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Letter of Transmittal

August 9th, 2011 Engr. Kamrul Hasan Assistant Professor Department Of Business Administration East West University Subject: Submission of Project Paper. Dear Sir, With due respect it is my pleasure to present the project paper entitled A Qualitative Analysis on the Ups and Downs in the Capital Market of Bangladesh (2010-2011) which I have prepared as the requirement of completion of the BBA degree and the course BUS 498, Project Work. While preparing the report I have tried my level best to focus closely on the topic and try to focus most complete and updated information available. I strongly believe that it will provide a clear idea about what reasons were primarily behind the fluctuations of capital market in Bangladesh during 2010-2011 periods. While making the report I studied the reasons of ups and downs in the capital market of Bangladesh during 2010-2011. I have come to know a lot of things about the practical scenario of the capital market in Bangladesh. The whole experience of this report writing enabled me to bridge the gap between classroom learning in my academic study in the university and real life situations to a great extent. I thank you and the University for providing me such an opportunity.

Sincerely Yours,

Dewan Joheb Zaman


ID no. 2009-3-10-035 Department Of Business Administration East West University, Dhaka.

Acknowledgement

It is my concession to thank Engr. KAMRUL HASAN, Assistant Professor of Department of Business Administration, East West University for assigning me a report on A Qualitative Analysis on the Ups and Downs in the Capital Market of Bangladesh (2010-2011). I would also thank all other faculty of East West University for helping me to acquire the necessary knowledge for making this paper. I am grateful to almighty Allah to make me able to finish this Paper. My special gratitude to my parents and family members for their encouragements and supports towards me. I am grateful to the employees of broker houses who helped me in collecting data and other necessary information for this report. I would also like to thank my friends and relatives for their supports. I also covey my deep gratitude to those people who have helped me to collect information and supported me in finishing this study paper.

Table of Contents
Acknowledgement Executiv e Summary 1.

Page No. iii v ii 1 1 1 4 4 5 5 5 6 6 6 7 7 8 9 9 10 10 10 10 10 11 12 13 14 14 16 16 16 17 17 17 18 18 20 25 27 28 30 31 32

Introduction
1.1 1.2 1.3 1.4 1.5 1.6 1.7 Origin of the Report Background of the Study Objectiv es of the Study Contribution of the Study Research Questions Scope Research Methodology 1.7.1 Approach of the Study 1.7.2 Sources of Data and Method 1.7.2.1 Primary Source 1.7.2.1.1 Self-Administered Questionnaire 1.7.2.1.2 Questionnaire 1.7.2.1.3 How the Respondents w ere Selected 1.7.2.2 Secondary Source 1.7.2.2.1 Books 1.7.2.2.2 I nvestigation Report 1.7.2.2.3 Data of I ndices 1.7.2.2.4 Past Researches 1.7.2.2.5 New spaper, Journal and Other Sources 1.7.3 Reliability and Validity Definitions & Acronyms Literature Review Limitations What is a Stock Exchange? What is Stock Market Trading? What is Stock Market Bubble? What is a stock market crash? What is KERB Market? What is broker? What is Securities and Exchange Commission (SEC)?

1.8 1.9 1.7 2. 2.1 2.2 2.3 2.4 2.5 2.6 2.7

Concept of Capital Market

3.

The Capital Markets of Bangladesh


3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 History of Stock Exchange Dhaka Stock Exchange (DSE) Chittagong Stock Exchange (CSE) Structure of Capital Markets in Bangladesh Securities & Exchange Commission of Bangladesh (SECBD) Central Depository Bangladesh Limited (CDBL) Stock Market Settlement Reasons behind the Underdeveloped Capital Market of Bangladesh

4.

Capital Market Crash of 2010-11


4.1 4.2 4.3 4.4 Background of the Crisis Reasons behind Market Upsurge or Root of Bubble Time of Historical Fall Reasons behind Market Crash 4.4.1 Reasons Created By the Role of Regulators Reasons Created By the Role of Priv ate Banks and Financial 4.4.2 I nstitutes 4.4.3 Reasons Created By the Role of I nv estors 4.4.4 Reasons Created By the Role of the Listed Companies 4.4.5 Reasons Created By the Role of Gov ernment

34 34 36 39 46 46 58 60 66 68 69 71 71 76 76 78 79 80 82

5. 6. 7.

The Potentials Of The Bangladesh Capital Market Qualitative Empirical Research


6.1 Result and Discussion

7.1 7.2 7.3

Recommendations

Recommendations to the Regulators Recommendations to the Gov ernment Recommendations to the I nv estor

8. 9.

Conclusion References

List of Figures
Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 Figure 10 Figure 11 Figure 12 Figure 13 Figure 14 Figure 15 Figure 16 Figure 17 Figure 18 Figure 19 Figure 20 Figure 21 Figure 22 Figure 23 Figure 24 Figure 25 Figure 26 Figure 27 Figure 28 Figure 29 Figure 30 Professional Areas for Considering Interviews Types of Secondary Market Capital Market Securities Listed companies and market capitalization in Bangladesh: 1989-2009 Sectorial Market Capital of Dhaka Stock Exchange Dhaka Stock Exchanges Main Board I nformation Total Number of Shares or Certificates in Dhaka Stock Exchange Total Number of Bonds in Dhaka Stock Exchange Total I ssued Capital of DSEBD Total Market Capitalization of DSEBD Highest Records in Chittagong Stock Exchange Structure of Capital Market in Bangladesh Stock Exchanges under Securities and Exchange Commission (SEC) Relations Betw een money supply and share price index of 1990-10 Market Capitalization as % of GDP Of 1988 To 2010 DSE Performance: March 2010 to February 2011 DSE Daily I ndex of December, 2010 CSE Daily CASPI I ndex of December, 2010 Daily DGEN I ndex of January, 2011 DSE Performance: September 2010 to February 2011 CSE Daily CASPI I ndex of January, 2011 DSE Sectorial Performance - February 2011 Sectorial P/E - February 2011 Recent Monetary Policy Changes by Bangladesh Bank Policies Taken By Bangladesh Bank to Stabilize the Capital Market Volatility Differences between the DSE I ndex and the Timing of Margin Loan Ratio. Volatility of DSE I ndex and the Timing of Margin Loan Ratio Regulation Policies Taken By Securities & Exchange Commission Policies Taken By Finance Minister to Stabilize the Capital Market Number of Respondents Agreed With Different Reasons behind Capital Market Crash Page No. 9 16 17 19 22 23 23 23 24 24 26 27 29 36 37 38 40 41 42 42 43 44 45 49 50 52 52 53 68 72

Executive Summary
For the proper functioning and improving the efficiency of the capitalistic economy of a country, financial markets or capital markets are absolutely vital because they serve and maintain the flow of fund through the channels from saver to borrower. In this connection Dhaka Stock Exchange (DSE) play an integral role in the pace of the industrialization of the country. Over the past four years Since 2007 Bangladesh stock markets outperformed almost all of the worlds stock market as there has been a steadily increasing trend of stock price in Bangladesh stock markets. The financial year 2008-09 was a volatile year and the stock market was turned into a route of easy money for too many new individual investors before the stock market finally crashed at the late of 2010. For this reason, during this period millions of new investors invest their all savings in the market. Many people have characterized stock market or capital market as Speculative Market over the years. It means return or profit can be earned from their investment by the market participators or investors through the stock price differences. But now days the capital market of Bangladesh has become a Manipulated Market as market participators or investors can control the stock price differences by insider trading which actually should not be. Market participators should not have the ability to control the stock price differentials because then it becomes just an illegal or illegitimate trading and as a result the market collapses or falls thus wrongdoer gains huge profit in the expense of the loss of majority specially small investors. Investors in Bangladesh suffered an experience of such a tragic event in the year 2010-2011. The fall of capital market of Bangladesh in 2010-2011 was not a single day event; it was just a bubble which was blown to huge that it finally came to a burst. The study has attempted to find out the major reasons for the recent stock market crash of Bangladesh in 2010-11 and role of different regulatory organizations. Most of the reasons behind the downfall of the market involve policy blunder by Securities and Exchange Commission and Bangladesh Bank. The crash of capital market was occurred mainly because of the poor monitoring of regulators, insider trading, given wrong information to the investors, imbalance of share, margin loan, weak accounting functionality and illegal participatory investment by the financial institutes, too much exposure by the banks and financial institutions, corrupted employees of regulatory organizations, direct listing, book building, lack of general investors knowledge, intervention of Bangladesh Bank and many more. At the end few recommendations about how the capital market scenario can be improved has been suggested in this study report.

1. INTRODUCTION
1.1 Origin of the Report
The report has been prepared as a requirement for the completion of BBA Degree and course BUS 498, Project Work, under Engr. KAMRUL HASAN, as the course instructor, assigned to do an analytical report on A Qualitative Analysis on the Ups And Downs in the Capital Market of Bangladesh (2010-2011). For this purpose I, DEWAN JOHEB ZAMAN, ID no. 2009-3-10-035 of East West University, BD choose to prepare this report on finding the core reasons which stimulates the capital market crash in 2010-11. The date of submission of the report is August 9, 2012.

1.2 Background of the Study


The world economy has always changed to integrate itself in the parts of the world to achieve the desire objective for growth and prosperity. Both developed and underdeveloped countries had to move the wheel of socioeconomic development with the means to facilitate economic development through the appropriate allocation of the same. Hafer and Hein (2007) pointed that growth of new businesses or economy would not be possible without availability of stocks and development of capital markets. For the economic growth stock markets are excellent financial institutions only if they are managed properly and efficiently. Due to the unavailability of the investment arena with safe return of both principle and interest, the idle money in Bangladesh is not correctly or properly canalized. To meet the capital requirements, most of the potential entrepreneurs gather in the capital market. In order to meet capital requirements, potential entrepreneurs enter in the capital markets. Millions of small and large investors can raise billions dollars of worth of capital with voluntary participation. In the public market investors voluntarily participate to purchase the ownership of a company. Stock market is an intermediary institution to adjust a gap between surplus units and deficit units of an economy. The surplus units of the society are not supposed to invest their money. Due to the sell and purchase ownership anytime without any hassle, stocks are more liquid than any other investment for an investor. As a result they use their money to supply in capital markets to purchase securities from the capital markets. In The mobilization of capital or the development of the capital market stock exchange plays an important role. According to the language of finance, share is the unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REIT's. So share or stock is the document which is issued by a company to make its holder entitles to be one of the owners of the company. For the economy of Bangladesh, stock

market is one of the most prominent financial institutions. Stock market opens door for companies to raise huge amount of capital from a lot of individual investors inside & outside of a country. For the developing countries like Bangladesh, stock market is one of the main economic sectors to be flourished. Due to the economic expansion and boost on south Asian region, Bangladeshs economy is now currently progressing rapidly. For the last decade in Bangladesh, the trading on stock market is influenced by the tremendous progress of sectors like textile, garments, manufacturing, investments and banking due to low labor cost and skillful manpower. Investing in stocks is more popular than investing in any other investment sectors in these days for millions of middle class educated people in Bangladesh. Bangladesh has two stock exchanges and these are Dhaka Stock Exchange and Chittagong Stock Exchange. Dhaka Stock Exchange is the main stock exchange of Bangladesh. Dhaka Stock Exchange, the frontline organization for the securities market development of Bangladesh, was incorporated on 28th April, 1954 as East Pakistan Stock Exchange Association Limited which started formal trading in 1965 at Narayangonj. Subsequently, in 1962 it was renamed as Dhaka Stock Exchange Ltd. After liberation, the Exchange opened up in 1976 with only 9 listed companies. Dhaka Stock Exchange (DSE) is registered as a public limited company and its activities are regulated by its articles of association rules & regulations and bye-laws along with the Securities and Exchange Ordinance 1969, Companies Act 1994 and Securities & Exchange Commission Act, 1993. The second stock exchange of the country, the Chittagong Stock Exchange(CSE) was established in December 1995.In order to control operation of the stock exchanges and trading of stocks of listed companies, the government of Bangladesh established the Securities and Exchange Commission (SEC) of Bangladesh on 8th June, 1993 under the Securities and Exchange Commission Act, 1993 .The mission of the SEC is to protect the interests of securities investors, develop and maintain fair, transparent and capable securities markets, ensure proper issuance of securities and compliance with securities laws. After studying the operation of stock markets in the developed world many scholars have established many well founded theories. Among these studies, one of the most famous hypotheses is that if the stock markets are operating based on information available fast and cheap for those who want and need them then the stock markets are information efficient. It also mentions that price of stock in the market include all information about it as the change of price only occurs when new information is available to investors. One can earn a portion by owning a share and also can get capital gain by selling it. So dividend plus the capital gain is the return earned by the investors. If the investors sell the share at a price below than their purchase price, they bear a risk of making a capital loss. The price of the stock of a company is the reflection of the investors expectation and thoughts about the stock and does not matter what actually the company is worth. The price of a stock of a company can grow quickly in trade at a higher price than the companys

actual current worth. Stock prices are affected by many direct or indirect factors. All forms of company and market news as well as the market forces and general investors opinions mainly affect the stock prices. Publicly traded companies are required to report quarterly on their financial status and earnings. Over the past four years Since 2007 Bangladesh stock markets outperformed almost all of the worlds stock market as there has been a steadily increasing trend of stock price in Bangladesh stock markets. In 2010 Bangladesh stock market was in second position after Sri Lanka by gaining nearly 83%. The financial year 2008-09 is known for the global financial and economic crisis as many developed and developing countries fall into recession but Bangladeshs economy was not affected greatly. For that reason, in that period there was no significant change or fall in the stock market. CPD (2011) [9] reported that, even the financial year 2008-09 was a volatile year but the economy of Bangladesh benefited from low priced import and was able to avoid the negative pressure on its goods and services exports. In the recent years before the crash of stock market the consecutive outstanding performance of the Bangladesh stock market lured millions of investors to invest in stock market with their small savings. The stock market was turned into a route of easy money for too many new individual investors before the stock market finally crashed at the late of 2010. For this reason, during this period millions of new investors invest their all savings in the market. It created a way to avoid the works for jobs to those millions of new investors investing in the market. Even many investors acted as intermediaries of their friends and relatives BO account. But at last the stock market crashed and thus the investors who invested their savings in the stock market learned that investing in stock market is risky. But the lives of millions of innocent investors were wreaked in havoc as they learned this lesson. The crash of stock market swiftly wiped out billions of taka from the market by making the new and illiterate investors as victims. It has been more than a year since the stock market was crashed and still the market is struggling to regain its loss from the crash. Stock market crash of 2010-11 has become a national, political and social issue of the country. Hossain (2011), the chairman of Securities and Exchange Commission of Bangladesh (SECBD) suggested that All market participants and regulatory organizations have to work together more professionally in order to achieve the ultimate goal of the Capital Market and Investors of this market have to enrich their knowledge and need to be aware about the stock market.

1.3 Objectives of the Study


The primary purpose of this research is to identify the reasons behind the capital market collapse in 2011. This study analyzes the reasons from different perspectives, such as from the point of view of regulators, investors etc. The objectives of the study were to: To review extant conceptual models and theoretical frameworks related to evolutionary trends of the capital markets in Bangladesh. To find out the important events in the capital market from 2010-2011. To identify unusual events caused the ups and downs in the capital markets. To evaluate the adequacy of the regulators actions and responses to control the market instability. To recommend solutions based on my research that will help to predict and prevent financial crisis.

The research project subject is very important to the stakeholders of Bangladesh stock market and emerging stock market as well as there have been very small scale research has been done on the Bangladesh stock market crash to provide the necessary knowledge on the reasons behind the crash. For these reasons, this project work tried to work out the reasons behind the Bull Run of dramatic increase of different instruments in Bangladesh stock market and the fundamental factors of the collapse. The roles of the Dhaka Stock Exchange, Chittagong Stock Exchange and Securities and Exchange Commission (SEC) as market regulators during the bubble formation and burst were also analyzed in this research project work. Also this project work will be able to provide some basic knowledge for the stakeholders on the subject matter related to the stock market so that investors and other stakeholders in Bangladesh as well as from other emerging stock markets can have a clear picture of awareness to this similar kind of collapse.

1.4 Contribution of the Study


This research will highlight the macroeconomic and microeconomic factors responsible for the uptrend and downward trend in the Bangladeshs Capital Market and develop a link between these factors and the collapse of the market. A proposition that will help prevent or forecast an imminent collapse will also be put forward.

To The Literature
If this research paper is published as a journal, it would serve as a viable source of secondary research for subsequent researchers on this topic. This would help the young learners in manipulative market behavior to get valuable insight for any further research work.

To The Users
The investors would be benefited since the research focuses on the reasons of capital market crash and their indications. If any anomalies exist, then the investors can predict their investment risk.

1.5 Research Questions


In order to guide the inquiry or investigation and to shed more light on the research project about the ups and downs of capital market of Bangladesh, the following research relevant questions were intended to answer as follows:

1. What were the reasons behind the unexpected and unusual boom or huge up trend 2. 3.
growth in the capital market in the year 2010? What were the causes or reasons behind the crash or huge downward trend in 2011 in the capital markets of Bangladesh? Ware there any adequate controlled precautionary and crash afterward measurements or initiatives adopted or ruled by the authoritative regulators to stabilize and sustain the growth of capital markets? If the regulators precautionary and crash afterward measurements or initiatives adopted or ruled by the authoritative regulators were not subsequently adequate, then what can be the long term consequence regarding the stabilization and growth sustainability of the capital markets in Bangladesh? What recommended suggestions can be proposed to stabilize and sustain the growth of capital markets in Bangladesh?

4.

5.

1.6 Scope
The scope of this paper is limited to only the reasons for which capital market crash in Bangladesh during 2010-2011. The mechanism of stock exchanges, scientific methods of investing in the securities, the mechanism of brokerage firms and commercial banks and stock market crash in other parts of the world are beyond the scope of this paper.

1.7 Research Methodology


The aim of methodology is to explain or describe how the data was collected in which method and the process initiated in analyzing the data. Research is the systematic study of materials and source etc. in order to establish facts and to reach new conclusions. The process by which a research is written or carried out is very important because it has a huge impact on the conclusions reached at the end of the research. There are two major research philosophies which underpin the research strategy

and the method that will be used to carry out a research (Collis and Hussey, 2009) are the Positivism and Interpretivism research paradigm.

[8]

. They

This research work employed the positivist paradigm as the use of the reality which is completely different and detached from the knowledge of the area of the author, so that it will serve an objective reality against which other researchers can compare claims and ascertain the truth. The positivist paradigm will also make it possible for findings to be applied externally and more broadly outside the study area as it is reliable and unbiased as well as the facts about the ups and downs of capital markets of Bangladesh cannot be altered by anyone.

