Premier University

Term Paper On:

Instruments Of Capital Market of Bangladesh
(This Term Paper is submitted for the partial fulfillment of the degree of Bachelor of Business
Administration with a major in Finance)

SUBMITTED TO:
Ms. Nilufar Sultana

Assistant Professor
Discipline of Finance

of Business Studies
Premier University, Chattogram.

SUBMITTED BY
Satyajit Sen
ID No: 1503210108409
Sec- B, Batch-32nd
Finance Discipline
Premier University, Chattogram.

Date of Submission:
 Letter of Transmittal

Date:

To
The Supervisor

Ms. Nilufar Sultana

Assistant Professor

Finance Discipline

Faculty of Business Studies

Premier University.
Subject: Submission of term paper on “Instruments of Capital Market in Bangladesh”

Dear Madam,

With immense pleasure, I would like to submit my term paper based on the topic of “Instruments
of
Capital Market in Bangladesh”. I have prepared this term paper for your kind consideration.

Throughout the study I have tried with the best of my capacity to accommodate as much
information and relevant issues as possible and tried to follow the instructions as you have
suggested. I tried my best to make this term paper as much informative as possible. I sincerely
believe that it will satisfy your requirements.

Sincerely yours,

Name: Satyajit Sen

ID No: 1503210108409
Batch: 32nd
Major: Finance
Program: BBA
 Acknowledgement

First of all, I am very much grateful to God for blessing me with the strength, aptitude and
patience for successfully completing my term paper. Next, I would like to express my kindness
to my beloved parents whose continuous inspiration and blessings encourages me to make a right
move in my life.

I would like to thank my honorable supervisor, Ms.Nilufar Sultana, Assistant Professor Finance
Discipline, Faculty of Business Studies, Premier University, for giving me the opportunity to work
with him during my period of term paper. I have completed this term paper in a comprehensive
manner due to the guidance, support and counseling that he has provided me with during
this period. I have tried my best to implement his constructive suggestions while doing my
term paper.

Finally, my sincere thanks go to each and every one who has helped and supported me
significantly in different stages during the period of my term paper writing.
Executive Summary
 Table of Content

Formal Part

Topics Name Pages No.

Cover Page
Letter of submission
Acknowledgment

Executive Summary

Chapter One- Introduction

Introduction of the study

Scope of the study

Objective of the study
Methodology of the study
Limitations of the study

Chapter Two-Theoretical Background

 Chapter Three- Body of the report

Topics Name Pages No

Chapter Four- Swot Analysis

Swot Analysis

Chapter Five- Findings

Findings

Chapter Six- Problems & Suggestions

Problems & Suggestions

Chapter Seven-Conclusion
Chapter One- Introduction of the study

1.1Introduction of the study:

As a student of Bachelor of Business Administration (BBA) everyone has to conduct a practical
orientation for fulfilling the requirements of term paper. My respected advisor has given me the topic.
The topic of my report is “Instruments of Capital Market In Bangladesh”.

The capital market is one of the driving forces of an economy. Capital market is a market for
securities (debt or equity), where business enterprises and governments can raise long-term funds. It is
defined as a market in which money is provided for periods longer than a year. The capital market
includes the stock market and the bond market. Financial regulators, such as the Bangladesh Bank, and
Securities and Exchange Commission, oversee the capital markets in their designated jurisdictions to
ensure that investors are protected against fraud, among other duties. In primary markets, new stock or
bond issues are sold to investors via a mechanism known as underwriting. In secondary markets,
existing securities are sold and bought among investors or traders, usually on a securities exchange,
over-the-counter, or elsewhere. In Bangladesh there are two capital markets in our country. One is
Dhaka Stock Exchange (DSE), and another is Chittagong Stock Exchange (CSE). DSE and SEC were
established with a view to collecting capitals for companies who need this. It facilitates to raise capital
which makes broaden our overall economy. It also accelerates our economy to drive us to be a
developed country from under developing situation.

1.2 Scope of the study:

The study explain the regulatory aspects of capital market of Bangladesh on the basis of disclosed
regulation will try to judge the quality of the regulations in terms of its achievement of the goals. This study
is basically descriptive in nature. The study covers only various functional areas of my educational
institution and the investors can use this report if they want.

