Financial Market in Bangladesh

Background of the Report

As a Part of our course, we have conducted this report preparation. This report was authorized by our course tutor Tanzina Hossain, Assistant Professor, as a report to be submitted on 02 August 2013.   I have made a detailed analysis on our assigned topic– Financial Market in Bangladesh and its past & present conditionsI have provided their sincerity and serious effort to prepare this report.

Objective of the Report

The main objectives of this study are as follows:

  • To fulfill the partial requirements of BBA program
  • Achievement of practical knowledge with theoretical base.
  • To know the past and present situation in capital market.
  • To find out the causes of the recent capital market crisis.
  • To figure out the consequent impact of this crisis in Bangladesh Economy.
  • Identification of the different factors affecting investment decisions.

Scope

The study was wide spread and has greater scope to focus on different aspect of investors’ decision in the capital market.

Methodology

For preparing the report the following methodology is adopted.

Collection of data:

This report is an exploratory and descriptive one in nature. Among primary and secondary source most of the data has been collected from the secondary sources.

Secondary sources of information:

  • Annual reports
  • Journals
  • Newspapers.
  • Internet
  • Security & exchange commission
  • Dhaka Stock Exchange.
  • Different Merchant Banks & Brokerage Houses in Dhaka Stock Exchanges.

Segregation of data

Collected data were segregated from the source material for the purpose of preparing report.

Processing of data

Collected data were compiled and processed for the purpose of preparing the report.

Presentation of data

Collected data were compiled in tables and presented in the body of the report.

Limitations

There are some limitations of this paper. But these limitations represent only the facts that really hampered the quality of report. We did not have access to all types of recent data. Again, some site were restricted Despite all these limitations, we have given the best of our efforts and tried to make the report as informative and as comprehensive as possible.

There is high degree of variations in the available market statistics produced by different sources which often put the report in a dilemma on determining the level of authenticity of the data collected.

An Overview of Capital Market in Bangladesh

Capital market is a mechanism to flow fund from the hands of small savers (individuals and institutions) at low costs to those entrepreneurs who do need fund to start business or to business. In the other words, capital market mechanism gives a part ownership of big companies/corporations to small savers like you and me. In simple term, it is a globally accepted scheme to share ownership of economic development with general public. Bangladesh capital market is one of the smallest in Asia but the third largest in the south Asia region. It has two full-fledged automated stock exchanges namely Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) and an over-the counter exchange operated by SEC. It also consists of a dedicated regulator, the Securities and Exchange Commission (SEC), since, it implements rules and regulations, monitors their implications to operate and develop the capital market. It consists of Central Depository Bangladesh Limited (CDBL), the only Central Depository in Bangladesh that provides facilities for the settlement of transactions of dematerialized securities in CSE and DSE. Dhaka Stock Exchange was set up on 28th April, 1954 that started formal trading on early 1956.Post–independence government did not promote a capital market during the first five years, and it was activated again in 1976 with 9 issues on board. In 1995, a second bourse, the Chittagong Stock Exchange, was set up with sophisticated logistic support and modern management. Two stock exchanges exist in Bangladesh

  • Dhaka Stock Exchange (DSE)
  • Chittagong Stock Exchange (CSE)

One investor must know about these markets before he/she goes for an investment. To make this report more understandable and specific, we will only focus on Dhaka stock market.

 “The stock market is an important ingredient of the financial system in Bangladesh. It is an important avenue for channeling funds to investors through mobilizing resources from individuals. In view of the rapidly increasing role of the stock market, volatility in stock prices can have significant implications on the performance of the financial sector as well as the entire economy. There exists important link between stock market uncertainty and public confidence in the financial market. The policy makers usually rely on the market estimate of volatility as the barometer of the vulnerability of the stock market. Stock return volatility represents the variability of day-to-day stock price changes over a period of time, which is taken as a measure of risk by the relevant agents. High volatility, unaccompanied by any change in the real situation, may lead to a general erosion of investors’ confidence in the market and redirect the flow of capital away from the stock market. Excessive volatility also reduces the usefulness of stock price as a reflector of the real worth of the firm. Volatility, however, is not an evidence of irrational market behavior or inefficient markets. Stock return volatility is usually asymmetric in its response to past negative price shocks compared with the positive shocks, but what factors drive volatility over time is not clear. Moreover, increase in firm-specific risk appears to adversely affect its stock valuation. This note analyzes the volatility in stock Research return in the Dhaka Stock Exchange (DSE) during 2003-2007 and draws some policy implications.”

