Executive Summary

In a market economy, the capital market plays a vital role in the efficient allocation
of scarce resources. Well-functioning and developed capital markets augment the
process of economic development through different ways such as encourage
savings, draw more savers and users into the investment process, draw more
institution into the intermediation process, help mobilize non financial resources,
attract external resources, bring disciplines in the sick organizations and invest for
organizing production of goods and services and create employment opportunities.

There is a saying that the stock market is the pulse of the economy. There is no
doubt that a vibrant capital market is likely to support economy to be robust but
two major catastrophes in the capital market of Bangladesh within one and half
decades do not indicate the existence of a vibrant market; rather these show a
highly risky and unstable capital market. The recent surge in the capital market
has shaken the whole country as millions of people became insolvent within a very
short span of time. It was observed in 2010 that the DSE general index was the
highest ever which made it Asias top performer after China.

But the reverse scenario was scaring investors in the 1st quarter of 2011 as the
lowest ever in the index observed during that period.

Actually, stock market crash is as more than 10% loss within few days in a stock
market. But stock market crash has differentiated from stock market correction
where the loss is 10% or less.

Stock market crash is a sharp and unexpected decline of stock market prices for
a very short period of time, usually accompanied with the decline of many other
assets prices mentioned by stock market crashes.net. It causes significant capital
losses of investors and speculators. The market participants become panicked
which leads to more losses.

Bangladeshi Stock Market has experienced a big crash twice from its inception. In
1996, the market was crashed because of speculative bubble whereas; it was an
asset bubble in the year 2011. The stock price was overvalued this time. Price was
inflated about 500-700 percent compare to the face value. DGEN Index climbed at
point 8918.51 on December 05, 2010 which signaled a steeper bubble.

This study postulates the present scenario of Bangladesh Stock Market through
various quantitative and qualitative data which are extracted from the secondary
sources. Quantitative data are gathered from the web site of Dhaka Stock
Exchange and other qualitative data are collected from published research
journals, newspapers, websites etc. This study has revealed that, Gap between
the Demand and Supply of stock, extraordinary over pricing of stock, market
manipulation, lack of knowledge about the stock market mechanism among the
general investors, price distortion, inefficient regulations, political unrest, etc
caused the crash of DGEN Index in the FY2011. Security and Exchange
Commission (SEC) of Bangladesh and government should encourage more public
limited companies to offer more share to meet the current demands. In order to get
back the confidence among the existing investors regulatory body may introduce
Income tax rebate, Injection of Market Stabilization Fund, Mandatory holding
certain percentage of share among the board of directors, short term incentives
packages etc.

Regulators had failed to take proactive measures to not grow the bubble and
caused losses for millions of investors when the bubbles burst. When analysts
were anxious about the bubbles, regulators were ignoring them and even defended
the bubbles.

The recent volatility of the capital market of Bangladesh is an abnormal

phenomenon and such volatility tends to economic instability. I believe it will be
interested enough to look into the causes of the problem. As such volatility affects
mass people (many investors), it is essential to try to minimize such volatility by
identifying the causes (esp., Regulatory failure) and solving the problems.

Introduction:

Stock market is one of the most important financial institutions of any economy as
well as Bangladesh. It opens door for companies to raise huge amount of capital
from a lot of individual investors inside & outside of a country.

Investors participate voluntary to buy ownership of a company in the public market.

It is said that stock market is an intermediary institution to adjust a gap between
surplus units and deficit units of an economy. In these days for millions of middle
class educated people in Bangladesh investing in stocks is more popular than
investing in any other investment sectors. For an investor, stocks are more liquid
than any other investment sources as it gives ability to sell and buy ownership
anytime without any hassle.

Since 2007 share prices of Bangladesh stock market have been increasing
steadily over the past four years and it outperformed almost all the worlds
markets.

The financial year 2008-09 is known for the global financial and economic crisis.
Many developed and developing countries fall into recession. However, it could
not affect Bangladesh economy greatly. So, the stock market of the country did not
see any significant changes or fall. As CPD (2011) reported, financial year 2008-
09 was a volatile year but during this year Bangladesh economy benefited from
low prices of import-able and was able to avoid negative pressure on its export of
goods and services. Consecutive outstanding performance of Bangladesh stock
market in recent years before the crash lured millions of investors to the stock
market to invest their little savings. Before the stock market crash the market had
become a route of easy money for too many new individual investors. That is why
millions of fresh investors invest their small saving in the market during this period.
For these fresh investors investing in this market provided a way to avoid working
a job. Even some BO account holders worked as intermediaries of friends,
relatives to invest their money in the stock market.

Finally, the stock market crashed and taught these investors that investing money
in the stock market involves risk too. But the lesson that investors are taught
wreaked havoc on the lives of millions of innocent investors. The crash wiped out
billions of taka from the market where fresh, illiterate investors were the main
victim. It has been more than a year since the crash occurred.

Generally market crash occurs because of a sudden dramatic fall of stock prices
across a significant cross-section of a stock market, resulting in a significant loss
of paper assets. Crashes are driven by panic as much as by underlying economic
factors. They often follow speculative stock market bubbles. Stock market crashes
are social phenomena where external economic events combine with crowd
behavior and psychology in a positive feedback loop where selling by some market
participants drives more market participants to sell. Generally speaking, crashes
usually occur under the following conditions, a prolonged period of rising stock
prices and excessive economic optimism, a market where P/E ratios exceed long-
term averages, and extensive use of margin debt and leverage by market
participants.

Objective of the report

Since the origination of DSE in 1986, it passed through two big market crashes
during 1996 and 2011. This repeated crisis made all the small investors empty.
Main r objective is to find out the underlying causes of recent market fall and
address some suggestions to get it back in structured market mechanism.
Specifically focuses are to:-

To depict the present scenario and the recent crash in the stock market of
Bangladesh through a chronological analysis of stock market in Bangladesh..
 The study tries to examine the reasons that leaded the Bull Run for dramatic
increase of different instruments in Bangladesh stock market and the fundamental
factors of the collapse

Tap few guidelines to recover the recent crisis.

