Progress and Prospect of Bangladesh Money Market and Capital Market Security In Bangladesh

Prepared for: Mr. Md. Mahbubul Haque Khan Lecturer Department of Business Administration East West University

Prepared By:
N.M. Baki Billah 2008-2-10-071 Anwer Hossan 2008-1-10-090 Nazia Choudhury 2008-2-10-068 Syeda Samia Akbar 2009-1-10-026 Amatul Gous 2007-1-10-092

Date of Submission: 21 April, 2011

Letter of Transmittal
21April, 2011 Mr. Md. Mahbubul Haque Khan Lecturer Department of Business Administration East West University

Dear Sir It is a pleasure to submit the term paper on Progress and Prospect of Bangladesh Money Market and Capital Market Security by today. It is a fantastic opportunity for us to prepare the individual term paper under your guidance, which really is a great experience. We have worked hard and tried our best, in order to prepare the term paper. We believe that it is encouragement for us to get involved with such process of reporting and a way to enrich financial knowledge. It will be a privilege for us to provide further clarification on this report whenever it is necessary. Thank you. Sincerely.
Anwer Hossan 2008-1-10-090 N. M. Baki Billah 2008-2-10-071 Nazia Choudhury 2008-2-10-068 Syeda Samia Akbar 2009-1-10-026 Amatul Gous 2007-1-10-092

AA Acknowledgement A
It really was a great challenge for us to prepare the term paper. First of all, we present our due regards to the Almighty, who has provided us the brilliant opportunity to build and complete this report successfully with good health & sound mind.

Our course instructor, Mr. Md. Mahbubul Haque Khan, Lecturer, Department of Business Administration, East West University helped us all the way through. He also gave proper guideline about this term paper and also by not getting irritated with our unlimited questions. We really want to express our gratitude to him for giving valuable advice and time, which helped immensely in preparing this term paper.

We also like to thank Shokil Alam Chaklader and Naimul Ehasan, two of our friends who helped us immensely in this term paper.

Table of Contents Content Introduction Money Market Securities T-Bill progress in Bangladesh Issuer Types Participants Who and How Can Invest Schedule for Issuance Selling System Secondary Market for T-Bill Procedure to Allot T-bills T-bill Yield Call Money Rate Repo Reverse Repo Capital market in Bangladesh History of Capital Market The Capital market, an important ingredient of the financial system, plays a significant role in the economy of the country & Regulatory Bodies 2. Participants in the Capital Market i) Stock Exchanges The Dhaka Stock Exchange (DSE) The Chittagong Stock Exchange (CSE) Compliance Officer Book Building Method Trading of Securities in the Exchanges O-T-C Market Settlement of Securities Transaction in the Exchanges Securities Trading in the Exchange through Borrowing Securities Issue through Private Placement Rights Issue,ICB,Specialized Bank,Products,Players,Parameters Capital Market Development Measures Supporting Capital Market Development: Indicators of capital market development Capital Market Securities Bond Market in Bangladesh Bangladesh Government Treasury Bonds (BGTBs) Auctions Bangladesh Government Islamic Investment Bond (Islamic Bond) Corporate bond ACI Bond Mudaraba Perpetual Bond (MPB) of Islami Bank Bangladesh Limited. Page number 1 1 2 2 3 3 3 3 4 4 5 5 7 7 8 9 9 10 11 11 11 11 11 12 12 12 13 14 15-16 17 17 17 18 18 19 19 19 20-21

Purpose of the Issue Salient Features Of Mudaraba Perpetual Bond of Islami Bank Bangladesh Ltd. (IBBL) Profit Distribution Features of MPB Risk Factors BRAC Bank 25% Subordinated Convertible Bonds Mutual Funds Debentures Capital market securities (DSE) Sectorial performance (DSE) Capital market securities (CSE) Problems Prospect Overview of SAARC Markets Recommendations Conclusion

22 22-23 23 24
24-25

25 26 27 28-30 30 31-34 34-35 35 36-38 39

Introduction
The Bangladesh economy is within the mainstream of the continuously changing global financial system. Domestic as well as international trade also characterizes Bangladesh economy. Hence a financial system has developed here consisting mainly of the capital and the money market. For any underdevelopment country the existence of a well functioning money market is of paramount importance. The money market currently existing has also developed due to certain needs. In general, these needs can be termed as need for short term liquidity within our financial system, to carry out the day to day economic activities and obviously to meet and match need for short term lending and borrowing of the participants within the financial system. T-bill market is by far the largest component of the money market in Bangladesh. Capital markets are essentially about matching the needs of investors with those that need capital for development. Bangladesh has no shortage of both such parties, a young and dynamic population that increasingly wants, and is able to, make provision for lifetime events, to save for childrens education, for the possibility of ill health and ultimately for old age and retirement. On the other side of the equation, Bangladesh has a pressing need for investment resources to bolster its stretched infrastructure resources, to build more power stations, bridges, ports and gaspipelines to empower the people in the development of enterprise and the creation of jobs. Debt markets are an extremely effective mechanism for matching the long term needs of savers with those of entrepreneurs. Like emerging-market countries around the world, Bangladesh could benefit from having a local-currency, fixed-income securities market. At present, its main fixed income financial products are bank deposits, bank loans, government savings certificates, term loans, treasury bills, and government bonds and corporate debt (syndicated loans, private placement, and debentures). But in general the corporate debt market is still very small compared with the equity market.

Money market securities are the debt securities that have a maturity one year or less. They generally have a relatively high degree of liquidity. Money market securities tend to have a low expected return but also a low degree of risk. Various types of money market securities are listed below.

Money Market Securities Treasury bills Retail certificates of deposit (CDs) Negotiable certificates of deposit (NCDs) Commercial paper Eurodollar Deposit Bankers acceptances

Issued by
Federal Government Banks and saving institutions

Common Investors
Households, firms and financial institutions Households

Common Maturities
13 weeks, 26 weeks. 1 year 7 days to 5 years or longer

Secondary Market Activity

High Nonexistent

Large banks and saving Institutions

Firms

2 weeks to 1 year

Moderate

Bank holding Firms companies, finance companies and other companies Banks located Firms and outside the country government Banks ( exporting firm can sell the acceptance at a discount obtain funds) Depository institutions Firms and financial institutions Firms

1 days to 270 days

Low

1 day to 1 year

Nonexistent

30 days to 270 days

High

Federal Funds Repurchase agreements

Depository institutions Firms and financial institutions

1 day to 7 days 1 day to 15 days

Nonexistent Nonexistent

T-Bill Progress in Bangladesh Issuer Bangladesh Bank (BB), the central bank of Bangladesh, operates throughout the country with its nine branches. Government receipts and payments are overseen and managed by BANGLADESH BANK. Where there is no BANGLADESH BANK branch but transactions of government occur, different branches of Sonali Bank (SB) are assigned to take part in these transactions on behalf of BANGLADESH BANK. These branches are known as 'Chest Branches'. In a district, there may be one chest and some sub-chests. BANGLADESH BANK directly monitors Chest branches. This function is known as 'Feed'. The Bangladesh government

finances its expenditures in excess of tax receipts through the sale of debt obligations. Currently, the total par value of outstanding Treasury bills stood at about Taka 22000 crore. Types Treasury bills are designated by the number of days to their maturity. There are six types of Tbills that prevail in Bangladesh. These are a) 28 days T-bill b) 91 days T-bill c) 182 days T-bill, d) 364 days T-bill e) 2 years T-bill f) 5 years T-bill Participants The market for Bangladesh Treasury bills has a complex structure and involves numerous participants--Ministry of Finance, Bangladesh Bank, government securities dealers and brokers, and other holders of Treasury securities. Who and How Can Invest Until 2003, there was no secondary market for treasury securities. Any investor (institution or individual), who maintains a current account with Bangladesh Bank, can invest in T-bills through primary market auctions. Auction is held on every Sunday at 11 a.m. at the Motijheel Branch of BB. If Sunday is a holiday, then the last working day before Sunday is used. All the investors submit their bid unless otherwise pension or provident fund. After receiving the bid, the auction committee decides how much T-bills will be offloaded. There is a high-powered committee to oversee the treasury functions; which includes seven members. Schedule for Issuance

