FRC tightens rules on converting share money into paid up capital

Mostafizur Rahman | Published: 23:02, Feb 12,2020


The Financial Reporting Council has tightened rules of company’s capital formation by directing companies to convert share money deposit into paid up capital within six months of depositing such fund in bank accounts and barring them from withdrawing the money.

The financial accounting regulator on Tuesday issued a directive in this regard to prevent anomalies with the share money deposit.

The non-compliant companies would face the music under the clause 48 of Financial Reporting Act 2015.

The Financial Reporting Council (FRC), an independent government regulatory body under the Financial Reporting Act (FRA) 2015. It is an organization under the aegis of the finance ministry.

The FRC regulates accounting, reporting, auditing and actuarial professions in Bangladesh.

According to the directive, the share money deposit received for increasing equity or paid up capital of a company must not be withdrawn or taking back at any means.

It also said that the received money must be converted into paid up capital within six months of deposit.

Besides, the share money deposit will be considered as potential share until its conversion into paid up capital, and the company must show the diluted earnings per share in the financial statement or impact of the new shares on EPS.

FRC executive director Mohammad Mohiuddin Ahmed told New Age on Wednesday that one of the prime reasons for the rise in non-performing loans in the country’s banking sector was wrongdoings with the share money deposit by companies.

Sometimes, company’s sponsor-directors deposited funds as share money deposit to show increase of equity of the company to the banks to take large amounts of loans against the equity, he said.

Company inflates valuation of asset like land or buildings to show a rosy picture in the financial statement, he said.

After taking the loans, the sponsor-directors of the company withdraws funds deposited earlier as share money deposit, which is against the clause 59 of the Company Act, he said.

Mohiuddin also said that the fraudulent activities with the share money deposit were also a prime reason for the distress the stock market was facing now.

He said that companies kept the share money deposit in the bank years after years without converting the money into paid up capital.

The guideline was issued with the aim of implementing effectively the definition of equity or capital as it is mentioned in the International Financial Reporting Standard accepted by the Financial Reporting Act 2015, he said.

Stock market operators said that allowing the issuance of a huge number of placement shares without proper inspection by the regulatory body hurt the capital market.

Ring Shine Textile, which has recently been listed on the stock exchanges, received Tk 275 crore as share money deposit in the period between 2006 and 2012 but the company converted the fund into paid up capital in 2018.

Before the conversion, the company showed in the financial statements that it had utilised the fund for business expansion.

Coppertech Industries was listed on the market amid huge criticisms as the media reported that the company allegedly engineered formation of paid up capital by withdrawing and depositing same amount of share money in the bank.

SS Steel issued placement shares worth Tk 210 crore in 2016 and a company has recently raised an allegation that SS Steel is trying to embezzle its placement shares worth Tk 9.9 crore shares.

The allegation has prompted the Bangladesh Securities and Exchange Commission to freeze around 1.8 crore placement shares of SS Steel Limited.

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