Methodology

The report is both descriptive & calculative by nature. The report is based on
information collected from primary as well secondary sources. The indicators
which are responsible for recent crash are measured by calculation. The trend of
those indicators has also been measured for last three years. Statistical approach
has also been used in the report.

To find out the critical issues of this sudden drama, we have collected secondary
information from various sources. We have emphasized on quantitative and
qualitative data to analyze the recent share market crash and its prevail crisis in
Bangladesh stock market. All the quantitative data are extracted from Dhaka Stock
Exchange website and qualitative data are collected from published research
journals, newspapers, websites etc.

Data Collection:

In order to make the report more meaningful and presentable, two sources of data
and information has been used.

The Primary Sources are as follows-

Practical work exposure

Discussion with the respective executives & officers of the bank.

The Secondary Sources of data and information are-

Annual Reports of DSE.

Various publications regarding DSE.

Analysis:

The main factors of DSE have been analyzed from different perspectives.

SOWT analysis
 Regression analysis:

Rationale of the report

The thesis is required for students who are completing Masters of Business
Administration (MBA) from University of Dhaka. It is a three credit hour program
with duration of minimum one and half month. Students who have completed all
the required courses are eligible for this program. This report has been prepared
as a partial fulfillment of MBA program authorized by the Department of Banking.
In this program, I was assigned to make report regarding DSE share crash. During
making this report, I have learned about various aspects related to share market.
This report has been prepared according to the topic given by the supervisor.

Scope and limitations

A comprehensive knowledge on stock market crash has come under the scope of
the report. The present study is an attempt to evaluate the stock market of
Bangladesh.

The report is limited only to gather knowledge about the determiner of the crash of
the share market of Bangladesh. Here the past history & present condition of
Bangladesh share market will also be taken into consideration.

Limitation

There are some limitations, which act as a barrier to conduct the program and for
doing an empirical research work. The limitations were:

Large scale analysis was not possible due to constraints & restrictions this
report is limited only to the share crash, it does not cover the whole perspectives.

In many cases, up to date information was not published.

In some cases, access to relevant papers & documents were strictly prohibited.

Another Problem was time constraints.

Insufficiency of necessary information, lack of experience and budget

constraint.

Chapter 2: Literature review

Chapter contents..
 Literature review of the report

Literature review

About share market volatility many researcher of our country and abroad has
worked by applying different methods and has tried to find out various factors that
are actually liable to cause a crash. Here I have given some of their opinions
regarding this topic and finally I have concluded according to my own.

The United States experienced the NASDAQ bubble in the late 1990s. The
fluctuations beliefs generated by overconfidence among Bangladesh investors led
to larger speculative component in stock prices, and the technical bubble of the
U.S. market was identified as the result of exuberance.

(Shiller, 2000; Chen, Hong, and Stein, 2002). Given that markets in the advanced
economies seemed to be more susceptible to speculative bubbles and crashes,
and many emerging markets also display similar evidence, it seems reasonable
that no one should look forward to these phenomena disappearing from the
Bangladesh markets (Ahmed et al., 2006).

In line with Shiller (2000), other researchers also discussed how price movements
are led by social processes in a non stationary environment or irrational market
and that individuals value other persons opinion in assessing probabilities. For
example Chen, Hong, and Stein (2002) analyzed the overvaluation generated by
beliefs. The authors conclude that the market overvaluation was caused by the
investors overconfidence.

According to (Zaman, 2011) regarding Bangladesh market it is found that there is

a general tendency among investors to hold onto their shares till the record date
so that they get entitled for dividend, and then sells it off after the record date. This
results in an increase in share supply which might result in price decrease.

Chowdhury & Chowdhury (2010) gathered secondary data of publicly listed

companies, traded in Dhaka Stock Exchange (DSE) and Chittagong Stock
Exchange (CSE), to see the relationship between capital structure and firm value
in Bangladesh. It was observed that by changing its current ratio, operating
leverage, EPS, dividend payout ratio or share capital, a firm may increase its value
in the market. Chowudhury & Abdullah (2011) opines that lack of market
regulation, lack of supply of good shares, presence of syndicate, lack of financial
knowledge helped the market index jumped over 8000 point during December
2011.
I also agree about that some of the factors that have been presented by them are
really the actual reason of market crash. Besides these I have also mentioned
some other elements related to crash among which some are primary issue related
and some are secondary issue related and some are authority regulatory related.

Here I think the Capital Market of Bangladesh have been passing tough times
since December 2010 as high volatility is eroding the capital of Thousands of
Investors that might turn into social instability. This fall is caused by many factors
that I tried to identify and tried to link up between causal factors of market crash
and regulatory failure.

Primary issue related problems was faulty listing methods and IPO overpricing,
few numbers of new listings, revaluating assets before company listing, high
premium in issuance of right share/Repeat IPO etc. while secondary market
related problems was stock splits and stock price manipulations through block
trading, circular trading and insider trading. Investors greed and irrational behavior
played a big rule to make the stock prices sky rocking as they were crazy to buy
shares without judging the company fundamentals. Shares of the companies with
closed operations and big accumulated losses were rising constantly due to
investors high risk appetite that caused them to loss everything. Government had
already taken many steps (including SEC reforms) to stabilize the market but failed
as investors confidence is in the bottom level. Government and regulators should
work together to identify the main speculators and should brought under proper
trial to bring investors back to the market. Regulator should make reforms on
Listing procedures and other faulty regulatory frameworks to ensure transparency
and efficiency in the capital market and also should bring clear guidelines
regarding Private Placements, Asset Revaluation, Insider Trading, Dealing with
Omnibus Accounts etc.

Chapter 3:

A profile of the DSE.

Chapter contents..
About stock exchanges

Historical background of DSE

Corporate information at a glance

Management, trading and settlement

DSEs functions.
About stock exchange of Bangladesh

A stock exchange is a body that provides services to stock brokers and traders to
trade stocks, bonds, and other securities. Stock exchanges also provide facilities
for issuance and redemption of securities and other financial instruments, capital
events including the payment of income and dividends. Bangladesh has two
exchanges. Their acquaintances are given below:-

Two stock exchanges

DSE
CSE
Type of organization: A Not-for-profit public limited company by guarantee.

