Impact Investing-Regulatory Development and Initiatives of the Dhaka Stock Exchange Limited

Regulatory Framework of Impact Fund in Bangladesh:

Under Bangladesh Securities and Exchange Commission (Alternative Investment) Rules, 2015

Rule-1(18)

“impact fund” means an alternative investment fund that invests in equity and equity-linked instruments of such companies, organizations, and funds which are engaged in activities with the intention to generate a measurable and beneficial social or environmental impact in addition to financial returns, as justified with internationally recognized criteria.

Rule-8 Formation and Types of Funds:

a.?????An alternative investment fund shall be constituted in the form of a trust under the Trust Act, 1882 (Act No. II of 1882) and registered under the Registration Act, 1908 (Act No. XVI of 1908).

b.????Before registration of the trust, the draft trust deed shall be approved by the Commission.

c.?????A fund shall be formed to make a particular type of investment and operate entirely in its respective investment arena only.

d.????A fund may be operated as a general fund or an Islamic fund.

e.?????An alternative investment fund shall have the following criteria:

??????????????????????????i.?????????minimum fund corpus shall be at least Tk.10,00,00,000.00 (taka one hundred million) and subscription by the sponsor(s) is not less than 10% (ten percent) of the corpus: provided that, the sponsors shall subscribe at least 20% of its total subscription to the fund before registration of the fund;

????????????????????????ii.?????????minimum investment by the fund manager shall be at least 2% (two percent) of the fund corpus:

provided that, if the fund manager also acts as sponsor of a fund, this investment shall be made in addition to its investment as sponsor of the fund;

??????????????????????iii.?????????along with its connected persons, the fund manager shall not hold more than 25% (twenty-five percent) of the units of a fund at any point of time.

??????????????????????iv.?????????The sponsor(s) shall maintain a continuous investment of not less than 2.5% (two and half percent) of the fund corpus.

????????????????????????v.?????????An alternative investment fund shall declare, to the unit holders, cash dividends only.

??????????????????????vi.?????????All investments in a fund shall be locked in for a period of 03 (three) years from the date of issuance of units.

?????????????????????vii.?????????The fund manager and sponsors shall disclose their investment in the alternative investment fund to the Trustee when the investment is made and to the investors

?through annual reports.

Rule-9 Registration of alternative investment funds.

The fund shall have the following eligibility criteria for registration, namely:

a.?????The fund is formed as a trust;

b.????the trust deed permits it to carry on the activities of an alternative investment fund;

c.?????The fund is prohibited by the trust deed from making an invitation to the public to subscribe to its units;

d.????the trust deed is prepared in accordance with Schedule ‘D’;

e.?????the key investment team of the fund manager have adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools

of capital or fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualification;

f.?????the fund manager and the Trustee are registered by the Commission under these Rules;

g.????the fund manager has necessary infrastructure and manpower to effectively discharge its duties;

h.????the investment objective, the target investors, proposed corpus, investment style or strategy and proposed tenure of the fund are clearly described in the application; and

i.??????the sole object of the fund is to carry out activities in furtherance of the interest of the unit holders, in accordance with the strategy stated in the constitutive documents

Rule-17 Investment in a fund

Investment in a fund: The fund manager may raise capital for a fund from eligible investors through issuance of units in accordance with the following conditions:

a.?????the funds shall be raised from eligible investors only whether resident or non-resident Bangladeshi or foreign by way of issuance of units upon realization of the subscription;

b.????the proposed fund corpus shall be disclosed in the constitutive documents;’

c.?????the minimum subscription to the units of a fund shall be Tk.50,00,000.00 (taka five million) by each investor;

d.????only the eligible investors shall be approached to subscribe to the fund;

e.?????the offer shall be made through a placement memorandum to subscribe through private placement only; no public offer shall be allowed;

f.?????every eligible investor shall be provided with copies of the placement memorandum and other constitutive documents; and

g.????no alternative investment fund shall be subscribed by more than 200 (two hundred) investors.