1.3Objective of the Study:

 To know about Financial instruments of capital market in Bangladesh

 To know about the process of Financial instruments of capitalmarket
 To know about impact of the Financial instruments of capital market in
Bangladesh
 To Identify the Problems of Financial instruments of capital market in
Bangladesh
1.4Methodology of the study:
To prepare this report, standard methods of report writing have been used. As I was not directly
involved with the organization, so I was unable to collect the data from the primary sources.
Therefore, Data are collected from secondary sources. Every now and then I tried to talk to
different officials to find out relevant facts even in unofficial manners. And talking about
secondary source I have used to the fullest extent possible. The sources of data details are given
below

Secondary Sources:

 Website of Bangladesh Bank

 Recent articles and news related to this field
 Self-observation
 Significant data from the Internet.
 Textbook.
 Online Article

1.5Limitations:

First of all, during the preparation and finalizing the report I have faced with a number of
problems such as:

 Unconfirmed accuracy of certain information

acquired.

 Lack of information from the primary source.

 The comparisons may not be effective enough.

 Lack of time for preparing the term paper.

 Chapter: 2

2.1 Financial Market:

Definition: A financial market is a market where financial assets are exchanged. Although the
existence of a financial market is not a necessary condition for the creation and exchange of a
financial asset, in most economics financial assets are created and subsequently traded in some
type of organized financial structure. Generally classify financial markets is by the maturity of
the claims. There are Capital market and Money market.

2.2Capital market:
Definition: Capital market is a market where buyers and sellers engage in trade of financial
securities like bonds, stocks, etc. The buying/selling is undertaken by participants such as
individual’s institutions.

2.3Functions of Capital Market

 Capital Formation

 Transaction

 Underwriting

 Lending

 Development

 Industrialization
 i. Capital Formation: Capital market collects individual savings to form the required capital for the
corporate body. It helps the proper utilization of financial resources of a company for the
development of economic condition of a country.

ii. Transaction: Capital market performs the transactions among the parties of a market. Through
which the savings go to the firm and thus the economic cycle circulates.

iii. Underwriting: Capital market takes the responsibility of collecting required capital for the firms
that massively help the firm to start and sustain. Underwriter provides security to the company for
selling the shares.

iv. Lending: Through the Govt. bond, note, capital market land money for long term. For individual it
provides loan also to buy land, machine, building etc.

v. Development: Capital is the source collection capital of a company. It helps to develop overall
financial market of a company. It helps to develop overall financial market of a country. Capital
market acts for developing the financial systems as a whole.

vi. Industrialization: Capital market directly helps in industrialization in home and abroad. Foreign
capital, necessary mechanism etc. are provided by the capital market.
2.4Capital market instruments:
Instruments in capital markets can be classified into three categories: Pure, Hybrid and Derivatives.
(1) Pure Instruments : Equity shares, preference shares, debentures and bonds which are issued with
the basic characteristics without mixing the features of other instruments are called pure instrument.

(2) Hybrid Instruments : Instruments which are created by combining the features of equity, preference,
bond are called as hybrid instruments.
Example: Hybrid instruments are:

 Convertible preference shares

 Non-convertible debentures with equity warrant

 Partly convertible debentures

 Secured premium notes

(3) Derivative Instrument : A derivative instrument is a financial instrument which derives its value
from the value of some other financial instrument or variable.
Example: Futures and Options belong to the categories of derivatives.

Courtyard of the Amsterdam Stock Exchange the foremost centre of European capital markets in
the 17th century. The Dutch were the first in history to use a fully-fledged capital market
(including the bond market and stock market) to finance publicly traded companies.

The trading floor of the New York Stock Exchange, one of the largest secondary capital markets in
the world. Most of the trades on the New York Stock Exchange are executed electronically, but its
hybrid structure allows some trading to be done face to face on the floor.

2.5 Types of Capital Market:

Capital Market refers to facilities and institutions arrangements through which long-term funds;
both debt and equity are raised and invested. The Capital Market consists of development banks,
commercial Banks and stock exchanges. The Capital market can be divided into two parts (a)
Primary Market (b) Secondary Market.