Authorized capital: TK. 150 Millions

Paid up capital: TK. 38.7 Millions ($0.72 millions)

Number of members: 129,

No. of listed companies: 212

No. of listed Mutual funds: 10

No. of listed Debentures: 04

Market capital: TK. 56.36 Billions

Trading days: Sunday to Thursday.

Trading procedure: Automated Trading System.

On line trading system: 30th may, 2004.

Location: Dhaka, Bangladesh

Founded: 1954

Key people: Mr. Md. Rakibur Rahman

Market Cap: US$ 50.28billion

 No. of listings: 750

Volume: US$ 1.43 billion

Indexes: DSE 20 Index

General Index

Trading procedure: Automated Trading System.

Types of securities traded: Shares, debentures and mutual funds

Trading days: Sunday to Thursday.

Website: www.dsebd.org

Historical Background of DSE

Dhaka Stock Exchange is the first & biggest stock exchange of the country. First
incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954
and started formal trading in 1956. It was renamed as East Pakistan Stock
Exchange Ltd in 23 June 1962. Again, renamed as Dacca Stock Exchange Ltd in
13 May, 1964. After the liberation war in 1971 the trading was discontinued for five
years. In 1976 trading restarted in Bangladesh, on 16 September 1986 DSE was
started. The formula for calculating DSE all share price index was changed
according to IFC on 1 November 1993. The automated trading was initiated in 10
August 1998 and started on 1 January 2001 and was upgraded time to time. The
latest upgrading was done on 21st December, 2008. 15 Central Depository System
was initiated in 24 January 2004.

Dhaka Stock Exchange (DSE) is registered as a Public Limited Company and its
active-ties are regulated by its Articles of Association rules & regulations and bye-
laws along with the Securities and Exchange Ordinance 1969, Companies Act
1994 & Securities & Exchange Commission Act 1993.

In the beginning DSE was a physical stock exchange and used to trade in the open
out-cry system. After that to secure smooth, timeliness & effective operation on the
market, DSE uses automated trading system. The system was installed on 10th
August, 1998 and was upgraded time to time. The latest upgrading was done on
21st December, 2008. 15.

There are 238 members and total 507 listed securities in Dhaka Stock Exchange.
The working days of DSE is 5 days in a week without Saturday, Sunday public
holidays & other government holidays. The trading time is from 11:00 am to 15:00
pm (local time). Investment options for an investor in this market are ordinary
share, Debenture, Bond & Mutual funds.

In the beginning DSE had only one index. However, now there are three different
indices which are DSI (All share), DGEN (A, B, G & N) and DSE 20.

DSE at a Glance for the year 2011

Factors FY 2011
Total trading days 235
Total Turnover Value (BD mn) 1,560,912
Daily average Turnover Value (BD mn) 6,642
Average Volume (BD bn) 849
Market Capitalization (USD bn) 30.77
Market Capitalization: Equity portion (USD bn) 23.84
DSE General Index (DGEN) 5,258
DSI Index 4,384
DSE 20 3,910
Total Number of Listed Securities 501
Total Number of Companies 232
Total Number of Mutual Funds 37
Total Number of Corporate Bonds 3
Total Newly Listed Securities 8
Market Capitalization to GDP (Ratio) 33.23

Management, trading and settlement

Management

The management and operation of Dhaka Stock Exchange is entrusted on a 25

members Board of Director. Among them 12 are elected from DSE members,
another 12 are selected from different trade bodies and relevant organizations.
The CEO is the 25th ex-officio member of the board.

The following organizations are currently holding positions in DSE Board:

 Bangladesh Bank

ICB

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 Industry)

Trading

The Dhaka Stock Exchange is open for trading Sunday through Thursday between
10:30am 2:30pm BST, with the exception of holidays declared by the Exchange
in advance.

Settlement

Trade in Public, Block & Odd-lot Market: Trade in Public, Block & Odd-lot
market has two different settlement periods for A, B, G, N & Z categories shares
and Settlement is executed through stock exchange clearing house. Here the
settlement period is same for A, B, G & N. However, for Z category share
settlement period is different.

1) A, B, G & N Category: Settlement is done through DSE or CSE clearing

house on T+1(pay in day) and T+3 (pay out day).

2) Z Category: Settled on the basis of T+1 (pay in day) and T+9 (pay out day).

Trade in Spot Market (A, B, G, N & Z category): Settlement period is same for
all category shares traded in this market through clearing house that is T+0 (pay
in day), T+1 (pay out day).

Settlement of foreign traders: Foreign buyers and sellers settle their

transaction between themselves involving custodian bank. It is processed within
T+5 (pay in day) and T+6 (Pay out day).

Functions of DSE
The major functions 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.

Causes of stock market crash in 2011

1. From the graph we find that most of the BO accounts were opened during
June 2009 to January 2011 that indicated that more than half of the investors
could be treated as new investors. During 2009, stock exchanges, Institutional
investors and SEC make many campaigns within and outside the country to
attract new investor that seems to be successful as the BO accountholders was
doubled in last two years that might be treated as a potential for market
development.

Increase of BO a/c

But due to scarcity of new securities market price increased substantially. This
demand-supply mismatch along with inadequate investors knowledge made the
stock prices in a new height and finally turned into a big depression that is still
going on.

2. increase of listed securities

The fundamental strength of the market essentially comes from financial strength
of the listed companies. The market witnessed that last few years many
fundamental companies with strong financial strength have been listed in the
market. From the graph, it is seen that number of security listing are increasing
year to year and highest amount is in the year 2011.