 Dhaka Stock Exchange (DSE)

Dhaka Stock Exchange (Generally known as DSE) is the main stock exchange of Bangladesh. It is located in Motijheel at the heart of the Dhaka city. It was incorporated in 1954. Dhaka stock exchange is the first stock exchange of the country. As of 9 December 2009, the Dhaka Stock Exchange had 671 listed companies with a combined market capitalization of $34.2 billion.Dhaka Stock Exchange (DSE) is a public limited company. It is formed and managed under Company Act 1994, Security and Exchange Commission Act 1993, Security and Exchange Commission Regulation 1994, and Security Exchange (Inside Trading) regulation 1994. The issued capital of this company is Tk. 500,000 which is divided up to 250 shares each pricing Tk. 2000. No individual or firm can buy more than one share. According to stock market rule only members can participate in the floor and can buy shares for himself or his clients. At present it has 230 members. Market capitalization of the Dhaka Stock Exchange reached nearly $9 billion in September 2007 and $27.4 billion in Dec 9, 2009.”

Functions

  • Listing of Companies. (As per Listing Regulations)
  • Providing the screen based automated trading of listed Securities.
  • Settlement of trading. (As per Settlement of Transaction Regulations)
  • Gifting of share / granting approval to the transaction/transfer of share outside the trading     system of the exchange (As per Listing Regulations 42)
  • Market Administration & Control
  • Market Surveillance
  • Publication of Monthly Review
  • Monitoring the activities of listed companies. (As per Listing Regulations)
  • Investor’s grievance Cell (Disposal of complaint bye laws 1997).
    Investors Protection Fund (As per investor protection fund Regulations 1999)

Announcement of Price sensitive or other information about listed companies through online.

Dhaka Stock Market Performance

Performance of DSE at a glance

Years

 

2007

 

2008

 

2009

 

2010

 

2011

 

Listed Issues

No. of Securities

350

412

415

445

501

% of Annual Growth

12.90

17.71

0.73

7.23

12.58

No. of Securities in mn

2081.00

2759.00

4625.00

14558.00

31844.31

% of Annual Growth

21.83

32.58

67.63

214.77

118.74

Issued Capital & Debentures

-Tk. mn

214472

372156

522129

666460

878905.14

-US$ mn

3127.33

5409.24

7548.49

9435.93

10980.82

% of Annual Growth

81.09

73.52

40.30

27.64

31.88

Market Capitalisation

-Tk. mn

742195.87

1043799

1903228.1

3508005.8

2616730.54

-US$ mn

10822.34

15171.50

27515.22

49667.36

32692.79

% of Annual Growth

135.28

40.64

82.34

84.32

-25.41

Conversion Rate

68.58

68.80

69.17

70.63

80.04

Turnover of Listed Securities

Total Turnover

Volume in mn

2831.23

4605.38

7973.08

16974.52

16967.15

Value (Tk. mn)

322867.07

667964.82

1475300.88

4009912.67

1560912.09

Value (US$ mn)

4707.89

9708.79

21328.62

56773.51

19501.65

% of Annual Growth

396.11

106.89

120.87

171.80

-61.07

Daily Average Transaction

Volume in mn

11.95

19.43

32.68

69.57

72.2

Value (Tk. mn)

1362.31

2818.42

6046.32

16434.07

6642.18

Value (,US$ mn).

19.86

40.97

87.41

232.68

82.99

% of Annual Growth

377.28

106.89

114.53

171.80

-59.58

 

Initial Public Offcring(IPO)

NO.of Public Issues

14

12

18

18

14

Size of Public Offer

~Tk. mn

4638.13

3043.41

8917.26

11860.82

19914.15

-US$ mn

67.63

44.24

128.92

167.93

248.80

% of Annual Growth

223.45

-34.38

193.00

33.01

67.90

Size of Pre IPO Placement

-Tk. mn

1540.00

800.00

3680.56

8251.51

3265

-US$ mn

22.46

11.63

53.21

116.83

40.79

% of Annual Growth

949.62

-48.05

360.07

124.19

(60.43)

Public Subscription

-Tk. mn

37937.06

37821.71

92828.05

109553.2

74,064.81

-US$ mn

553.18

549.73

1342.03

1551.09

925.35

% of Annual Growth

148.90

-0.30

145.44

18.02

(32.39)

Over Subscriptions Times

-Value (Tk. mn)

8.18

12.43

10.41

9.24

3.72

% of Annual Growth

(22.98)