1.7.1 Approach of the Study


Qualitative research method is chosen for the nature of this research. The aim of this research is to find the reasons behind the uptrend and down trend or crash of the Bangladesh stock market. The required information itself asks for a qualitative research approach. A qualitative research method quoted by Myers (2009, p.6) [21] quoted a qualitative research method as, to understand the peoples motivations, actions, reasons and the context of their beliefs and actions in to a depth way, many qualitative researchers argued that a qualitative research is the best. According to Ghauri & Gronhaug (2002, p.88) [15] , a phenomenon qualitative method is most suitable when the aim of the research is to go in depth insight of the study.

1.7.2 Source of Data and Method


As qualitative research approach has been chosen for the study, data has been gathered or extracted from two different sources for this research which are primary and secondary sources. For the primary data set collection, self-administrative questionnaire has been sent to 8 employees of four Representatives of corporate organizations different brokerage houses, 1 representative of regulatory bodies, 1 representative of corporate organizations and 10 general investors. The questionnaire generally consist a good number of questions related to the research work. Secondary data is data that have already been collected for some other purpose, perhaps processed and subsequently stored (Saunders, et al 2007) [15]. 1.7.2.1 Primary Source WALLIMAN (2011, p.92) [33] addressed that the basic methods for obtaining primary data are asking questions, immersing oneself in a situation, conducting interviews, doing experiments and manipulating models, observing without getting involved. Through selfadministered questionnaire primary data for this study is obtained.

1.7.2.1.1 Self-Administered Questionnaire For the primary data set collection the author conducted self-administered questionnaire with 8 employees of four Representatives of corporate organizations different brokerage houses, 1 representative of regulatory bodies, 1 representative of corporate organizations and 10 general investors. Distance and time constraints are the reasons behind choosing self-administered questionnaire. As an inexpensive communication channel for the distance e-mail (internet) was found. Moreover, it allowed respondents to provide accurate and clear answers for the questions according to their thinking and feelings. Saunders, Lewis & Thornhill (2009, p.362-63) [30] suggested that the respondents usually complete the selfadministered questionnaires and internet or intranet, by post or by hand and collected later can be used to execute the process questionnaires to send to the respondents. Robson (2002, cited in Saunders, Lewis & Thornhill, 2009, p.362) [30] suggested that standardized questions in a questionnaire ensure that it will be interpreted in the same way by all respondents. The Investigation report conducted by KHONDKAR IBRAHIM KHALED (2011) [18] concludes the reasons which are behind the crash. But to find out any other causes which one did not appear in the investigation report has been find out by the self-administered questionnaire. What kind of role have been played by the regulators and governments has been played to improve the market conditions since the crash were asked in the self-administered questionnaire. Moreover, recommendation on what kind of steps that regulators and government can adopt to protect investors in this kind of collapse in future were asked in the self-administered questionnaire. The self-administered questionnaire helped the gathering of information to solve the research questions related to this study and make the recommendations in this research paper work. Result expected from this self-administrative questionnaire would provide: New ways, ideas and theories on causes of the stock market crash that were not provided in the investigation report After crash development of the market by the regulators and government Recommendations to prevent this kind of huge crash to the regulators and government Respondents answers in details and according to their feelings

1.7.2.1.2 Questionnaire To match the expected result the questions for the questionnaire were selected logically. There were 10 questions in the questionnaire which were in English version. The questionnaire consists of 3 closed questions and 7 open questions. The questionnaire is attached in the appendices of the thesis.

1.7.2.1.3 How Respondents Were Selected It was a very hard job to select the respondents for this research study because it involves conflict of interest of opinions among the stakeholders. Ethical judgment was used in choosing respondents. There are many investors in this stock market who dont have enough proper knowledge about investment in the capital market which is actually determined by Different market analysts and economist. For this reason, the aim was to ignore this sample of investors. Following criteria were used to select the respondent author: Does the respondent have the corrected as well as accurate information about the crash? Is the respondent adequately experienced and educated about the subject to opine? Does the respondent have information about market conditions even after the crash?

Two deferent sample groups of respondents including employees of broker houses and general investors were selected keeping all these questions in mind. The employees of the broker houses have daily updates information about the market and regular relationship with different stake holders of the market and good educational background that help them to obtain a job in broker house. The respondents who are the employees of the broker houses were from different departments including research and sales and most them invested in the stock market thus they have experience of investing in the market with working experience. So, it would be possible to obtain information from employee and investor point of view. As there are many broker houses in Bangladesh, selection of broker house was made on the basis of easy availability of getting information from the broker house. Suggestion from the employees of broker houses were taken to select investors for the self-administered the author took. Educational back-ground, knowledge about the market and investment in it, regular updated information of the market and experience of the stock market crash of 2010-11 were the selection bases for the general investors.

Interview was conducted based on the following personnel as their followed professional areas-

Representatives of Regulatory Bodies Stock Brokers and Analysts

Representatives of Corporate Organizations Shareholders and Investors

Figure 1: Professional Areas for Considering Interviews


1.7.2.2 Secondary Source There are three main types of secondary data that is used in this research project and these are documentary, survey and information from multiple sources. To investigate or identify the causes or reasons behind the ups and downs in the capital market, a secondary research data set collection will be proceed through the related and relevant newspaper reports, working research papers, probe repots and different sort of academic or professional articles, so that these information can be used to evaluate the reasons behind ups and downs of capital market. Semi-structured and unstructured interviews will be used for this research because the semi-structured interviews has allowed to get answers to precise areas of the research that needs clarification and are specific to each respondent while the unstructured interviews which will be less restricted will allow the interviewee to express their opinions freely and providing the opportunity to get information that could be useful to this research. Also, a lot of the opinions regarding the crash of the Bangladeshs capital markets vary from person to person; the unstructured interview will provided the opportunity to get in-depth and varied response from the various respondents. Books, investigation report, past researches, newspaper, journal, electronic publications and indices data of DSE and CSE are used as secondary sources for the study. 1.7.2.2.1 Books Although books were not the major secondary source for the study, there was some use of some books too. Some books related to stock market were studied to be familiar with the subject. Moreover, few books written on different methodologies in business studies and qualitative research approaches were studied to execute methodology part of the study.

1.7.2.2.2 Investigation Report Investigation report of Dr. KHONDKAR IBRAHIM KHALED (2011) [18] is used as the main resource for theoretical part for this research. The report was collected from bdnews24.com. The full report consists of 300 pages. The report is very useful for the research as it gives complete idea about the context of the problem with case studies and serves to solve the research questions. It also helps to estimate the role of regulators and government in the capital market of Bangladesh during and before the crash. 1.7.2.2.3 Data of Indices Indices data of DSE was collected from broker house and indices data of CSE from Chittagong stock Exchange website. To examine significant fall and rise of share prices in both exchanges and to draw graphs of indices for different time periods, these data were used. 1.7.2.2.4 Past Researches It was difficult to find past researches for stock market crash of Bangladesh in 2010-11. But there were some articles on the crash and researches on other crashes done by different scholars which have been founded and were useful. 1.7.2.2.5 Newspaper, Journal and Other Sources The most important and more used sources than other sources used for the study were the newspaper, journal and other electronic sources. Important daily news and other information which were crucial for this kind of research have been collected from the newspaper. Both recent and archives journals were used for this study. Different articles were collected from these sources. The resources of these sources are downloaded via inter-net.

1.7.3 Reliability and Validity


To avoid unnecessary deceptiveness, the entire questions self-administered questionnaire was made as simple as possible. It helps respondents to provide accurate and credible answers. Also the indices data collected from both stock exchanges are highly reliable. Therefore, the study claims to have reliability. The sample of respondents and the questions fit with the findings of the study which is valid to the research.

1.8 Definitions & Acronyms

Abbreviations BO = Beneficiary Owners DSE = Dhaka stock exchange CSE = Chittagong stock exchange SEC = Security and exchange commission CDBL= Central depository Bangladesh limited BB = Bangladesh Bank AGM = Annual general meeting DVP = delivery versus payment CEO = Chief Executive Officer IPO = Initial public offerings DGEN = DSE general index CASPI = CSE all-share price index CSCX = CSE selective categories index ICB = Investment Corporation of Bangladesh NAV = Net asset value CPD = Centre for Policy Dialogue SLR = Statutory Liquidity Ratio CRR = Cash Reserve Ratio MC = Market Capitalization EPS = Earnings per share FDI = Foreign direct investment

1.9 Literature Review


The literature on financial crisis is classified into three models namely first-generation models, second-generation models and third-generation models. In the first generation model Krugman (1979)[19] , Flood and Garber (1984)[13] explains that A government with continual money-financed budget deficits is believed to use a restricted stock of reserves to peg its exchange rate and the attempts of investors to anticipate the inevitable collapse generates a speculative attack on the currency when reserves fall to some critical level. The Importance of investors beliefs was highlighted in the second generation model, Obstfeld (1994) (1996) [22, 23], Radelet and Sachs (1998) [25], Ozkan and Sutherland (1995) [24] all agreed that policy is less mechanical: a government decides whether or not to defend a pegged exchange rate by making a tradeoff between short-run macroeconomic flexibility and longer-term credibility. The crisis then starts from the fact that defending parity is more expensive as it requires higher interest rates. Should the market believe that the defense will ultimately fail, a speculative attack on a currency develops either as a result of a predicted future deterioration in macro fundamentals, or purely through self-fulfilling prediction (Vlaar, 2000) [16]. The third generation model which came about in the 1990s after the Mexican tequila crisis of 1994 and the Asian crisis of 1997. Dooley (1997) [10], Krugman (1998) [20], Radelet and Sachs (1998) [25] classified it into three different groups which are moral hazard, herd behavior and contagion. Moral hazard emphasizes mainly on liquidity shocks as an explanations of financial crisis. Herd behavior which was developed by Banerjee (1992) [3] and Bikchchandani et al (1992) [2] complements the logic in the second generation models by illustrating a mechanism where large expectation shift occur due to a small injection of new, possibly wrong information. This theory leads to an emphasis on the informational transparency in markets to prevent financial crisis. The contagion model comes in a variety of theoretical forms and has been subjected to a large amount of empirical testing and scrutiny. Contagion is the cross country transmission of shocks or the general cross-country spillover effects. Contagion can take place both during "good" times and "bad" times. Then, contagion does not need to be related to crises. The recent efforts at developing an early warning system for a looming financial crisis have taken the form of two related approaches which are Probit/Logit model or signaling model. The Probit/Logit model was pioneered by Frankel and Rose (1996)[14], they used limited dependent variable models known as probit/logit regressions to identify the causes of crisis and to predict future crisis.

The signals approach was developed by Kaminsky et al (1998) [17], and it consists of a bilateral model where a set of high frequency economic variables during a specified period is compared, one at a time with a crisis index so that when one of these variables deviates from its normal level beyond a specific threshold value prior to a crisis it issues binary signals for a possible currency crisis. The statement that market prices instantaneously and fully reflect all relevant available information is known as the efficient market hypothesis. Fama (1970) [11] provided an operational base for testing market efficiency by distinguishing between three types of efficiency: weak-form efficiency, semi-strong-form efficiency and strong-form efficiency. According to Fama (1970) [11]: A market is said to be weak-form efficient if the current prices of securities instantly and fully reflect all information of the past history of security prices. A market is said to be semi strong-form efficient if the current prices of the securities instantly and fully reflect all publicly available information. A market is said to be strong-form efficient if the current price of securities instantly and fully reflects all information, both public and private.

1.10 Limitations
Following are the perceived limitations of this study paperTo conduct self-administered questionnaire, it was not possible to approach to all stakeholders related to the stock market of Bangladesh. As a result it was not possible to get the different views of different stakeholders related to the stock market of Bangladesh, which may create a conflict of interest among the stakeholders. It was not possible to briefly and heavily explain the roles of securities Exchange Commission, Dhaka Stock Exchange, Chittagong Stock Exchange, Government, Bangladesh Bank and the monetary policy taken by the Bangladesh Bank in different time periods because of time constrain and unavailability of data.

2. CONCEPT OF CAPITAL MARKET


2.1 What Is A Stock Exchange?
Stock exchange is an organized marketplace in where the members of the exchange acting both as agents and as principals trade stocks, common stock equivalents and bonds. To execute orders from institutional and individual investors to buy and sell securities, most of the stock exchanges have a physical location where buyer and dealers meet. For membership approval, each significant stock exchange has its own requirements. Even the stock exchanges decide what to exchange, the exchange would be initiated by which system should process the different parts of an order. According to Fellowes (2008, p.29) [12] capital market or stock market has some features as like a normal ordinary market such as buyers, sellers and agrees price. Stock exchange, regulatory organizations, investors, listed companies with securities, broker houses, merchant banks, and other intermediary organizations all together forms the structure of a stock market with the cooperation and coordination of central bank and government. Brokers usually represent physically to initiate orders on the floor of the exchange in an open outcry market. The stock market provides the assurance that there is a ready market for the investors holdings to sell or an alternative easier investment by placing debt or equity in the primary capital market for the need of fund. Stock exchange turns all the daily pricing of these financial products into ideal instruments as collateral for loans. To operate an economys financial sector efficiently, the importance of the capital market or stock market is enormous. Despite the frequency of volatility of price movements which leads the excessive speculation followed by the panics and repeated scandal, stock market have become the hallmark of success for the modern capitalistic economy. There are three features which are essentials for the long term success of the development of the worldwide stock exchanges and these are as follow: A large stock of homogeneous, readily identified financial assets available to the public A numerous and diverse customer base that is aware of the financial assets availability A set of trustworthy intermediaries to handle trades of the various financial products among the customers

The Primary Market The primary market deals with newly issued securities and is responsible for generating new long-term capital. Stock markets play an important role in economy by providing liquidity for the initial investors, governments or corporate debt through both the primary market and the bank credit mobilization inside an economy. The Secondary Market The secondary market handles the trading of previously-issued securities which are highly liquid in nature because most of the securities are sold by investor. Secondary markets are formally organized and structured by the stock exchanges for the trade of financial instruments which have been already issued in the primary market. There are four kinds of secondary markets exists in the capital markets of Bangladesh and these are as follows Public Market In the public market, Instruments are traded in normal volume which is called lot share. Spot Market In the spot market, trading is done in normal volume under corporate actions and must be settled within 24 hours. Block Market In the block market, bulk volumes of instruments are traded through pick & fill basis. Odd Lot Market In the odd lot market, Odd lots of all instruments are traded through pick & fills. Odd lot generally refers to a quantity of shares that is less than market lot. Actually odd lots generated from bonus and rights issues. (Ullah, 2011) [31]

Some exchanges are physical locations where the transactions are executed on a trading floor. The method used in this kind of transactions is called open outcry. Only those stock exchanges and commodity exchanges use this type of auction where traders can simultaneously place verbal bids and offers. Another type of exchange is there which a virtual kind of exchange is. This exchange is made up of a computer network. In this type of exchanges, trading is done electronically through traders at computer terminals.

Public Market

Odd Lot Market

Secondary Market

Spot Market

Block Market

Figure 2: Types of Secondary Market 2.2 What Is Stock Market Trading?


Stock Market Trading is the process of buying and selling of company stocks or shares through stock exchanges. Stock market trading of securities is also known as the Equity Trading.

2.3 What Is Stock Market Bubble?


We can define an Economic Bubble as a surge in the market caused by speculation regarding a commodity which results in an explosion of activity in that market segment causing vastly overinflated prices. The prices are not sustainable and the bubble is usually followed by a crash in prices in the affected sector. An economic bubble taking place in the stock market where market participants drive stock prices above their value in relation to some system of stock valuation (e.g. dividend model) is called a Stock Market Bubble.

2.4 What Is A Stock Market Crash?


As the definition given by the Amadeo (n.d.) [2], stock market crash refers to the loss of more than 10% within a few days in a stock market. So, stock market crash is the sharp and unexpected decline of stock prices in a stock market accompanied by the decrease of many other assets prices within a very short period of time which causes significant capital losses of stakeholders and investors.

Treasury Notes Treasury Bonds

Stocks

Capital Market Securities


Mortgages Municipal Bond Corporate Bonds

Figure 3: Capital Market Securities

2.5 What is KERB Market?


Kerb market is an unofficial name for an unofficial activity - the trading of securities outside a recognized stock exchange. The name derives from the historical practice of dealers continuing to trade on the pavement after the exchange's hours of business.

2.6 What is broker?


A broker is an intermediary who works as a media to bring together buyer and seller. And it takes commission form the buy/sales made. A broker must be listed member of any stock exchange (i.e. - DSE, CSE).

2.7 What is Securities and Exchange Commission (SEC)?


It is the regulatory body of Bangladesh capital market. For your information stock exchanges are called capital market as companies raise capital from here. SEC defines working process and rules and policies under which the stock exchanges will operate.

3. THE CAPITAL MARKETS OF BANGLADESH


3.1 History of Stock Exchange
The history of stock exchanges can be traced back to the France in 12 th century, when the first broker is believed to be developed by trading the debt and government securities. In the 1600s across Europe, unofficial share markets were existed in where would meet outside or in a coffee house in order to make trade. In 1602, the first official stock exchange named the Amsterdam Stock Exchange was created to trade shares of the Dutch East India Company. Shares of the Dutch East India Company were the first company shares ever to be issued. In France, England and America, there were fully active and operational stock exchanges by the early 1700s. Stock exchanges were continually becoming important financial institutions to the businesses because of its ability to raise capital for investment and its ability to offer investors the opportunity to share the company profits. Many scandals and share crashes were experienced or witnessed in the early days of history of the stock exchanges. But today stock exchanges have become highly regulated institutions operating all around the world. Now days investors have to buy and sell shares through the share brokers and brokers have to pay for owning a seat in the stock exchanges. Most of the stock exchanges in the early history of the world were begun by the trading on floor of the exchanges in where dealers made their trades by face to face. The New York Stock Exchange is the largest stock exchange in the world and still it operates as a floor exchange where most of the other exchanges around the world became fully electronic. After five years of the independence of the Pakistan in the early 1952, the transactions of the Pakistani stocks were prohibited by the Calcutta Stock Exchange which actually necessitated the formation of the stock exchange in the East Pakistan. As a result on the 28 th April 1954, the East Pakistan Stock Exchange Association Ltd. was incorporated and on 23 rd June 1962 the name was changed to East Pakistan Stock Exchange. Because during that time Pakistan used to be ruled the Bangladesh and the name of the country was East Pakistan. But on 14th May 1964, the name was again changed to Dhaka Stock Exchange. Formal trading of shares was started in 1956 on Narayangonj even the stock exchange was incorporated in 1954. The stock exchange was shifted to the Narayangonj Chamber Building in 1958 until Dhaka stock exchange purchased its own land at 9/F Motijheel C/A in 1959 when it moved to its own premises. The numbers of listed company in Dhaka stock exchange were 196 with a paid up capital of tk. 4 billion and average daily transaction of around 20,000 shares before the independence of Bangladesh in 1971.