But growth of market demand for stock was much then that of supply that inflated
the market in recent years and made the market most volatile one in the region

3. Increase of Market Cap and Turnover value.

The graph shows that market capitalization and turnover of Dhaka stock exchange,
prime bourse of Bangladesh increased substantially in consecutive three years
that might be considered as a good factor for capital market development. But as
the supply side response was poor, stock price might go up due to excess liquidity.
SEC had nothing to do with this as they had no direct tool to control money supply
and also they cannot force companies to come to the market.

The DSE General Index (DGEN) crossed 3000 marked point in December 2007
for the second time. Since the third quarter of FY09, the DGEN gained sharply and
it jumped to 8918.51 in December 2010 increased by 5908.51 points or 197
percent from the index of end June 2009(3010 points).

4. Fluctuation of DGEN

In December 2010, DSE index had crossed 8500 points. The market had called
bullish during this period. After this period, the market became bearish. The
exchange lost 1800 point between, December 2010 and January 2011. In January
2011, the General Price Index (DGEN) fall 660 points. Again that during December
2011 to January 2012 Dhaka Stock Exchange general Index (DGEN) felled by
more than 50% during that period, i.e., DGEN lose its value by 50% during the
period that says that this is not simple volatility and it can be defined as a collapse.

January 2011, the General Price Index (DGEN) fall

Graph gives the highly volatile and sharply falling index trend of DSE general Index
that started to increase from 2600 points in January 2009 and crossed its zenith
price of 8600 in December 2010.

After climbing the highest point it started to fall sharply and came down below 4000
in December 2011 to January 2012 less than half of the highest point.
From graph, we find that DSE general index, Daily trade value and market
capitalization of DSE increased substantially during last 4 years. But number of
listed securities remained almost the same during the period that implies that
supply side response was less relative to demand side response and market
capitalization and index increased due to increased demand for securities.

5. Faulty listing methods

In the year 2010, regulator introduced Book building method to attract new
companies to the market. Some companies abused this opportunity to exploit
maximum benefits from listing that inflated the market. SEC allows companies to
float securities through IPO (Fixed Price and Book Building method), Direct Listing
and Repeat IPO where Book building method is used mostly in the year 2010.

In Bangladesh, following companies used book building method for listing in the
capital market:

Name of Company Premium value Offer price Collected capital

(Million Tk.)Market Price (02/02/12) MJL Bangladesh

Ltd.142.40152.40569068.10MI cement Ltd.101.60111.60305065.20Khulna power
company Ltd.184.25194.25960043.20Ocean containers
Ltd.(OCL)135145160046.20RAK Ceramics Ltd.3848131054.07

From the Table it is found that first four companies charged very high premium for
its share where and withdrawn huge amount of capital from market. When these
companies asked for very high price, shares of other companies of same industry
tends to rise on an expectation that it is highly undervalued that increases the
general price index which is the most important factor behind the recent stock
market volatility in Bangladesh.

6. Recently listed Companies with financial information

Twenty three companies (including three direct listing companies) raised new
equity of Taka 18.2 billion in the capital market in FY10, higher than the Taka 5.9
billion raised by the sixteen companies in FY09.

The volume of public offerings in FY10 was oversubscribed more than nine times
indicating the high demand of new securities in the primary market. Bonus shares
valued at Taka 27.6 billion were issued in FY10 by one hundred and twenty one
companies against retained profits, higher than the Taka 16.2 billion issued in
FY09 by ninety one companies.
Currently 493 securities (Debt and Equity securities) are being traded in Dhaka
stock exchange. Few numbers of companies are making fresh issue every year.
13, 18 and 10 companies listed their securities respectively in 2009, 2010 and
2011. [In appendix]

Traditionally DSE used fixed price method for flotation of new companies. But
fixed price method does not attract good companies always. So, to attract new
companies, SEC decided to introduce Book building method that is a globally
acceptable method for IPO. But in Bangladesh, Book Building method is handled
very roughly that caused loss for millions of investors.

7. Changes in Face Value (Stock Split) of Securities

With similar financial condition or weaker financial conditions lower face value
companies were overvalued relative to higher face value companies in same
industries. This situation was persisting for many years and regulator failed to
identify the face value of all listed companies that created some overvalued
securities in the market. Investors were eager to buy the securities of these
companies that were going to change face and before split price of these were
jumping.

7. Stock price Manipulation:

Stock price manipulation was very common in last few years as some companys
stock price grew by more than 4000% in one year without any significant change
in company fundamentals. Stock price was inflated with the help of serial trading
by few numbers of big investors that was one of the reasons of recent collapse of
stock market in Bangladesh.

8. Pre-IPO & IPO process:

Investigation committee considered that due to Pre-IPO & IPO manipulation share
prices sky rocketed and that is the main reason for the share market crash.
Manipulators illegally & unethically created a Kerb market in Pre-IPO stage.
Without recommendation by the listing committee application for IPO was
accepted. SEC did not examine abnormal asset revaluation and indicative price.
As a result in Pre-IPO or IPO stage placement process and placement trade Kerb
market overvalued share prices. This eventually generated liquidity crisis in the
capital market.

9. Investment of bank in the capital market

In 2010 & 11 banks and financial institutions invested huge amount of deposit
money in the stock market. As a result share prices sky rocketed until December
2010. When Bangladesh Bank restricted more than 10 percent investment of
deposited money, increased CRR and SLR ratio, created liquidity crisis and market
crashed.

10. Omnibus account

Investigation report found Omnibus accounts of ICB and merchant banks as

another major reason behind the stock market debacle. Every branch of merchant
bank operates only one omnibus account. There could be 3-10 thousands BO
Accounts under the omnibus account which are not under the surveillance of SEC.
So, information of individual accounts and its transaction 40 are kept only with
merchant banks. As investigation reports shows that this kind of account made a
lot of illegal transactions. It publishes name of 30 big players including ICB for a lot
of suspicious transactions and says most manipulators traded from the omnibus
accounts. It was also reported at least Taka 2.5 billion has been traded from hidden
or omnibus accounts.