Primary Market

The most important type of capital market is the primary market. It is what we call the new issue
market. It exclusively deals with the issue of new securities, i.e. securities that are issued to
investors for the very first time.
The main function of the primary market is capital formation for the likes of companies,
governments, institutions etc. It helps investors invest their savings and extra funds in companies
starting new projects or enterprises looking to expand their companies.

The companies raise money in the primary market through securities such as shares, debentures,
loans and deposits, preference shares etc. Let us take a look the various methods of how new
securities are floated in the primary market.

Secondary Market

Secondary market is the market where previously issued securities, such as stocks and bonds, are
traded among investors. It is also the market where investors buy securities from other investors,
and not from the issuing organization. The sale proceeds from the secondary market go to the
investor, and not the issuing company. A primary market, on the other hand, is the place where
the securities are given by the issuing organization for the first time and the proceeds go
towards the capital of that organization.

After the primary market is the secondary capital market. This is more commonly known as the
stock market or the stock exchange. Here the securities (shares, debentures, bonds, bills etc.) are
bought and sold by the investors.

The main point of difference between the primary and the secondary market is that in the
primary market only new securities were issued, whereas in the secondary market the trading is
for already existing securities. There is no fresh issue in the secondary market.

2.6Instruments of Secondary Market

Following are the main financial products/instruments dealt in the Secondary market which may
be divided broadly into Shares and Bonds:

 Equity Shares: An equity share, commonly referred to as ordinary share, represents the
form of fractional ownership in a business venture.
 Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio
to those already held, at a price. For e.g. a 2:3 rights issue at tk 125.
 Bonus Shares: Shares issued by the companies to their shareholders free of cost based on
the number of shares the shareholder owns.

 Preference shares: Owners of these kind of shares are entitled to a fixed dividend or
dividend calculated at a fixed rate to be paid regularly before dividend can be paid in
respect of equity share. They also enjoy priority over the equity shareholders in payment
 of surplus. But in the event of liquidation, their claims rank below the claims of the
company’s creditors, bondholders/debenture holders.

 Cumulative Preference Shares: A type of preference shares on which dividend

accumulates if remained unpaid. All arrears of preference dividend have to be paid out
before paying dividend on equity shares.

 Cumulative Convertible Preference Shares: A type of preference shares where the

dividend payable on the same accumulates, if not paid. After a specified date, these
shares will be converted into equity capital of the company.

Types of secondary market:

EXCHANGES

It is a marketplace, wherein there is no direct contact between the buyer and the seller, like
NYSE or NASDAQ. There is no counterparty risk as an exchange is a guarantor. Also, heavy
regulations make it a safe place for investors to trade securities. However, investors face a
comparatively higher transaction cost due to exchange fees and commission.

OVER-THE-COUNTER (OTC) MARKETS

It is a decentralized place, where the market is made up of members trading among

themselves. Foreign exchange market (FOREX) is one such type of market. There is more
competition among the participants to get higher volume, so prices of security may vary from
seller to seller. Also, OTC markets suffer from counterparty risk as parties deal with each other
directly.
Financial Instrument:
Financial instruments that help you save, invest, get insurance or get a
mortgage. These are issued by various banks, financial institutions, stock brokerages, insurance
providers, credit card agencies and government sponsored entities. Financial instruments are
categorized in terms of their type or underlying asset class, volatility, risk and return. Securities
and investments created to provide buyers and sellers with short term or long term financial
gains are known as financial instruments. These allow liquidity to circulate in an economy and
risk
to be spread. Many of the financial instruments are in the form of contracts that you can
negotiate
on financial markets. The contracts stipulate cash movement at present and in future, depending
on conditions stated.

Financial instruments can help us grow the amount of money we have to meet various financial
goals, such as retirement, children’s education, marriage and so on.

Before invest in any financial instrument, should learn about any potential risks, limitations, costs
as well as other characteristics of the instruments.
Financial Instruments of capital market:
Equity:

This refers to a stock or any other security that represents an ownership interest in a limited
liability company. Equity ownership in can be obtained through an Initial Public Offer (IPO), a
Rights Issue or through purchase through the Nairobi Securities Exchange.