The charges of the abandoned industrial units were taken by the government of Bangladesh after the independence under a pursued policy to the nationalization of the large industrial unit. Until 1975 the trading activities and operations of Dhaka Stock Exchange was suspended. The operations of Dhaka Stock Exchange was resumed with 9 listed companies and a total paid up capital of tk. 137.52 million after the change in economic policy of government in 1976. After 1983 the actual development and growth of Dhaka Stock Exchange was began as the market stood at a position of tk. 812 million of capitalization. In 1987, the Dhaka Stock Exchange witnessed a relatively steep rise with 92 listed companies. The stock market started to prosper gradually after the 1990s with the liberalization of government policies. In the 1990s high development of the stock market was noticeable comparing with any other time since its establishment (Economy watch, 2010). In Dhaka Stock Exchange the number of listed securities was 244, number of listed debentures was 10, numbers of shares of all listed companies were 666,553 and the numbers of mutual funds were 72,250 with the total market capitalization of tk. 72,168 million ($ 1226 million) on 30th June 2001. To apply to become a member of the stock exchange by buying a share and to obtain the dealer or broker license from the Securities and Exchange Commission (SEC) one needs to be sound mind and over 21 years of age. A procedure has been followed for every security through ordinarily called only once for a trading day by a typical cries out system since the incorporation of Dhaka Stock Exchange. On 10th August 1998 this cry out system was abolished to install the fully automated computerized system. The trading is now in continuous session from 10:30 am to 2:30 pm.

Figure 4: Listed Companies and Market Capitalization In Bangladesh: 1989-2009

3.2 Dhaka Stock Exchange


The main stock exchange of Bangladesh is generally known as the Dhaka Stock Exchange. It is the first stock exchange in the country. It is situated in Motijheel at the heart of the Dhaka city. In 28th April, 1954 Dhaka Stock Exchange was incorporated as the East Pakistan Stock Exchange Association Ltd. But the usual formal trading was taken place in 1956. In 23 rd June, 1962 it was renamed as East Pakistan Stock Exchange Ltd. and after that in 13th May, 1964 the name was again changed to Dacca Stock Exchange Ltd. the trading of the stock exchange was discontinued for five years after the liberation war of 1971. The trading in the Dhaka Stock Exchange was restarted in 1976. DSE All Share Price Index was introduced in 16 th September 1986. In 1st November 1993, according to IFC, changes were bought into the formula for calculating DSE All Share Price Index. Dhaka Stock Exchange was a physical stock exchange with open cry out system as trading system at the beginning of its history. In Dhaka Stock Exchange, the automated trading was introduced on 10 th August 1998. Dhaka Stock Exchange introduced the automated trading system to secure smooth, timeliness & effective operation on the market. The automated system is upgraded time to time and the latest upgrading was done on 21st December, 2008. DSE 20 Index was initiated in the 1 st January 2001 on Dhaka Stock Exchange. In 24th January, 2004 Central depository system was introduced. In 16th November, for the first time the benchmark index of Dhaka Stock Exchange has crossed the line of 4000 points and few days later another new record high at the 4148 points. By the year 2007, Dhaka Stock Exchange has listed 350 companies with a combination of $26.1 billion worth of market capitalization. The Dhaka stock exchange ltd. is registered as a public limited company under companies act. DSE is a self-regulatory Organization and its activities are regulated by Articles of Association Own (set of) Regulations and by laws such as, Companies Act 1994 Securities and Exchange Ordinance 1969 Securities and Exchange Rules 1987 Securities & Exchange Commission Act 1993 Others relevant laws of Bangladesh

There are 238 members and total 507 listed securities in Dhaka Stock Exchange. There are five working days in a week for Dhaka Stock Exchange to be operated excluding Saturday, Sunday public holidays & other government holidays. 10:30 to 14:30 is the daily trading time for Dhaka Stock Exchange. Ordinary share, Debenture, Bond & Mutual funds are the investment options for the investors in the Dhaka Stock Exchange. According to Fellowes (2008) [12], Every stock market has its indices to show movements in the market as a whole.

There are three different indices in Dhaka Stock Exchange as they are DSI (All share) DGEN Index(A, B, G & N) DSE-20 Index

Management of Dhaka Stock Exchange The management and operation of Dhaka stock exchange is entrusted on a 25 members board of director. The boards of directors are elected and among them 12 are elected from DSE members, another 12 selected from different trade bodies and relevant organizations. The CEO of the Dhaka Stock Exchange is the 25 th ex-officio member of the board. The following organizations are currently holding positions in DSE management board: Bangladesh Bank Investment Corporation of Bangladesh President of institute of Chartered Accountants of Bangladesh President of Federation of Bangladesh Chambers of Commerce and Industries President of Metropolitan Chambers of Commerce and industries Professor of Finance Department of Dhaka University President of DCCI (Dhaka Chamber of Commerce and Industries)

Functions of Dhaka Stock Exchange The major functions of Dhaka Stock Exchange are: 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) Investors grievance Cell (Disposal of complaint by laws 1997) Investors Protection Fund (As per investor protection fund Regulations 1999) Announcement of Price sensitive or other information about listed companies through online

Policies of Dhaka Stock Exchange (DSE) Introducing automate monitoring systems that control price manipulation, malpractices and inside trading. Ensuring the publications of annual reports of the listed companies by these companies with actual and proper information that can ensure the interest of the investors. Forcing the listed companies to declare and pay regular dividends through conducting Annual General Meeting. Making arrangement to set up merchant banks, investment banks and floatation of more mutual funds particularly in the private sectors. Encouraging more banks, insurance companies and other financial institutions to deal in share business directly The management of DSE should be vested with professionals and should not in any way be linked with the ownership of stock exchange and other firms. Training the investors about fundamentals to deal in share transactions. Punishing the member brokers for breaching of contract.

Sectorial Market Capital


0% 0% 3% 5% 30% 8% 4% 14% 5% 11% 1% 0% 10% 2% 2% 1% Insurance Telecom Ceramics Cement Service Pharmaceuticals Treasury Textile Jute 0% 2% 2% 0% Fuel & Power IT

Figure 5: Sectorial Market Capital of Dhaka Stock Exchange

Total Number of Listed Securities Total Number of Companies Total Number of Mutual Funds Total Number of Debentures Total Number of Treasury Bonds Total Number of Corporate Bonds

476 229 33 8 203 3

Figure 6: Dhaka Stock Exchanges Main Board Information

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

(Number in Million)
15,673 13,268 2,393

Figure 7: Total Number of Shares or Certificates in Dhaka Stock Exchange

Total number of Bonds


Total Number of All Listed Debentures Total Number of All Listed Gov. T-Bonds Total Number of All Listed Corporate Bonds

(Numbers in Thousands)
409 4,672 7,336

Figure 8: Total Number of Bonds in Dhaka Stock Exchange

Total Issued Capital of DSEBD


All Listed Securities All Companies Shares All Mutual Funds All Debentures All Listed Govt. T-Bonds All Listed Corporate Bonds

(Figure Tk. in Million)


719,316 220,543 23,183 140 468,113 7,336

Figure 9: Total Issued Capital of DSEBD

Total Market Capitalization of DSEBD All Listed Securities All Listed Companies Shares All Listed Mutual Funds All Debentures All Listed Govt. T-Bonds All Listed Corporate Bonds

(Figure Tk. in Million) 2,349,353 1,843,471 30,477 576 468,113 6,716

Figure 10: Total Market Capitalization of DSEBD

3.3 Chittagong Stock Exchange


On 10th October 1995, the Chittagong Stock Exchange (CSE) was started its journey from the location of the Chittagong city through the cry out trading system with the promise to create a state of the art bourse in the country. Chittagong Stock Exchange is the second stock exchange of Bangladesh. In January 1995, for establishing the countrys second stock exchange the founder members of the proposed Chittagong Stock Exchange approached to the Bangladesh government and obtained the permission of the Securities and Exchange Commission (SEC) on 12th February, 1995. On 1st April 1995, Chittagong Stock Exchange was incorporated as a self-regulated non-profit organization. The exchange is running under an independent secretariat from the very first day of its inception and the board of directors of the Chittagong Stock Exchange is comprised of twelve board members. On 4 th November 1995, Chittagong Stock Exchange (CSE) was formally opened by then honorable prime minister of Bangladesh. Chittagong Stock Exchange has introduced the most advanced modern technology & sophisticated logistic support and for these reasons Chittagong Stock Exchange is said to be the pioneer of the modern capital market of the country. Chittagong Stock Exchange had the countrys first automated trading bourse. The automated trading of Chittagong Stock Exchange started to operate on 2nd June 1998 and the internet trading service was started on 30th May 2004. The board of members of Chittagong Stock Exchange consists of 25 members among them 12 are elected through election of CSE members, 12 members are elected from different major economic & social arena of Bangladesh. The CEO of Chittagong Stock Exchange is nominated and appointed by the board of members of Chittagong Stock Exchange but the approval of Securities and Exchange Commission (SEC) is mandatory. Today Chittagong Stock Exchange has total 147 members and 238 listed companies whose stocks can be traded in the Chittagong Stock Exchange. The trading time and working days of Chittagong Stock Exchange is same as the Dhaka Stock Exchange which is from 10:30 am to 14:30 pm and five days in a week excluding the national holidays. As similar to the Dhaka Stock Exchange, Chittagong Stock Exchange also has four different kinds of markets for the trades and these are public, Spot, Block & Odd Lot market. There are five categories of companies listed in the Chittagong Stock Exchange and these are A, B, N, G and Z whereas there is no company still categorized in G category. To calculate the movements of it markets, the Chittagong Stock Exchange has its own indices. Until 10th October 1995, there was only one index of Chittagong Stock Exchange and it was called the All Share Price Index. But now Chittagong Stock Exchange has three new indices for its markets and these indices are All Share Price Index (CASPI) CSE Selective Index (CSE30) CSE Selective Categories' Index (CSCX)

Mission of Chittagong Stock Exchange Chittagong Stock Exchange was established based on the idea and need of a dynamic, automated, transparent stock exchange in Bangladesh. In order to facilitate the competent entrepreneurs to raise capital and accelerate industrial growth for overall benefits of the economy and keep pace with the global advancements, Chittagong Stock Exchange is working towards an effective, efficient and transparent market of international standard to serve and invest in Bangladesh. Objectives of Dhaka Stock Exchange and Chittagong Stock Exchange Develop a strong platform for entrepreneurs raising capital Provide a full automated trading system with most modern amenities to ensure quick, easy, accurate transactions and easily accessible to all Undertake any business relating to 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 nonresident Bangladeshis to invest in Bangladesh stock markets Collect, preserve and disseminate data and information on stock exchange Develop a research cell for analyzing status of the market and economy

Highest Records
Title
Total Number of Trades Total Trade Volume Total Traded Value in Taka Total Closing Market Capital in Taka CSE 30 Index CSCX Index CASPI Index

Values
60645 29264294 3,404,724,131 3,159,253,497,508

Date
Nov 25, 2010 Jul 21, 2011 Oct 28, 2010 Dec 5, 2010

22627.63 16122.42 24920.89

Dec 5, 2010 Dec 5, 2010 Dec 5, 2010

Figure 11: Highest Records in Chittagong Stock Exchange

3.4 Structure of Capital Markets in Bangladesh

Financial Market

Money Market

Capital Market

Commercial Banks

Insurance Companies

Non-security Segment

Security Segment

BSB

Primary Market (IPO)

Secondary Market

BSRS

DSEBD

ICB

CSEBD

Commercial Banks

BSB - Bangladesh Shilpa Bank BSRS- Bangladesh Shilpa Rin Shashta ICB - Investment Corporation of Bangladesh CSE - Chittagong Stock Exchange DSE - Dhaka Stock Exchange

Figure 12: Structure of Capital Market in Bangladesh

3.5 Securities & Exchange Commission of Bangladesh (SECBD)


On 8th June, 1993 under the Securities and Exchange Commission Act, 1993 The Securities & Exchange Commission of Bangladesh (SECBD) was established. Government appoints the chairman and members of the commission who are entrusted the duty of the overall responsibility to administer securities legislation. The commission is consists of a chairman and four members. The commission is a statutory body and attached to the Ministry of Finance. SEC defines working process and rules and policies under which the stock exchanges will operate. Security Exchange Commission has been empowered to control, even self-regulatory institutions such as Stock Exchanges according to Securities and Exchange Ordinance 1969. To protect investors interests, appropriate issuance of securities, proper guiding of securities laws and development of securities markets are the major aim of establishing the Security Exchange Commission. Dhaka Stock Exchange, Chittagong Stock Exchange, CDBL, stock brokers, merchant banks and asset management companies are the organizations and intermediaries which are under direct supervision of Security Exchange Commission. Mission of the Securities & Exchange Commission Protect the interests of securities investors Develop and maintain fair, transparent and efficient securities markets Ensure proper issuance of securities and compliance with securities laws

Functions performed by Securities & Exchange Commission Regulating the business of the stock exchange or any other securities market Registering and regulating the business of stock brokers, sub brokers, share transfer agents, merchant bankers and managers of issues, trustee of trust deeds, register of an issue, underwriters, portfolio managers, investment advisers and other intermediaries in the securities market Registering, monitoring and regulating of collective investment scheme including all forms of mutual funds Monitoring, controlling and regulating all authorized self-regulatory organizations in the securities market Prohibiting fraudulent and unfair trade practices relating to securities trading in any securities market Promoting and developing investors education and providing training for intermediaries of the securities market, executing market research and publication of these researches. Prohibiting insider trading of securities

Regulating the substantial acquisition of shares and takeover of companies Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of securities, the stock exchanges and intermediaries or any self-regulatory organization in the securities market Conducting research and publishing information Registering and regulating the business operation of stock exchanges, stock brokers, merchant banks, underwriters, share transfer agents, portfolio managers and other intermediaries. Inspecting and controlling fraudulent and unfair trading in security markets Auditing and investigating of any intermediaries or stock exchanges Collective investment scheme registering & controlling

Functions performed by SEC members Serve as the members of the commission and supervise its management Provide policy direction to industry and staff as well as promulgate legally binding rules Act as an administrative tribunal for decisions on the capital market

Dhaka Stock Exchange Securities and Exchange Commission of Bangladesh Chittagong Stock Exchange

Figure 13: Stock Exchanges under Securities and Exchange Commission (SEC)

3.6 Central Depository Bangladesh Limited (CDBL)


To add value to the stock markets of Bangladesh and to attract the investors investment especially the foreign investment, Central Depository Bangladesh Limited (CDBL) was established. Transferring and delivering ownership was too lengthy and risky before the establishment of Central Depository Bangladesh Limited (CDBL) process services. The stock markets of Bangladesh were transformed to more effective and credible system in the eyes of investors after the implementation of the automated trading system in Dhaka Stock Exchange and Chittagong Stock Exchange and by the introduction of central depository system (Bepari & Mollik) [4]. On the 20th August 2000, Central Depository Bangladesh Limited (CDBL) was incorporated as a public limited company. Dhaka Stock Exchange, Chittagong Stock Exchange, banks, Investment Corporation of Bangladesh and some other financial institution are the owners of Central Depository Bangladesh Limited (CDBL). The participants of Central Depository Bangladesh Limited (CDBL) are called Depository Participant (DP) and for different services provided by the Central Depository Bangladesh Limited (CDBL), they charge fees from their participants. The functions of Central Depository Bangladesh Limited (CDBL) Operate and maintain the Central Depository System (CDS) of Electronic Book Recording and maintaining securities accounts and registering transfer of securities Changing the ownership without any physical movement or endorsement of certificates Supervision of Depository participant activities Providing different investor services including providing a platform for the secondary market trading of Treasury Bills and Government Bonds issued by the Bangladesh Bank

Method of CDBL Operation 1. The investor opens a depository account with a participant or CDBL. 2. Certificates are dematerialized' by lodging them at the issuer. 3. The issuer updates the register and moves the holding to the depository portion of the register. 4. The investor sells on a stock exchange through a stock broker and another investor buys. 5. The stock exchange advises CDBL to update its records. 6. CDBL debits the sellers account. 7. CDBL credits the buyers account. 8. Investors may rematerialize if they wish.

3.7 Stock Market Settlement

1. Trade In Public, Block & Odd-Lot Market There are two different types of settlement periods for A, B, G, N & Z categories shares to trade in Public, Block & Odd-lot market and stock exchange clearing house executes the Settlement process. For A, B, G & N categories of stocks, the settlement period is same whereas for Z category share settlement period is different. a) A, B, G & N Category Dhaka Stock Exchange or Chittagong Stock Exchange clearing house does the settlement process on T+1(pay in day) and T+3 (pay out day). b) Z Category Dhaka Stock Exchange or Chittagong Stock Exchange clearing house does the settlement process on the basis of T+1 (pay in day) and T+9 (pay out day). 2. Trade In Spot Market (A, B, G, N & Z Category) For all category shares traded in the spot market, settlement process period is same for all of them and Dhaka Stock Exchange or Chittagong Stock Exchange clearing house does the settlement process on T+0 (pay in day), T+1 (pay out day). 3. Settlement of Foreign Traders By involving a custodian bank, foreign buyers and sellers settle their transaction between themselves. Dhaka Stock Exchange or Chittagong Stock Exchange clearing house does the settlement process on the basis of T+5 (pay in day) and T+6 (Pay out day). 4. Trading Day The trading shall be open on all days except bank holidays as declared under the Negotiable Instruments Act, 1881 (XXVI of 1881). 5. Trading Period Unless otherwise decided by the Council, the trading period shall be between 10:30 AM to 2:30 PM on all trading days.

3.8 Reasons behind the Underdeveloped Capital Market of Bangladesh Availability of Information
For the stock market of Bangladesh, one of the major problems is that there are not sufficient accesses for the high quality corporate information based on which investors can take their decision. While only few institutional investors have the benefits of correct analyzing of the corporate information based on proper information because they have an investment unit managed by group of qualified financial analysts but in the case of retail investors there is nothing. When it comes to the investment decision, Retail investors mainly focus on the advices provided by their brokers because there are no independent research houses and those advices given by the brokers are often constructed based on market rumors. This situation is not acceptable for a sustainable and potential stock market as a result retail investors face huge losses in their investment portfolios. But one has to consider that retail investors are most vital elements for an emerging capital market like Bangladesh. Scope of manipulation can be reduced by the filtration of information across different types of investor. As we know stock market crash of 1996 was occurred because of this reason at the cost of investments of many retail investors.

Inadequacy of Fundamental Sound Scripts


Bangladesh capital market does not have the adequate number of fundamentally sound scripts for the sustainable stock market operation. Without creating any sort of friendly enabling environment, the regulatory authorities have been pressurized major corporations to be enlisted in the stock market but this should not be happening. Rather government of Bangladesh should focus more on the privatization of state owned corporations through public offerings to be enlisted in the stock market. Economy of Bangladesh is in such a worst position that bank financing is not sufficient to revive the state owned corporations.

Absence of Risk Free Instruments


Interest rates on savings instruments had been reduced by the government but this risk free instrument market is still limited to the financial institutions. The retail investors do not have any kind of access to this sort of risk free instrument because they have no presence on capital market of Bangladesh. So absence of risk free instruments makes the overall risk of investment of investors very high as there are no options available for the investors to reduce his or her average portfolio risk by adding these risk free instruments.