51.96

(16.25)

(11.24)

(59.74)

 

2.3 Chittagong Stock Exchange

BACKGROUND

The  Chittagong  Stock  Exchange  (CSE)  began  its  journey  in  10th  October  of  1995  from Chittagong City through the cry-out trading system with the promise to create a state-of-the art bourse in the country. Founder  members  of  the  proposed  Chittagong  Stock  Exchange  approached  the  Bangladesh Government  in  January  1995  and  obtained  the  permission  of  the  Securities  and  Exchange Commission on February 12, 1995 for establishing the country’s second stock exchange. The Exchange  comprised  of  twelve  Board  members,  presided  by  Mr.  Amir  Khosru  Mahmud Chowdhury (MP) and run by an independent secretariat from the very first day of its inception. CSE was formally opened by then Hon’ble Prime Minister of Bangladesh on November 4, 1995.

MISSION

The Chittagong Stock Exchange believes that a dynamic, automated, transparent stock exchange is needed in Bangladesh. It works towards an effective, efficient and transparent market of international standard to serve and invest in Bangladesh in order to facilitate the competent entrepreneurs to raise capital and accelerate industrial growth for overall benefit of the economy and keep pace with the global advancements.

OBJECTIVES

  • Develop a strong platform for entrepreneurs raising capital;
  • Provide a fully automated trading system with most modern amenities to ensure: quick, easy, accurate transactions and easily accessible to all;
  • Undertake  any  business  relating  to  the  Stock  Exchange,  such  as  a  clearing  house, securities depository center or similar activities;
  • Develop a professional service culture through mandatory corporate membership;
  • Provide an investment opportunity for small and large investors;
  • Attract non-resident Bangladeshis to invest in Bangladesh stock market;
  • Collect preserve and disseminate data and information on stock exchange;
  • Develop a research cell for analyzing status of the market and economy.

 Importance of Stock Market in Bangladesh

One of the most burning questions today is what the use of the capital market is and why the government should get involved to stabilize the market. Why should we care about the prospect of the market, if it does not contribute to our economy? Apparently, it seems that stock market does not keep any connection with the economy. But this market offers a great opportunity for the whole economy if we can grab it properly: Firstly, the companies can arrange their long term capital for business expansion from market with a minimum cost. The banks are suitable only for short term and mid term financing. Secondly, the companies listed in the stock market come under regulation of Securities and Exchange Commission, which ensures the corporate governance of the companies. The financial statement of listed companies is quite informative and valuable than unlisted companies. Thirdly, the most important factor is that stock market can attract investment. People reduce their consumption and invest here to earn better in future. Fourthly, stock market can finance huge fund for large projects easily. Finally, stock market is considered as the barometer of economy. An efficient stock market is the leading indicator of the economy.

How volatile Bangladesh’s Stock Market is?

According to the famous Capital Asset Pricing Model, Market return, proxies by return from a broad-based market index should be related to the risk associated with macroeconomic health of the an economy as the later affects an individual firm’s cash flows and the systematic risk component. Therefore, the overall performance of Macroeconomic condition of a firm in terms of its contribution to the market portfolio return, in turn, can be evaluated based on some macro variables like GDP growth, inflation, etc. As far as a risk adverse investor is concerned, uncertainty is the most important factor in pricing any financial asset. According to most asset pricing theories, uncertainty or risk is determined by the covariance between asset return and the market portfolio. Although it has been recognized for quite some time that the uncertainty of speculative prices, as measured by the variances and covariance, is changing through time, it was not until recently that financial economists have started explicitly modeling time variation in second- or higher order moments. Sufficient evidences are still to come from emerging markets like the Dhaka Stock Exchange (DSE) in Bangladesh. Their paper showed how predicted macroeconomic volatility is related to the predicted stock market volatility in Bangladesh. “Results showed that the relation between stock market and macroeconomic variables is not strong. It was also found that industrial production volatility Granger-causes stock market volatility and stock market volatility Granger-causes inflation uncertainty (volatility). However, in the absence sufficiently large number of investors and analysts in Bangladesh capital market, it might have reflected the investors’ reaction in reverse direction. The dearth of qualified analysts and institutional investors is a well-known fact in the emerging markets like the one in Bangladesh.”

Current situation of the investors

–      Most of the investors invest in the market based on their surrounding’s information

–      Most of them have hard that the market is quite profitable.