Marketable Treasury securities are issued through regularly scheduled auctions in what is called the primary market. The process importantly involves the Bangladesh Bank, which serve as conduits for the auctions. Selling System Treasury bills are sold on a discount basis, which in simple terms means that we have to pay for the bills less the interest receivable during the term of the bill and receive the face value of the bill at the end of the period. Treasury bills are not listed at the Stock Exchange. If one wanted to exit before maturity, rediscounting isn't possible at the Central Bank, rather he or she may take part in the Repo auction. Secondary Market for T-Bill Until 2003, there was no secondary market for T-bills transaction in Bangladesh. Government had decided to introduce the secondary T-bill market with a vision of broadening the government securities market. World's leading financial institution Citigroup's subsidiary Citibank, N.A. and local Prime Bank Limited had taken part in the first secondary transaction of T-bills in Bangladesh that year. Citibank, N.A. had sold a T-bill of 2 years maturity bearing Taka 3 crore of face value to Prime bank. BANGLADESH BANK had taken necessary steps to assist this transaction. This was regarded the first secondary T-bill transaction in the country. a. Primary Dealers: Bangladesh Bank has selected eight banks and one non-bank financial institution as primary dealers (PDs) to handle secondary transactions of T-bills and other government bonds. The eight banks are Sonali Bank, Janata Bank, Agrani Bank, Prime Bank Ltd, Uttara Bank Ltd, South-East Bank Ltd, Jamuna Bank Ltd, and NCCBL, and the only NBFI is International Leasing and Financial Services Ltd. The inter-bank Repo is one kind of secondary market for Tbills and government securities, which was introduced from July 27, 2003. The selected banks and the NBFI have already ended all procedural eligibility requirements for being appointed and start operating as secondary bond market dealers. The BANGLADESH BANK earlier invited applications from all scheduled banks and financial institutions and directed interested parties to drop applications to the FOREX Reserve and Treasury Management Department of the central bank latest by August 21, 2003. A total of 18 commercial banks and 1 non-bank financial institution filed their applications for receiving PD licenses during the stipulated time. The

central bank earlier issued a guideline for the PDs with a view to activating and streamlining the country's secondary bond market. Under the guideline, the PDs will subscribe and underwrite primary issues and make secondary trading deals with 2-way price quotes. A PD won't short sell any particular issue and won't carry a short position in secondary dealings. The PDs won't act as inter-bank or inter-dealer brokers; it was specified in the guidelines. Procedure to allot T-bills To foster liquidity in the market, the Treasury issues securities consistently and predictably through a regular schedule of auctions. In Bangladesh, Multiple-units Auction Model is followed. Two types of bids may be submitted at the auction: a) Competitive bids b) Non-competitive bids Competitive bids specify both the quantity of the security sought and a yield. If the specified yield is within the range accepted at the auction, the bidder is awarded the entire quantity sought (unless the specified yield is the highest rate accepted, in which case the bidder is awarded a prorated portion of the bid. Noncompetitive bids specify only the quantity of the security sought. Let us discuss the procedure that BANGLADESH BANK follows to allot T-bills to competitive and non-competitive bidders through T-bill auctions. In Bangladesh, T-bills are quoted on a 364day discount basis. We define the bank discount rate (BDR) as BDR = D/M * 364/t, where t is the number of days from settlement to maturity, and D is the discount from par, D = M - P, M being the par or maturity value, and P being the price. Hence the discount from par is given by D = BDR x M x t/364, while P = M - D. Example: The WSJ on Monday, Feb 7, 1994 gives the ask quote on the May 05, '94 T-bill as 3.21%. (If we were to buy the bill, we would buy at the ask). The quote is for Friday, February 4. The market convention used in the WSJ is that two days are needed for settlement; under this convention settlement would take place on Tuesday, Feb 8. There are 86 days between Feb 8 and May 5. The discount on a $10,000 par bill is D = 3.21% x 10, 000 x86/364 = 75.84, and the price is P = 10, 000 - 75.84 = 9924.16. Conversely, assume the price of the T-bill were $9,900. The discount amounts to D = 10, 000 - 9, 900 = 100, and the bank-discount rate equals BDR =100/10000 * 364/86 = 4.23%.

T-BILLYeild The values of Treasury securities are often summarized by the yield curve, which plots the yields of all non-callable securities against their maturities. An example of the yield curve on August 27, 2009 (Auction no #255) is given below. This curve has an upward-sloping, concave shape. Securities having maturities of less than five years are highly concentrated, because shorter-term securities are auctioned more frequently and because many previously issued longer-term securities fall in that maturity range. Yield Volatility of T-bills in Bangladesh (As of 27-07-2010 Auction no.255) T-Bill 28 days 91 days 182 days 364 days 2 years 5 years Yield 6.84% 8.52% 9.15% 9.76% 10.62 % 10.69 28 days -1.68% 0.63% 0.61% 0.86% 0.07% 91 days 182 days 364 days 2 years 5 years

-0.63% 0.61% 0.86% 0.07%

-0.61% 0.86% 0.07%

-0.86% 0.07%

-0.07% --

% Source: Bangladesh bank

This is an upward sloping yield curve or normal yield curve which indicates that the higher the maturity, the higher the yield. That means, yield of 91-dayu T-bill is higher than that of 28day T-bill and so on. Here the yield spread between the 91-day T-bills and 28-day T-bills is 1.68%, which is the maximum than those of others. The reason is that the demand of T-bills gradually decreases with term to maturity. Call Money Rate is the interest rate banks charge a broker for the funding of loans to investors who buy on margin. This is also known as broker loan rate. In the call money market, participants enter into lending and borrowing for overnight. The transaction takes place due to immediate liquidity need. This may arise from various sources like temporary inability to meet the mandatory 4% cash reserve requirement (CRR) demanded by the central bank, sudden shortage of fund to meet the liabilities like any prescheduled repayment etc. free from any specific regulation the participants determine the call money rate on a negotiated manner. The call money rate is a volatile rate in our country. It is quite affected by certain seasonality. During the Eid especially when there is a surge of deposit withdrawals, the banks find themselves in immediate liquidity crisis. There is a direct and positive relationship between T-bill rate and call money rate. When there is a seasonal cash crisis, banks rush to the call money market. In this situation, call money

rate peaks. Naturally investors of T-bills are not available at that time unless otherwise they are offered higher yield rate. Difference with the basic definition However, in Bangladesh, two and five year securities are also regarded as T-bills since they are zero coupon securities. REPO Repo is a commitment of the seller to the buyer to buy back the instrument as and when the buyer intends to sell. This is an arrangement between seller and buyer. Earlier in Bangladesh, there was a premature encashment facility for the investors of T-bills. Premature encashment facility is a procedure of buying back the security when cash is needed giving amount and accrued interest. This is also called discounting the T-bills. Currently, instead of Discounting Window, Repo facility is opened for the investors. Here instrument isn't required, rather it is lined. Investors can borrow either full or partial amount against the bill. If an investor borrows 100% against the bill, then maximum 95% discounted value will be provided. There is also a Repo auction that is held side by side of the T-bill auction. The yield rate of Repo is determined through bid offer and bid acceptance, and this yield is higher than the yield of T-bill. For example, let us assume that, T-bill yield = 8%, Repo yield = 9%, then, Net yield = 1%. To whom Repo facility will be provided is dependent upon the liquidity in the market. Repo auction is held for 1 and 7 days tenure. Reverse Repo When a bank or financial institution has excess liquidity, it can deposit it to Bangladesh bank. This procedure is frequently known as Reverse Repo. There is also a Reverse Repo auction that is held side by side of the T-bill auction. Reverse Repo auction is also held for 1 and 7 days tenure. Suggestions

Introducing new instruments will create adequate opportunity for investment of short-term excess fund, which in turn will increase liquidity and further reduce dependency on the call money market The instruments may be introduced be as new Instruments in Bangladesh Money Market are explained here. 14 days T-bills: this new lesser maturity bill will give the investors greater liquidity preference in the short term. And give an out let for earning return on ideal excess fund.