11. Asset revaluation & Rumor

By taking chance of weak asset revaluation method companies have overvalued

their asset. In this process dishonest auditors generated artificial audit reports. So,
calculating of NAV on overvalued asset indicates wrong signal. Some companies
issued Bonus shares against unrealized gain of revalued asset price which is a
faulty accounting practice. There is rule to maintain provision against deferred tax
during asset revaluation to pay tax in future, but companies are not following it.

12. Block placement

There was a lot of suspicious block trading of mutual funds. Some investors got
enormous amount of placement time to time.

13. Direct listing:

With the approval of SEC few companies have been directly listed in the stock
exchange. These companies come to the market with inflated share prices.

14. Suspicious transaction of top players

Investigation report reveals some names of individual and institutional investors as

top buyers and sellers during abnormal increase and decrease of index in different
time periods. The transactions of these investors were suspicious and affected the
market heavily and liable for abnormal rise and fall.

15. Serial and artificial trading

Some manipulators created artificial active trading environment among

themselves through bulk transaction and increased share 41 prices. Moreover
serial trading and price manipulation by many buy-sell orders through different
accounts and broker houses which overheated the market.

The above reasons can be categorized in the following way:-

Background of the 1996 crash

The scenario of stock market crash in 1996 was totally different. The number of
BO account holders was only 300,000 and most of them were very new in the
market. During the crash of 1996 paper shares used to be sold in front of DSE and
it was not easy for investors to indentify fake and original shares. The market was
enough developed to gain confidence of investors. There was no automated
trading sys-tem, surveillance was not enough strong and no circuit breakers as
well as international protections.

From 1991 to the end of 1995 DGEN price index gained by 139.3% and reached
to 834 point. But in 1996 the market experienced dramatic change and pushed the
price index up by 337%. DGEN Index recorded high growth from July and stood at
3648.7 points or by 280.5% on 5th November 1996.

During the Bull Run period new records were posted almost every day in both
bourses for example market capitalization achieved to $2 billion which is equal to
20% of total GDP. As market became overheated government took step by selling
state owned institutions and Taka 2 billion will be given to ICB for buying shares
and support the mar-ket. But the steps taken by the government did not work.

Finally abnormal rise of share prices started to fall and Bangladesh stock market
experienced its first crash of the history in 1996. The index lost over 233 points on
Nov 6, 1996. After the bubble burst DGEN index dropped to its lowest point and
stood at 957 in April 1997. It stood at around the same point where it was 10
months before and DSE General Price index lost almost 70 percent from its highest
point of November 1996.

Reasons of the 1996 crash

Manipulation
Some foreign portfolio, 28 managers, few brokers and sponsors of few listed
companies were behind the stock price manipulation in October 1996. As a result
all share price index of DSE dramatically sky rocketed to 3600 point from 1000
point in six months time. Few foreign & local investors that had inside information
made huge profit and a lot of general investors paid heavily.

Demand Supply mismatch

The cause of stock market crash in 1996 was the failure of market regulators
mentioned by Afroz (2006). Stock exchanges did not take any action against the
dramatic price in-crease of listed securities during June to November 1996. Bubble
formed due to abnormal demand of securities by new investors where the numbers
of listed securities were very few. The reason of huge influx of investors was
political stability in the country and bringing confidence in investor`s mind.

Defective (DVP) system

The delivery versus payment (DVP) system of trading used to allow buyer-seller
to settle their transactions between them without stock exchange participation.
Many brokers/dealers used it as a tool to show fake trading to increase demand of
share from the general investors side. According to Bangladesh Bank analysis
that there was an unauthorized kerb market consisting of over 25,000 investors
outside the stock exchange where securities were traded at a very high price.
Moreover, SEC could not handle the crisis for its defective infrastructure. Weak
regulations and surveillances could not monitor market manipulators and market
intermediaries. Even information inefficiency, artificial financial statements certified
by chartered accountants, false information and rumor were other important factors
that overheated the market and burst the bubble.

Background of the 2011 crash

History of the stock market crashes show that Bull Run before a stock market
crash is kind of normal phenomenon. There was no exception for the stock market
crash of Bangladesh in 2010-11.

According to CPD (2011), the total number of BO Account holders on 20th

December, 2010 reached to 3.21 million though the number was 1.25 million in
December 2009. Most of these new investors dont have enough knowledge about
the stock market but invest their most or all savings in the market.

As CPD (2011) found, internet-based trading operation, opening branches of

brokerage houses across the country, easy access to the market information,
arranging a countrywide share mela (fair) are the factors for increasing investors.
But supplies of new securities through IPOs were not enough to chase huge capital
of too many investors in the market.

Last couple of years broad money made excess liquidity and the main motive
behind it was Bangladesh Bank`s ex-change 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.

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

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
be-ginning 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)

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.

Comparison between two years

 2011
trading was automated
surveillance was strong
circuit breakers and international protections
were in place
Being automated there were no forged shares
traded and the kerb market
there were also omnibus accounts in the market
the BO account value was 35 lacs
2011 crash was an asset bubble
while in 2011 it lost up to 660 points, nearly 10
percent
1996
trading was not automated
surveillance was weak
circuit breakers and international protections
were not properly in place
Being not automated there were no forged
shares traded and the kerb market
there were no omnibus accounts in the market
compared to 3 lacs before
the 1996 crash was a result of a speculative
bubble
In the end, in 1996 the index lost 232 points,

SWOT Analysis of Stock Market

SWOT analysis:

SWOT analysis is a strategic planning method used to evaluate the Strengths,

Weaknesses, Opportunities, and Threats involved in a project or in a business
venture. It involves specifying the objective of the business venture or project and
identifying the internal and external factors that are favorable and unfavorable to
achieve that objective. The technique is credited to Albert Humphrey, who led a
convention at Stanford University in the 1960s and 1970s using data from Fortune
500 companies.

A SWOT analysis must first start with defining a desired end state or objective. A
SWOT analysis may be incorporated into the strategic planning model. Strategic
Planning has been the subject of much research.

Strengths: characteristics of the business or team that give it an advantage over

others in the industry.
Weaknesses: are characteristics that place the firm at a disadvantage relative to
others.

Opportunities: external chances to make greater sales or profits in the

environment.