–      Most of them have heard that earning profit is quite easy and academic knowledge is not that much necessary. All they need to do is to stay in the market for few  days

–      Most of the investors are highly risk averse or they take risk without knowing about the market situation correctly and accurately

–      Information is manipulated frequently

–      Market is above average volatile

–      Young investors are increasing in number

–      The craze of investing in the stock market is spreading all over the country

–      Number of brokerage house has been increased so fast

–      Process to be a part of the investment in the market is getting more and more hazardous and lengthy

 Market Capitalization Ratio

Between FY 1995-96 and FY 2008-09, market capitalization stayed between 4 to 20 percent. In FY1995-96, the rate of market capitalization was 4.77 percent while in FY 2004-05, it reached at 5.72 percent. After this period, the rate of market capitalization increased at a smooth rate and in FY 2008-09; the market capitalization ratio reached at 16.29 percent. But after that year, market capitalization ratio doubled than that of the previous year and reached at 32.79 percent in FY2009-10 and finally in FY2010-11, the market capitalization rate became 29.55 percent.

GDP and market capitalization have not displayed any significant correlation (Figure 2). That is, the size of market capitalization has not shown any relationship with GDP. The percentage change in GDP at current price has a smooth shape while the percentage change in market capitalization has shown an erratic trend. In FY 1996-97, the percentage change of market capitalization was 33.26 whereas the percentage change of GDP at current price was 8.64 percent. Again in FY 2001-02, the percentage change of market capitalization was -9.82 percent whereas the percentages change of GDP at current price was 7.75 percent. And finally in FY 2010-11, the percentage change of market capitalization is 2.22 percent while the percentage change in GDP at current price is 13.42 percent.

Market Capitalization and Investment Ratio

From FY 1995-96 to FY 2006-07, the market capitalization and investment ratio has stayed between 10 to 35 percent. Following that fiscal year the scenario has been changed significantly and the ratio of market capitalization and investment has increased with a maximum growth, indicating the huge accumulated concentration in capital market than those of other forms of investment. In FY 1995-96 the market capitalization and investment ratio was 23.86 percent which increased with a growth rate of 1.12 percent in following year and reached 35 percent. In FY 2007-08, the market capitalization and investment ratio increased to 59.69 percent, 70.54 percent higher than previous fiscal year. This increasing rate has prevailed in FY 2009-10 and FY 2010-11 and the market capitalization and investment ratio were 134.29 and 119.46 percent respectively. These indicate that in these years the market capitalization exceeded the total investment of the economy.

TURNOVER

Turnover equals the value of total shares traded divided by market capitalization. High turnover is often used as an indicator of high level of liquidity. Turnover also can be used as complements of total value traded ratio. While total value traded and GDP ratio capture trading compared with the size of the economy, turnover measures trading relative to the size of the stock market. Therefore a small, liquid market may have a high turnover ratio but with a small total value traded and GDP ratio.

In FY 1995-96, the turnover of DSE was Tk. 819.91 crore while in FY 1996-97, it reached at Tk. 6541.35 crore. ‘Fake’ demand mechanism during this period has led the general index price to move vertically and hence increased the liquidity of capital market.  But the following year in FY 1997-98, the turn over reduced at a significant rate and a total of Tk. 5279.66 crore fell short from the previous fiscal year and the turn over became Tk. 1261.69 crore. In FY 2005-06, the turnover was Tk. 4599.36 crore. In FY 2009-10, the turnover again increased dramatically and reached at Tk. 256353.55 crore.

The extent of ups and downs in turnover of capital market mainly depends on economic environment and some others factors such as short term increase in profit in capital market than those of other economic activities. In calendar year 1996, the sudden increase in general index made the temptation to the people and it also has induced people to invest more in capital market. Therefore in FY 1996-97, the turnover increased by 697.81 percent than the previous fiscal year. But ‘game planner’ has achieved the goal and reduced the turnover by 80.71 percent than that of the previous fiscal year. The turnover increased dramatically from FY 2008-09 to FY 2009-10; in this period the turnover increased about 186.81 percent than that of previous fiscal year and became Tk. 256353.55 crore. The turnover as well as liquidity of capital market started to fall in FY 2010-11. The present economic adverse condition together with the contra dictionary monetary policy may cause a negative impact on turnover and liquidity of capital market may go down in near future.

CAPITAL MARKET SIZE

One of the important indicators of the capital market is the number of listed companies.  The rationale of including this measure is that as the number of listed company increases, available securities and trading volume also increases. In basis of Bangladesh Economic Update, October 2011.

