IFIC Bank ex-MD Sarwar rewarded

For unprecedented unethical works

Staff Correspondent: Former Managing Director Shah AlamSarwar has failed to improve the financial health of IFIC Bank but was able to help some of the board members, whether legally or illegally. He was rewarded by being appointed as an advisor to the bank just after finishing his tenure as Managing Director, which is termed an unprecedented example in the history of Bangladesh’s banking industry.
It is alleged that Shah AlamSarwar directly helped Beximco Group to siphon Tk 1,000 crore from the market under the name IFIC Amar Bond, which has no relation to IFIC Bank. Beximco Group tactfully siphoned the money with the connivance of the bank’s Managing Director, Shah AlamSarwar.
According to media reports, a real estate company issued bonds offering eye-popping returns to raise funds for a gigantic housing project in Gazipur, a normal development on the surface. However, the way the Tk 1,000 crore bonds have been presented to prospective investors has raised questions because it looks as if a private commercial bank has rolled out the financial instrument, and not the realtor.
What is more, the possibility of a conflict of interest has surfaced since an influential businessman and Prime Minister’s adviser Salman F Rahman, and his son Ahmed ShayanFazlur Rahman, are partners of the realtor as well as shareholders of the bank.
All of these factors came together to create a dizzying investment avenue for risk-takers, and it could pose a greater risk to the bank, which is mostly owned by the government and retail investors, than to Salman and his son.
IFIC Bank PLC, the private bank in question, has recently announced the completion of the subscription of the five-year IFIC Amar Bond, meaning all the bonds worth Tk 1,000 crore have been sold in just over a month. The bonds will yield an annual 12 percent interest rate, popularly called the discount rate, which is higher than the interest rate offered by the government for investments in national savings certificates, the deposit rates at banks, and other corporate bonds.
The bonds were not issued by IFIC Bank, but by Sreepur Township Ltd (STL), a newly-formed real estate company. IFIC is giving a guarantee although STL was set up in March last year and has no experience in constructing any flats or developing any plots, let alone building a township.
One of the concerns is that no zero-coupon bond issuers have ever sought a guarantee from any bank in Bangladesh to raise funds. In fact, taking the guarantee is not required as per debt securities rules, and it entails extra costs.
A top official of the Bangladesh Securities and Exchange Commission (BSEC), seeking to remain unnamed, said the regulator considered the bonds to be at “high risks of default”, so it verbally suggested that STL secure a guarantor to protect the interests of general investors.
A top official of a private bank said he would never have given the guarantee using public money to such a company if he was the top executive of IFIC. But Shah AlamSarwar has given it to his bank’s chairman.
According to him, STL obtained the guarantee to use the goodwill of the bank and assure people that it would not default on the payments.
Can STL use the name of IFIC Bank?
STL is using the name ‘IFIC Amar Bond’ in public communication, which immediately gives an impression to an unsuspecting common investor that the bonds are issued by the private bank. This is because while IFIC’s name is conspicuously visible, the name of STL comes in a much smaller font in the newspaper advertisements. Sometimes, the real name of the bond — IFIC Guaranteed Sreepur Township Green Zero Coupon Bond — is not cited at all.
A former banker said the name of the bond can’t be “IFIC Amar Bond” because the issuer’s name is hidden here. “The name of the bond is clearly misleading,” he added. The bank is allowing its brand image to be used by a new firm because the architect of the bond knows that investors will not extend their money if they know the issuer’s name, the banker said.
“This type of trickery is rare in the banking sector. The central bank should ask IFIC Bank to explain how it allowed its name to be used in such a manner.”
A lawyer who deals with corporate cases said the name of the bonds misrepresents its real name and the name of the real issuer. “The inclusion of the word ‘Amar’ in the bond’s name is also another example of misinformation since it is not part of the original name.”
Conflict of interest
The bond documents show that STL has onboardedBeximco Ltd in the project. Beximco Ltd and SFR Real Estate Ltd have collectively contributed 25 acres of land to form a joint venture on a revenue-sharing basis with STL. STL plans to appoint Beximco Engineering Ltd for detailed engineering, procurement, construction, and related services for the delivery of the scheme.