18. Investment conditions and restrictions

All investments from the investible fund shall be made subject to the following conditions:

a.?????the fund manager shall make such investments which are in conformity with the investment and fund management guidelines;

b.????the investible fund shall not be invested with a connected person of the fund manager or the Trustee;

c.?????Investment parameters

??????????????????????????i.?????????at least 75% (seventy-five percent) of the fund corpus shall be invested in non-listed securities of portfolio companies:

provided that, in case of delay of such investment, the

unused portion of realized fund may be invested in money

market instruments up-to a period of maximum 01 (one) year;

????????????????????????ii.?????????maximum 25% (twenty five percent) of the fund corpus may

be invested in listed securities and units of alternative investment funds managed by other fund managers, of which maximum 10% (ten percent) of the fund corpus may be invested in money market instruments: provided that, investment in a single listed securities shall not exceed 5% (five percent) of the fund corpus;

??????????????????????iii.?????????no alternative investment fund shall invest more than 25%

(twenty five percent) of the fund corpus in a single non-listed portfolio company;

??????????????????????iv.?????????The above investment restrictions shall not be applicable in case of buyouts by a private equity fund;

????????????????????????v.?????????investment of an alternative investment fund in non-listed

portfolio companies shall be made only in equity and equity linked instruments but shall not invest in pure debt securities nor provide any loan;

Impact investing prospects in Bangladesh

Impact investing is described as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return, that can be below market-to-market rate, depending on the investors' strategic goals. In fact, according to a 2020 survey by the Global Impact Investing Network (GIIN), the market size for impact investing increased from USD 502 billion to USD 715 billion between 2018 and 2020.

Impact investments have a critical role to play if the country, and in fact, the world, is to achieve the SDGs by 2030. Achieving the SDGs by 2030 will take an estimated USD 5 to USD 7 trillion per year, with a financing gap of USD 2.5 trillion globally. For Bangladesh, the financing gap stands at nearly USD 928 billion.

Some notable impact investments in Bangladesh over the years include funding raised by bKash, Chaldal, Shop Up, Solshare, iFarmer, and Shuttle from primarily international organizations such as the Bill and Melinda Gates Foundation, IIX Impact Partners, UNCDF, and Biniyog Briddhi.

Impact Investing:

Impact investments as investments made in companies or organizations with the intent to contribute measurable positive social or environmental impact, alongside a financial return. Investments may be made into the full range of public and private assets, as long as by doing so the investor contributes to achieving impact. Specifically, the definition encompasses three observable attributes of impact investors that can distinguish them from other investors.

Intent. The investor articulates an intent to achieve a social or environmental goal by identifying outcomes that will be pursued through the investment, and specifying who will benefit from these outcomes.

Contribution. The investor follows a credible narrative, or thesis, which describes how the investment contributes to the achievement of the intended goal—that is, how the actions of the impact investor will help achieve the goal. In this case, the contribution is considered at the level of the impact investor and can take financial or non-financial forms.

Measurement. The investor has a system of measurement in place linking intent and contribution to the improvement in social and environmental outcomes delivered by the enterprise into which the investment has been made. The measurement system enables the investor to assess

Why Does it Matter?

The potential to make a difference in global development challenges such as poverty, inclusion, and climate change is why the global development community is supporting the growth of impact investing. Indeed, by making a difference, impact investment has the potential to mobilize additional resources, and potentially generate additional momentum toward achieving the 2030 Agenda for Sustainable Development. While not all impact investments will have an equal impact, continued development of the industry improves the prospects for achieving the SDGs.

Looking Ahead: The Future of Impact Investing

First, a new set of operating principles for impact management represents an important step in bringing clarity and discipline to managing investments for impact. Developed by IFC in concert with other DFIs, asset managers, and asset allocators, the principles establish a shared understanding of the key elements of the process through which an investor integrates impact considerations with financial considerations at each stage of the investment process, and with independent verification. As more and more impact investors commit to following the principles in their operations, this will bring greater transparency to how investment funds are managed, build trust in the market, and help investors to identify the funds, institutions, and asset managers that pursue impact in a disciplined way.

Second, the adoption of uniform standards for measurement frameworks and tools will bring greater transparency and comparability to the performance of impact investments. The growth of impact investing places greater demands on companies to measure and report on their impact, and to consider the potential positive and negative impacts of their investment decisions. Initiatives to strengthen impact reporting by firms such as the Global Reporting Initiative will help provide investors with the information they need to assess impact. And uniform standards will enable the industry to better compare the effectiveness of impact strategies. As the amount of money managed for impact increases, companies that can provide this information will have an advantage in raising capital. There is a shared agenda now to build the evidence base for demonstrating the social and environmental impacts of investments.

