounts of 25% or more to their NAV,
making them subject to the conversion mandate. The original deadline for
initiating the process expires tomorrow.
Under the proposed framework, at
least 75% approval from unit holders is required for either conversion or
liquidation.
BSEC spokesperson Abul Kalam
defended the reform, saying it is aimed at protecting investors. He argued that
open-end funds offer greater liquidity, easier redemption and a more
transparent exit mechanism for investors who have remained trapped in
undervalued funds for years.
He emphasised that the reform is
designed to address governance transparency and ensure that the market price of
a fund's units more closely reflects its underlying assets.
According to market sources, out of
around 34 listed closed-end mutual funds, at least 22 are now exposed to either
liquidation or mandatory conversion into open-end funds under the new
regulation.
As the deadline looms, the fate of
billions of taka invested in these 22 mutual funds remains in limbo.
















