Investor protection and criminal liabilities for defective prospectuses. Bangladeshi laws compared with their equivalents in India and Malaysia
| Pages | 467-492 |
| DOI | https://doi.org/10.1108/13590790610707582 |
| Published date | 01 October 2006 |
| Date | 01 October 2006 |
| Author | S.M. Solaiman |
| Subject Matter | Accounting & finance |
Investor protection and criminal
liabilities for defective
prospectuses
Bangladeshi laws compared with their
equivalents in India and Malaysia
S.M. Solaiman
Faculty of Law, University of Wollongong, Wollongong, Australia
Abstract
Purpose – This paper aims to critically examine the applicability of disclosure-based regulation in a
pre-emerging securities market.
Design/methodology/approach – The paper presents, by using archival data, an analysis of
prerequisites for the usefulness of the disclosure philosophy making reference to some Asian securities
markets with special reference to the contemporary experiences of the Bangladesh securities market.
Findings – The paper concludes that the disclosure philosophy itself is not a panacea, an effective
disclosure regime requires a certain level of structural and infrastructural development of the market,
and that a particular securities market should follow a paternalistic merit regulation until the
attainment of that progress.
Originality/value – This paper contributes to the understanding of effectiveness of the disclosure
philosophy for the regulation of securities markets from the perspective of investor protection.
Keywords Disclosure, Securities markets, Investors, Bangladesh,India, Malaysia
Paper type Technical paper
Introduction
The Bangladesh securities market was established half a century ago. Despite its
operation of such a long period, it remains in its embryonic form. A chronic lack
investor confidence emanated from multifarious and widespread yet almost unfettered
misfeasance of other players in the market. Individual amateur investors in company
shares that constitute 97 per cent of the total listed securities overly dominate the
market. As regards the market for initial public offerings (IPOs), many companies
have been taking advantage of the “innocence” of general investors and raising
money by issuing prospectuses reportedly containing false and misleading material
information[1]. A recent survey reveals that the performance of a total of 72 companies
out of 137 IPOs issued in the market from 1993 to July 2004 have been very poor
because of weak fundamentals, and many of those issuers are even currently
nonexistent. The survey clearly identifies the issuance of “defective prospectus”[2] as
one of the major reasons for their poor performance[3] (Mahmud, 2004a). The absence
of a Code of Corporate Governance has worsened the situation further (Anonymous,
2004). Despite such widespread allegations of corporate malfeasance, no reported cases
have been found in this regard in Bangladesh. The Securities and Exchange
Commission (SEC) has so far lodged a total of 94 cases, none of which has been finally
disposed of as yet (Mahmud, 2004b).
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Investor
protection
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Journal of Financial Crime
Vol. 13 No. 4, 2006
pp. 467-492
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790610707582
The government has been striving in vain to promote investment by progressively
offering incentives to the investors and companies. As part of the governmental efforts,
the SEC unexpectedly introduced the Disclosure-based regulation (DBR) in January
1999 by discarding the previous paternalistic regulation to protect investors in the
market. This new regime has been adopted without any changes being made in
the liability provisions, although the disclosure regime entails clear and stringent legal
provisions for infringements of prospectus requirements. Such a situation requires a
searching reappraisal of prospectus liability regime and this endeavour is devo ted to
that pursuit.
“Good legal rules” are widely regarded as of paramount importance in all successful
examples of the development of securities markets (Johnson, 2002). A group of writers
namely, La Porta, Lopez-De-Silanes, Shleifer and Vishny (LLSV) have presented
perhaps the most cited recent literature in connection with investor protection. Their
empirical studies conducted by various teams covering numerous states of different
legal systems all over the world demonstrate that investor protection is very crucial for
the development of securities markets (La Porta et al., 1997, 1998, 2000a, b, 2002a, b;
Lopez-De-Silanes, 2002; La Porta and Lopez-De-Silanes, 1999, Shleifer and Wolfenzon,
2002, Shleifer and Vishny, 1997). Apart from these, there have been a good number of
studies which concur with LLSV (Glaeser et al., 2001).
This paper examines the prospectus criminal liability provisions in Bangladesh by
comparison with their equivalents mainly in India and Malaysia from the perspective
of investor protection. The securities markets in India and Malaysia have been
performing better than that in Bangladesh over the last decade. More appreciably, the
performance of the Malaysian market in recent years demonstrates a great success in
financing corporations.
As part of former British-India, Bangladesh has been notably following the legal
reforms being made in India in many respects including those regarding the securities
market. Bangladesh is very much similar to both India and Malaysia in respect of
social, economic and legal traditions (common law). All of these aspects are relevant to
the development of securities markets. Therefore, a comparison amongst these three
jurisdictions on prospectus liabilities can be drawn in search of flaws in Bangladeshi
laws.
In addition to these two foreign jurisdictions, the relevant legislation of some other
jurisdictions such as Australia, the USA (federal law), Arizona and Taiwan will also be
referred to on some occasions where the laws of Bangladesh, India and Malaysia will
be found flawed or inadequate. It is understood that the Bangladesh securities market
may not be compared with developed ones. However, these jurisdictions will be cited
especially in addressing the liability of market professionals and intermediaries for a
defective prospectus, where uniformity of securities law regardless of the level of
market development is highly desirable. The analysis relies much on judicial
observations of some developed common law jurisdictions mainly because of a serious
dearth of case law in Bangladesh, India and Malaysia.
It concentrates on the liability of individuals associated with the preparation of a
prospectus rather than the company itself. This is because, the remedies under crimin al
liability are usually either imprisonment or fine which comes as a penalty. A company
cannot be jailed, and fines have to be paid out from the fund of the entity in which the
shareholders have a legal residual claim. Fines will go to the relevant governme ntal
JFC
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