Threats: external elements in the environment that could cause trouble for the
business.

Strength, weakness, opportunity, and threats (SWOT) of Bangladesh Stock Market

are given below:

Strength:

The first and for most thing of strength of Bangladesh stock market is its ability
to provide high return.

Regulatory body of Bangladesh stock market that protects the interest of the
investors.

Large number of securities which provides medium for investment.

Large number of Brokers who plays a role of facilitator for investment.

Weakness:

The weak point of Bangladesh stock market is its volatility.

It is a kind of gambling where no guarantee of return and some time it depends

on luck also.

Opportunity:

Stock market provides an opportunity to money lender and money seeker to

invest and use money for their plan.

It provides an opportunity to the investor to be the owner of the company and

contribute in the business decision of the company.

Stock market is a kind of indicator of the economic growth of the country where
it provides an opportunity to gain according to the inflation of the country or more
than that.

Threats:
 There are many competitors of stock market such as post office savings, public
provident fund, company fixed deposits, fixed deposits with bank etc. which
provides fixed and assured returns.

Changing of economic condition.

Capital market instrument is highly risky then money market.

Changing of government rules and regulations.

Speed of growth in Capital Market not complemented by the controlling

agency.

Regression analysis

In this analysis, Turnover value and M.Cap are taken as independent variable
where DGEN is taken as dependent variable. Here I try to find out the relationship
between the DGEN and independent variables Turnover value and M.Cap.

Variables Entered/Removed
Model Variables Variables Method
Entered Removed
1 turnover, M.Capa . Enter
a. All requested variables entered.
b. Dependent Variable: DGEN

Model Summary
Model R R Adjusted R Std. Error of the Estimate
Square Square
1 .966a .934 .919 196.91543
a. Predictors: (Constant), turnover, M.Cap

Interpretation of R:

It is the coefficient of correlation. It shows the positive or negative correlation

among Turnover value and M.Cap with DGEN. Here the value of R is .966that
indicates that the independent variables Turnover value and M.Cap are strongly
positively related with the dependent variable DGEN.
Interpretation of R square:

It is the coefficient of determination. If the independent variable is changed by

some units then the dependent variables also became changed and how much
changed is done by the independent variables, is shown by R square. Here the
value of R square comes .934 meaning that 93.4% changes in the dependent
variable are happening for the changes of the independent variables. And the least
part (1 .934) = 0.066 is changed by other factors which are not considered.

Interpretation of Adjusted R Square:

It is the actual coefficient of determination. If another independent variable is added

then the R also became changed and Adjusted R Square shows logically how
much value change is possible and thats why the value of Adjusted R Square is
always less than the value of R square. The value of Adjusted R square is .919. It
shows actually how much dependent variable (DGEN is changed for the changing
of independent variables Turnover value and M.Cap.

Interpretation of Standard Error of Estimate:

It shows how much error or variability stands between the predicted result and
actual observed result. Here the value is 196.91543 that show the amount of
variability of our predicted result and the actual result acquired from the real
observation.

ANOVA
Model Sum of df Mean Square F Sig.
Squares
1 Regression 4900558.846 2 2450279.423 63.191 .000a
Residual 348981.194 9 38775.688
Total 5249540.040 11
a. Predictors: (Constant), turnover, M.Cap
b. Dependent Variable: DGEN

Interpretation of Regression Sum of Squares (SSR):

How much error is reduces by using regression rather than mean is shown by SSR.
The value comes 4900558.846 showing the extent to which the error can be
minimized through using the multiple regression tools.
Interpretation of Error Sum of Squares (SSE):

Here the Residual is SSE. It is shown how much error is not possible to remove by
using regression because of some independent factors, which is not considered.
The value comes 348981.194 showing the extent to which error is remaining after
the regression and can be minimized with the increment of the dependent variable.

Interpretation of Total Sum of Squares (SST):

The sum of SSR and SSE together forms the SST. In this observation the value is
5249540.040 that come after adding the SSR (4900558.846) and SSE
(348981.194).

Interpretation of Degrees of Freedom (DF):

Here, the value 2 is degrees of freedom for the numerator and the value 9 is
degrees of freedom for the denominator.

Interpretation of F Distribution:

F Distribution shows whether our taken model is rejected and accepted as a whole
or on an average, but not individually. So it is showing whether there is any relation
between dependent variable and independent variables as a whole.

Interpretation of F value:

The Null Hypothesis is that the Turnover value and M.Cap are related to DGEN. It
means if we give any value to X then the value of DGEN became changed. The
DGEN is dependent on Turnover value and M.Cap.

So Alternative Hypothesis is that the Turnover value and M.Cap are unrelated to
DGEN. It means if we give any value to X then the value of DGEN will become
constant. The DGEN is independent of Turnover value and M.Cap.

Interpretation of Table Value:

At a 10% significance level, for 2 numerator degrees of freedom which is

regression and for 9 denominator degrees of freedom which is residual, the table
value is 3.36.

Interpretation of Acceptance Criterion:

If the calculated value of F is less than the table value of F then the null hypothesis
is accepted subsequently the alternative hypothesis is rejected.
Interpretation of Rejection Criterion:

If the calculated value of F is greater than the table value of F then the null
hypothesis is rejected subsequently the alternative hypothesis is accepted.

As the calculated value of F is 63.191, which is greater than the table value of F
3.36, so the Null hypothesis is rejected and alternative hypothesis is accepted.
Hence the conclusion comes that the T value and M.cap are not related that means
negatively related to DGEN.

Coefficients
Model Unstandardized Standardized t Sig.
Coefficients Coefficients
B Std. Error Beta
1 (Constant) -1203.865 873.383 -1.378 .201
M.Cap 2.471E-9 .000 .839 7.013 .000
turnover 3.504E-8 .000 .171 1.433 .186
a. Dependent Variable:
DGEN

= a +b1 X1+b2X2

= 1203.865 + 2.471E-9X1+3.504E-8X2

In this regression equation, the relationship between DGEN with Turnover value
and M.Cap has been demonstrated.