About Dhaka Stock Exchange

Dhaka Stock Exchange Limited (“DSE”), founded in 1954, is the leading exchange of Bangladesh with around 95% of the total market turnover. Since its inception, DSE has been contributing to the country’s industrialization, development of infrastructure, and overall economic growth. DSE introduced the automated trading system in 1998. In line with the global trend and with a vision to be a leading exchange in the region, DSE transformed into a demutualized exchange in 2013. In 2018, DSE got two leading exchanges in the world- Shenzhen Stock Exchange and Shanghai Stock Exchange as its strategic shareholders. At the end of April 2023, the DSE recorded about USD 70 billion market capitalization of listed companies, 355 Listed companies, 245 Government securities, 36 mutual funds, 8 debentures and 9 corporate bonds, and 1 Sukuk in main Board, 15 listed companies in SME Board and 2 listed securities in ATB Board. The number of registered investor accounts has reached 1.9 mn million, while the number of DSE TREC Holders (brokerage firms) is 308.

DSE maintains a strong association with different forums of exchanges and market regulators around the world. DSE is a full member of the World Federation of Exchanges and an active member of the South Asian Federation of Exchanges. DSE is a partner exchange of the United Nations Sustainable Stock Exchanges Initiative, the OIC Exchange Forum, and the Asian and Oceanian Stock Exchange Forum. DSE and GRI have a non-exclusive collaboration agreement to build further commitment and awareness to provide guidance to listed companies on Environmental, Social, and Governance disclosure in Bangladesh.

Collaboration between GRI and Dhaka Stock Exchange to drive uptake of sustainability reporting in Bangladesh

As part of a larger effort to closely work with stock exchanges and regulators in the region and create a conducive environment for large companies to report on their sustainability impacts and contribute to a more sustainable trade, in 2017 GRI South Asia and the Australian Government’s Department of Foreign Affairs and Trade (DFAT) renewed their cooperation with the Sustainable Trade and Investment Through Reporting (STIR) Programme. In what followed, an agreement with the Dhaka Stock Exchange (DSE) was signed to sensitize companies and regulators to sustainability reporting with the world’s most widely used sustainability disclosure standards –the GRI Standards. In collaboration with GRI, DSE launched the Guidance on Sustainability Reporting for listed companies in Bangladesh.

What to expect from GRI and DSE Program?

The GRI and DSE joint Program is designed to assist the reporters on their sustainability reporting journey through a series of workshops and sessions that cover a wide variety of reporting aspects, such as identifying the most relevant topics for disclosure, engaging the stakeholders involved, preparing the content of the report, etc.

The GRI and DSE Program can provide invaluable guidance and practical support on the development of sustainability reports using the world’s leading sustainability disclosure standards –the GRI Standards.

DSE Initiatives regarding Impact Investing:

GRI Reporting and Impact Investing:

Dhaka Stock Exchange Limited (“DSE”), the third largest exchange in South Asia, has contributed to the country’s industrialization, infrastructure development, and overall economic growth. To keep this development progress, formulation of sustainability into listed companies’ operations and developing a sustainability reporting standard is very important. While there are a variety of ESG factors at play at any given time, it is unquestionable that many of these factors impact the ability of companies and their investors to achieve sustainable growth and prosperity.

A listed entity should disclose whether it has any material exposure to economic, environmental, and social sustainability risks and, if it does, how it manages or intends to manage those risks. This Guide is designed to complement the reporting requirements of prevailing rules and regulations. For the purpose of corporate sustainability reporting, all the stakeholders related to Bangladesh’s capital market need to be included in the preparation of the report. A uniform reporting practice for all companies to ensure transparency, better regulation, and progress towards sustainability organization needs first a long-time strategy and success. From the regulatory point of view, DSE will play a vital role in monitoring the sustainability report and impact investing through which listed companies’ economic, environmental, and social impacts and decisions will be reflected. We look forward to continuing improvements in sustainability disclosure in corporate reporting in Bangladesh. At present more than 50 companies are reporting financial statements as per GRI standards which is included ESG and sustainable investment. DSE is planning to publish upcoming annual report based on GRI standard.