Capital market in Bangladesh

History of capital market Capital market started in USA at Wall Street in 1653. 1t came to Mumbai, the commercial capital of India around 1890. However, investment in shares boomed in late 1970s. It took many years to come to the land, now comprising Bangladesh. The origin of stock market in Bangladesh goes back to April 28, 1954 when a stock exchange was formed under the name East Pakistan Stock Exchange Association at Narayanganj. Trading started in 1956. It was renamed East Pakistan Stock Exchange Ltd. Transferred to Dhaka in 1958 and again renamed Dhaka Stock Exchange Ltd in 1964. Trading remained suspended during the Liberation War in 1971. The Dhaka Stock Exchange resumed operation in 1976 with nine listed companies as against 452 today. Capital market in Bangladesh got momentum with the establishment of Securities and Exchange Commission in 1994. A big wing was added to the capital market with the incorporation of Chittagong Stock Exchange on April 1, 1995. Operation of CSE started on October 10, 1995.

The Capital market, an important ingredient of the financial system, plays a significant role in the economy of the country.

Regulatory Bodies The Securities and Exchange Commission (SEC) was established on June 8, 1993 as capital market regulator in Bangladesh through Securities and Exchange Commission Act, 1993 ( Act 15 of 1993). The commission ensures compliance of capital market related laws, rules and regulations etc. by the intermediaries and persons and institutions related with capital market. Basic laws of the capital market are as follows; a. Securities Act, 1920 b. Securities and Exchange Ordinance, 1969 c. Securities and Exchange Commission Act, 1993 and d. Depository Act, 1999 Bangladesh Bank exercises powers under the Financial Institutions Act 1993 and regulates institutions engaged in financing activities including leasing companies and venture capital companies. Participants in the Capital Market The SEC has issued licenses to 27 institutions to act in the capital market. Of these, 19 institutions are Merchant Banker & Portfolio Manager while 7 are Issue Managers and 1(one) acts as Issue Manager and Underwriter. I) Stock Exchanges There are two stock exchanges (the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE)) which deal in the secondary capital market. DSE was established as a public Limited Company in April 1954 while CSE in April 1995. As of 30 June 2000 the total number of enlisted securities with DSE and CSE were 239 and 169 respectively. Out of 239 listed securities with the DSE, 219 were listed companies, 10 mutual funds and 10 debentures. The Dhaka Stock Exchange (DSE) The Dhaka Stock Exchange Limited (DSE) was established in 1954, but its commercial operation started in 1956. Due to nationalization policy trading activities of DSE remained suspended during the post liberation period and resumed again 1976. DSE is a self-regulatory

not-for-profit organization. As a self-regulatory organization DSE supervises the function of listed companies. Administration of DSE is run by Dhaka Stock Exchange (Board and Administrations) regulations, 2000. The board of directors consists of 24 members, 12 directors are elected by direct votes of DSE members and 12 directors are nominated by elected members from non-DSE members with the approval of the commission. The Chief Executive Officer (CEO) is also a non-voting member. DSE hires the CEO of DSE which requires commissions approval. The CEO conducts the daily affairs of DSE. Now there are 234 members in DSE of 194 members are registered by SEC for conducting securities business. According to the rules every member must be corporate body. Transaction and transfer of most of the securities listed on DSE are executed electronic form. At presented DSE expanded its on-line trading activities into the divisional and district towns of the country.

The Chittagong Stock Exchange (CSE) The Chittagong Stock Exchange Limited (CSE) was set up in 1995. It is also a self-regulatory not-for-profit organization and its management structure is same as DSE. The Chittagong Stock Exchange Limited (CSE) started first on-line trading system in Bangladesh capital market in 1998 and at present it is carrying out trading activities from Dhaka, Chittagong. Sylhet, Rajshahi, Barisal, Coxs-Bazar and Khulna. Compliance Officer As per the securities laws every intermediary institution has to designate an officer as compliance officer whose main responsibility is to ensure particular firms compliance with securities laws. As a primary regulator, if an intermediary does not comply with the laws properly the compliance officer has to report to the chief officer of the related intermediary. If violation of securities laws continues then the compliance officer shall report to the commission. Book Building Method Book Building Process of IPO pricing is a free pricing regime that values the company on its performance, both past and future, keeping in mind its investment, earning forecast, economic

scenario etc. The commission is examining possibility of introducing Book Building System for IPO pricing on selected basis. Trading of Securities in the Exchanges In DSE and CSE trading of securities is done through automated system. As a result volume of transaction has increased substantially over the years. Now trading is done in the following four market segments: a. b. c. d. Public market Spot market Block market Odd-Lot market

O-T-C Market Securities and Exchange Commission (Over-the-Counter) Rules, 2001 was issued in 2002 under which securities de-listed from the exchanges and securities not listed with the exchanges but have been issued obtaining consent from the commission could be traded. CSE has provided the platform but this facility has not yet been used. Settlement of Securities transaction in the Exchanges Mechanism of settlement of securities transactions is elaborately specified in DSE and CSE settlement of Stock Exchange Transactions Regulations, 1998. It also categorizes securities into A,B, G,N and Z based on profitability, operation and failure to hold AGM and sustaining loss that ultimately exceeds paid up capital. This categorization helps investors to know about the fundamental and attractiveness of security. During the FY 2006-07, governance scenario of listed company improved remarkably. In this period number of A category companies increased and number of B and Z category companies decreased and increased respectively. Securities Trading in the Exchange through Borrowing In a bullish market securities price continues to increase and the investors may opt for investing more than his equity availing loan from the brokers. A per DSE/CSE (Members margin)

Regulations, 2000 investors could invest more than his own resources and help reaping profit from the bullish market. Likewise supply of securities could also be increased through short-sale mechanism. Short-sale refers to selling of securities that the seller does not own. As per Dhaka Stock Exchange (Shortsale) Regulations, 2006 any person with a securities borrowing arrangements could sale securities without owning it. This mechanism helps increasing supply of securities and could be a win-win situation for seller, lender and brokerage firm. Securities Issue through Private Placement Rules that are required to be complied with for issuance of securities through private placement is Securities and Exchange Commission (Issue of Capital) Rules, 2001 under which applicants has to furnish certain information and documents to the commission. While according consent the commission imposes conditions that include timely preparation of financial statements and furnishing of the same to the commission, execution of all transactions except petty cash items through companys bank account. These conditions help issuer companies elevate their corporate governance status and make them ready for raising capital through public offering. Rights Issue Share issue to existing shareholders by listed companies in proportion to their capital is approved by the commission under Securities and Exchange Commission (Rights issue) Rules, 2006. As per the said rules, such rights issue and price are required to be approved by the shareholders in general meeting. ii) Investment Corporation of Bangladesh (ICB) The Investment Corporation of Bangladesh was established in 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programs, and maintains investment accounts, floats and manages closed-end & open-end mutual funds & closed-end unit funds to ensure supply of securities as well as generate demand for securities. ICB also operates in the DSE and CSE as dealers.