Bonds:

A bond is a debt instrument in which an investor loans money to an entity (typically corporate or
government) for a defined period of time at a variable or fixed interest rate. Bonds are used by
companies, municipalities, states and sovereign governments to raise money and finance a
variety of projects and activities. Owners of bonds are creditors of the issuer. There are two main
categories of bonds -

a) Treasury Bonds: Treasury bonds are medium to long-term debt instruments usually longer than
one year issued by the government to raise funds in local currency. Treasury bonds may be defined
by the purpose, interest rate structure, maturity structure, and even by issuer.

Treasury bonds are available in both the primary market (through auctions) and the secondary
market.

b) Corporate Bonds : These are long-term (at least one year and above) debt instruments
issued by the private sector. Issuers of this instrument target high net worth investors who
understand technical information about pricing, valuation, yields etc.

Loan Stocks & Preference Shares:

Preference shares: These are shares of a company’s stock that rank higher in seniority, compared to
ordinary shares, with dividends getting paid out first to shareholders holding them before
common stock dividends are paid. In the event of bankruptcy, shareholders with preferred stock
are have to be paid from the bankrupt company’s residual assets first, before ordinary shareholders
are paid.

Loan stocks: Loan stock are shares in a business that have been pledged as collateral for a loan.
This type of collateral is most valuable for a lender when the shares are publicly traded on a
securities exchange and are unrestricted, so that the shares can be easily sold for cash.
Collective Investment Schemes (CISs):

Collective investment schemes securities offered by a company under which, contributions made
by the investors, are pooled and utilized with a view to paying a return in accordance with
specific shared investment objectives that have been established for the scheme. Collective
investment funds thus group assets from individuals and organizations to develop a larger,
diversified portfolio.

In return for putting money into these funds, the investor receives shares or units that represent
their pro-rata share of the pool of fund assets. The unit price (also known as the net asset value
(NAV)) is dependent on the market value of the instruments in which the pool of money is
invested and therefore rises and falls. It is calculated daily.

Real Estate Investment Trusts (REITs):

Real Estate Investment Trusts are pooled investments typically designed to enable the investors
to benefit from investments in large-scale real estate enterprises. They invest in real estate
through property or mortgages.

Income Real Estate Investment Trusts (I-REITs)

This is a REIT that primarily derives its revenue from property rentals. It owns and manages
income generating real estate for the benefit of its investors. Distributions to investors are
underpinned by commercial leases. This means that income returns are predictable and generally
less volatile. I-REITs provide an instrument for investing in the real estate market offering both
liquidity and a stable income stream.

Derivative Instruments:

As the name suggests, a derivative is a financial instrument whose value is derived from the
value of one or more underlying assets. Derivatives generally take the form of (legal) contracts in
which two parties agree to payoffs based upon the value of an underlying asset or other data at a
particular point in time. The main use of derivatives is to transfer risk. Derivatives can be based
on different types of assets such as commodities, equities (stocks), bonds, interest rates,
exchange rates, or indices Derivatives can either be traded over-the-counter (OTC) or on an
exchange. An Over the Counter transaction involves trades done directly between two parties
without any supervision of an exchange as opposed to trading on an exchange characterized by
standards and rules upon which the parties engage.

Private Equity Funds:

Private equity funds invest and acquire equity ownership in private companies, typically those in
high-growth stages. These PE funds purchase shares of private companies or those of public
companies that go private, with a strategy to exit at the opportune moment. There are various
types of private equity firms, and depending on strategy, the firm may take on either a passive or
active role in the portfolio company. Passive involvement is common with mature companies
with proven business models that need capital to expand or restructure their operations, enter
new markets, or finance an acquisition.
IPO:

The first sale of stock by a private company to the public. IPO are often issued by smaller, younger
companies seeking the capital to expand, but can also be. The main purpose of an IPO is to raise
capital for the corporation.
IPO’S are offer stock for sale to the public the first time.
IPO concepts an initial public offer is the selling of securities to the basic steps for a company
venturing and IPO is the primary market.
The IPO process requires SEC and shareholder approval, in addition to choosing an exchange and
trading symbol.
Preparing an IPO
When a corporation decides to go public a portion of it will be put up for sale to the public through
the sale of stock. An IPO is the first offering of shares of a privately held to have an IPO is to bring
money into the Business. It is often the main way that at Satrap Company will be able to make the
money it needs to succeed in the market.
 Chapter Three- Introduction of the study

3.1 Financial product Development in Bangladesh:

Historically, DSE started trading activities in 1976 with only 9 companies. In 1977, the ICB was
established in order to give institutional support to the stock exchange. In 1979, the first ICB unit
Fund came to the market. The SEC (Securities and Exchange Commission) is established in
1993 and CSE was established in 1995. The Central depository system was introduced in 2004.
The debenture, Treasury bond, corporate bond came to market in 1987, 2005, 2007 respectively.
No. of Products Now, only five categories of products are traded in the market. These are
common share, mutual fund, debenture, Treasury bond, and corporate bond which were
introduced in the market in 1977, 1980,1987,2005,2007 respectively.