Low Amount of Institutional Investors


A research estimate shows that the ratio of institutional investors to retail investors is very low for Bangladesh capital market with relative to other emerging capital markets. Institutional investors have long term commitment towards the capital market. Capital market remains sustained as institutional investors focus on fundamentally sound securities. Also because of the specialized analytical skills of the institutional investors, it is expected that they will ensure the better valuation of securities. In the economy of Bangladesh, it has both types of institutional investors such as public and private. But the proprietary investment of these institutional investors is very low except the Investment Corporation of Bangladesh (ICB) created in 1976. There are several mutual funds which are now managed by the Investment Corporation of Bangladesh (ICB).

Lack of Corporate Governance


In Bangladesh, there is a huge lacking in the corporate governance relative to international standards. High international standard compliance regime is often adhered by the Multinational corporations and institutions operating in Bangladesh. Most of the multinational corporations operating in Bangladesh have their scripts listed in the global developed markets but not in the capital markets of Bangladesh. Unless the local market adheres to and effectively enforces a standard corporate governance system, there will be no level playing ground for multinational corporations through local operators.

Lack of Fair Value of Securities


The fair value of securities is an important aspect for the capital market. But in the current scenario of Bangladesh capital market there is no existence of fair value of securities. Because of the absence of fair value of securities, most of the foreign and local investors are not receiving the attention of potentiality of Bangladesh capital market. In the Bangladesh capital markets, investors are now having more dependence towards the speculative analysis rather than fundamental analysis results the volatility in the capital markets. This capital market volatility can be reduced by the use of fundamental analysis which is initiated by most of the long term investors who are sure about their investment tenure and expectations.

4. CAPITAL MARKET CRASH OF 2010-11


4.1 Background of the Crisis
Stock markets are one of the fundamental financial institutions for economic growth if only they are regulated properly. Billions of dollar worth of capital can be funded or raised from the millions of small and large investors with their voluntary participation. There are many theories regarding the operations of stock markets and one of the well-known hypotheses is that stock markets are efficient through information because they operate on the base of availability of quick and low cost information for investors and stock prices in the market only change when new information is available. For the last 5 years, there have been certain major changes occur in the capital market of Bangladesh involving massive ups and downs. Many people have characterized stock market or capital market as Speculative Market over the years. It means return or profit can be earned from their investment by the market participators or investors through the stock price differences. But now days the capital market of Bangladesh has become a Manipulated Market as market participators or investors can control the stock price differences by insider trading which actually should not be. Market participators should not have the ability to control the stock price differentials because then it becomes just an illegal or illegitimate trading and as a result the market collapses or falls thus wrongdoer gains huge profit in the expense of the loss of majority specially small investors. Investors in Bangladesh suffered an experience of such a tragic event in the year 2010-2011. The fall of capital market of Bangladesh in 2010-2011 was not a single day event; it was just a bubble which was blown to huge that it finally came to a burst. To understand what actually triggered the Sturm und Drang in the capital market of Bangladesh one has to go back to the story behind the rise of the stocks and then come to understanding the falls. It was a mixed performance by the Bangladesh capital markets in 2008.during the first half of the 2008 the stock prices showed significant expansion while in the second half there was a downward movement. The monthly average of all share price index DSI, DSEG and DSE20 declined by as following 14.1%, 12.1% and 8.3% compared to the last month of the previous year of 2007. During July-December 2008, these indexes declined harshly while the liquidity position of the capital market was well enough good than the previous year of 2007. The daily average turnover in year 2008 was tk. 2.8 billion whereas it was tk. 1.4 billion in 2007. In 2009, the stock market was in turbulence throughout much as the long running bullish trend starting to turn grim. Because of the end of two year political crisis and reemergence of democracy through the December 2008 election, the bullish trend was initiated. The

capital market was heavily aided by the entrance of the GrameenPhone as on the November 16, 2009 the index rose by 22% in a single day trade. Before plummeting at the end of 2009, the share prices were continued to fluctuate by reaching to the annual high in the mid of 2009. Bangladesh capital market was overvalued and overheated at the end of the 2010. Bangladesh stock index marked 80% growth in the year 2010 by increasing the index to extra 2500 points without any price correction and there was hardly any market participator who made loss in 2010. In the earlier period of 2010, the stock market witnessed a manifold boom of the price index, turnover, market capitalization, its ratio to GDP and number of new arrivals both in terms of investors and issues. To make gain huge profit from the opportunity of long Bull Run, 1.5 million new investors were investing in the capital market in 2010. According to Centre for Policy Dialogue's (CPD) analysis, the total number of beneficiary owners' (BO) account holders was 3.21 million on December 20 last year, which was 1.25 million in the same month a year before so this number increased by 154 percent in 2010. By putting a leash on the liquidity supply, the Bangladesh bank tried to take measures to stabilize the market and to control the inflation. The capital market was adversely affected by the conservative monetary policy. But the Bull Run finally stopped in December 8, 2010 when Dhaka Stock Exchange suffered the third highest single day plunge since 2001 by losing 185.53 points or 2.12%. As a result Dhaka stock exchange general index fall on December 13, 2010 by 285 points. On December 19, 2010 the capital market suffered the second fall which the largest fall of index on a single day trading in the 55 years history of capital markets in Bangladesh. As a chain reaction Dhaka Stock Exchange suffered the biggest crash on December 19, 2010 as the index nosedived by 551 points or 6.72%. After that the capital markets raging bull was tamed on back to back record plunges on January 9 and 10 of 2011 and then after the nosedives, the index took a high jump rise of more than 15% which was the highest one day spike ever rebounding record. Many analysts who believed the capital market was overvalued, to them this fall were deemed as normal. With the masterminding of the crash of capital market for making taka 50,000 million($667 million) out of the scam, The DGEN index fall from 8500 by 1800 points as a total 21% fall within the period of December 2010 to January 2011. The market was send into further turmoil by the fall of 5% on June 12, 2011 before taking a 4% plunge in October 11, 2011. On October 16, 2011 the small investors related to the capital market were finally triggered by the fall and thus they form the Bangladesh Capital Market Investors' Council as many opposition leaders declared their solidarity with the small investors protest toward continues capital market fall. Only by a year difference, the capital market index stood around 5,500 points from 8,900 points. Despite the measures taken by the regulatory commissions people suffered major financial loss and worse than that, many lost confidence in the stock market.

4.2 Reasons behind Market Upsurge or Root of Bubble


Due to political unrest of Bangladesh state of emergency was declared and military took power of the country in 2007. During military-backed regime investment in real sectors as well as FDI decreased but the inflow of foreign remittance increased. Investors tried to find alternative investment sector to invest their savings and found stock market as an attractive alternative. (Khaled, 2011) [18] According to CPD (2011) [9], the total number of BO Account holders on 20th December, 2010 reached to 3.21 million though the number was 1.25 million in December 2009. Most of these new investors dont have enough knowledge about the stock market but invest their most or all savings in the market. 238 brokerage houses opened 590 branches at 32 districts. As CPD (2011) [9] found, internet-based trading operation, opening branches of brokerage houses across the country, easy access to the market information, arranging a countrywide 'Share Mela (fair)' are the factors for increasing investors. But supplies of new securities through IPOs were not enough to chase huge capital of too many investors in the market. Banks & other financial institutions of Bangladesh had a lot of excess liquidity due to less business opportunities in the recession period of 2009-10. To minimize the cost of bearing excess liquidity and as a great opportunity, theses financial institutions & its officials as well as other people took loan and invest in the share market. This made a huge influx of liquidity in the share market. It was seen that the daily transaction in the share market was on an average from Taka 20,000 to 30,000 million in 2010 and the figure was double comparing to 2009. (Raisa, 2011) [28]

Figure 14: Relations between Money Supply & Share Price Index of 1990-10

To grow Bangladesh`s economy by 7-8% per year Bangladesh Bank adopted accommodative monetary policy during the high inflation periods to support investment. Bangladesh Bank has pegged Taka against dollar to support exports. As Taka has been undervalued it has made excess growth in money supply. Last couple of years broad money made excess liquidity and the main motive behind it was Bangladesh Bank`s exchange rate policy. A big portion of this excess liquidity had gone to the stock market but there were very few shares in the market. The policy that was adopted by BB to grow economy by increased exports & investment eventually misguided and ended up blowing the mother of all bubbles. Then government again fuelled the bubble after per-mitting whitening of black money through tax breaks and schemes. (Rahman, 2011) [26] Moreover Security & Exchange Commissions was not capable to monitor the market conditions properly. Due to the poor monitoring & market surveillance share prices of Z Category Companies and small companies increased dramatically. Moreover, some initiatives taken by SEC were not effective and changed directives frequently such as; it changed directives of margin loan ratio 19 times. (Raisa, 2011) [28]

Figure 15: Market Capitalization as % of GDP Of 1988 To 2010


Comparing the local market scenario with that of the rest of the region, Bangladesh is in pretty good shape as we have most of the infrastructure in place. Bangladeshs capital market capitalization is relatively smaller and it currently stands at $9.3 billion, which is just over 13 percent of GDP. Higher liquidity is skewed towards a handful of stocks, while a stagnant situation exists for few less profitable issuers. At present, the government is heavily focusing on developing a debt capital market. Such measures are certainly welcome as Bangladesh lacks a proper secondary market for bonds. The market is yet to support short-term capital requirements of corporations. Commercial Paper (CP) has not yet been tried primarily due to interest rate volatility and illiquid risk-free instruments that can be used as benchmark neither for short-term and hardly for long-term

financing. It can, therefore, be said that we have a somewhat flat yield curve in Bangladesh at the moment.

DSE Performance: March 2010 to February 2011


Month DSE Turnover Value Volume Tk. in MN Nos. MN 175,115.99 747.99 191,303.18 700.63 386,238.36 1,013.99 387,733.65 1,203.94 322,769.28 1,163.22 394,438.07 1,793.43 312,562.35 1,602.83 468,008.97 2,265.35 471,717.20 2,233.33 387,174.09 2,275.47 186,969.24 1,442.65 114,887.12 1,020.38 Ratio of Turnover to Market Cap. 0.08 0.08 0.08 0.14 0.11 0.13 0.10 0.14 0.13 0.11 0.06 0.05 Index DGEN 5,582.33 5,654.88 6,107.81 6,153.68 6,342.76 6,657.97 7,097.38 7,957.12 8,602.44 8,290.41 7,484.23 5,203.08

DSI 4,573.81 4,641.54 5,030.05 5,111.63 5,278.89 5,555.49 5,930.90 6,612.14 7,135.16 6,877.66 6,198.82 4,317.89

DSE 20 2,952.01 3,039.17 3,432.23 3,650.04 3,721.78 3,874.50 4,137.93 4,533.18 5,119.13 5,204.98 4,701.74 3,514.51

Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11

Figure 16: DSE Performance: March 2010 to February 2011


There were lots of encouragements for the investors as the opening trading of state owned oil companies such as Jamuna Oil Company Ltd and Meghna Petroleum Limited initiated in the capital markets. With such government initiatives of listing the state owned enterprises has resulted the increase of capital market capitalization and liquidity improvemeTo ensure the fair price in the initial public offerings, the Securities and Exchange Commission (SEC) is used various kinds of investor friendly valuation methods. These policies taken by the Securities & Exchange Commission of Bangladesh (SECBD) will encouraged the companies with sound financial position to enter into the capital market of Bangladesh. There are huge governmental and regulatory pressures on the telecom companies to be enlisted in the capital markets of Bangladesh. As a result Grameen Phone enlisted itself on the capital market of Bangladesh. There was a big jump in the index about 1000 points when trading began with such higher value and it was included in the DSE index for the entire capital value of GRAMEEN PHONE. If the other top telecom companies in Bangladesh becomes enlisted in the capital market then estimations shows that there will be more foreign investment, will increase in the market capitalization and will introduce higher standards in corporate governance.

4.3 Time of Historical Fall


Timeline of historical fall of the crash has been divided into two sections which are December 2010 and January 2011.

December 2010
It has been stated by Bhuiyan (2011) [5] that 5th December, 2010 as the last glorious day of the year for the investors of Bangladesh stock market. On this day DSE General Index (DGEN) gained its all-time highest 8, 918.51 point & broke all old records of DSE turnover by Taka 32.50 billion. Security & Exchange Commissions and Bangladesh Bank applied a lot of directives to keep the market under control in 2010. But in December both BB & SEC changed many of their previous directives and applied new more. On 6th December, 2010 SEC introduced a directive saying that buy orders will be performed after encashment of Investor`s cheque. On the following day another directive called netting facilities was applied. This indicates that no investor will be able to purchase securities against the sale proceedings of any other securities during the settlement & clearance period. But both directives of 6th & 7th December were cancelled on 8th December. The reason of cancelling these directives was a significant fall of share prices on 8th December. (Bhuiyan, 2011) [5] SEC changed directive of margin loan ratio by increasing it from 1:0.5 to 1:1 on 13th December and later it was again hiked to 1:1.5 & 1:2 because of free fall of share prices. (Bhuiyan, (2011) [5] Bangladesh Bank got a complaint that Banks are investing money in the stock market from their reserve. On the 1st day of December BB sent 50 teams in different banks of Dhaka & Chittagong to investigate and found some banks in such irregularities. (Raisa, 2011) [28] Raisa (2011) [28] discussed about the most important directives initiated by BB in December 2010 are withdrawal of illegally invested industrial loans, increasing SLR & CRR. On 15th December, BB increased CRR and SLR by 0.5 percent and increased to 19 & 6 percent. Another important directive initiated by BB was withdrawal of illegally invested industrial loans by December 31, 2010. As a lot of the reserved money was invested in capital market, banks started selling shares and withdrawing that money from the market. By the time investors became panicked. To handle the disastrous & assure the panicked investors BB extended its deadline for submitting and adjusting loans. For the merchant banks the deadline was January 15, 2011 and for the commercial bank February 15, 2011. Institutional investors including financial institutions started selling shares from the beginning of December to show high return on investment at their balance sheet. As the

Institutions & banks started selling their shares from the beginning of December the turnover of DSE was the highest ever in its history on 5th December. (Raisa, 2011) [28] 19th December was a historical day of the financial year 2010-11 in Bangladesh stock market. On this day DSE witnessed its biggest one day fall in 55 years history until the date with losing 551.76 points or 6.71 percent. The losing index was even higher than 284.78 points or 3.32 percent of 12th December. Prices started to nosedive in an hour after the trading started and about 200 points were wiped off. In the middle of the session it recovered little bit and ended up the session at 7654 point. To meet CRR & SLR requirements of BB by the deadline created liquidity crisis in banking sector and call money rate made a new record of 180% by 20th December. Investment Corporation of Bangladesh (ICB), state-owned commercial banks (SCBs), regulators and government brought some kind of stability in the market after the big fall of 19th December & liquidity crisis. As a result, share prices increased from 20th to until 30th December and index stood at 8290 point at the end of the financial year 2010-11.

DSE Daily Index of December, 2010


9000 8800 8600 8400 8200 8000 7800 7600 7400 7200 7000 DGEN

Figure 17: DSE Daily Index of December, 2010

CSE Daily CASPI Index of December, 2010


25500 25000 24500 24000 23500 23000 22500 22000 21500 21000 CASPI

Figure 18: CSE Daily CASPI Index of December, 2010

January 2011
Share prices started to fall from 3rd January, 2011 as investor had the information of ongoing liquidity crisis of financial & non-financial institutions that limiting margin loan. The down slope of index is noticeable from January 2nd to 10th. As Chairman of probe committee Mr. Ibrahim Khaled (2011) mentioned, Due to trigger sale of shares from 2nd to 5th January, market experienced its biggest decline in share prices and market crash from 6th to 10th January. On 9th January, DSE General (DGEN) Index declined by 600 points and all indices declined nearly 7.75 percent. On 10th January Dhaka Stock Exchange General (DGEN) Index lost by 660 points or 9 percent & Chittagong Stock Exchange Selective (CSE) Index declined by 914 points or 6.8 percent within 50 minutes of trading. CSE All Share Price Index (CASPI) stood at 19212.34 losing by 1,396.21point, which is 6.77 percent. CSE Selective Categories Index (CSCX) lost 914 points or 6.87 percent and CSE -30 Index also lost 1490.83 or 8.28 percent.

Daily DGEN Index of January, 2011


8500 8000 7500 7000 6500 6000 DGEN

Figure 19: Daily DGEN Index of January, 2011

It had broken all previous records of decreasing index. After that Security & Exchange Commissions called for an emergency meeting with BB and stop trading at both Dhaka & Chittagong Stock Exchanges. Investors came out in the street with processions and demonstrated against free fall of Share index in both bourses as well as suspension of trading. Investors from different parts of the country such as, Chittagong, Comilla, Narsingdi, Narayanganj and Jessore brought out processions and clashed with law en-forces in some places as well.