The owners from Beximco Ltd are Salman F Rahman and his son Ahmed ShayanFazlur Rahman, respectively vice-chairman and adviser of the industrial behemoth. Both sit on the board of IFIC Bank as well: Salman is the chairman and Shayan is the vice-chairman. IFIC’s guarantee to the bond shows that both have an interest in STL because of their shareholding in Beximco. No information is publicly available about SFR Real Estate.
This ultimately indicates that IFIC is giving a guarantee to the project for the benefit of its two directors and taking risks as it will have to repay the money along with the interest in case STL fails to pay. As of October 31, 2023, owners held only a 6.14 percent stake in IFIC Bank, while the government owns 32.75 percent, institutions 20.83 percent, and retail shareholders 39.16 percent, according to data from the Dhaka Stock Exchange. Despite knowing all this, the BSEC gave its consent to the bond.
A top banker sees it as a conflict of interest as the bank has extended the guarantee to a realtor where its directors’ company has a partnership. “This is a clear compromise when it comes to corporate governance,” he said. A corporate lawyer echoed the banker, saying this is a governance issue. The Bangladesh Bank has, however, limited its responsibility to just seeking an explanation from IFIC although the government as well as the depositors’ funds are at stake.
Faruq Ahmad Siddiqi, a former chairman of the BSEC, said STL started its business just a few months ago and is not generating any revenue. “How will it return people’s funds from the very beginning?”
If an investor buys bonds worth Tk 100,000, he will get Tk 1,000 per month in interest in the following 60 months. At maturity, he will get back the principal amount. “It’s nothing but a complete financial engineering to raise funds,” he added. Faruq Ahmad termed the venture also risky. “I don’t know how the BSEC has approved the bond that is huge in size.”
According to the Debt Securities Rules of 2021, an issuer can make an application to the commission for the issuance of debt securities if it has a good track record of profitability and liquidity generated from net operating cash flows. If the issue is to support a new or greenfield project, its forecasted financial position shall indicate significant profitability, liquidity, and ability to pay back by generating sufficient net operating cash flows.
STL has shared a projection, but several financial market stakeholders have expressed doubt over the forecasted revenue stream.
A top official of a merchant bank, who has vast experience in managing the issuance of bonds, said it is clearly a related party transaction as IFIC’s directors’ company has a partnership with STL. He said it is not difficult to raise funds by issuing bonds because issuers do not have to be profitable companies. Moreover, it is a comparatively new instrument in Bangladesh, so it is easy to attract people by giving a lucrative rate. After poring over the documents related to the bond, he said the approval for this type of financial instrument is only possible if there is political pressure. The BSEC, however, said it went by the book.
Deviation in bonds’ nature
A zero-coupon bond is a debt instrument used by a company to take loans from investors. It does not pay monthly interest. Rather, it offers a deep discount at face value, rendering profit at maturity when the bond is redeemed. Generally, an issuer of a zero-coupon bond repays annually or after maturity. By offering monthly interest or coupon, the issuer is deviating from the zero-coupon bond’s nature.
A source from the issuer company said, “Beximco Group has decided to join this venture, and the IFIC board decided to extend the guarantee considering the business potential and benefit to the bank and its depositors.”
Meanwhile, Bangladesh Bank Spokesperson MdMezbaulHaque said IFIC Bank did not seek any permission from the central bank since it is not the issuer of the bond. He declined to make any further comments.
A top official of the central bank said the BB was concerned when it saw that the issuer used IFIC’s name in the bond, making it look as if the bonds were issued by the bank. He describes IFIC’s guarantee as risky, saying it will be difficult to generate the projected income and build the township in the next five years.
“A bank has no right to do it because depositors keep funds mainly to safeguard their savings. The Bangladesh Bank and the BSEC have a duty to check whether any bank is putting its savers at stake,” he said. He said regulators have become ineffective in reining in banks from engaging in risky businesses. “The bank has independent directors and directors from the government side. What did they do?”
A former governor of Bangladesh Bank told the Daily Industry that it is the sole responsibility of a bank’s CEO to protect the interests and provide safeguards for public deposits, but Shah AlamSarwar did the reverse. He must face trial, the ex-governor added.
Shah Alam Sarwar could not be reached and does not answer his phone for clarification and comments over the allegations despite repeated phone calls.