In FY 1990-91 the number of listed companies of DSE was 149 and finally in FY 2010-11, the listed companies of DSE stood at 268. The properties of the companies, the companies are divided into five groups; A, B, G, N and Z. The properties of these companies are shown in the table below.

The number of listed companies has grown from 149 to 268 with an average annual growth rate of 2.99 and a standard deviation of 43.39 from fiscal year 1990-91 to FY2010-11. In FY 1990-91 the number of listed companies of DSE was 149 while in FY 2001-02, the number of listed companies was increased to 248 and finally in FY 2010-11, the listed companies of DSE stood at 268.

The descriptive statistics of total listed companies in DSE shows that the minimum and maximum numbers of listed companies of DSE were 149 and 300 respectively with an average mean value of listed companies was 232 based on the last twenty two years information. The standard deviation of the number of listed companies was 43.39.

 Growth of Listed Number of Companies

Over the time, the number of listed companies of DSE was following both positive and negative growth. In FY 1991-92, the numbers of listed companies increased by 2.68 percent while in FY 1994-95 the number of listed companies decreased by 4.47 percent. In FY 2009-10, the number of listed companies of DSE decreased from 300 to 273, about 9 percent less than that of the previous fiscal year. And finally in FY 2011-12, the number of listed companies declined to 268.

 SECTOR WISE PERFORMANCE

In FY 2010-11, there was an upward trend in terms of sector wise performance; all sectors experienced an upward trend with a few exception. On the basis of market capitalization of ordinary shares of companies listed with DSE, total market capitalization of banking sector in FY 2010-11 was Tk. 68061.9 crore which was 5.67 percent higher than that of previous fiscal year. In this fiscal year total market capitalization of mutual fund was Tk. 3595.5 crore; 32 percent higher than that of previous fiscal year. In general the investment in mutual fund is normally assumed to safe investment due to volatility in capital market but the market capitalization of mutual fund was comparably lower than other sector. In FY 2010-11 the market capitalization of fuel and power sector was Tk. 28931.4 crore which was 4 percent lower than that of previous fiscal year on the other hand the market capitalization growth of insurance sector accumulated 32.28 percent in terms of previous fiscal year. But real sector components of economy such as jute industry although gained a positive market capitalization growth but the total market capitalization were lower and in last fiscal year it was only Tk. 79 crore. Telecommunication sector started it activities in capital market in FY 2009-10 with a total market capitalization of Tk. 31826.6 crore.  But in the following fiscal year, the market capitalization of this sector dropped down about 30.46 percent and became Tk. 22131.4 crore.

In terms of sector wise composition of the financial sector including banks, investment and insurance continues to hold the majority share in total market capital capitalization. In FY 1995-96 the major contribution of market capitalization were engineering (22%), pharmaceuticals (13%), food and allied products (11%), banks (11%) and insurance (7%). In this period the major market contribution of market capitalization was mainly depended on those sectors which have direct influence on the real sector of the economy.

In FY 2001-02, the major sector wise contribution of market capitalization has significantly differed from the previous time trend. In this fiscal year the major market contribution in terms of market capitalization was banking sector. About 30 percent market capitalization has contributed by only single banking sector. All the other sectors like engineering, food and allied products, pharmaceuticals and fuel and power have less contribution in market capitalization. The sectors which can directly influence the real sector have contributed less than that of previous time and the growth of financial sector of market capitalization process has increased significantly.

The financial market contribution in capital market in terms of market capitalization has increased significantly in FY 2010-11. In this year the banks, insurance including mutual funds have jointly contributed 53 percent of market capitalization whereas pharmaceuticals and chemicals, textile industries, food and allied products and engineering have jointly contributed 21 percent of total market capitalization. The short term larger profit of financial sector has induced the investors to make a larger investment in financial sector than those of real sectors. Therefore in short run the profit has been maximized but in the long run it can make a disturbing effect on the economy which has already been observed through capital market downward trend and zero recovery in the capital market in this year.

CAPITAL MARKET CONDITION IN 1996

There was a huge surge in the stock market in 1996 evidenced by an enormous increase in the market capitalization. Total annual turnover and daily average turnover in DSE general index increased from 775.65 in January 1996 to 3064 in November, 1996.  After an increase in the general index of DSE for a short period, the index started to fall down dramatically and in December 1996, the index fell down to 2300.15. The short time ‘game plan’ made the investors to invest more in the capital market but when this ‘game plan’  achieved its goal;  the confidence of the investors was significantly damaged because of excessive speculations, allegedly aggravated by widespread irregular activities. This fall down of general index of DSE continued over the calendar year of 1997. In April 1997, the general index of DSE was 957.48 while in December 1997 it fell down to 756.78.