iii) Specialized Banks Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS), BASIC Bank Ltd., some Foreign Banks and NCBs are engaged in long term industrial financing. 3. Product of capital market: a) Shares, b) Debentures, c) Mutual funds, d) Bonds, e) Derivatives, f) Future and options. 4. Players of capital market: a) Investors, b) PLCs, C) Stock Exchanges, d) Brokers and Dealers, e) Merchant banks, f) Securities and Exchange Commission, g) CDBL. 5. Parameters used to measure size of capital market: a) Number of listed companies, b) Number of securities, C) Size of market capitalization, d) Index, e) Daily trade volume, f) GSP ratio to market capitalization, 6. Efficiency indicators of capital market: a) PE multiple, b) Dividend yield, c) Liquidity, d) Visible presence of regulators, e) Exit route regulation for sick PLC.

Capital market development:

The World Bank is already working with the Government and Bangladesh Bank on some of these key issues, and we shall be ready to work further with them within the limits of our own comparative advantage. We have been extremely pleased to see the coordinated approach of the Bangladesh Bank, Ministry of Finance, the SEC and the National Board of Revenue to work with IPDC to bring the first securitization transaction to market in Bangladesh. This has been one solid step towards mobilizing finance for entrepreneurs and has confounded those skeptics who thought that securitization is too sophisticated for Bangladesh. Perhaps those skeptics would benefit from seeing the collected talent and enthusiasm for development gathered here in this room today. We would very much like to hope that the next securitization will be another transaction close to our heart, that of the securitization of a portion of the toll revenues of the Jamuna Bridge. The IPDC loan securitization was a long time in the making and the Jamuna Bridge securitization appears to be following the same path. This is a transaction which all experts agree would have a major positive impact not only on capital market development in

Bangladesh, but also in mobilizing taka finance for other strategic infrastructure developments such as the proposed Padma Bridge. We can only hope that the Jamuna Bridge securitization will enjoy the same long term success. To facilitate this process, it would be useful to have designated counterparts from the Government and Bangladesh Bank. Such a crucial market as a domestic bond market needs excellent domestic regulation and supervision if investors and borrowers are not to be disappointed or worse. It cannot be created by outsiders. Presently, Bangladesh capital market has achieved phenomenal growth in size, depth and maturity. All indicators of capital market showed an increasing trend during last couple of years. Increased investors' participation, demand for stocks is pumping to price hike in the market. Other indicators of the capital market also recorded a significant growth. Market capitalization of DSE, a remarkably increased during last three years that reflected in the ratios of market capitalization to the country's GDP at current market price. The ratio of market capitalization of DSE to GDP rose to 39.1 percent in end FY10 from 5.2 percent in FY06 and from 2.3 percent of FY00. Except 13.1 percent of 1996's bubble, the ratio was almost in horizontal level with around below 3 percent up to FY04. The capital market developments and its sustainability depend on market fundamentals at least in the medium term, and the fundamental strength of the market essentially comes from financial strength of the listed companies. Also, strong regulatory environment created and maintained by the regulatory bodies and participation of institutional investors and professional market analysts help orderly market operations. The market witnessed that last few years many fundamental companies with strong financial strength have been listed in the market. The main regulatory body SEC and the Government of Bangladesh and others related regulatory authorities have continued their all efforts to develop the Bangladesh capital market that reflected in the market trends. The Bangladesh capital market is now maturing gradually in terms of depth and breathe and approaching to more shock resistant operational mode. Measures Supporting Capital Market Development The Securities and Exchange Commission (SEC) undertook several measures to strengthen capital market through build-up the confidence of the investors in capital market during FY10:

1.

For the benefits of investors and capital market, Dhaka Stock Exchange (DSE) is advised

to provide over-the-counter (OTC) facility to the issuers, which have been delisted by the exchange, excluding those securities which have been delisted upon application by the issuers concerned. 2. For the benefits of the investors, deposit refund money is made directly into unsuccessful

IPO applicants' bank account. 3. Stock Exchanges are advised that a stock broker can open maximum 15 branches and

offices within one kilometer periphery of the main office. 4. For investment decision and for avoidance of confusion, all listed companies are advised

for making the detailed quarterly financial statements available in their website. 5. Maturing of all closed-end mutual funds has been fixed. According to this directive no

mutual fund shall have maturity for more than 10 years. However, the close-end mutual funds which have already passed 10 years after launching are allowed to continue a little more but must retire within 31 December 2011. 6. 2010. 7. New criteria for margin loans for mutual funds have been set. According to the new Banks, other financial institutions and insurers are advised to form separate subsidiary

companies to run brokerage and dealer activities. The subsidiaries must be formed by 31 March

criteria, the funds that will trade 7.5 percent higher than their latest net asset value (NAV) will not qualify for the loans. 8. In order to increase the supply of shares mandatory provision has been made for

companies having paid-up capital more than Taka 0.50 billion must apply for IPO to off-load shares in the capital market. 9. To cool down the stock market margin loan criteria has been reset. According to the new

criteria investors are not entitled to get margin loan to buy equity shares exceeding P/E ratio 40. Previously it was at 50.

10.

Plan to increase the number of mutual funds, merchant banking license to financial

institutions. 11. Setting up of Bangladesh Institute of Capital Market to train the investors and the

officials working in the intermediaries agencies.

Table 1.1: Indicators of capital market development

FY 03 Number of listed securities Isuued capital & debt (billion taka) Market capitalization (billion taka) Turnover (billion taka) General price index GROWTH IN PERCENT Number of listed securities Isuued capital & debt Market capitalization Turnover General price index FY04 FY05 FY06 FY07 FY08 FY09 FY10

260 36. 1 69. 2 30. 6 830

267 46.8 142. 4 24.8 1319

259 52.8 213 74.1 1713

277 64.7 205. 3 46 1339 .5

281 83.7 412. 2 164. 7 2149 .3

294 109 789. 4 209. 2 3000 .5

308 147.1 8 1001. 9 892.7 9 3010. 26

279 213.1 1 2276. 98 2714. 28 6153. 68

1.2 3.1 5.6 12. 3 4.7

2.69 29.6 4 105. 78 18.9 5 58.9 2

-3 12.8 2 49.5 8 198. 79 29.8 7

6.95 22.5 4 -3.62 37.9 2 -21.8

1.44 29.3 7 100. 78 258. 04 60.4 6

4.63 30.2 91.5 1 204. 51 39.6

4.76 35.05 26.92 326.7 6 0.33

-9.42 44.8 127.2 7 204.0 2 104.4 2

Capital market securities

BOND MARKET IN BANGLADESH Bond market acts as buffer of equity market. On the one hand, bond markets are essential for a country to enter a sustained phase of development driven by market-based capital allocation and increased avenues for raising debt capital. On the other hand, the central position occupied by domestic bond markets in markedly increasing the resilience of a countrys financial system and insulating it against external shocks, contagion and reduction of access to international capital markets is established. This market in Bangladesh has been found very inefficient with respect to number of issues, volume of trade, number of participant, long-term yield curve, interest rate policy etc. In view of this, the present study has been undertaken aiming at identifying the problems that impedes the growth and development of Bond Market in Bangladesh. The study has found that the size of debt market of Bangladesh is very low as compared to other SAARC Countries; has huge growth potentiality; and identified important impediments to the growth and development of Bond Market in Bangladesh such as risk and return factor, liquidity and government policy factor, issue management factor, investment policy factor, macro-economic and regulatory factor, and market & issue related factor. The study has suggested some important policy measures such as regulatory change, establishment of long-term yield curve, offering fiscal benefits, encouraging companies raising funds through corporate bond issues, keeping treasury rate low etc. for the development of Bond Market in Bangladesh. Bond markets in most countries are built on the same basic elements: a number of issuers with long-term financing needs, investors with a need to place savings or other liquid funds in interest-bearing securities, intermediaries that bring together investors and issuers, and an infrastructure that provides a conducive environment for securities transactions, ensures legal title to securities and settlement of transactions, and provides price discovery information. The regulatory regime provides the basic framework for bond markets and, indeed, for capital markets in general. Efficient bond markets are characterized by a competitive market structure, low transaction costs, low levels of fragmentation, a robust and safe market infrastructure, and a high level of heterogeneity among market participants.

