Staff Correspondent:

The state-run Investment Corporation of Bangladesh (ICB) has proposed that mutual funds (MFs) be allowed to distribute dividends from profits in the current fiscal year without meeting provisional requirements but experts say it will cause capital erosion.

Both fund managers and unitholders will eventually endure consequences as the MFs will only get smaller in size after the disbursement of dividends for FY25, warn several fund managers while.

The proposal came at a meeting on Saturday between officials of the Bangladesh Securities and Exchange Commission (BSEC) and market stakeholders. ICB Managing Director Niranjan Chandra Debnath suggested allocating 20 per cent of the profits in the current fiscal year for provisioning and the rest for paying dividends to unitholders.

But MFs are required to keep 100 per cent provision against unrealised losses.

Explaining why ICB wants pooled funds to bypass the rules, the ICB chief said, “We want to motivate unitholders of the funds having provisioning shortfalls.”

Unitholders have become demoralised for having not received dividends for a long time amid persistent erosion of the equity market, he said, adding that ideally there should be no scope of paying dividends after partial provisioning.

The argument against the proposal is that the payout of dividends will lead to erosion of capital if unrealised losses are not fully taken into account.

An example may help untangle the matter at hand.

An MF received Tk 100 from investors and has seen an unrealised loss of Tk 10.

The fund then earns a profit of Tk 10 in the current fiscal year. Twenty per cent of the profit or Tk 2 will be kept in provision, considering that the proposal is accepted, and the rest, Tk 8 will be disbursed as dividends.

In that case, the fund will shrink to Tk 90.

That means unitholders will have received a portion of the capital that they gave to fund managers as investment in the first place instead of profits.

“Any distribution of dividend without complete provisioning is nothing but distribution of capital,” said a senior official of VIPB Asset Management, wishing not to be named.

Meanwhile, a majority of the mutual funds experienced losses in FY24 because of the dire straits of the country’s capital market. They remained in the red in the first two quarters of FY25 through December last year.

Surprisingly, a good number of the funds reported positive earnings for the third quarter through March this year even though the secondary market was more volatile during the period than in the previous two quarters.

With unrealised losses fully covered by provisions earlier, a close-ended fund managed by ICB Capital Management showed a rebound in the third quarter to March of FY25. ICB AMCL Sonali Bank Ltd. 1st Mutual Fund posted earnings per unit (EPU) of Tk 0.10 for Q3, FY25, as opposed to a loss of Tk 1.21 per unit in Q3 FY24.

The fund manager said diligent provisioning played a role in the improvement apart from the fact that the portfolio had been reshuffled with investments diverted to government debt-based securities.

Provisioning ensures strong footing for any kind of investment.

Md. Moniruzzaman, managing director of Prime Bank Securities, said the fair value of any kind of financial asset is determined by deducting costs from profits. If the provision is partial or incomplete, the fair value of an MF will not be reflected in the net asset value.