Bank mergers and NBFI windups: What’s in store for shareholders?

• Bangladesh Bank orders liquidation, merger drive
• Shareholders face losses as assets erode
• Government recapitalises banks with taxpayer funds
• Small investors still chase troubled stocks

The Bangladesh Bank's move to liquidate nine ailing non-bank financial institutions (NBFIs) and merge five struggling banks marks one of the most sweeping clean-ups of the financial sector in recent years. The move is aimed at restoring stability in the country's volatile financial sector, marred by rampant systemic corruption.

But while the regulator's actions are well-intentioned, they have raised questions about the fate of thousands of small investors: what will happen to the money they poured into those firms?

Of the 14 institutions on the chopping block, 13 are listed on the stock market. Together, general shareholders hold around 550 crore shares with a face value of Tk 5,500 crore. Many of them now face a grim prospect, with those shares effectively becoming worthless.

The nine NBFIs headed for liquidation are in deep financial distress — weighed down by high levels of classified loans, negative capital adequacy, ballooning liabilities, and years of consecutive losses. In such circumstances, liquidation leaves virtually no room for equity holders to recover their investments.

The asset base of these institutions has eroded to the point that even depositors are expected to lose a substantial amount after the liquidation process. Shareholders, who are legally the last to be compensated, are unlikely to get anything back at all.

The situation is hardly better for shareholders of the five banks being merged into the newly named United Islami Bank. Many investors are hoping to receive proportionate shares in the new entity. However, all five lenders carry negative net asset values (NAVs) ranging from -Tk 75 to -Tk 438 per share, meaning their liabilities far exceed their assets.

Central bank spokesperson Arief Hossain Khan said no final decision has been made regarding shareholders' claims in the merger process. However, the legal framework offers little comfort.

"Shareholders have a stake in the assets and liabilities of the merged banks," he said. "But since the banks' net asset values are negative, shareholders would only be entitled to shares in the new bank if they first paid off the liabilities, which are much higher than their assets."

"In short, the banks' assets and liability situation is not in favour of shareholders," he added.

To prevent a collapse that could shake depositor confidence, the government is stepping in with fresh capital, effectively using taxpayers' money to recapitalize the new bank. But those funds will go toward issuing new shares in the government's name, not to compensate private shareholders.

"There is no chance for shareholders to get anything. All the banks' NAVs per share are negative. Very soon, shareholders will see that they have nothing left against their investment," said Saiful Islam, president of the DSE Brokers Association of Bangladesh.

He added that while depositors are protected under an insurance scheme, shareholders are not. "This will be a hard lesson for investors. They must invest cautiously. When a company's ability to continue operating is in doubt, it means there is a real possibility of shareholders losing everything."

Islam, however, pointed out that many small investors appear undeterred. Even as liquidation and mergers threaten their holdings, they continue buying shares of long-troubled companies. On Thursday, for instance, shares of Familytex BD — a loss-making firm for at least seven years — rose by 6 percent to become the third-highest gainer on the Dhaka Stock Exchange (DSE).

"This is not an isolated case," he noted. "It has become common for investors to chase non-performing companies."

The stock market is a place where investors are expected to put money after evaluating a company's performance. If a company fails to perform, shareholders will have to bear the loss. If the company performs well, shareholders will benefit. "So, naturally, shareholders are expected to be responsible."