The percentage change in monthly closing index of DSE during capital market clash of 1996 shows that the price volatility of this market structure. The index took only three months to reach the Bangladesh Economic Update, October 2011. In July 2009 the general index of DSE was 2914.53 while in November 2010 it increased to 8602.44.peak and short run game plan indicated that a carted of investors probably was engaged in this game. The change of general index of DSE remained between 1 to 10 percent during January 1995 to June 1996 but in July 1996 the index increased by about 20.55 percent than previous month and in September 1996 and October 1996 the index increased by 38.8 and 76.67 percent respectively and then it started to fall down and in December 1996 and March 1997, the general index of DSE fell down to 24.95 and 32.24 percent respectively.

THE CAPITAL MARKET SCENARIO IN 2011

The trend of general index of DSE during July 2009 to August 2010 shows that the general index of DSE has increased smoothly. In July 2009 the general index of DSE was 2914.53 while in April 2010 it increased to 5654.88. During this time period, there was an increasing trend of general index. In August 2010 the general index of DSE stood at 6657.97 and finally in November 2010, it reached the peak and became 8602.44. After this general index has started to fall down and in February 2011 it reached to 5203.08.

The percentage change of general index of DSE in 2011 suggests a different situation than that of the capital market downturn in 1996 because the market volatility of DSE was created long before the nose dive of the capital market during 2011.  In November 2009, the general index of DSE increased about 30.22 percent than the previous month. During the consecutive twelve months the general index has risen on an average of 1 to 12 percent per month. This steady growth of the capital market index made a greater confidence among general investors of capital market. There was no greater market price volatility of general index, as a result a continue trend of a greater profit induced general investors to reinvest their profits along with additional capital. The ‘long term game planners’ have again won the game by selling the shares they have collected resulting in increased supply of shares, forcing the general index to fall. In December 2010 the general index started to fall by 3.62 percent than previous month. In February 2011, it decreased about 30.5 percent and reached at 5203.08. This declining trend of general index of DSE was continued and finally in 15 November 2011 it dropped down to 4645.89 (lowest in last 22 months).

The percentage change of general index during the downward trend of capital market in 2011 suggests a crafted long term ‘game plan’. By creating a artificial demand and sustaining it for a long time they made a strong confidence in investors.

Reasons of Recent Catastrophe in Stock Market

The Government

It is natural from micro point of view that an individual will plan his investment on the basis of fiscal policy of the government which is expressed through the annual budget in the Parliament. Similarly from the macro point of view, it is important to through light on future national economic policy by means of budget. So, it is obvious that everybody will look for a clear indication of the government plan regarding the activities of a fiscal year including its thinking about capital market. Thus, government plays an important role in the growth of capital market. But unfortunately, the government failed to do so in the recent years which brought the mighty blow on the stock market. In the fiscal year 2010-2011 the government has taken some risky decisions which helped to create a bubble in the market. Such decisions included the reduction of interest rate, imposing tax on Government Saving Certificates, providing facilities to enter black money in the stock market and so on. It is worth mentioning that both of the big plunges of 1996 and 2010 have been followed by the permission of whitening the black money through stock market. Moreover, the government has changed several regulations through SROs and other ways which brought the ailing fruits.

 Bangladesh Bank

Bangladesh Bank as the regulatory body of financial market has the responsibility to materialize the plan of the government regarding financial market through controlling the activities of Banks and other financial institutions (Merchant Banks, Insurance Companies, Mutual Funds and Non-Banking Financial Institutions). Paradoxically Bangladesh Bank has failed to control the activities of financial market throughout the 2010-2011 fiscal years. During that period, most of the banks and their merchant banking wings invested in the stock market without following any rule. Even in some cases they invested money in capital market which they ought to invest in other industrial sectors. Bangladesh Bank did not take steps to abstain them from such activities up to the last month of 2010. But all on a sudden it realized the results of such unproductive investments and in December, 2010 it forced the banks to readjust its investments. Through a circular in December 2010, Bangladesh Bankincreased Cash Reserve Requirements (CRR) from 5.5% to 6.00% and Statutory Liquidity Ratio (SLR) from 18.5% to 19.00% the obvious result of which was the liquidity crises. As a resulta huge sales pressure helped the acceleration of the pace of the slump of capital market. “The small investors think that the Bangladesh Bank and the Securities and Exchange Commission are responsible for the stock market crash in an unholy alliance with the corporate culprits and the bankers believe the central bank is holding back and creating the liquidity pressure in the market. Some bankers feel the central bank is more interested in dabbling in ‘esoteric banking’ and has touch with the real world”. (Ali, M.A, 2011).