Bangladesh Government Treasury Bonds (BGTBs) Auctions: Treasury Bonds, bearing half yearly interest coupons, with tenors of 5-year, 10-year, 15-year and 20-year are auctioned in every month. 48 auctions of these instruments were held in FY10. A total of 767 bids for Taka 218.49 billion were received and 159 bids for Taka 87.85 billion were accepted, of which Taka 39.41 billion was devolved on BB/PDs. The amount of outstanding bonds stood at Taka 396.26 billion at the end of June 2010 as against Taka 314.83 billion at the end of June 2009. The outstanding amount of bonds at the end of FY10 was higher than 25.86 percent that of end of FY09. The weighted average yield-to maturity for the treasury bonds ranged from 7.47 percent to 9.41 percent in FY10. It was found that the yield rates on all tenors of treasury bonds were decreased sharply during the year under the report. It is mentionable that in FY09, bids for a total of Taka 239.96 billion were received, of which Taka 124.71 billion was accepted and Taka 55.98 billion was devolved on BB/PDs. The overall weighted average yieldto-maturity ranged from 9.20 percent to 13.07 percent in FY09.

Bangladesh Government Islamic Investment Bond (Islamic Bond) The operations of 6-month, 1-year and 2-year Bangladesh Government Islamic Investment Bond (Islamic Bond) introduced in FY05 continued in FY10. This Government Bond is operated in accordance with the rules of Islamic Shariah. As per the rules, Bangladeshi institutions, individuals and non-resident Bangladeshis who agree to share profit or loss in line with Islamic Shariah may buy this bond. As of end June 2010 the total sale against this bond amounted to Taka 23.4 billion while balance of total amount of financing stood at Taka 15.4 billion and the net outstanding against the bond stood at Taka 8.0 billion. As of end June 2009 the total sale against this bond was Taka 16.4 billion against the balance of total financing of Taka 12.1 billion and the net outstanding of Taka 4.3 billion.

Corporate bond ACI Bond Authorities of Advanced Chemical Industries Limited (ACI), sponsor of ACI 20 per cent Convertible Zero Coupon Bonds, have stated the following: (1) As per the maturity schedule, the record date of ACI 20 per cent Convertible Zero Coupon Bonds is March 6, 2011. The bondholders whose name will appear in the Depository List on the record date will be entitled to get the redemption of 1st Series of Bonds, (2) As per the announced features, 80 per cent of the redemption value will be paid in cash and rest 20% can be converted into ACI shares. The bondholders, who do not want to exercise the convertibility option, shall notify in writing their intention by five working days from the record date (March 13, 2011) to the address of Bond Department, ACI Limited, 245, Tejgaon Industrial Area, Dhaka-1208.

(3) The NAV per share as per last audited financial statements (2009) is Tk 156.16 and the conversion strike price is Tk 171.78 as per announced formula, (4) If any bondholder gets fraction or odd lot number of shares through conversion, the fraction or odd lot shares shall be credited to suspense account and will be sold out in the market. The equivalent selling price against the odd lot or fraction of shares will be paid to the respective bondholders and (5) After record date of 1st Series of Bonds, the number of series in each lot will be reduced to four from five. DSE Online Mudaraba Perpetual Bond (MPB) of Islami Bank Bangladesh Limited. Brief Overview of the Bank 1. Date of Incorporation: March 13, 1983 2. Commencement of Business: March 30,1983 3. Authorized Capital: Tk. 5,000 million. 4. Paid up Capital: Tk. 3,456.00 million (Pre issuance of MPB) 5. No of Branches: 176 Table 1.2: Details of the Issue

Description Pre-IPO Placement Public Offering Total Value of Bond after IPO

No. of Units Offer Value Amount In Taka Tk. 1,500,000 1,000 1,500,000,000 1,500,000 1,000 1,500,000,000 3,000,000 1,000 3,000,000,000

Table 1.3 Basic information of the Issue: Sl No. 1 Name of the Bank 2 Size of the Issue Tk. 3,000 m (Tk. 1,500 m private placement & Tk. 1,500 m IPO 3 Unit Price 4 Market Lot 5 5 Term Perpetual (no maturity period) Tk. 1000 Islami Bank Bangladesh Ltd. Category Description

6 Profit Distribution a) MPB will carry 1.25 weight ages for distribution of profit. b) Not less than 65% of the income generated by deployment of MPB fund and c) An additional rate of profit equivalent to 10% of the rate of dividend declared by the Islami Bank Bangladesh Limited every year. No portion of dividend will be distributed to the MPB holders.

Minimum Subscription

Tk. 5,000 or multiple of Tk. 5,000.

Credit Rating

MPB has been rated as A+ by Credit Rating Information and Services Limited (CRISL) Investment Corporation of Bangladesh (ICB) ICB Capital Management Limited (A subsidiary company of ICB)

9 10

Trustee Manager to the Issue

Purpose of the Issue

The main purpose of the bond is to raise fund to meet the capital adequacy ratio of the Bank. Since the raising of Tier-1 Capital has impact on share value dilution and dividend paying capacity of the bank, the IBBL has been looking for alternate sources of Tier-2 Capital as a subordinated investment instrument and identified the issuance of Mudaraba Perpetual Bond to resolve the issue of capital adequacy.
Table 1.4: Dividend Information of the Bank

Year 31.12.200 6 31.12.200 5 31.12.200 4 31.12.200 3 31.12.200 1

Cash (%) Bonus (%) Right (%) Total Dividends (%) 15% 10% 25% 25% 20% 20% 200% 100% 25 % 20 % 220 % 100 %

Salient Features Of Mudaraba Perpetual Bond of Islami Bank Bangladesh Ltd. (IBBL) 1) It has no redemption facility & pre-determined interest rates. 2) MPB will share income derived from investment activities and also get an additional rate of profit equivalent to 10% of the rate of dividend (no portion of dividend will be distributed to the MPB holders. 3) MPB will be issued to meet the capital adequacy ratio of the Bank. 4) Term: Perpetual (no maturity period). 5) The Minimum subscription amount is Tk. 5,000 or multiple of Tk. 5,000. 6) MPB as a Mudaraba instrument it will get priority over the shareholders in respect of getting profit and also refund of principal in case of liquidation of the bank. 7) The Bondholders will however stand subordinated to the Depositors in respect of the payment of both profit and refund of principal. 8) MPB will be listed with both Bourses of the country and will remain freely transferable depending on the market demand.

9) IBBL has already agreed to create floating charge to the extent of Tk. 3,000 million on the present and future assets of the bank in favour of the trustee in order to secure the interest of the Bondholders. 10) The bond will be further secured by the corporate guarantee of the IBBL. 11)MPB will be treated as a Tier-2 Capital as a subordinated investment instrument that will save from dilution effect & enhance dividend paying capacity of the bank.