DSE Performance: September 2010 to February 2011


Month DSE Turnover Value Tk. in Volume Million Nos. Million 312,562.35 1,602.83 468,008.97 2,265.35 471,717.20 2,233.33 387,174.09 2,275.47 186,969.24 1,442.65 114,887.12 1,020.38 Ratio of Turnover to Market Capital 0.10 0.14 0.13 0.11 0.06 0.05 DSI Index DGEN DSE 20

Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11

5,930.90 6,612.14 7,135.16 6,877.66 6,198.82 4,317.89

7,097.38 7,957.12 8,602.44 8,290.41 7,484.23 5,203.08

4,137.93 4,533.18 5,119.13 5,204.98 4,701.74 3,514.51

Figure 20: DSE Performance: September 2010 to February 2011

CSE Daily CASPI Index of January, 2011


24000 23000 22000 21000 CASPI 20000 19000 18000

Figure 21: CSE Daily CASPI Index of January, 2011


Following two days consecutive historical fall of share prices the government, Central Bank & SEC took instant actions to stabilize the market and bring the confidence among millions of small investors. The government created pressure on Bangladesh Bank & SEC to improve the market condition. As a result, recovery was initiated with Institutional buyer for instance merchant banks, state owned banks & non-financial institutions. On 11th January market recovered 15.6 percent of General index by the end of the session and made a record in Bangladesh stock market history of gain. (Chowdhury, 2011) [7] Moreover, Ahmed (2011) [1] mentioned that institutional buyers were asked not to sell shares rather to buy. Bangladesh Bank pushed money into the market as liquidity sup-port and repo. Index started to decline again on 18th January and market hits the lowest turnover in nine months which is taka 8.49 billion. Because of free fall of share prices, Investors came out in the street again and started protesting against free fall of share prices and chanted slogans against market regulators. SEC asked DSE & CSE to halt trading for the 2nd time within 8 days. DSE General Index (DGEN) declined by 243 points or 3.29 percent and CSE Selective Category Index 298 points after a trading of around 2.4 hours. Though steps were taken and applied by the government, BB and regulators to improve the market conditions and bring the investors confidence market index declined heavily on 20th January DGEN by slipping 599.77 points or 8.68 percent. From 26th of January there was an increase trend of index. But finally Index stood at the lowest point which is 5579 from 7th to 14th February. (Khalid, 2011)

DSE Sectorial Performance - February 2011


Sector Market Capitalization (in Million) February January % of total Market Capital Financial Sector 863,038.59 29.72 358,110.22 13.77 Turnover (Tk. in Million) February January % of total Turnover

Banks Financial Institutions Insurance Mutual Funds Total Foods Pharmaceuticals Textile Engineering Ceramics Tannery Paper & Printing Jute Cement Total Fuel & Power Service & Real Estate IT Telecommunication Travel and Leisure Miscellaneous Total Corporate Bond Total Grand Total

561,617.62 260,221.58 102,568.39 30,476.60 954,884.19

38,847.87 19,244.78 6,064.29 4,069.48 68,226.42 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 8,518.04 724.62 331.12 3,547.66 2,156.57 4,721.61 19,999.61

66,308.47 25,902.01 11,614.28 10,281.43 114,106.19 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 12,584.36 1,238.21 527.99 5,053.28 4,065.75 6,959.01 30,428.60

33.81 16.75 5.28 3.54 59.39 1.59 4.10 7.37 5.95 1.75 0.55 0.01 0.03 1.75 23.10 7.41 0.63 0.29 3.09 1.88 4.11 17.41 0.11 0.11 100

159,153.82 5.43 39,774.31 1.61 1,420,076.95 50.54 Manufacturing 44,488.99 60,815.97 2.35 150,418.71 197,966.28 7.96 72,982.86 113,573.28 3.86 89,177.70 142,247.97 4.72 29,921.39 55,384.39 1.58 11,498.95 15,685.41 0.61 668.80 1,084.90 0.04 563.36 880.90 0.03 43,816.28 66,265.68 2.32 443,537.05 653,904.79 23.47 Service & Miscellaneous 207,119.69 292,616.55 10.96 16,242.27 27,113.91 0.86 4,643.77 0.17 320,426.20 10.00 13,793.65 0.47 81,396.06 3.18 739,990.14 25.63 Bond 6,716.23 3,990.11 0.36 6,716.23 3,990.11 0.36 1,889,501.73 2,817,961.98 100 3,140.86 188,906.97 8,837.65 60,116.82 484,364.26

127.11 83.05 127.11 83.05 114,887.10 186,969.24

Figure 22: DSE Sectorial Performance - February 2011

Sectorial P/E - February 2011


Sector Bank Financial Institutions Mutual Funds Engineering Food & Allied Fuel & Power Jute Textile Pharmaceuticals Paper & Printing Service & Real estate Cement IT Tannery Ceramic Insurance Telecommunication Travel and Leisure Miscellaneous Market P/E Feb-11 14.13 31.50 9.15 32.08 18.65 14.91 26.30 30.08 25.07 67.29 23.17 20.08 38.76 14.06 57.89 33.87 11.58 47.82 14.47 17.79 Sectorial Price Earnings Ratio Dec-10 Dec-09 Dec-08 Dec-07 Dec-06 21.75 16.46 16.33 25.99 16.24 43.35 32.45 25.26 15.13 7.88 12.54 29.06 20.37 20.29 6.13 51.13 36.50 30.24 28.57 17.34 25.46 17.29 16.93 23.28 18.69 21.16 17.71 15.83 35.95 18.87 42.72 27.23 12.15 7.98 6.74 46.66 32.93 13.85 12.14 12.01 32.83 27.64 30.96 21.05 11.76 109.15 27.59 9.36 6.23 6.62 38.68 45.65 22.66 8.82 12.62 30.36 56.90 10.26 12.61 18.53 57.31 60.71 46.52 15.25 11.12 19.08 15.39 16.43 15.38 8.00 107.15 39.97 47.80 29.85 14.88 55.04 31.39 21.81 15.59 10.24 19.64 84.85 74.64 19.68 28.85 34.43 14.43 11.05 26.66 25.65 18.42 23.58 14.51 Dec-05 18.24 33.83 6.55 14.14 9.13 22.32 12.55 10.08 10.84 4.69 8.16 16.13 10.46 10.28 17.06 20.87

7.83 13.85

Figure 23: Sectorial P/E - February 2011

4.4 Reasons behind Market Crash


The capital market was crashed due to those factors which were very much commonly blamed by the many economists, market analysts and stakeholders related to the capital market. According to HOSSAIN (2011) who have criticized that, this time liable factors are omnibus account, placement share, book building method, rumors and so on. Misuse of those factors causes the capital market debacle. A professor of finance and Vice Chancellor of the Northern University Bangladesh, Mr. M. SHAMSUL HAQUE said that, Combination of wrong information to the investors, illegal participation of banks and institutions in the stock markets, weak accounting functions are at the core of the crisis that saw billions of Tk. wiped out. To investigate the crash of capital market of 2011 and to find out the individuals and institutions who were involved in the capital market crash and scam, Government of Bangladesh commissioned a committee consisting of four members led by Mr. Dr. KHONDKAR IBRAHIM KHALED as chairman. On the 7th April 2011, the commissioned committee submitted a report regarding the reasons behind the capital market crash and some suggested recommendations to follow. a group of manipulators including key government an regulatory officials, auditors, securities issuers, issue-managers, brokers, individual investors and some other stakeholders were identified in the report. With the help of self-administered questionnaire answered by respondents, investigation report of Dr. KHONDKAR IBRAHIM KHALED and different market analysis, the study has attempted to find out the major reasons for the recent stock market crash of Bangladesh in 2010-11. The study not only has identified the reasons behind the crash but also the number of problems that are hampering the sustainability and growth of stock market. According to this study, reasons for the stock market crash are as following:

4.4.1 Reasons Created By the Role of Regulators Liquidity Crisis


The liquidity crisis is one of the reasons behind the downfall of the capital market. Liquidity crisis was felt in large scale by most of the private banks and financial institutions as a result which initiated the performance of money market to go down. In a single day the money market interest rate went up to 150%. Moreover, capital market crash was also initiated as private banks were pressurized by the Bangladesh Bank to reduce the CRR and SLR rate. As a result in a short period of time, huge amounts of funds were cashed out from the capital markets which directly influenced the capital market to decrease in a rapid and large scale proportion.

The Role of Bangladesh Bank


In the monitoring activities, Bangladesh Bank played an important role. Bangladesh Banks jobs are supposed to monitor the money market whereas they mostly concentrate on the capital market. For the betterment of good banking Bangladesh Bank can do such activities. Bangladesh remained silent in the earlier stage when the capital market was going for a bubble burst but rather they started to monitor tightly when the capital market reached to its peak. After the stock market crash in 2011, the central bank of Bangladesh, the Bangladesh Bank was at the center point of the debate regarding the crash. Bangladesh Banks some erroneous policies were surely aided the capital market crash. The reasons of the capital market most lies in the question of whether the monetary policy response was appropriate during the period of stock market rise as well as during the time of subsequent crash. Private Commercial banks were heavily involved in the investment of the stock market as well as the merchant banks were also became one of the key players of the capital market. So it is easily understandable that the stock market will have significant effect if regulators want to control the exposer of the private banks through regulations and policies. Because of the liquidity crisis as well as the comments from IMF mission to minimize the exposure of the banks to capital market in December 2010, the capital market started to shake from its bubble position as the private banks and financial institutions were pressurized the capital market by their year-end selling. BB tightened its stance on compliance at 10% of total liabilities by banks to the capital market exposure and also on calculation of capital market exposure at market price, tight surveillance regarding diversion of industrial loans to the capital market. All these triggered the sale of shares on the part of banks. The problem of excess liquidity in the market turned exactly opposite direction and made crash. The strength of the growth of capital market might have fueled the overheated market but it does not have the capacity to absorb the massive correction. Supply of money was decreased during the stock market crash because of strong import operations payments, weak growth of remittance inflows alongside high outflows and commercial payments to abroad. For this reasons taka was depreciated against USD with the weighted average interbank rate at Taka 70.75 per USD on December 30, 2010, against Taka 69.44 per USD on June 30, 2010. Taka again depreciated against USD in January 2011. Many merchant banks financed their operational margin loans by borrowing from the money market at call money rate before the capital market crash. But after the crash the instability in the call money market halted the barriers for the merchant banks to take further borrowing for the purpose of margin loan lend in the capital market.

To pull the rising inflation, Bangladesh Bank applied tight monetary policy in October 2010. In that period before capital market crash, tk. 30 billion was cash out for auction of Treasury bill and to increase the CRR ratio forced another 32 billion to go out from the capital market creating a liquidity crisis. The central bank also issued another directive asking financial institutions to adjust their stock investment exposure by December. Bangladesh Bank reduced he money supply to stop the credit flow to non- productive sectors which affected the capital market hugely by making it to be crashed. Bangladesh Bank also ordered that, any investment not more than 10 percent of any financial institutions total liabilities would not be allowed in the capital market and the financial institutions exposure will be calculated based on market price, not cost price. The Bangladesh Bank announced the 6 months tight monetary policy in July 2010 and was continuously pressurizing the private banks to minimize the capital market exposure. Commercial private banks were pushed by the Bangladesh Bank to bring down their capital market exposure as to comply with the AD ratio. In the end of monetary policy implementation period of 2010, Bangladesh Bank started its execution by triggering their money market tools and surveillance. Institutional investors did not buy back shares at the beginning of the 2011 because of the crisis in the money market and pressure of Bangladesh bank to reduce capital market exposure. There was a quick response from the borrower as they realize that the profit has further led the fund out from the capital market when Bangladesh Bank gave direction to adjust the diverted term loan by 15th February, 2011. Monetary policies taken by Bangladesh Bank were easier and softer before the 3 years of the crash, for that reason money supply during that period increased to 22%. But Bangladesh Bank was not much aware of the exposure of the private banks because probably the profits from the stock market investment of them were shown in their balance sheet which was seemed to be negligible in the eye of Bangladesh Bank. Even there was a widely held public perception that banks were making handsome profits from stock market investment. The government was total failure on their part of the Bangladesh Bank as a regulatory and monitoring authority failed to find out the proper information related to private commercial banks exposer to the capital market. Bangladesh bank took almost all the policies during the second half of the 2010 when the ASPI of DSE reached to the alarming level crossing the highest limits of 8000. Within days the Bangladesh Bank proposed some mistimed policy to control the private banks exposer to capital market. As an example, on a sudden the all the banks were called to maintain their investment in the capital market to the equivalent of 10% of their total liabilities by the Bangladesh bank through a policy issue. Private Banks had only one month to the end of 2010 but their investment in the capital market was much higher than the 10%, in some cases it was more than 60% of the total liabilities of the banks.

The cash reserve ratios (CRR) were also another policy that triggered the capital market to be crashed in 2011. A sudden increase of CRR from 5.5 % to 6%, SLR from 18.5% to 19 % and an extra pressure for commercial banks to raise their liquidity was created by the call for an increase of paid up capital. Due to fulfill their reserve gaps huge investors had to sell huge volume of stocks which triggered the sales pressure and as a result market went down. As the private banks were withdrawing their profit and principal funds from the capital market, the market finally fall on December 2011 only for Bangladesh Banks mistimed monetary policy. For some additional reasons were the factors behind the Bangladesh banks decision to control the private banks investment in stock market, these reasons were to contain inflation, to channel more credit to the real sector, and to protect the interest of the bank depositors by limiting them from risky investments. But Bangladesh did not ever have the good timing for announcing a policy in the year of 2010 and 2011. As following the monetary policy, Bangladesh bank tried to control supply of money because of the rising inflation trend. But fund running after stocks had some multiplier effect in accumulating more stocks; therefore, it appears not to contribute to inflation to that extent. The credit given by the merchant banks were much more negligible to the Bangladesh Bank compared to capitalization of capital market. Commercial banks should have been given more time for gradual adjustments. In addition, the CRR was not raised at an appropriate time. Therefore Bangladesh Bankss policy does not strongly justify their action against banks' investment in the stock market.

Date
06-May-10 01-Aug-10 01-Dec-10 13-Mar-11 26-Apr-11 15-Jun-11

Policy Changes
Cash reserve ratio increase by 50 bps to 5.50% Repo/Reverse repo rate increased by 50 bps to 5.50% Cash reserve ratio increase by 50 bps to 6.00% Repo/Reverse repo rate increased by 50 bps to 6.00% Repo/Reverse repo rate increased by 25 bps to 6.25% Repo/Reverse repo rate increased by 50 bps to 6.75%

Figure 24: Recent Monetary Policy Changes by Bangladesh Bank

Date
10-Jan-11

Regulations

Index

% Change

Bangladesh Bank (BB) extended the deadline on 6499.43 1.58% 8 banks in recovering industrial credit that was diverted into the stock market 28-Feb-11 Sanctioned fund amounting to BDT. 6 billion for the 5203.08 Investment Corporation of Bangladesh to buy shares also sanctioned fund SONALI Bank Limited, AGRANI Bank Limited, RUPALI Bank Limited and JANATA Bank Limited in two phases to buy shares from the stock market. 19-Sep-11 Reduction of Single Party Exposure limit of Banking 5966.51 Institutions 24-Nov-11 A circular on four issues in the newly unveiled 5065.18 -5.73% incentives package had been issued. 1. Banking institution invested portion of industrial loan in stock market, as a result BB ordered banks to recover those investment.

Figure 25: Policies Taken By Bangladesh Bank to Stabilize the Capital Market

Securities and Exchange Commission as Inefficient and Ineffective Regulator


Securities and Exchange Commission of Bangladesh (SECBD) played a very controversial role when the capital market was termed as overheated by excess liquidity. The change of face value, split, changes nothing in the value of the company but only increases the supply of no. of shares which enhanced the liquidity. Many stock prices were irrationally overheated as the Securities and Exchange Commission of Bangladesh (SECBD) permitted them to split. Securities and Exchange Commission of Bangladesh (SECBD) was never consistent and it interrupted frequently the capital market system in the case of loan ratio. SECURITIES AND EXCHANGE COMMISSION OF BANGLADESH (SECBD) as regulatory authority has been failed in stabilizing the capital market by frequently changing rules and regulation, imposing new polices related to margin trading, interest rate on margin and other issues. Securities and Exchange Commission of Bangladesh (SECBD) is operating with limited office staff, lawyers of inadequate competence and no available chartered accountant. There are 134 staffs in the Securities and Exchange Commission of Bangladesh (SECBD) of which only 47 were officers. There are four persons currently working to support the lawyers on

different legal issues in the law department of the Securities and Exchange Commission of Bangladesh (SECBD).because of this limited human resource capacity Securities and Exchange Commission of Bangladesh (SECBD) is only able to monitor two brokerage houses in a month. Moreover Securities and Exchange Commission of Bangladesh (SECBD) does not own itself surveillance software rather to monitor capital market activities it uses the software owned by Dhaka Stock Exchange and Chittagong Stock Exchange. Because of this dependence towards each other often it becomes difficult to continue the monitoring of proper surveillance of transactions. The project titled Improvement of Capital Market is yet to be initiated by Securities and Exchange Commission of Bangladesh (SECBD) for purchasing high-powered computer software for monitoring and surveillance operation in the capital market expense at USD0.3 million. USD 3 million has been allocated by the Asian Development Bank (ADB) to initiate this project. The main objective of this project is to improve technical, operational and management capabilities of the Dhaka Stock Exchange. Securities and Exchange Commission of Bangladesh (SECBD) is a statutory body of government which is attached to the Ministry of Finance. But the nature of relationship maintained by the Securities and Exchange Commission of Bangladesh (SECBD) with the Ministry of Finance is often found to be erroneous for the capital market. As such incidents were happened in the issue of face value harmonization. It was a proposal by the consultative committee of Securities and Exchange Commission of Bangladesh (SECBD) to harmonize the face value of all listed securities at Tk.10 but this proposal was rejected in few months by the standing committee of the Ministry of Finance. After that the proposal was again revised for several times and finally it was decided that all new securities will off load their stocks at taka 10. Meanwhile it was also decided that after receiving the approval from the board of directors of the existing listed companies, they should also restructure their share price face value at taka 10. In some instances, the Parliamentary Standing Committee for the Ministry of Finance has taken "adversarial position" which has created an unwarranted pressure in the operation of the capital market and other regulatory authorities. Securities and Exchange Commission (SEC) had always shown its incompetency in the case of using the margin requirement tools to stabilize the market. The capital market crisis even started when Securities and Exchange Commission (SEC) started to change margin loan frequently. On the February 01, 2010, Securities and Exchange Commission (SEC) increased the margin loan from 1:1 to 1:1.5 thus creating a more leveraged trading opportunities. But after two days later it hanged back its decision by rearranging margin loan to 1:1. Again on march 15, 2010, Securities and Exchange Commission (SEC) increased the margin loan ratio to 1:1.5 and reduced it on July, 2010 to 1:1 as well as on October, 2010 to 1:0.5. Securities and Exchange Commission (SEC) as regulatory can never provide a justification on such frequent revision of decisions. The following table highlights the change in DSE General Index and corresponding SECs decision to change the margin loan ratio.

Date
31-Jan-10 1-Feb-10 2-Feb-10 3-Feb-10 4-Feb-10 14-Mar-10 15-Mar-10 16-Mar-10 8-Jul-10 11-Jul-10 12-Jul-10 7-Oct-10 10-Oct-10 11-Oct-10 12-Oct-10

DSE General Index


5,367.11 5,451.15 5,503.38 5,399.65 5,434.04 5,375.07 5,338.14 5,460.75 6,432.50 6,303.54 6,313.32 7,480.34 7,292.54 7,396.43 7,463.06

Change in Index
(23.4) 84.0 52.2 (103.7) 34.4 (124.8) (36.9) 122.6 27.8 (129.0) 9.8 67.7 (187.8) 103.9 66.6

Margin Ratio
1:1 1:1.5 1:1.5 1:1 1:1 1:1 1:1.5 1:1.5 1:1.5 1:1.5 1:1.5 1:1.5 1:1.5 1:1 1:1

Figure 26: Volatility Differences between the DSE Index and the Timing of Margin Loan Ratio.