 Security and Exchange Commission (SEC)

Security and Exchange Commission (SEC) is the supreme regulatory body of capital market. So, it must have a formal plan of actions to regulate the activities of stock market. But ironically its failure in doing so is a matter of shame. Though it needs to impose rules considering the future growth, it became a kind of joker by frequently changing its own decisions because in 2010, the SEC issued 81 notifications, circulars and directives, of which 32 were related to the changing of margin loan ratio. The regulator revised the loan ratio from time to time although the changes in the ratio were made following the unusual rise and fall (Mufazzal, 2012). Even it has record of changing own decision within an hour of making it. It had to undergo a lot of criticism when its members made some very sensitive decision whimsically. The main reasons of such meaningless decisions are the lack of coordination among the members and involvement of many of them in share trading in others’ name. Moreover, the manpower required to operate such an organization is not sufficient in SEC. It is unfortunate that SEC has no software of its own. Even it does not have any Chartered Accountant to ensure accurate audit report.

 DSE and CSE 

Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) play vital role in monitoring the activities of brokerage houses as well as the smooth functioning of stock market through giving permission of listing companies, delisting a certain company for violation of rules and other reasons, placing a company in a specific category (e.g. A, B, Z, N) and queering unusual price hike of a particular script. It is a matter of sorrow both of the stock exchanges failed to ensure proper monitoring. Especially two activities of DSE played pivotal role behind the recent surge and plunge in the capital market. The first one is the circulation of news that within a very short period of time a huge number of Beneficiary Account (B/O) has been opened which was an indicator of the confidence of investors towards the capital market and can be compared with the provocation for investing money in the capital market.

Thus it worked as a catalyst of price hike. Again DSE called for a press conference on 13th October, 2010 through which it urged people not to invest in the stock market as it became a risky sector according to them. It was a clear indication of upcoming crash. Thus it spread threat among the investors and they put a huge sell pressure even the institutional investors were also involved in force sell and trigger sell considering all the negative factors. Such a panic situation even provoked people to sell fundamentally strong shares.

 Credit Rating Agencies

Investors get a clear picture of a company through its credit rating because such rating indicates the financial strength, management efficiency and growth potential of a company. At present there are four credit rating agencies in Bangladesh namely, (a) Credit Rating Agency of Bangladesh (CRAB), (b) Credit Rating Information and Services Limited (CRISL), (c) National Credit Rating Limited (NCRL) and (d) Emerging Credit Rating Limited (ECRL). But most of the listed companies are being rated by none of the above mentioned credit rating companies. As a result, investors are deprived of proper information about those companies which is one of the major obstacles of making informed investment decision. In our research, which is conducted through a survey among 323 people from different areas including 255 investors, 11 Financial Analysts, 6 of different regulatory bodies and 51 brokers, it is found that 173 (74+43+56) or 53.65% (17.34%+23%+13.31%) of the investors surveyed believe that the role of the regulatory bodies are the main reason behind the recent catastrophe in Stock Market.

 Syndicate

Like other market in Bangladesh, Syndicate is very much active in our capital market which is also found in the report of the Government Probe Committee report leaded by Khondkar Ibrahim Khaled. In their report they said that  the  stability  of  the  stock  market  would  not  be  achieved  without  political  commitment  at  the  highest  level,  only  which is capable of eliminating the ‘vicious cycle’ ruling the market. The comment comes after the probe body has  identified  a myriad of  corruptions committed by a  section of powerful businessmen, politicians, stakeholders, key  officials, and individual investors through syndication in the stock market.