Dependent Variable = DGEN

Independent Variable X= Turnover value and M.Cap

Here, a is constant and b1 and b2 are the slope of X1 and X2.

If Turnover value and M.Cap is zero then a = = -1203.865

Here, = -1203.865 is Y intercept. It shows that the DGEN of the DSE is negative
because the DSE will have some DGEN without Turnover value and M.Cap in a
given year as there may be some DGEN of previous years.

Now, the value of b1 and b2 or the slope of X1 and X2 are 2.471E-9 and 3.504E-8 it
means if the volumes of Turnover value and M.Cap increase by TK. around tk.2
and 3 then the DGEN decreases for TK. 2 and 3 points assuming all other variables
are constant.

Findings

After preparing this report, it has been come to my mind that only one factor cannot
be mentioned greatly for this share market crash. But it is the collective of various
factors who are responsible for this huge crash. The followings are some findings
that are.

Financial institutions are the biggest investors in the market and there
aggressive involvement increased market liquidity manifold in recent years.
Financial Institutes could invest more than 10% of their demand and time liabilities
to the stock market and greater involvement of financial institutes increased the
liquidity in the market that created a bubble in the stock market.SEC must be aware
about this.

Number of listings in the DSE and the procedures of listings were not fair and
square.

Book building method was not followed properly in case of share pricing. For
this reason share price especially IPO pricing was overvalued. It can be said that
by taking chance of weak asset revaluation method companies have overvalued
their asset also.

Demand and supply side of stock in the stock market were mismatched which
resulted a great crash in the 55 year history of Bangladesh.

Stock price manipulation and insider trading was very common phenomena in
the stock market in which SEC did not perform its inspection clearly.

Omnibus accounts of ICB and merchant banks as another major reason behind
the stock market debacle. This kind of account made a lot of illegal transactions
and manipulation which was in favorable for the stock market.

Misunderstanding between stock market and stock exchanges was very poor
and irregularities to take actions against the manipulators were also responsible
for this crash.

During the time of crash year Block trading, circuit trading and direct listing
have also been noticeable greatly.

Recommendation
All are responsible for crash. So proper activities have to be adopted by everybody
from their own situations to restore the previous situation of the market. Some of
them are in the following.

Recommendations for the Government

There is no doubt that the failure of the government in making various decisions
regarding capital market played role behind the recent crash:-

Government should ensure the supply of fundamentally strong shares in the

market to meet the demand which will make the market efficient as investors would
not go for buying junk shares. For ensuring the supplies of such shares,
Government can offload the shares of different companies which it possesses now.
It also can urge the private limited companies to go public by offering tax benefits
through fiscal policy. Even it can offer shares to the public for infrastructural
development work like constructing big bridges, highways and power stations.

Government must ensure the appointment of skilled and capable personnel in

different regulatory bodies and must give punishment to the persons responsible
for any kinds of irregularities.

The responsible persons of the Government should refrain from delivering

irrelevant, irresponsible and sensitive speeches which many of them did before.

Government should ensure more active merchant banks to participate in the

smooth building of a sound stock market.

Government must ensure that the chairman and members of the Investment
Corporation of Bangladesh (ICB) are honest and skilled. Any sort of direct or
indirect involvement of any of the ICB members and officials in the stock market
must be stopped in any way.

Government should delegate all power to the SEC to take legal actions against
the criminals. Even if necessary, new Act may be passed in the Parliament in this
regard.

Flow of black money in the capital market must be restricted as it can never
bring any good results in the long run other than creating bubble in the stock market
the blast of which nothing but a disaster.

Recommendations for Securities and Exchange Commission (SEC)

SEC as the guardian of capital market should play significant role to make it march
forward. It must ensure the followings:
 SEC must ensure that neither of its members nor any of its officials is involved
either directly or indirectly with the transactions in the stock market.

The monitoring and surveillance should be strengthen so that none can get
chance to gamble.

SEC must have its own certified Chartered Accountants to ensure the accuracy
of the Financial Statements of the listed companies and they should give
punishment if the books of accounts are not accurately audited.

SEC must rethink about the rule of disclosure of quarterly financial reports by
the companies because many of the companies misused it as a vehicle of
misguiding the investors. In fact, it became a common practice of most of the listed
companies to show high quarterly EPS in its un-audited quarterly report to bring
down P/E ratio. In some cases, it is seen that a few companies annual audited
EPS for the year ended 2010 was lower than its accumulated EPS of three
quarters.

It must ensure speedy disposal of decision for market operation and all the
decisions should be taken considering the long term effect on the market.

To bring fundamentally strong private companies in the capital market, there is

no alternative of Book Building Method of IPO. So, the postponed Book Building
Method must be reintroduced with necessary correction to resist all sorts of
manipulation.

It is high time for SEC to take a decision regarding the stocks in the OTC market
because huge amount of money has been blocked due to inefficient OTC market.
The companies in the OTC market should either be de-listed and their assets and
liabilities should be settled or these companies may be brought in the main market
through acquisition by the Government or by the interested entrepreneurs
restarting production of those enterprises.

Recommendations for DSE

Dhaka Stock Exchange has important role to play as the monitoring authority of
the Broker Houses. So, it needs to play vital role by ensuring the followings:

It must ensure proper monitoring of the brokerage houses for which more
skilled manpower should be appointed in the Monitoring and Surveillance Team.

Any sort of irregularities in case of trading should be identified promptly and

immediate action should be taken.
 The operating software of the stock exchange should be updated as often
these fail to take immediate sale or buy order. So, it must bring new software within
the shortest possible time to bridge a gap between the prices of script in stock
exchange

Now there is a common practice by DSE to ask for query for price hike of any
script which is nothing but a routine work. To make such query fruitful, visible action
should be taken if any involvement of sponsor/directors is identified.

To aware investors having no or insufficient skills about the investment in stock

market should be trained through different training programs, seminars and
motivating fair.