Profit Distribution features of MPB All Mudaraba Fund holders/ Mudaraba depositors of the Bank will share income which is derived from investment activities i.e., income from use of Mudaraba Funds. Income under this category will mean and include profit, dividend, capital gain, rent and any other income derived from investments. Table 1.5: Example of estimated Rate of Profit on MPB for 2006 based on the actual performance of the Bank for the last 5 years will be as follows: Sl. No. 1 Particulars Profit on Mudaraba Savings Bond (8 years) at 1.25 weightage 2 3 4 5 6 Dividend Declared 10% of rate of dividend Estimated Rate of Profit on MPB (1+3) Remarks Entitlement 25% 2.50% 13.35 25% 2.50% 12.89% 20% 2.00% 10.81% 20% 2.00% 12.04% 25% 2.50% 13.29 2006 10.85 % 2005 10.39% 2004 8.81% 2003 10.04% 2002 10.79 %

% % Based on Final Rate of Profit. Entitlement will be based on Record Date/Book Closure

Risk Factors

1) Rule and principles of utilization & distribution of profit of such funds as in vogue in IBBL and shall be subject to change and modification from time to time. 2) There is a risk that the issuer may fail to satisfy the terms of the obligation with respect to the timely payment of profit due to adverse market condition. 3) Entrance of a new competitor like new bank or financial institution or expanding services of existing competitors may increase the market competitor and may adversely affect the profitability of the bank. 4) Changes in Government policy, which are not conductive to financial and banking business may hamper the future growth and profitability of the bank.

Table 1.6: BRAC Bank 25% Subordinated Convertible Bonds BRAC Bank 25% Subordinated Convertible Bonds Opening date for subscription December 5, 2010 Closing date for subscription December 9, 2010 For Non-Resident Bangladeshi Quota, December 18, 2010 subscription closes on: Issuer: Purpose: BRAC Bank Limited To raise Tier 2 Capital (subject to regulatory approval) and undertake normal commercial banking activities with the proceeds as permitted by the Bangladesh Bank. Lead Arranger: Issue Manager: Trustee: RSA Capital Limited IDLC Finance Limited The City Bank Limited

Investors:

90% of the total Issue Size shall be offered to institutional investors including onshore and offshore investors and the remaining 10% shall be offered to public through IPO.

Issue Size: Issue Type:

BDT 3,000,000,000 (Bangladesh Taka Three Billion) Subordinated Convertible Bond Issue (Bond) of BRAC Bank Ltd. with qualification as Tier 2 Capital. 84 Months from the date of issue, bullet repayment. Each Bond will have a Face Value of BDT 1,000 (One Thousand).

Tenor: Face Value: Market Lot:

Mutual Funds
Mutual funds are professionally managed investment schemes that collect funds from small investors and invest in stocks, bonds, short term money market instruments, and other securities. This ensures a diversified portfolio for the investors at much less efforts than through purchasing individual stocks and bonds. Mutual funds are usually managed by fund managers who undertake trading of the pooled money and are responsible for managing the portfolio of holdings. Generally, mutual funds are organized under the law as companies or business trusts and managed by separate entities. Mutual funds fall into two categories: open-end funds and closed-end funds. In Bangladesh, the number of mutual funds is small having low issued capital. At present, there are only 33 mutual funds 1JANATAMF( First Janata Bank Mutual Fund )1STBSRS( 1st Bangladesh Shilpa Rin Sangstha M.F. ) 1STICB( 1st ICB ICB M.F. )1STPRIMFMF( Prime M.F. )7THICB( 7th 1st Islamic Mutual Finance First Mutual Fund ) ICB 1st 2NDICB( 2nd ICB M.F. )3RDICB( 3rd ICB M.F. )4THICB( 4th ICB M.F. )5THICB( 5th ICB M.F. )6THICB( 6th ICB M.F. )8THICB( 8th M.F. )AIBL1STIMF( AIBL Fund )AIMS1STMF( Aims

M.F. )DBH1STMF( DBH

First

Mutual

Fund )EBL1STMF( EBL

First

Mutual

Fund )GRAMEEN1( Grameen Mutual Fund One )GRAMEENS2( Grameen One : Scheme Two )GREENDELMF( Green Delta Mutual Fund )ICB1STNRB( ICB AMCL 1st NRB Mutual Fund )ICB2NDNRB( ICB AMCL 2nd NRB Mutual Fund )ICB3RDNRB( ICB AMCL Third NRB Mutual Fund )ICBAMCL1ST( ICB AMCL 1st M.F. )ICBAMCL2ND( ICB AMCL Second Mutual Fund )ICBEPMF1S1( ICB Employees Provident MF 1: Scheme 1 )ICBISLAMIC( ICB AMCL Islamic Mutual Fund )IFIC1STMF( IFIC Bank 1st Mutual Fund )IFILISLMF1( IFIL Islamic Mutual Fund-1 )MBL1STMF( MBL 1st Mutual Fund )PF1STMF( Phoenix Finance 1st Mutual Fund )PHPMF1( PHP First Mutual Fund )POPULAR1MF( Popular Life First Mutual Fund )PRIME1ICBA( Prime Bank 1st ICB AMCL Mutual Fund )TRUSTB1MF( Trust Bank 1st Mutual Fund ) Debentures A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture. DEBARACEM( Aramit Cement Ltd.(Deb-14%) )DEBBDLUGG( Bangladesh Luggage Ind. Ltd. (Deb-14%) )DEBBDWELD( BD 15%) )DEBBDZIPP( Bangladesh Denims (Deb-14%) ) Zipper Welding Ind. Electrodes Fisheries Ltd.(DebLtd.(DebLtd.(Deb-14%) )DEBBXDENIM( Beximco

Ltd.(Deb-14%) )DEBBXFISH( Beximco

14%) )DEBBXKNI( Beximco Knitting Ltd.(Deb-14%) )DEBBXTEX( Beximco Textiles Ltd.

Capital market securities (DSE): (Main Board as on February 2011) Table 1.7: Capital market securities (DSE): Total Number of Listed Securities Total Number of Companies 476 229

Total Number of Mutual Funds Total Number of Debentures Total Number of Treasury Bonds Total Number of Corporate Bonds Total number of Shares/Certificates: Total Number of Shares & Mutual Fund Certificates of All Listed Securities* Total Number of Shares of All Listed Companies Total Number of Certificates of All Listed Mutual Funds Total Number of All Listed Debentures Total Number of All Listed Gov. T-Bonds Total Numberof All Listed Corporate Bonds Total Issued Capital of : All Listed Securities All Companies Shares All Mutual Funds All Debentures All Listed Govt. T-Bonds All Listed Corporate Bonds Total Market Capitalization of: All Listed Securities All Listed Companies Shares All Listed Mutual Funds All Debentures All Listed Govt. T-Bonds All Listed Corporate Bonds Conversion Rate: BDT against USD (Figure Tk.in mn) 719,316 220,543 23,183 140 468,113 7,336 (Figure Tk.in mn) 2,349,353 1,843,471 30,477 576 468,113 6,716 71.18

33 8 203 3 (No. in mn) 15,673

13,268 2,393 (No. in ' 000) 409 4,672 7,336

(FigureUS$ in mn) 10,105.59 3,098 326 2 6,576 103 (FigureUS$ in mn) 33,006 25,899 428 8 6,576 94