Daily Changes in DSE General Index around the Change in Margin Loan Ratio
150.00 122.60 100.00 50.00 0.00 -23.40 -50.00 -100.00 -150.00 -200.00 -250.00 -103.70 -124.80 -129.00 -187.80 84.00 52.20 34.40 36.90 27.80 9.80 103.90 67.70 66.60

Figure 27: Volatility of DSE Index and the Timing of Margin Loan Ratio

Date
10-Jan-11 10-Jan-11 10-Jan-11 10-Jan-11 18-Jan- 10 18-Jan- 10

Regulations
Transferred 14 companies share trade to public market1 instead of spot market2 Allowed netting or financial adjustment3 facilities for non-marginable stocks4 Withdrew restrictions on merchant banks' exposure5 to the stock market All listed6 companies would change face value7 to BDT. 10 from BDT. 100 or BDT. 1,000 Rectification of Margin Loan8 - increasing margin loan ratio to 1:1, to 1:1:5 and 1:2 Revised the members' margin rule, increasing the free limit of stockbrokers' and dealers' exposure to the market Introduction of circuit breaker9 on share index to protect against a big rise or fall Cancellation of Book Building method Sanctioned fund amounting to BDT. 6 billion for the Investment Corporation of Bangladesh to buy stocks also sanctioned fund SONALI Bank Limited, AGRANI Bank Limited, RUPALI Bank Limited and JANATA Bank Limited in two phases to buy shares from the stock market. Approval of BDT. 50 billion Bangladesh Fund, an openended mutual fund Ordered all companies and funds listed in the stock market to change their face value to BDT. 10 Regulator made it compulsory for sponsors, directors and promoters of a listed firm to jointly hold at least 30 percent stake in the firm. Set the new rule to stop sales of shares by the sponsors and directors within their companies. Sponsors and directors of a company will only be able to sell their shares in 'block market' instead of public market. 138 companies and mutual funds cannot be traded on December 1 on account of record date for changing the face value of shares.

Index
6499.43 Do Do Do 7140.24 Do

% Change
1.58% Do Do Do -0.03% Do

19-Jan-11 27-Jan-11 28-Feb-11

6913.39 7385.91 5203.08

-8.49% 1.45% -

18-Apr-11 15-Sep-11 21-Nov-11

5601.60 5960.74 5322.68

7.66% -0.10% 0.18%

21-Nov-11 21-Nov-11

5596.96 5372.66

5.15% -4.01%

26-Nov-11

5065.18

-5.73%

Figure 28: Regulation Policies Taken By Securities & Exchange Commission

1. A stock market or equity market 2. The spot market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date. 3. Netting or financial adjustment means no investor will be allowed to buy shares against the sale proceedings of other securities within the existing settlement period. 4. Securities that cannot be purchased on margin at a particular brokerage. 5. SEC withdrawn Merchant Banks restriction on stock market investment. 6. A company is said to be listed, quoted or have a listing if its shares can be traded on a stock exchange. 7. All companies issue shares with a fixed denomination called the face value (or par value) of the share. This face value is indicated on the share certificate. 8. Margin loans are loans taken to finance the purchase of securities, usually the purchase of stock (also known as equity). 9. Circuit Breaker is the maximum permissible deviation of the price (specified as percentage) of the incoming order from the Circuit Breaker Base Price for that instrument. Orders violating circuit breaker will result rejection of the order.

From the tables it is clearly understandable that to guide the capital market in the proper direction with the tools of margin loan ratio, Securities and Exchange Commission (SEC) has been totally incompetent in its regulatory practices. Every time when the index deceased, Securities and Exchange Commission (SEC) without any further thoughts changed the margin loan ratio thus decreasing the purchasing power of investors. Margin loan usually increase the purchasing power of the investors but as Securities and Exchange Commission (SEC) frequently volatized the margin loan, it was the investors who suffer the most losses when the capital market burst. Because of the liquidity crisis the merchant banks were unable to provide additional loans to investors and for that reason banks were unable to provide loan additional loan. Once the liquidity crisis become apparent, the Bangladesh Merchant Bankers' Association (BMBA) proposed providing margin loans by adding the money collected for the purpose of IPO (initial public offering) rights shares, at purchase price or market price, whichever is the lowest. BMBA has proposed providing margin loan ratio to 1:2. But Securities and Exchange Commission (SEC) frequently changed margin loan ratio without adjusting with money market. As a result decreased money supply stopped the private banks and merchant banks to provide margin loans and without margin loan there was no purchasing power for investors to adjust the loosed portfolio by buying stocks, so they sold their entire portfolio and capital market crashed severely.

Security Exchange Commission is the regulator of the Bangladesh Capital Market. But they were failed to do so properly and effectively. Lack of Efficient and effective manpower is the true reason behind the ineffective control and monitor of the capital market by Securities and Exchange Commission (SEC). When the capital market went upward and upward, Securities and Exchange Commission (SEC) were failed to initiate their authoritarian power effectively and efficiently. Securities and Exchange Commission (SEC) made many decisions regarding to stabilize the boom of capital market but most of them backfired by influencing the capital market to go more upward.

Book Building Method


By using book building method, many low earning companies raised their IPOs prices through the use of unethical fault accounting method practices, took advantage of the system in private placements and then went to the capital market with much higher valued IPOs without due regard to P/E ratios. Just the day before the mayhem, the president of the Dhaka Stock Exchange were charged with faulty accounting method practices where more than fifty companies were ready to enter into the capital market with the book building method. Book building method is a procedure of determining the price of stocks IPOs in which a fair price is offered by the determination of the demand of institutional investors and their indicative price. Book building method was introduced by the regulators so that it will attract many non-listed companies to become enlisted in the stock exchanges through the fair price sharing. But later it was found that it was an excellent instrument for manipulating stock market. In Bangladesh, to suit purposes of the companies the accounting figures are regularly changed and audit process is just a formality so it was not quiet appropriate to use the book building methods for price discovering. The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED published in their report that the share prices for placements were being manipulated to make it to become too high priced by the manipulators during the price discovery or bidding stage in the road show of the IPOs. High price was only maintained for the lock-in period after that investors offloaded their shares. So as a result the manipulators pulled out a huge amount of profit within a short period of time and the stock price gradually decreases. Most of the corrupted Issuer and issue manager were behind this price manipulation process through book building method.

CRR and SLR Rate


According to Bangladesh Bank circular, for better liquidity purpose all the private banks were supposed to reduce the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). Many of the private banks had invested heavily in the capital market before 2011, so as a result it became required for most of the private banks to go for selling their holdings of stocks to reduce their CRR and SLR rates. Thus the capital market went to downtrend in December 2010 and finally crashed.

Role of Employees of Capital Market Regulators


The image of Securities and Exchange Commission were deteriorated because of their role in the controlling and monitoring of the Capital market as they were working for the favor of the manipulators by approving unethical proposal and issuing wrong directives which finally caused the lead of unexpected capital market volatility. The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED published in their report that some corrupt employees names of the Securities and Exchange Commission who were directly or indirectly responsible for the capital market manipulation. Between Securities and Exchange Commission (SEC) and stock exchanges, there is a job overlapping. There is no co-ordination between Securities and Exchange Commission (SEC) and Dhaka Stock Exchange as they both have the same job of surveillance of trading activities. Securities and Exchange Commission (SEC) do not properly examines the listing applications of the companies whereas listing committees of Dhaka Stock Exchange & Chittagong Stock Exchange examines these listing applications properly. Powerful employees of regulators invented a new method of bribery through the placement of mutual fund & IPO (Initial Public Offering) at a price lower than the market value. There is another accusation that these senior level employees received placement shares by using other`s name which is very difficult to identify. The investigation report admits that Securities and Exchange Commission (SEC) doesnt have enough employees for example; qualified accountant, financial analyst and researcher to control and monitor the market. According to Rahman & Moazzem (2011) [27], Dhaka stock exchange is becoming more volatile but the regulators are unable to defend it. Surveillance of Dhaka Stock Exchange and Chittagong Stock Exchange The main objectives of the Surveillance functions of the Stock Exchanges are to promote market integrity in two ways By monitoring price and volume movements (volatility) as well as by detecting potential market abuses at a nascent stage, with a view to minimizing the ability of the market participants to influence the price of the scripts in the absence of any meaningful information. By managing default risks by taking necessary actions timely and efficiently.

But this Surveillance functions taken by Stock Exchanges and Securities and Exchange Commission (SEC) were not very efficient and effective for the development of the capital market. Surveillance committee usually asked the companies for the reasons behind the increase of their share price as whose share price became doubled but before doubling the price of stocks they remained silent. The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED published in their report that many members of Surveillance committee of regulators were involved in capital market manipulation directly or indirectly.

Direct Listing
Many companies have been directly listed in the Stock Exchanges With the approval of Securities and Exchange Commission of Bangladesh (SECBD). Most of these directly listed companies came with inflated share prices. The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED published in their report that indicative prices of these companies were determined even 58 times more than EPS and 9 times of NAV. the Securities and Exchange Commission of Bangladesh (SECBD) never investigated the reasons behind the unreasonable higher abnormal price of stocks of these companies, even by knowing that The prices of stock of these kinds of directly listed companies were artificially determined.

Uniform face value of share


The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED published in their report that one of the major reasons for unnatural increase of stock exchange index was initiated by the declaration of uniform face value of share at Taka 10. Securities and Exchange Commission of Bangladesh (SECBD) should have the little knowledge about the fact that splitting the stocks in price and quantity do not change the revenue or asset of the companies. Also Investors should have the basic knowledge that splitting the stocks in price and quantity do not affect the price of the stock of the companies. But it was the retail investors who showed their utmost interest in the purchase of split share along with their small investment portfolios and as a result the price of the stocks were consequently not went but basically pushed up. In 2009 & 2010, up to 62 listed companies split their shares. These affected the capital market capitalization by abnormally increasing the liquidity of the capital market and thus increasing the capital market index. The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED published in their report that MC increased about 655% of companies those adopted uniformities of stocks and MC increased only 46% of those that did not adopt this procedures. From July 2009 to December 2010 the role of total MC were 81.5% of companies which adopted share uniform and only18.5% those that did not adopt.

Delays of Settlement
It usually takes an unusual long time in the financing procedures and delivery of securities for which the money is blocked for nothing.

The lack of proper policy


There was always a lack or absence of proper framework and inefficient and ineffective implementation of policies which provides incentives and protection to the investors.

4.4.2 Reasons Created By the Role of Private Banks and Financial Institutes Private Banks Investment
For a developing economy, the role of private banks in the economy is huge in scale. Among the listed companies in the Dhaka Stock Exchange, private banks are the largest capitalized companies. Even few years ago private banks were engaged in their regular activities which is the general banking, but in the later years to earn earnings besides their operating income, many private banks started investing their valued depositors savings in the stock markets. As per regulations, private banks have the right to invest up to 25% of their deposits in the stock markets. But most of the private banks of Bangladesh invested more than 70% of their deposit amounts before 2011. Before 2009 and 2010, huge amount of deposited fund of private banks and financial institutions were invested in the capital market. This caused the market shares to go up as sky rocket until the December 2010. In December 2010, Bangladesh bank restricted the private banks investment of deposited fund not to cross more than 10% of deposited fund, increased CRR and SLR ratio and thus these steps initiated the liquidity crisis. Investment in the capital market made by the private banks was short term in nature but the amount they invested was an enormous figure. Most of the private banks sold their stocks at the peak of the capital market as quickly their profit were booked. This caused the outflow of huge amount of fund out of the capital market thus capital market lost its capital and went to downtrend again in 2011.

Actions of Merchant Banks


Merchant banking operational division was massively and country widely opened by the entire private banks and financial institutions before the capital market crash of 2011. Private Banks and financial institutions through their merchant banking operational division offered the investors basically the retail investors a 1:1 loan on the equity of the retail investors. For example if an individual has one lakhs taka, he or she will be able to get another one lakhs from merchant banking operational division of private banks and financial institutions and in total he or she will be able to invest total two lakhs worth of investment. For the margin loans the investors have to pay the interest to the private banks and financial institutions. Monitoring on the margin ratio of investors was taken regularly by the merchant banks. Every merchant bank has its own margin ratio benchmark and its own policy to call margin from their investors or clients. Margin ratio was reduced and reduced by Merchant banks of the entire private banks and financial institutions when the capital market was falling and crashing. So at one time, clients of merchant banks were forced to sell their stocks by the merchant banks to avoid the loss of merchant banks capital. As a result selling pressure was initialized and this influenced the capital market to go to more downtrend.

Omnibus Account
Another major reason for capital market crash of 2011 was the trading activities of omnibus accounts of ICB and merchant banks. Every branch of merchant bank operates only one omnibus account. The omnibus accounts are not under the surveillance of Securities and Exchange Commission and each omnibus account can contain 2 to 10 thousands of BO Accounts. Thus merchant banks have been always kept the individual accounts information and transactions only by themselves through the omnibus account. There were lots of illegal transactions happened through the omnibus accounts. Most of the manipulators traded the securities only from omnibus accounts. The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED published the name of such 30 big player or manipulators including the ICB who were accused of doing manipulation by the use of omnibus accounts. More than 2.5 billion taka worth of trading was occurred from the hidden omnibus accounts.

Roles of Brokerage Houses


Behind the capital market crash, the actions of the brokerage houses also contribute a huge role. For ensuring market stability and helping the trading process for investors of various kind, there les and compliance guidelines for the brokerage firms set by the Securities and Exchange Commission of Bangladesh (SECBD). But most of the brokerage houses broken many of these regulations. Violation of SEC rules includes margin loan ratio, providing netting facilities on non-net-able shares, short sell etc. In fact the magnitude and frequency of violation has increased by the brokerage houses. Even brokerage houses provided margin loans to the investors for purchasing Z category stocks which is a clear violation of regulation of Securities and Exchange Commission. For such kind of behaviors, Securities and Exchange Commission of Bangladesh (SECBD) took action against 23 brokerage houses. As per the securities exchange laws, brokerage houses and merchant bankers are not allowed to give loans to their clients for purchasing shares of companies under Z category which groups low profile shares. But as the brokerage houses provided margin loans to investors for purchasing Z category stocks, the price of these non-fundamental, high risk stocks increased making the investment of investors more risky. But when the capital market crashed and there were no more margin loans to acquire, the investors faced huge amount of losses against these Z category stocks which made them sold out the entire portfolio of them. These actions triggered the capital market crash to further.

December Closing
The capital market crash happened at the end of November and December of 2011. It was the time closing for many of the private banks and financial institutions. So private banks and financial institutions, who had investments in the market, started to peg their profit into their bag. So lots of profit taking took place in that time. It influenced the market to go in the bearish too.

4.4.3 Reasons Created By the Role of Investors


Retail investors are the major part of the Bangladesh capital markets an most of them do not have basic or fundamental and proper knowledge on the investment process making intellectuality o the capital market. They just want to purchase a share to get profit after 3 days when the shares got matured. But how and why they are supposed to get a profit they do not have any proper knowledge about the stock trading investment process. Most of the investors are supposed to wait and not to sell their stock in loss when capital market goes down, but the retail investors get panicked very quickly and sold their stocks as quickly as possible even in massive loss. So this attitude prolonged the capital market to go in the bearish situation.

Placement Trade or KERB Market


Before issuing IPO, Issue manager or Issuer Company sell shares to their nominated person and that is called private placement or pre-IPO placement. Private placement is risky as it doesnt have accounting discloser. In Bangladesh, even at today Securities and Exchange Commission did not initiated any proper useful rules and regulations regarding the Private placement or pre-IPO placement whereas in the developed countries there are some fixed rules and regulations about the sellout of private placement or pre-IPO placement. This provided the manipulators to use the private placement or pre-IPO placement as a tool for price manipulation. Investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED as chairman found that private placement or pre-IPO placement was offered at less than the IPO price in most of the cases. Though participation of public is the aim of public offering but placement doesnt make sure of it. In 2009 & 10 eight companies issued convertible preference share in which the average 69% of shares went for placement. So the placement trade or KERB market was created due to the public participation was hindered. In private placement or pre-IPO placement some companies distributed 50-90 % of their paid up capital. Moreover decrease of the number of free-floating shares is initiated when a company raises too much paid up capital through the private placement or pre-IPO placement. Because of this reason, the stock prices were pushed up due to the difference between demand & supply. Also huge investments of investors were stuck up with these private placements or pre-IPO placements which later initiated the liquidity crisis. A new process of trading outside of the share market which is actually illegal was created by the private placement or pre-IPO placement. With the use of artificial financial report manipulation and scam many small unprofitable or bankrupt companies raised millions of millions worth of funds from illiterate and uninformed investors by taking the chance of using private placements or pre-IPO placements.

Speculation and Manipulation


Artificial trading environment activities were created by many manipulators with the help of bulk transaction and increased stock prices. Moreover the capital market was overheated because of many serial trading and price quantity manipulation by lots of buy and sells orders through different accounts, broker houses and merchant banks. After the crash major newspapers reported that there few bull cartels whose irregular and illegal practices indicated capital market manipulation. According to national major newspapers reports there are more than ten bull cartels exist and operate in the capital market and they were accused and operational in the 1996 capital market crash too. People including some members of Dhaka Stock Exchange and Chittagong Stock Exchange, officials of Securities and Exchange Commission of Bangladesh (SECBD), political leaders, giant businessmen, officials of financial institutions, and owners of brokerage houses were alleged to be comprised of these bull cartels. Operation of curb market in the case of offering placement shares of IPOs, access to price sensitive information prior to public announcement, fake transactions through brokerage houses, lifting lock-in period in favor of selected companies directors, speculative trading of 'Z' category shares by artificially raising the share prices and syndicated practices through use of book building system were the manipulation practice methods taken by those bull cartels. With the support of share departments of the respective companies, these bull cartels have access to undisclosed and secret information of the company such as information on buying and selling of shares by a large quantity. Securities and Exchange Commission of Bangladesh (SECBD) was unable to prevent these illegal practices done by these bull cartels because of their corruption as well as of their inefficient and ineffective surveillance and monitoring system.

Market Rumors
Thus it has been observed that some profitable companies share values have been increased fictitiously which have hampered the sustainable operation of Dhaka Stock Exchange. There have been always lots of rumors in the capital market and these rumors get more values from the illiterate investors who are more prone to these rumors. For example the price of stock of Eastern Housing Co. (EHL) was tk. 600 for the last few months. But after one month the price of this share gone to tk. 1000 and so in the market it was being rumor that the price of this share will go for taka 2000. So following this rumor the illiterate investors run after the share to purchase with all of his or her precious savings without a bit analyzing the financial position, capabilities and resources of this company. Thus it has been found that the price of the share went from taka 40 to taka 2000 by increasing a maximum 4900% of gain in a single year and after that the investors were still purchasing this share and at last with bubble burst the market crashed.

Demutualization
Members, directors, brokers, dealers are the important elements of Dhaka Stock Exchange but these elements of Dhaka Stock Exchange do not work separately. There are both elected & nominated members in Dhaka Stock Exchange and Chittagong Stock Exchange. Some members of Dhaka Stock Exchange or Chittagong Stock Exchange as well as being the directors of listed companies of Dhaka Stock Exchange or Chittagong Stock Exchange used their internal information of share market for their own interest. Due to less Interests & relations of nominated members, so the elected members operate the regulatory administration. For that reason, an individual who is a member of Dhaka Stock Exchange is also a stock broker and stock dealer too. These type of individuals gained benefit from the capital market for their own favor. As a result, the players or manipulators of the capital market act as controllers. Meanwhile due to conflict of interest controllers were inactive during unethical activities. The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED published in their report that demutualization of stock exchanges are supported and demanded by many stake holders of capital market and individuals of civil societies. The meaning of Demutualization is separating the controlling functions from controllers functions, empowering controller and taking decisions without being motivated by the market players.