Education and Skills of Investors 

Though the number of BB/O Account HHolders is huge (About 33 lakh) in our stock market, but their education and skills in investment in stock market is not that good. In our study we found some investors who do not know even the ABC of stock of market. While talking with such investors we learned that they invest in the market either by taking others’ advices or on the basis of rumor. Though unfortunate, it also came out that  often they buy and sell  shares  seeing  other  big  investors  in  the  broker  houses.  When  big  parties  buy  shares,  they  also  do  so  with  the  expectation of increase  in price and  vice-versa. From the study it is evident that 10.54% off the total respondents thought that lack of knowledge of the mass investors in the stock market about the appropriate way of analysis and investment decision is the main reason of the recent slump

 Brokerage Houses   

Broker  houses  play  important  role  inn  capital  market  operation  as  share  trading  are  being  facilitate  through  their  participations.  They  sometimes  violate  different  rules  of  DSE  and  CSE,  for  which  the  trading  of  six  brokerage  houses  (namely,  Securities  arms  off  Dhaka  Bank,  NCC  Bank,  AIBL,  PFII  Securities,  Alliance  Securities  &  Management, and IIDFCC Securities) were banned for 30 days for triggering collapse on 20th January, 2011 and few top  officials  of  those  brokerage  houses  were  given  punishment.

Trading through Omnibus Account 

An  omnibus  account  is  as  stock  holding  account  that  involves  more  than  100,000  investors,  although  actual shareholders or individual  investors don’t have the accounts in their own names. In the probe report regarding the  recent  catastrophe,  Khondkar  Ibrahim  Khaled  has  stated  that  most  big  traders  made  transactions  through  the  omnibus accounts of the ICCB during the  sessions of  gain or loss.  The committee held 30 big players responsible including the ICB for the recent plunge and all of these big players traded through omnibus accounts.

Recommendations of the Study 

Suggestions to improve the activities of Stock Market

  • To introduce automated monitoring system that may control price manipulation, malpractices and inside trading.
  • To introduce full computerized system for settlement of transactions.
  • To force the listed companies to publish their annual reports with actual and proper information that can ensure the interests of investors.
  • To control and abolish kerb market form premises of stock market.
  • To take remedial action against the issues of fake certificates.
  • The composite Quotation system (CQS) should be introduced and implemented that available the exchange specialist bid-ask quotes to the subscribers.
  • To make arrangement to set-up merchant banks, investment banks and floatation of more mutual funds particularly in the private sectors.
  • Banks, insurance companies and other financial institution should be encouraged deal in share business directly.
  • The brokers should not be allowed to deal in the Scripps on their own accounts.
  • The management of DSE and CSE should be vested with professionals and should not in any way be linked with the ownership of stock exchange and other firms.

Major future prospects that will change the Stock Market:

Within 3 to 6 months 8 large profitable government enterprises are going to be listed under Direct Listing Method adding value worth another 1 billion Dollar.

  • The Telecom Giants in Bangladesh are finalizing their offers for IPO in the market.
  • Power and energy sectors demand for capital is 5 to 10 billion dollar within short time to meet the immediate needs of 5000 MW power demand.
  • A deep sea port requiring 1 billion dollar is going to start with a policy decision that it will also be listed.
  • The Pharmaceutical sector and API enjoying WTO benefit is growing sharply.
  • Textile sector as backward linkage to thriving export oriented garments industries is booming.
  • Export oriented food processing industry needs huge capital and technical capacity to meet the growing standards in global market for marine food, fruits and poultry.
  • IT sector with our talented developers, yet to demonstrate the massive potentials of software industry of the country.

Conclusion:

To expedite the market development process, it may be a good idea to decide on certain milestones and link them to the disbursement of Development Credit Support of the World Bank. The government is making good progress in other sectors, including monetary management, corporatization of public-sector banks and others through this linkage. The missing link between the SEC, Bangladesh Bank, Bangladesh Telecom Regulatory Commission and other regulatory bodies is now getting established. Individually, they were not serving each others’ interests, and there was no effective coordination among them, hence the country was deprived of great initiatives. A dedicated financial market cell at the Ministry of Finance could be formed to coordinate with these regulators as well as other ministries. In terms of creating market depth, more profitable state-owned-enterprises should be listed. The supply of securities can be increased if the SOEs are allowed to operate through the stock exchanges. Floatation of SOE scrip’s is expected to expand the market by couple of times. Corporatization of SOEs will bring in transparency as well as confidence on the government financial system.

The Bangladesh capital market still has a long way to go. The recent measures taken by the transitional government have already begun to positively impact the markets. If more investor friendly policy reforms were to be implemented, the capital market will undoubtedly play a critical role in leading Bangladesh towards being the next Asian tiger with growth comparable to India, Vietnam and the other most dynamic economies in the region.

References

Website

www.msn.com

www.google.com

www.wikipedia.com

www.scribd.com

www.globaloneness.com

www.cse.com.bd

www.dsebd.org

www.secbd.org

Financial Market in Bangladesh