BSEC in legal standoff over mutual fund conversion order despite High Court stay
Fund trustees caught between regulator’s directive and court order.
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.
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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.
