3/31/2013

Bangladesh Stock Market Failure 2009-2010

Possible Solution

Bangladesh Stock Market Failure 2009-2010

Possible Solution

Prepared for
Sheikh Morshed Jahan Associate Professor BBA Program

Institute of Business Administration University of Dhaka

March 31, 2013

The 2010-11 Bangladesh share market Crash is an ongoing share market turmoil in the two Bangladeshi stock exchanges, DSE and CSE. Millions of small investors have lost all their investments due to the market crash. The underlying market failures are failure in regulation resulting in market players unethical activity, agency dilemma and information asymmetry. The market turmoil began in late 2009 with the entrance of GrameenPhone with a large IPO (over 4000 crore) with much higher values over the face value of Tk. 10 only into the capital market. When trading began with such higher value and it was included in the DSE index for the entire capital value of GrameenPhone, the index rose by 22 per cent in a single day on November 16, 2009. There was a big jump in the index about 1000 points. So the faulty index gave wrong information to investors. Though the index reached 6000 or so from under 3000 in a very short time, finance minister dismissed that the market was not overheated and overvalued. Around the same time some foreign firms set their feet into the market and created further push up. Since there was no capital gain tax on the earnings and no restrictions were placed by Bangladesh Bank on transferring their capital plus gains, they took advantage of super returns and transferred money out of the country by buying dollars from the curb markets. DSE General Index soared to its highest levels from October to December 2010, with the peak on December 5, 2010 at 8,918 points which was a 95.23 per cent increase from that of January 3, 2010. On January 10, 2011, trading on the DSE was halted after it fell by 660 points, or 9.25 per cent, in less than an hour - the biggest one-day fall in the 55 years of the course. CSE also met the same fate. Imperfect and in some cases manipulated information regarding the IPO, assets reevaluation of companies, circular trading in secondary market, stock price manipulation were example of Information asymmetry which along with regulatory failures such as supporting and legalization of unethical activities of Big Investors, formulating policies to support market Players, failing of SEC to take measure against manipulation of Financial statements, led ultimately led to the market crash. Agency dilemma was also one of the factors. A major overhaul of the regulatory SEC, including the replacement of its current chairman, Coordinate actions to restore Investors Confidence, new regulations, punishing unethical works done by the agents, educating investors so that they have better knowledge of the market are some of the measures that DSE, CSE and SEC can take to avoid repeting such situations in the future. . "All the institutions that have anything to do with the stock market were responsible for the debacle," former central banker Khondkar Ibrahim Khaled, told newsmen after submitting share probe committee report 2011 to Finance Minister AMA Muhith.

Reference
Share Probe Committee Report- 2011 by Khondkar Ibrahim Khaled, former central banker Share market crash and the reasons behind the disaster by Md Noor Solaiman Jewel, Senior Executive, the Premier Bank Limited (Brokerage Division), Chittagong Published on Tuesday, 16 October 2012 Recent stock market crash in Bangladesh, Wrong signals from responsible quarters since the CTG caused the asset price bubble by M. Shamsul Haque, professor, finance dept. and Vice Chancellor, Northern University Bangladesh 2011 Bangladesh share market scam by Wikipedia. Org.
http://en.wikipedia.org/wiki/2011_Bangladesh_share_market_scam

Externalities: Prices Do Not Capture All Costs, FINANCE & DEVELOPMENT by Thomas Helbling, Advisor, IMFs Research Department, published on March 28, 2012