Table 1.8: Sectoral Performance - February 2011 DSE Sectoral Performance - February 2011 Sector Market Capitalisation in % mn February Financial Sector Banks Financial Institutions Insurance Mutual Funds Total Manufacturing Foods Pharmaceuticals Textile Engineering Ceramics Tannery Paper & Printing Jute Cement Total Service & total January Marke t Cap 561,617.62 260,221.58 102,568.39 30,476.60 954,884.19 863,038.59 358,110.22 159,153.82 39,774.31 1,420,076.9 5 44,488.99 150,418.71 72,982.86 89,177.70 29,921.39 11,498.95 668.80 563.36 43,816.28 443,537.05 60,815.97 197,966.28 113,573.28 142,247.97 55,384.39 15,685.41 1,084.90 880.90 66,265.68 653,904.79 2.35 7.96 3.86 4.72 1.58 0.61 0.04 0.03 2.32 23.47 1,831.64 4,711.34 8,465.27 6,833.76 2,009.12 629.03 6.35 34.94 2,012.51 26,533.96 29.72 13.77 5.43 1.61 50.54 38,847.87 19,244.78 6,064.29 4,069.48 68,226.42 66,308.47 25,902.01 11,614.28 10,281.43 114,106.1 9 3,191.74 8,308.06 15,211.57 8,150.19 3,343.06 1,121.21 6.88 45.39 2,973.30 42,351.40 1.59 4.10 7.37 5.95 1.75 0.55 0.01 0.03 1.75 23.10 February January

of Turnover Tk. in mn

% total

of

Turnove r 33.81 16.75 5.28 3.54 59.39

Miscellaneous Fuel & Power 207,119.69 Service & Real 16,242.27 Estate IT Telecommunicatio n Travel 3,140.86 188,906.97

292,616.55 27,113.91 4,643.77 320,426.20 13,793.65 81,396.06 739,990.14 3,990.11 3,990.11

10.96 0.86 0.17 10.00 0.47 3.18 25.63 0.36 0.36

8,518.04 724.62 331.12 3,547.66 2,156.57 4,721.61 19,999.61 127.11 127.11

12,584.36 1,238.21 527.99 5,053.28 4,065.75 6,959.01 30,428.60 83.05 83.05

7.41 0.63 0.29 3.09 1.88 4.11 17.41 0.11 0.11

and 8,837.65 60,116.82 484,364.26 6,716.23 6,716.23

Leisure Miscellaneous Total Bond Corporate Bond Total

Grand Total

1,889,501.7 3

2,817,961.9 8

100

114,887.1 0

186,969.2 4

100

Table 1.9: Capital market securities: CSE (June 2010): Indicators Chittagong Stock Exchange 204 26 2 232 Figures in million (TK)

No. of companies No. of mutual funds No. of debentures No. of treasury bonds No. of corporate bonds Total No. of Listed Securities

No. of shares of all listed companies No. of certificates of all listed mutual funds No. of debentures of all listed debentures No. of all listed govt. T-bonds No. of all listed corporate bonds Total No. of Tradable Securities Issued capital of all companies Issued capital of all mutual funds Issued debentures Total issued capital Total Market Capitalization All Share Price Index

6,730.54 1,225.28 4.34 --7,960.16 Figures in million (TK) 184,214.21 12,565.50 4,335.85 210,115.56 Figures in million (TK) 2,534,393.27 18116.0515

Problems:
1. The Political Situation: The Peoples Republic of Bangladesh has been a parliamentary

democracy since September 1991. The present government is headed by the Awami League which has an absolute majority, but the opposition party has stepped up its nationwide program of strikes, processions, and mass meetings. These activities have weakened the governments intentions to foster changes such as the development of the financial market. In addition, certain commercial and financial regulations are outdated in that they tend to focus on institutions rather than functions. Governance and accountability are lacking in certain areas, and there are elements of inefficiency in the financial system, mainly concerning the state-owned banking sector. Although the government is aware of these problems, it has been slow to improve governance and develop strong institutional capacity. The problems created by these weak institutions are compounded by an increasingly confrontational. 2. A sense of urgency is missing in policymaking, despite the growing imbalances in the

economy and crowding out as Bangladesh continues to channel vast monetary resources into servicing bad loans. Given that macroeconomic changes can happen in short periods of time and that nonperforming loan, which account for a third of the loan portfolio, can create financial sector vulnerability, the bad-loan situation could trigger a severe liquidity crisis nationwide. It

can take decades to build a fixed-income market in the wake of such crises. This issue clearly needs immediate and focused attention. 3. Certain omissions or drawbacks of the broader laws and regulations directly affect

development of the fixed-income market. 4. The government securities market in Bangladesh is small, does not provide much of a

yield curve to support a corporate bond market, and does not provide intermediaries with skills and a profit base to support the corporate bond market. 5. Regulators and Regulations: One impediment at the regulator and regulation level is the

overlapping authority between the two financial market regulators, Bangladesh Bank and the Securities and Exchange Commission (SEC), and no clear jurisdiction over the fixed-income market. In general, BB regulates the commercial banks and their activities, while the SEC regulates the NBFIs, the two stock exchanges, and the capital market. A second problem is that the SEC has no authority to issue rules and regulations, and the procedure as a whole is long and drawn out. As a result, the SEC has not proposed any regulations for the issuance of bonds or debentures. All rule proposals must first be submitted to the Minister of Finance for approval and then passed on for approval from Ministry of Law. Furthermore, potential issuers have to look at various sets of regulations and follow a long and cumbersome procedure. 6. Investors: On the investor side, few investors are sophisticated enough to think about

investing in bonds. Most of them dont have even financial literacy. 7. Intermediaries. Intermediaries in Bangladesh lack many of the skills needed to foster an

active local corporate bond market. As mentioned earlier, commercial banks dominate the financial sector and not enough intermediaries are skilled in securities. Few are able to identify issuers and investors and bring them to the market. They provide little or no research analysis on industries or companies to encourage investment in the local debt market. Too few private merchant banks are able to conduct financial advisory and trust services. Nor do any feel motivated to become a market maker for an issue. Hence the market is illiquid, with large spreads. At the same time, the fee structure and pricing are high enough to allow intermediaries

to make money, but because transactions are so limited, the intermediaries seldom make money. Even if they are able to participate, intermediaries are reluctant to take any risk in dealing. 8. Growth of mutual fund in Bangladesh has been slow. Only recently there has been a rush

for new funds. Many banks and financial institutions are in the queue with proposals for their funds. Mutual fund is often a misunderstood subject in Bangladesh. Many investors do not understand the difference between mutual fund shares and other company shares. 9. The Securities and Exchange Commission will have to be more efficient and

professional. It simply cannot run with the present manpower. It needs more professionals, more training at home and abroad and more logistic support. But it is just not possible to attract the right kind of professionals with the current pay structure. 10. Lack of transparency in public sector borrowing: Public sector borrowing has been

riddled with lack of transparency that failed to eventually proffer any reliable demand-supply scenario in which an efficient debt market can function. Because of the frequent shifts and ad hoc culture and volatility of demand, many of the debt instruments could not be designed to be publicly traded that could fuel a vibrant market. Efforts are now on to issue tradable instruments and bring fiscal discipline. 11. Price manipulation: It has been observed that the share values of some profitable

companies has been increased fictitiously some times that hampers the smooth operation of DSE 12. Delays in settlement: Financing procedures and delivery of securities sometimes take an

unusual long time for which the money is blocked for nothing. 13. Irregulations in dividends: Some companies do not hold AGM and eventually declare

dividends that confused the shareholders about the financial position of the company. 14. Some members being the directors of listed companies of DSE look for their own interest

using the internal information of share market 15. Many companies of DSE dont focus real position of the company as some audit firms

involve in corruption while preparing financial statements.

16.