Last but not the least that the stock exchanges need to be demutualized as it
is the demand of time now to have a new corporate governance structure for more
effective conflict management among market participants, and to make more quick
decision with greater flexibility.

Recommendations for Bangladesh Bank

Though Bangladesh Bank is the regulatory body of Money Market; but its
decisions are also reflected in the capital market as the money market and capital
market are interrelated. In this regard it has the following roles to play:

It must ensure that the Banks and Other financial institutions exposures do not
exceed the limit from the very beginning. But in the recent slump it failed to do so
as it could not monitor the involvement in the early periods while it put pressure on
the banks to readjust their capital market exposures at the eleventh hour which
accelerate a huge sale pressure from their side.

It must ensure the proper functioning of the Merchant Banks through arranging
money from the parent company to mitigate liquidity crisis.

It should keenly monitor the loan of the commercial banks to industrial sector
and take regular feedback so that no industrial loan may flow to the capital market.
It is found that in case of recent catastrophe, it failed to do so.

Recommendations for Institutional Buyers

Institutional Buyers (Mutual Funds, Merchant Banks etc.) ensure balance in

capital market through reacting according to the interaction between demand and
supply. But in recent past they completely did the opposite as when there was
huge sales pressure in the market instead of buying, they also sold shares in a
large scale resulting further decline. Their behavior in that case was not different
from individual investors.

They must show mature behavior to ensure balance in the stock market by
buying shares when there is sale pressure and vice-versa.

In providing margin loan, they must follow the rules as prescribed by SEC as
well.

They should advise their client giving emphasis on the benefits of the clients
instead of thinking their own benefits only.

At the time of huge decline they should not be involved in forced/trigger sale of
clients shares without giving them any chance to adjust their loan.

All sorts of transactions through omnibus accounts should be restrained.

Recommendations for Individual Investors

No matter what is the reason of a crash, individual investors are the ultimate
losers. Hence, it is their own responsibility to take care of their own money and
they ought to consider the following things while taking investment decisions.

Before investing in a particular script they must analyze the key factors of that
company to justify whether the company is fundamentally strong. Such factors
include EPS, P/E Ratio, dividend policy, future growth, industry average etc.

In analyzing financial strength of a company they must consider the audited

annual reports instead of quarterly un-audited report as often these information is
not accurate or do not reflect the real position of the company.

They must restrict themselves from buying junk shares and taking whimsical
investment decision.

They must build their portfolio in a way which will involve at least three or four
different types of fundamentally strong shares from different industries. It should
also contain shares considering both long term and midterm benefits.

Instead of being traders, the retail investors need to think of being investors.

They ought to keep some cash for emergency so that they might buy more
shares (fundamentally strong) which they bought earlier when there is a big decline
in price.
 They should not buy on the basis of rumor or following advices of the persons
who do not possess sufficient knowledge about capital market investment.

They ought to participate in different seminars and training programs relating

to stock market to enhance their knowledge and skill in making stock market
investment decisions.

They must know that both gain and loss are the indispensable parts of stock
market.

Instead of looking for gain, sometimes they must accept loss with patience so
that they may recover the loss in future through higher gain.

Above all, they must understand that perseverance and patience is the key to
success in investing in capital market.

Conclusion

From our analysis we have found that major indicators of the countrys major stock
exchange is becoming more volatile over time and the regulators are not efficient
enough to guard this volatility. But, for a developing country like Bangladesh, the
importance of sound development of the market cannot be undermined. Although
the SEC has been trying to maintain a continuous flow in the market, very often its
role meets the broad economic objectives. In order to make the market less
volatile, SEC itself should be strengthen both in terms of number of manpower and
quality of the professionals involved with special focus on independent research,
monitoring mechanism and prompt decision making.

Security and Exchange Commission (SEC) of Bangladesh and government should

take the short term and long term initiatives to stabilize the market. They should
encourage more public limited companies to offer more share to meet the current
demands. Income tax rebate, Injection of Market Stabilization Fund, Mandatory
holding certain percentage of share among the board of directors, short term
incentives packages should be introduced to get back the confidence among the
existing investors. Regulatory bodies of Bangladesh stock market must educate
the current and potential investors about the market mechanism and provide them
the accurate information so that investors trade their shares carefully. Unless,
there are any corrective measures, Bangladeshi stock market will be facing this
irrational downward of DGEN Index again in the near future.

To guide and restore the confidence of individual investor in capital market, the
regulatory authority should take necessary actions to encourage corporate
governance rating among listed companies, which will enable investors to
differentiate the good governance companies from the rest and can then attach
higher value to those firms as well. And, without improving the governance of the
market and eliminating scope of manipulation, it will be difficult to attract good
scripts at the desired level. In this endeavor, regulators must adapt continuously
to the changes in the economy and the pressures of globalization.

References

AiDz, (2011), What can we learn from Bangladeshs stock market crash?.
Available from: http://www.pnoytrader.com/2011/01/learn-from-bangladeshs-
stock-market-crash/[Accessed on 14.04.2012]

Hossain, Md. Toufique (n.d), Bangladesh stock market crisis: diagnosis,

remedies, and prospects. Available from:
http://www.scribd.com/doc/86557899/Bangladesh-Stock-Market-Crisis [Accessed
on 05.05.2012]

Ibrahim Khalid Committee sharer probe Report

(www.mof.gov.bd/en/index.php?option=com_content&view=article&id=169&Itemi
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Ahmed, H. U., & Samad, Q. A. (2008). Performance Level of Dhaka Stock Market:
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Ahmed, M. N. & Imam, O. M. (2007). Macroeconomic Factors and Bangladesh

Stock Market: Impact analysis through Co integration Approach.

International Review of Business Research Paper, pp.21-35, Vol.3, No.5.

Uddin, M. B. (2009). Determinants of market price of stock: A stock on bank leasing

and insurance companies of Bangladesh. Journal of modern Accounting and
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Newspapers of Bangladesh

Websites

Central Depository Bangladesh Limited, www.cdbl.com

Dhaka Stock Exchanges, www.dsebd.org

Security and exchange commission, www.secbd.org.26.16