Sale Pressure from Institution and Big Parties


For most of the private banks and financial institutions the accounting year ends in the December and at that time these institutions dispose a great portion of their stockholdings I the capital market. This triggers the selling pressure in the capital market. In the December of 2010, it was alleged that many of the manipulators or gamblers sold out their stockholdings in capital market and walkout with huge amount of fund out of the capital market. Also observing the situation many merchant banks and brokerage houses also started offloading huge amount of stockholdings that pressurized to the aggravated situation further to turmoil. Some leading security houses selling pressure was so severe that they sold a huge amount of stockholdings within five to six minutes and this caused the capital index to shed more than 600 points out of the Dhaka Stock Exchange General Index. As a result the capital market of Bangladesh still suffers from severe liquidity crisis.

Block Placement
There was lots of suspicious block trading of mutual funds and many companies directors. Some investors got enormous amount of placement time to time.

Investment of Value Earned Money


It is the basic knowledge that the savers are prone to invest only their idle money in the capital market. But in Bangladesh before the crash of capital market of 2011, most of the people of all classes and stages were investing their value earned money in the stock market. To get an extra profit or income within a short time most of the people of all classes and stages invested their value earned money in the stock market not their idle money. So as a result the capital market went up and up and a last the market started to fall on December 2011 and these investors got panicked and sold off their almost entire of their portfolios. So this attitude prolonged the capital market to go in the bearish situation.

Irrational Retail Investors


Retail investors sentiments play an important role in creating a volatile market by deviating stock prices away from their intrinsic value as their heard behavior and sentiment surely played a part in creating bubble and ultimately bursting it in the capital market. There are 3.5 million investors in the capital market amongst them maximum are small or retail investors. The rising value of the stocks in recent years has attracted them to invest in stock market because it was given much higher return than traditional savings investment. In the country where unemployment is a serious issue, money income opportunity from the capital market attracted many unemployed youths and old people. They sold their saving, possessions and borrowed money from relatives, banks and other sources as they could to invest in stocks during the period Jan 2009 to mid of 2010. Bank sectors affected a little because of the huge withdrawal taken out from the banks to invest in capital market by retail investors which also triggered liquidity crisis. Retail investors do not have enough knowledge on stock market activities. So when the institutional investors like Banks, mutual funds started to realize the capital gain due to some change in monetary policy and government rules as the capital market started to crumble, most of the retail investors were panicked. As well as there was no positive impacts of the regulator's measures on the market. Market experts put the declining trend down to the liquidity crunch in the secondary market. But the situation has worsened for lack of confidence and knowledge among investors. So the retail investors lost their confidence and started to afraid of having strong fundamental stocks. Small Investors Association of Bangladesh accused that some Securities and Exchange Commissions members are responsible for creating panic in the market to spur panic selling. Retail investors have largely lost their confidence on the capital market and they are still afraid of purchasing stocks at todays current attractive low price.

Retail Investors Sentiment


Retail investors trading action and trend involve or comprehend a similar stream coursed factor element. Suppose if one category or collection of shares are bought or sold by retail investors then other collection of shares are also likely to be bought or sold. So as if some retail investors are buying or selling shares then other retail investors are also likely to be buying or selling shares. As a result co-movement in stocks expected return is encouraged by the investor sentiment through the changes in retail inventors portfolio. For these reasons if some retail investors are going for the purchase of low performance risky share then many other retail investors will also purchase such high risk share. In 2010, to many retail investors of Bangladesh capital market purchased low performance and high risk Z categorized share in huge volumes which triggered the price of these Z category shares to sky rocketed. But at last when the capital market crash, the retail investors over exposure to this Z category shares became nightmare and the prices of these shares declined in a rapid speed. Thus the retail investors suffered a huge amount of loss in their portfolio. Retail investors trading action and trend measures the changes in retail investors sentiment which shows changes in investor sentiment have accumulative as increasing by additional illustrative analytical potential ability or power over- 1)small stocks 2)value stocks 3)low institutional ownership stocks and 4)lower priced stocks. Which means retail investors portfolios containing these above categorized stocks will receive higher excess return, only if retail investors trading activities and sentiment become relatively bullish. Conversely, retail investors portfolios not containing these above categorized stocks will receive lower return, only if retail investors trading activities and sentiment become relatively bearish. So shifts in retail investor sentiment are most sensitive with those stocks which are preferred by the retail investors. Before the crash of 2011 in Bangladesh capital market, most of the retail investors invested in the low performance companies shares which are Z categorized because they actually do not have any analytical knowledge. As the circuit breaker for Z category shares are high, meaning high risks with high return, most of the illiterate investors invested in those stocks making the capital market vulnerable to crash. The strength of the relationship between the investor sentiment and future expected return is affected by the factors correlated with retail investor surrounding ambiance and cross sectional differences in arbitrage cost to take advantage of price difference between two or more markets to earn a risk free profit at zero cost with no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state. Retail investors agglomerate or concentrate their capital and trading activities or trend in the portfolio containing smaller, lower priced, higher B/M and lower institutionally owned firms which are most sensitive to changes in investor sentiment. As a result firms stocks with higher arbitrage cost like higher idiosyncratic risk and liquidity betas are most sensitive to changes in investor sentiment. So the strength of relationship between investor sentiment and

future expected return is a function of arbitrage costs. Also retail investors of Bangladesh capital markets before crash of 2011, always tried to purchase the low performance Z category stocks because the single lot price of these stocks are much lower than the single lot price of one fundamentally good category A stock. So having fewer funds to invest, most of the retail investors gone for the Z category stocks trading. This overexposure investment in Z category stocks made the capital market of Bangladesh to be crashed in 2011.

Suspicious Transaction of Top Players


The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED revealed some names of individual and institutional investors as top buyers and sellers of stock exchanges in their report who were accused by the investigation committee to artificially controlling the unnatural or abnormal increase and decrease of index in different time periods in the capital markets. The transactions of these investors were suspicious and affected the market heavily and they were liable for the abnormal rise and fall of the capital markets.

Role Played By Institutional Investors


The number and amount of investment of institutional investors trading on the stock markets increased heavily after year 2007 and they had an enormous role in fluctuation of the stock prices. Institutional investors refer to those non-bank person or organization that trades securities in large quantities or amounts that they qualify for preferential treatment and lower commissions. Institutional investors have better knowledge on the capital market investment, for this reason there are fewer protective regulations for them. In Bangladesh most of the institutional investors are commercial banks, insurance companies, mutual fund companies, merchant banks, finance and investment corporations etc. but among them the private commercial banks investment stake in capital market of Bangladesh is the biggest. Because of lack of efficient and effective regulatory supervisory from the regulators, most of the private commercial banks invested in stock market beyond their legal boundaries of exposure limit. As the December is usually the closing period for end of accounting year, most of the institutional investors close their positions in stock market to realize capital gain and to fulfill the regulatory guidelines regarding maximum limit of investment in stock market have to be 10% of each institutional investors liabilities portion. Also most of the institutional investors forced their clients to sell clients stocks to adjust clients margin loaned portfolios. So the capital market lost liquidity and thus it crashed in December, 2010. Apart from the commercial banks and a big number of active merchant banks, insurance companies and mutual funds have also played their part primarily in formulating and then diffusing the bubble realizing their share of the cake.

4.4.4 Reasons Created By the Role of the Listed Companies Pre-IPO & IPO Process
One of the main reasons behind the capital market crash of 2011 was pre IPO and IPO manipulation and share prices of the capital markets were gone sky rocketed because of the pre IPO and IPO manipulation. Illegally and unethically a KERB market in Pre-IPO stage was created by the manipulators. Applications for IPOs were accepted without being recommendation by the listing committee. Abnormal asset revaluation and indicative price were not properly examined and investigated by the Securities and Exchange Commission as a regulator. As a result share prices were overvalued by the Pre-IPO or IPO stage placement process and placement trade in the KERB market which has eventually generated liquidity crisis in the capital market.

Issue of Right and Preference Share


Right Share is issued at a discount price to existing shareholders. It is mysterious that in many times it took five to six months for the decision of approval of right share issue proposal by the Securities and Exchange Commission (SEC). Meanwhile, the prices of companies shares were increasing rapidly without any stopping as the moment the companies declared in the capital market about their Right issuance proposal. Moreover, issuance of Right share increase number of share which should decrease share price but it did not happened. Investment in preference stock is safe because it gives a fixed percentage of profit. But the companies can go for opportunity of Convertible Preference Share by making the stocks more attractive by converting it. Companies issued preference shares for only 2-3 months even for 1 month which is not common in other countries. The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED published in their report that the faults with the convertible preference share were its short time period, convertible process and private placement. Investigation committee also found that Securities and Exchange Commission (SEC) did not have proper guidelines for Right and Preference Share issuance.

Asset revaluation
Most of the enlisted companies of the capital markets have shown their asset value as overvalued by taking chance of weak asset revaluation method. Dishonest auditors helped these companies in generating artificial audit reports. As a result calculations of NAV (Net Asset Value) on these overvalued assets were giving wrong signals to the investors. Bonus shares were given against unrealized gain of revalued asset price by many companies enlisted in the capital markets. But it is a faulty and illegal accounting practice. There is rule to maintain provision against deferred tax during asset revaluation to pay tax in future,

but companies did not followed it. The investigation committee led by Mr. Dr. KHONDKAR IBRAHIM KHALED published in their report that some companies got NAV (Net Asset Value) more than 100% to 3,472% after asset revaluation.

Irregular Payment Dividends


Annual General Meetings are not held by some the companies and thus they eventually declare dividends that do not reflect the real or actual financial positions of the companies and ultimately shareholders become confused about his or her investment.

Improper Financial Statement


Many companies of Dhaka Stock Exchange do not focus on the real position of the company with the help of some corrupt audit firms who prepares the improper and wrong financial statements for those companies. As a result the shareholders as well as investors do not have any idea about position of the companies and with the help of improper financial statements the price of these poor performed and unethical companies stock went sky rocketed.

GRAMEEN PHONE IPO


The upsurge began a year or so back when GrameenPhone offered a large IPO (over tk. 40 billion) with much higher values over the face value of Tk. 10 only. Even then, the issue was only about 10% of the total capital of GRAMEEN PHONE. There was a big jump in the index about 1000 points when trading began with such higher value and it was included in the DSE index for the entire capital value of GRAMEEN PHONE. So the faulty index gave wrong signal to investors and the upward rise never stopped thereafter.

4.4.5 Reasons Created By the Role of Government Technical Problems and Political Infighting
The concept of centralization of securities market has not been implemented by the government of Bangladesh because of technical problems and political infighting.

Date
09-June-11

Regulations
Undisclosed money can no longer be invested into the share market in a process for whitening
Undeclared money would not be questioned if it is invested in the capital market

Index
6250.00

% Change
-1.08%

20-Nov-11

5800.42

-2.78%

Figure 29: Policies Taken By Finance Minister to Stabilize the Capital Market
Speeches Made By Finance Minister
The finance minister come up with an unprecedented statements like, I do not know anything about stock market or similar comments like those who invest in stock market are not investors rather they are gamblers and government has no role in protecting them. This has created a huge dissatisfaction amongst the small investors who looked at the government to do something in protecting their investment. Moreover, finance minister has also helped create the panic in the market by declaring that the government within 20 days would offload 50 per cent of its stakes in the State-Owned Enterprises (SOEs) in the stock market that resulted in a massive slide in SOE share prices. This news minimizes the demand of share due to possibility of heavy supply of shares. The retail investors got panicked seeing no positive impacts of the regulator's measures on the market. Market experts put the declining trend down to the liquidity crunch in the secondary market. But the situation has worsened for lack of confidence among investors. Some experts say coordinated measures from the government, the regulator and stakeholders can help the market overcome the current situation. Most of the small investors wanted the government to take initiatives to sustain and develop the stock market, but even a direct hand of the prime minister bypassing the DSE, SEC, ministry of finance could not alter the course of the fragile market.

5. THE POTENTIALS OF THE BANGLADESH CAPITAL MARKET


The capital markets play an important role in the development and growth of an economy by performing or acting the critical role of intermediary between the savers and the companies who need additional financing for business expansion. To support a robust economy of a country, vibrant capital is most likely necessary. For the corporate or economic growth, lending from the commercial banks is essential as well as valuable for the initial support. But for the corporate or economic growth, the most important pre requisite is the development of the stock market so that moving into a more mature growth phase becomes easier along with more sophisticated conglomerates. Today Bangladesh should focus on the development of governance as well as the improvement of advanced market products like derivatives and swaps along with its $67 billion worth of economy and about $700 per capita income. Bangladesh has achieved the significant milestones on the social development despite the challenges including political environment as well as the widespread poverty. The economy of Bangladesh is accelerating to an excellent level every year with average growth of 6%. The leading global investment banks such as Citi, Goldman Sachs, JP Morgan and Merrill Lynch all have identified the Bangladesh as one of the most prime investment opportunity. Even the capital market of Bangladesh has been underdeveloped, it is essential to develop the capital market so that Bangladeshs economic potentiality could be fully realized. Even the development process of the capital markets of Bangladesh is slow, it gives enormous encourages and hopes about the growth of Bangladesh capital markets. Since the inception of the Securities and Exchange Commission (SEC) in 1993 the capital markets of Bangladesh has developed or improved a lot. Today Bangladesh capital markets of Bangladesh has many advanced infrastructure which were attracted the attentions, importance and awareness as a result of the bubble burst of 1996. Government of Bangladesh is trying to develop and establish a debt capital market for the country as Bangladesh lacks a proper market for bonds. This market will be able to support the short term capital required by the domestic businesses. Because of the volatility in interest rate and absence of illiquid risk free instruments, commercial paper has not been introduced primarily by the government. For the short term mainly and slightly for the long term, illiquid risk free instruments can be used as benchmark. So Bangladesh has a flat yield curve of economic development at this moment. Because of the securitization of the potential companies with good health position, there are huge opportunities or potentialities exist in the capital market of Bangladesh. And there will be more investment from the foreign investors as their hedge investment exposure will increase through the introduction of debt instruments such as commercial papers, corporate bonds, and derivatives in the Bangladesh capital market.

The present situation of the capital market can be improved and such intensified degree of capital market crash can be prevented only by recruiting honest regulatory officials, providing proper education to the retail investors on the capital market functionalities, preventing faulty accounting practices and methods and implementing strong actions against market manipulators. Investors are losing their confidence from the capital market as well as from the government and regulators and for this reason Securities and Exchange Commission had adopted ten short term policies. These are as follows(1) Developing investment advisory service to open the information for all (2) Opening up avenues for academicians, policy makers for equity research publications (3) Developing corporate governance guidelines for companies in the Dhaka stock exchange (4) Taking steps to increase the capital base for the merchant banks and their subsidiaries (5) Developing financial reporting act to improve the quality of financial reporting of the companies in the stock market, (6) Strengthening the insider trading regulations to improve the confidence of the investors, (7) Drafting small investors protection act in line with the developed world, (8) Increasing the corporate governance mechanisms for the stock exchanges with quick implementation of demutualization in the market, (9) Developing mutual fund sector for investment in the market (10) Developing surveillance mechanism to improve investment protection mechanism for the investors. Securities and Exchange Commission, Bangladesh Bank, Bangladesh Telecom Regulatory Commission and other regulatory bodies are now restructuring the linkage between them. The country as well as the capital market was deprived of strong initiatives as there were no effective coordination between these regulators as they were not serving each theirs interests individually. To coordinate these regulators as well as the other ministries, there should be a formation of a dedicated capital market monitoring cell under the Ministry of Finance. State owned enterprises which are running on profit must be enlisted in the capital market in order to increase the market depth. If these state owned enterprises are allowed to operate through the stock exchange, the supply of securities in the capital market will be increased. It is expected and forecasted by many stock market expertise that the floatation of the state owned enterprises securities scripts will expand the capital market by multiple times. Government financial system will be transparent as well as confident, if the state owned enterprises are corporatized.

6. QUALITATIVE EMPIRICAL RESEARCH


Research ethics relates to questions about how we formulate and clarify our research topic, the data collection and processing method and how we report our research findings in a moral and responsible way. The appropriateness of a researchers behavior in relation to the rights of those who become subject of their work or are affected by their work is referred to as research ethics (Saunders et al, 2007) [15]. Although all research methods have specific ethical issues associated with them, qualitative research is likely to have a greater range of ethical concerns compared to quantitative research. Most of the data that will be used in conducting this research will be qualitative data. The qualitative informations are not readily and publicly available without any form of moral or ethical intrusion. The qualitative information has been used were the use of semi-structured and unstructured interviews as well as the self-administrative questionnaire. The respondents will be voluntary participants because they wont be coerced into participating in the research; they will be given full information regarding the procedure and risk involved in participating thereby giving an informed consent. The confidentiality and anonymity of the participant will also be respected, except an agreed approval is given by the respondent for his or her identity to be declared. The result is analyzed and summarized according to the objectives of the study. Here, the research project work paper represents reasons of the stock markets ups and downs.

6.1 Result and Discussion


Relation of Respondents with Bangladesh Stock Market To get idea about the relationship of individual respondent with Bangladesh stock market the following questions were asked to respondents. It was a closed question with 3 different possible answers which are Employee, Investor and Both. In the first group of sample, out of 12 employees of broker houses 5 were found as Employee and 7 were Both (employee and investor). On the other hand, in the second group of sample all 6 respondents were General Investors who invests in the market. So, the result of the question number 1 fits with the expected sample of the author for the Self-administered questionnaire. Agreeing With Major Causes of Investigation Report of Dr. KHONDKAR IBRAHIM KHALED From both employee and investor group, there was not a single respondent who agreed with all the causes given in the questionnaire. Every respondent selected few causes as major reasons behind the crash.

The following table provides information about number of respondents agreed with different causes:

Reasons
Book Building Method Direct Listing Placement Share Audit Report Corrupted Employees Of Regulators Split Share Serial Trading Block Trading Insider Trading Over Exposure Of Banks & Financial Institutions Omnibus Account Poor Monitoring Or Regulators Margin Loan Kerb Market Issue Of Right & Preferences Shares

No. of respondents
6 8 2 3 11 1 2 0 8 15 7 12 11 2 2

Figure 30: Number of Respondents Agreed With Different Reasons behind Capital Market Crash
As the result shows, over exposure of banks & financial institutions are the most important reasons behind the crash where 15 respondents selected the cause by Dr. KHONDKAR IBRAHIM KHALED. The second important reason for the crash chosen by 12 respondents was the poor monitoring of regulators was found as. Corrupted employees of regulators, Margin loan were chosen by 11 respondents and direct listing & insider trading was selected by 8 respondents. Other causes were selected by different number of respondents. Though anyone did not chose Block trading as a reason for the crash but it was mentioned by the respondents in other questions. Any Other Reasons That Were Liable For the Stock Market Crash To find out if there is any other reason that caused the stock market crash but did not appear in the investigation report of Dr. KHONDKAR IBRAHIM KHALED was the aim of asking this question. Therefore, the answer of the question serves to generate new ideas about major stock market causes and it was successful to do so.

