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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,
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.
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
3.
4.
34 34 36 39 46 46 58 60 66 68 69 71 71 76 76 78 79 80 82
5. 6. 7.
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.
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.
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.
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. 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.
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.
1.7.2.1.1 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-
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.
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
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.
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
Secondary Market
Spot Market
Block Market
Stocks
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.
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.
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
(Number in Million)
15,673 13,268 2,393
(Numbers in Thousands)
409 4,672 7,336
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
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
Financial Market
Money Market
Capital Market
Commercial Banks
Insurance Companies
Non-security Segment
Security Segment
BSB
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
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)
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.
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.
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.
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]
financing. It can, therefore, be said that we have a somewhat flat yield curve in Bangladesh at the moment.
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
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.
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.
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.
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
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
7.83 13.85
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%
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
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
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
-8.49% 1.45% -
21-Nov-11 21-Nov-11
5596.96 5372.66
5.15% -4.01%
26-Nov-11
5065.18
-5.73%
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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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)
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?