As the DSE is small market, the spread/cost ratio is relatively higher which is a more

important factor for capitalization.

Prospects:
1. A large number of new investors from across the country are entering the market.

Institutional investors are active in the market. Asset management companies are growing and their activities are visible. A number of proposals for new mutual funds are awaiting approval. 2. Regulatory policies should be framed with long term vision. In recent months, some

policy decisions are being taken to address current problems at the cost of long term market interest. These policy changes include fixation of minimum size of new public issue, imposing restriction on private placements, disqualifying private sector companies under direct listing and discouraging new mutual funds. 3. Many of the stocks are overpriced and this is a serious risk factor for the inexperienced

investors. Entry of new companies in the market can help reduce gap between demand and supply and help bring stability in the market. 4. Immediate entry of at least two or three large companies could be extremely helpful for a

balanced growth of the market. Currently, Grameen Phone alone accounts for a large portion of the market capitalization. As a result, normal movement of its price affects the index substantially and entire market is influenced by it. 5. BTCL with its huge asset is another public sector company that could make immense

contribution to supply side of the market. 6. Private placements have been stopped in case of smaller companies. It is true that scope

of private placement has been misused in some cases recently and the problem called for intervention.

7.

In the interest of improving supply of shares in the market, direct listing could also be

allowed for the private sector companies with some modifications. There should be an improved price discovery mechanism so that general investors get the shares at an acceptable price and manipulations are controlled. 8. SEC has taken very crucial initiatives to publicize and educate the investors about

fundamentals to deal in share transactions. Table 2.0: Overview of SAARC Markets Name of the Capital Markets Colombo Stock Exchange Dhaka Stock Exchange Indices Year ending 2008 1631.3 4 2795.3 4 5865.0 1 9647.3 1 Market Cap in US$ mn 2008 4285.9 15138.5 1 23500 647204. 8 Turnover in US$ mn 2008 1022.6 9687.67 350.00* * 309178. 7 PE Ratio (2008 ) 6.53* 18.42 13.77

Indices Name CSE Milanka DSE GEN

Indices Current Listed Jun 2009 Companies 2721.64 3010.26 7177.64 14493.8 4 235 276 652 4921

Yield % (2008) 4.72* 2.48 1.78

Karachi KSE 100 Bombay Stock Exchange SENSEX

Recommendations
Bond market

1.

The Government bonds must come first. To increase the attractiveness of these bonds

and to ensure their soundness, Bangladesh Bank will need to continue its initiatives to develop the secondary market, lower transaction costs and improve upon the market infrastructure to support secondary market liquidity. The Bangladesh Bank has already achieved a great deal to this end in a very short time. It was not so long ago that government debt market trading was effectively zero; now we see a disciplined, organized market taking shape with maturities in traded securities out to ten years. 2. All issues of debentures are rated by independent rating agency prior to issue. Companies

issuing bonds/debentures to public may be rated periodically to keep track of issuing company's financial position. 3. Public utilities and infrastructure projects be asked to raise a part of debt through issue of

marketable bonds. 4. forces. 5. Investment in bonds/debentures approved by SEC may be given tax-exempt status up to a Coupon rates and all other issuing conditions of debentures be determined by market

certain limit. If all the above things can be done, then this could pave the path for a well-functioning bond market that can change the existing bank-oriented financial system to a multilayered system, where capital markets can complement bank financing. Capital market securities other than Bnods Rules, Regulations, and Regulators. The role of the BB and SEC in regulating the fixed-

income market needs to be clearly defined in detail so that appropriate regulations can be written for the public, private, and secondary markets. These regulations should ensure that each market is encouraged and protected. In view of situations around the world, it likely is best to have the SEC regulate the fixed income market. But whichever agency is chosen, the regulator must be educated appropriately to ensure that it fully understands the product and is able to supervise the

markets, monitor the risks in the markets and the intermediaries, and enforce its power where necessary to ensure a quality market. Central Market Infrastructure. Bangladesh should consider whether to develop a central

clearing, settlement, and depository institution. Such an entity would support both the equity and debt markets. Market Participants. There are too few professional participants in the Bangladesh market

to create an effective secondary market in fixed-income instruments. Activities in the market are as yet too limited because the government is unable to create an effective yield curve. When such a base is established, market participants will know their relative value for issuing and investing, which in turn will attract new participants to the market. The government also needs to support private initiatives to bring intermediaries to the marketplace. They, in turn, bring the trading mentality to the market that is essential for a secondary market. The best way to do this is to create incentives for professional people to establish their own profitable business. With such a base, the market will drive itself and private initiatives will ensure diversity in fixed-income instruments. To build investor confidence, the market needs strong accounting rules and regulations comparable to international standards. To that end, the government should strengthen and supervise the accounting rules and controlling body. Macroeconomic. At a more general level, to foster market development, Bangladesh

needs to bring more competition into the financial sector through deregulation and privatization. The country appears to be moving in that direction, but the speed is slow. The government needs to accelerate its efforts in this area. Not only will a bond market require good financial foundations, but long-term investment

institutions will also need to be developed with demand for longer maturity assets. The insurance and pension markets are currently not fully developed in Bangladesh. These markets should be reformed as they are the natural buyers of long-term securities. Systems of market makers (specialists) may be evolved to facilitate market.

At a more general level, to foster market development, Bangladesh needs to bring more

competition into the financial sector through deregulation and privatization. The country appears to be moving in that direction, but the speed is slow. The government needs to accelerate its efforts in this area.
Broader Financial System. Ideally, there are several ways that Bangladesh might work to improve

operations in its government securities market, to create a market that provides an interest rate structure that supports the entire financial system and a benchmark for corporate bond offerings. However, the analysis performed for this study was not sufficient to determine whether and if so when certain changes might best be suited for Bangladesh. But some suggestions can be made which Bangladesh might consider over time, as it seeks to improve operation of its government securities market. More specifically, instead of issuing tax-free and nontransferable government bonds to the retail market, the government should consider issuing its bonds in the marketplace. It might issue T-bills and T-bonds with a broader maturity base, transparent pricing, which are tax-neutral and transferable. To start with, efforts might focus on building an effective money market (O/N365 days), and from that base it may be possible over time to create new short-term instruments such as futures, short-term interest rate swaps, and a USD/Taka forward market. It is important to build a more sophisticated interbank deposit market with different maturities. This will help create the everyday price fixing needed to price other financial products (for example, leasing agreements), and it can help create a forward rate agreement (FRA) market. Creating an effective yield curve will help provide a foundation for ultimately creating a diverse secondary market.

Provisions can be made to ensure investment of the generated fund in the prescribed

priority sectors. To force the listed companies to publish their annual reports with actual and proper

information that can ensure the interest of investors. DSE There should be complete transparency in brokers transactions with the clients. Person being the director of listed company should not be allowed to be a member of

Conclusion

The capital market is the engine of growth for an economy, and performs a critical role in acting as an intermediary between savers and companies seeking additional financing for business expansion. Vibrant capital is likely to support a robust economy. While lending by commercial banks provides valuable initial support for corporate growth, a developed stock-market is an important pre-requisite for moving into a more mature growth phase with more sophisticated conglomerates. Bangladesh's stock market is poised for rapid development. For this the SEC, DSE, CSE and all market players should work together with the support of the government. Market confidence is sure to erode if conflicting signals are received from different authorities. At the same time investors will have to understand that in any stock market there are ups and downs and they cannot blame others whenever stock prices slide down. Fortunately, investors are getting matured gradually and hopefully we may not have to see shouting and slogan in front of the exchanges any longer. Bangladesh should really focus on improving governance and developing advanced market products, such as derivatives, swaps etc.

Bibliography