Most of the respondents answer the question with following causes: Imbalance of demand and supply of shares in Dhaka Stock Exchange & Chittagong Stock Exchange Investors didnt have idea about financial report of listed securities / unfair audit report Buying shares based on rumor & without study Majority of general investors dont have knowledge about capital market Intervention of Bangladesh Bank (central bank) Over expectation of general investor Liquidity crisis

To find result of research question number one, the question number 2 and 3 was structured. The most common reason mentioned by the respondents of broker houses which was not in the investigation report was the poor knowledge of general investor about the stock market. From them it was mentioned that many of general investors dont have enough knowledge about the stock market as they buy shares without studying companies, on rumors and they have over expectations. However, most of the general investors did not mention it. Intervention of Bangladesh Bank, imbalance of demand & supply of shares and liquidity crisis were other reasons mentioned by the respondents of both groups. Do the Investigation Report Leads to Any Market Improvements The question was another closed question with Yes and No two different possible answers where 9 respondents answered Yes and 9 answered No. It was a decision of high court to publish the investigation report. So, the regulators and government will work according to the report and its recommendations were a great expectation of all stakeholders of the market. There was another investigation report in stock market crash of Bangladesh in 1996. But it was blamed that steps were not taken according to the report. So, the usefulness of the report and effectiveness of it by the regulators and government reveals the answer of this question. Investigation report didnt lead to any market improvement which is believed by most of the general investors. However, most of the employees of broker houses agreed that it leads to market improvements and some mentioned it as slowly effective. Development of Rules & Regulations by Regulators That Were Blamed For the Crash Respondents answered the question providing brief idea about the improvement of rules and regulations since the crash. Regulators developed their many rules and regulations which were blamed as the causes of the crash were agreed by 12 respondents of employee of broker houses & general investor agreed.

According to the respondents developed rules and regulations are following: Margin loan decision would be taken by broker houses and merchant banks not Securities and Exchange Commission (SEC) Sponsor director mandatory holds individually 2% and all together 30% shares Book building method in IPO has been developed Bangladesh Bank imposed limitations on Bank & financial institutions about their exposure in the market

Should There Be More Development of Market Regulations, Directives or Surveillance by the Regulators Respondents mentioned that there should be more development of rules and regulations in following ways: Adoption of Software (surveillance) and surveillance team to monitor overall trading activities Trustworthy IPO approval process Actual book building process should be introduced Offloading government shares Margin loan decision should be taken by broker houses and merchant banks not SEC Insider trading would be strictly prohibited

Suggesting Tools That Should Regulators Adopt To Prevent This Kind of Crash In Future Every respondent makes recommendation how regulators can protect this kind of crash in future by answering the question. The expected answer for the question contains different tools that can or should adopt by the regulators. Most of the respondents of both sample groups provided accurate and clear answer for the question. They made following recommendations for Securities and Exchange Commission (SEC) and stock exchanges. Provided recommendations are: Regulators should perform their job honestly and sincerely SEC needs honest officials Insider trading should be prohibited Omnibus should be converted to BO account

Effective Steps That Government Took To Improve the Market Condition after the Crash Respondents answered that the government of Bangladesh took initiatives to improve the stock market situation mentioning different strategies, tools, policies and rules-regulations taken by Bangladesh government.

The effective steps taken by the government to improve the market condition are following: Opportunity to whiten the black money by investing in stock market Appointing new chairman and members in SEC Establishment of law division

Actions Taken By the Government Sufficient To Handle the Situation or Not With Suggestion Actions taken by Bangladesh government are sufficient to tackle the condition of the stock market after the crash was agreed by 16 respondents of the general investor and employee group. In addition, some respondents also suggest implementing the actions taken by the government. Only two respondents did not agree with them and recommended following actions that should the government take to handle the situation: Incentives through SEC to attract companies to the capital market should be announced by the Government Long term actions for the market should be taken by the Government

Role of Government to Prevent This Kind of Crash In Future Recommendations of steps or actions for government that should adapt to prevent or avoid and tackle same kind of crashes in future were contained in the answer of this question. Recommendations are given following: Actions should be taken against those who were involved in this recent stock market crash Improving security laws and penalty for breaking those Balancing of demand and supply of shares Follow-up the market and protect against any kind of manipulation

To serve the research question number two, the question number 5, 6, 7, 8, 9 & 10 were designed. The result of these questions describe that the regulators and the government of Bangladesh has contributed in the development of stock market after the crash. However, more developments are necessary. Following recommendations are made after collecting primary data through self-administered questionnaire, used investigation report and other secondary materials for the study.

7. RECOMMENDATIONS
7.1 Recommendations to the Regulators
The role of Securities and Exchange Commission and Dhaka Stock Exchange is a sine-quanon for the development of securities market of Bangladesh. With the help of selfadministered questionnaire answered by respondents, investigation report of Dr. KHONDKAR IBRAHIM KHALED and different market analysis, the study has tried to provide some suggestive recommendations to follow to the regulatory organizations to improve the market activities of Dhaka Stock Exchange as follows To control price manipulation, malpractices and inside trading regulatory authorities should introduce automated monitoring system. Regulatory authorities should force the listed companies to publish their annual reports with actual and proper information that can ensure the interest of investors. Regulatory authorities should force the listed companies to declare and pay regular dividends through conducting the Annual General Meeting (AGM). Regulatory authorities should never allow any person being the director of a listed company to become the member of the Dhaka Stock Exchange. To improve the effectiveness and efficiency of transactions settlement regulatory authorities must introduce full computerized system. It is essential for the regulatory authorities to restructure the Security and Exchange Commission with honest, skilled, knowledgeable, clean imaged people. To make the exchange specialist bid-ask quotes available to the subscribers, regulatory authorities should introduce and implement The Composite Quotation System (CQS). Regulatory authorities should Increase the limited supply of securities in the market. Regulatory authorities must restructure the board of Dhaka Stock Exchange because it is formed by the combination of 25 members including 12 stock brokers, 12 dealers and the chief executive officer of Dhaka Stock Exchange who are the market player as well as controller. Regulatory authorities should ensure the greater degree of transparency in financial disclosure and management structure for better corporate governance. Regulatory authorities must create a supportive friendly atmosphere between Dhaka Stock Exchange Ltd (DSE) and Securities and Exchange Commission (SEC) so that their actions for the development and betterment of capital markets becomes more effective and efficient. Regulatory authorities should severely punish the member brokers for any breaching of contract.

Regulatory authorities should properly carry out the investigations on the verification of the rumors and the detection of the cases related to insider trading. Bar or circular must be established on the investment criteria for the banks and financial institutions by the regulatory authorities such as Bangladesh Bank. Regulatory authorities should improvise a new regulation on the placement business before the pre IPO state of a company. Regulatory authorities should encourage more banks, insurance companies and other financial institutions to become more active in deal with securities or stock business directly to maintain the supply and demand equilibrium. Regulatory authorities should develop and strengthen the market regulation and supervision to make the capital market more effective and efficient. Regulatory authorities should take severe remedial actions against the issues of fake certificates by any company to establish or set an example for others not to imitate such actions. Regulatory authorities should develop the institutional sources of demand for securities in the market. Regulatory authorities should develop and modernize the capital market support facilities. Regulatory authorities should not allow or permit the stock brokers to exchange or deal the securities on their own accounts or any of their beneficiary accounts. Regulatory authorities should establish an active market for government, municipal and state owned corporate bonds beside the private corporate bonds as an alternative investment source for the investors to provide risk free instruments. Regulatory authorities should elect and select the management or managerial level personals of Dhaka Stock Exchange and Chittagong Stock Exchange be vested with professionals and they should not have any kind of linkage with the ownership of a particular firm or enlisted company. Regulatory authorities should ensure the speedy disposal of their decisions and decision making power to be more effective and efficient for market operations. To broaden the market depth regulatory authorities must rule all the major infrastructure companies under telecommunication and energy sectors to be enlisted in capital markets through proper rules, laws and regulations. If all the telecommunication and energy sector corporations are enlisted in the capital markets then market capital will be $15 billion by 2013 with daily average turnover from current level of average of 10 to 15 million dollar to a level of 70 to 100 million dollar. Regulatory authorities must be more effective in issuing verbal or written warnings to the members of the capital markets if there any sort of suspicion irregularity is noticed. Based on the evidence from investigation report, regulatory authorities should either impose penalty or suspend the member who is involved in the market irregularity.

Regulatory authorities should be efficient and effective in conducting the in depth investigations based on preliminary enquiries or analysis made into trading of the scrip. It usually takes a long time by the regulated authorities to approve the stuck up shares to become free temporarily in the Dhaka Stock Exchange from the application of circuit breaker as a result the all price index of Dhaka Stock Exchange do not show the reflection of the actual position. So regulatory authorities should be more efficient in approving the stuck up securities. Regulatory authorities must control and abolish KERB market form premises of stock market. Regulatory authorities should provide foundation and core courses and training programs for retail investors to enrich their knowledge on capital markets. Regulatory authorities should adopt technologies like surveillance software to monitor the omnibus accounts trading activities. Securities and Exchange Commission should appoint more qualified officials for market research and in other necessary areas. Regulatory authorities like Bangladesh Bank should not change the monetary policy in a very short period of notice and they should always make their monetary policy decisions with patience and care.

7.2 Recommendations to the Government


For the economy of Bangladesh, capital market is one of the most important factors because the growth of the capital market indicates the growth of the economy. Huge numbers of investors mostly from the middle and lower class families with their small savings are related to the Bangladesh capital markets. So the government of Bangladesh should take necessary steps and initiatives to secure these investors investments and to accelerate the economic growth of the country. With the help of self-administered questionnaire answered by respondents, investigation report of Dr. KHONDKAR IBRAHIM KHALED and different market analysis, the study has tried to provide some suggestive recommendations to follow to the Government of Bangladesh to improve the market activities of Dhaka Stock Exchange as follows Government should take necessary actions or steps or initiatives to punish the manipulators of the stock market crash of 2011, who have been found guilty from the investigation report because these same people were also behind the stock market crash of Bangladesh in 1996. Government should increase the importance of the roles of the security laws. Government should follow up with the capital markets on a regular basis to stop and to protect the capital markets from any kind of misconduct activities.

Government should off load the shares of the State Owned Corporations (SOC) to maintain the balance between the demand and supply of shares in the capital markets of Bangladesh. To monitor and control the investment limit of the private banks and financial institutions, government can work together with Bangladesh Bank. Ministers of the government should not give out or comment any speech which will influence the capital market and market share prices. Government should make any decisions and comments very carefully and with patience.

7.3 Recommendations to the Investor


With the help of self-administered questionnaire answered by respondents, investigation report of Dr. KHONDKAR IBRAHIM KHALED and different market analysis, the study has tried to provide some suggestive recommendations to follow to the investors to improve the market activities of Dhaka Stock Exchange as follows Without having enough knowledge on the stock market trading, investors should not invest in the market. Investors should not make investment decision based on or depending on rumor and artificial financial report of companies. Being illiterate of knowledge on the company and the company operations, investors should not risk his or her money in the stock investment. Investors should not follow the illegal steps regard the creation and maintenance of BO accounts of their families and friends. Before investing on a companys stock, investors should study the financial report of that company. Investors should always make their investment decision with patience and care. Investors should not largely rely on the margin loan in making their investment.

8. CONCLUSION
The study has attempted to find out the major reasons for the recent stock market crash of Bangladesh in 2010-11 and role of different regulatory organizations including Dhaka Stock Exchange, Chittagong Stock Exchange, Securities and Exchange Commission and the government of the Bangladesh. As we have already understood that Dhaka Stock Exchange has been improving since 2011 crash and there has been an increasing trend in the case of number of securities traded in the stock market but the total capitalization is having a decreasing trend. The stock market crash of 2011 has shattered the public confidence tremendously. The study not only has identified the reasons behind the crash but also the number of problems that are hampering the sustainability and growth of stock market. As a watchdog of the market, the Securities and Exchange Commission must play a more dominant and prominent role in market reactivation otherwise our pace of industrial acceleration will suffer severely. The study was conducted to provide basic knowledge to different types of investors especially retail investors and stakeholders in the capital markets to make them aware on the fact that which reasons stimulates the capital market crash. With the help of self-administered questionnaire answered by respondents, investigation report of Dr. KHONDKAR IBRAHIM KHALED and different market analysis, the study has tried to provide some suggestive recommendations to follow to the regulatory organizations. About 3.2 million BO account holders lost their entire life savings and as an aftershock step an enquiry commission named IBRAHIM KHALED COMMISSION was created by the government. But report developed from this commission has implicated and accused several powerful politicians including some of the ruling partys members. But still today, for unknown reasons the full report of the commission has not been published. Moreover, the commission chief, Mr. IBRAHIM KHALED who is a respected banker, has been charged with defamatory cases! In addition of the investigation report, several reasons behind the capital market crash have been identified. In the capital market crash, few factorial reasons have emerged as strong as explored by majority of respondents through many causes behind the capital market crash has been identified. The crash of capital market was occurred mainly because of the poor monitoring of regulators, insider trading, given wrong information to the investors, imbalance of share, margin loan, weak accounting functionality and illegal participatory investment by the financial institutes, too much exposure by the banks and financial institutions, corrupted employees of regulatory organizations, direct listing, book building, lack of general investors knowledge, intervention of Bangladesh Bank and many more. Nothing short of a judicial enquiry by the high court will be sufficient to address the crisis,

compensate the innocent victims and restore confidence of the investors in the market and those in charge of economic governance in BD. Also numerous numbers of capital market vulnerabilities has been identified from the recent crash of capital markets such as misguided reliance on institutional investors, serious mispricing of the securities , excessive leverage and many more. Still the market is trying to become stable. Although the stock market is struggling to recover from the bearish mood, there are still much confusion and lack of cooperation between government, regulators, Dhaka Stock Exchange members and retail investors. Most of the investors are waiting for the correct moment to get the confidence to invest their valued savings in the stock market. For the greatest interest of the huge number of retail investors who are actually the heart of the stock market, government should take steps to sit down with all the important elements of the capital market to stabilize it. It is a good idea to come up with certain milestones and linking them with the disbursement of Development Credit Support of the World Bank to expedite the market development process. By using this linage, the government of Bangladesh is having greater development in the sectors such as monetary management and corporatization of public sector banks. Most of the reasons behind the downfall of the market involve policy blunder by Securities and Exchange Commission and Bangladesh Bank. Since the capital market crash of 2010-11, the roles and functions of the regulators and government are developing. But to prevent the future capital market crash of such degree, the government and regulators should develop and introduce more new tools, strategies, directives, rules and regulations in the capital market. Because the repetition of capital market fall is obvious since speculative buying and selling, short selling, margin trading, option trading are the mechanism of this pure play market with no well documented relationship with the real economy. Even there is a long way to go for the Bangladesh capital markets, the market has been positively impacted or affected by some recent measures taken by the transitional government. Also as a regulator Securities and Exchange Commission should be more cautious on their monitoring and over sighting of the capital market with coordinated monetary policy from Bangladesh Bank. The capital market will undoubtedly play a critical role in leading the Bangladesh towards being the next Asian tiger with growth comparable to India, Vietnam and the other most dynamic economies in the region only if government of Bangladesh takes more investor-friendly policy reforms.

Hopefully, this study will help to develop the knowledge of all the stakeholders and investors related to the Bangladesh capital market about the recent stock market crash in 2010-11.

9. REFERENCES
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22. Obstfeld, M. (1994) The Logic of Currency Crises Cahiers Economiques et Monetaires (43): 189-213 23. Obstfeld, M (1996) "Rational and Self-Fulfilling Balance of Payments Crises", American Economic Review, Vol. 76 (March), pp. 72-81 24. Ozkan, G. and Sutherland, A. (1995). Policy Measures to Avoid a Currency Crisis. Economic Journal, 105: 510-519 25. Radelet, S., and J. Sachs. (1998), The East Asian Financial Crisis: Diagnosis, Remedies, and Prospects. Brookings Papers on Economic Activity, 1: 1-90 26. Rahman J., 2011. Share Market Bubble the Big Picture. 27. Rahman, T. & Moazzem K. G., 2011. Capital Market of Bangladesh: Volatility in the Dhaka Stock Exchange (DSE) and Role of Regulators. International Journal of Business and Management, Vol. 6, No. 7; July 2011. 28. Raisa A., 2011. Behind the Scenes the Stock Market Saga. 29. Saunders, M., Lewis, P. and Thornhill, A. (2007) Research Methods for Business Students (4th edition), Harlow, Pearson Education 30. Saunders, M. Lewis, P. & Thornhill, A., 2009. Research methods for business students. 5th ed. Prentice Hall. 31. Ullah A. F. M. A., 2011. Capital Market in Bangladesh. 32. Vlaar, P. (2000) Early Warning Systems for Currency Crises. Papers De Nederlandsche Bank. Number 167 33. Walliman, N., 2011. Research Methods the basics. Routledge.

Websites 1. Central Depository Bangladesh Limited, www.cdbl.com


2. Chittagong Stock Exchanges, www.cse.com.bd 3. Dhaka Stock Exchanges, www.dsebd.org

4. Security and exchange commission, www.secbd.org

Survey on the Reasons of Capital Market Crash in 2010-11

This is DEWAN JOHEB ZAMAN, studying B.B.A. in Finance at East West University, Dhaka, Bangladesh. This is a survey to study the reasons of the stock market crash of Bangladesh in 2010-11 and role of regulators. I would be very grateful if you kindly answer the questionnaire and return it to me. N.B. Respondent can even answer the questionnaire anonymously. 1. How are you related with the Bangladesh stock market? Employee Investor Both

2. According to the Investigation report of KHONDKAR IBRAHIM KHALED (2011), major reasons of the crash are following elements. (please tick the boxes, if you agree with the elements)

Book Building method Direct listing

Split Share serial trading

Omnibus account Poor monitoring or Regulators Margin loan KERB market

Placement share Audit report

Block trading Insider trading

Corrupted employees of regulators

over exposure of banks & financial Institutions

Issue of Right & Preferences shares

3. Did you find any other reasons that were liable for the stock market crash? If yes, please mention.

4. Do you think the investigation report of Ibrahim Khaled leads to any market improvements since the crash? Yes No

5. Have the regulators developed their rules & regulations that were blamed for the crash? If yes, please mention those & how.

6. Should there be more development of market regulations, directives or surveillance by the regulators that havent been taken yet? If yes, please mention those.

7. Could you please suggest some tools that should regulators adopt to prevent this kind of crash in future?

8. Have you find any effective steps that government took to improve the market condition after the crash?

9. Are the actions taken by the government are sufficient to handle the situation? (If Not, please suggest some actions that should government take)

10. What kind of role can government play to prevent this kind of crash in future?

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