3.1.1 Number of product:

Now, only five categories of products are traded in the market. These are common share, mutual
fund, debenture, Treasury bond, and corporate bond which were introduced in the market in
1977, 1980,1987,2005,2007 respectively.

The corporate bond and debenture market is regulated by the SEC although the market is small.
Fixed income securities first came into existence in 1987 with the floatation of debenture by two
companies. As on November, 2011, only eight debentures exist in the Dhaka stock exchange. No
new debenture was issued after 1999. Besides these, ten debentures already went to maturity.
The corporate bond market is not mentionable feature. Only three corporate bonds are trading in
the capital market. First corporate bond is floated in 2007 by the Islami bank Bangladesh limited
named as IBBL Mudaraba perpetual bond. Then in 2010, ACI zero coupon bond is introduced in
the market.

The primary market of government securities is regulated by the ministry of finance and
Bangladesh bank. The government securities are traded in two places -over the counter segment
and the organized segment at the stock exchange. The CDBL (Central Depository Bangladesh
Limited) provides the depository function for all securities including government securities and
corporate bond and debentures. The OTC (over the counter) segment of the secondary market in
the government securities is regulated by Bangladesh Bank while the stock exchange traded
segment is regulated by Securities and Exchange Commission (SEC). Primary dealer of
government securities are regulated by Bangladesh Bank. Trading of government treasury bonds
stated in December 2005 at DSE. As in November 2011, 221 treasury bonds are traded in the
market with the name of 5-years Treasury bond, 10-years Treasury bond, 15- years’ treasury
bonds, and 20- years’ Treasury bond. The common stocks are traded in DSE and CSE. The
Dhaka stock exchange started it operation in 1977 with only 9 companies’ share capital.
Presently as on November 2011, the numbers of common share are 232 in DSE which are
gradually increased. The numbers of companies issued share are 192,234,247,218 in 1995, 2000,
2005, and 2010 respectively. The Dhaka stock exchange introduced Mutual funds operation in
1980.Now, as on November 2011, the numbers of Mutual funds share are 37 in DSE which are
gradually increased. The numbers of Mutual funds are 1,3,9,10,15 in 1980, 1985, 1998, 2000,
and 2005 respectively.

3.2 Market Development:

Market development is the process of entering new markets to expand revenue and
reduce concentration risk. This involves identifying target and finding a way to sell to them.
Target markets are a flexible concept that can include factors like location, demographics,
customer, customer preferences and lifestyle. As target markets are diverse, so are strategies to
reach them. The following are common types of market development strategy.

Pricing

Implementing price structures and strategies to target a set of customers. For example, an airline
offers a May to June discount ticket plan for groups greater than 18 people for certain domestic
routes. This price strategy is aimed at attracting the large number of schools who take a school
trip in May and June.

Distribution

Developing new distribution channels to reach target customers where they shop including
physical and digital locations. For example, a brand of sunglasses that would like to sell to
snowboarders develops distribution agreements with snowboard shops.

Branding

Developing a new brand for products to reach a target market. For example, a manufacturer of
warm socks that creates a brand to appeal to snowboarders.

Promotion

Reaching a new target market with tailored marketing messages such as offers, promotional
videos and coupons.

Sales

Developing a pipeline of leads, opportunities and quotes to close sales with the target market.
For example, a software company that traditionally sells to large firms begins to target mid-sized
companies.
Product Development

Developing a new product for the target market. This can be an alteration of an existing product
such as warm socks that are designed with new colors and patterns to appeal to snowboarders.
Alternatively, it can be a major initiative that reinvents your business model or product line.
 Chapter Four- Swot Analysis

Swot Analysis of Capital market in Bangladesh (Dhaka stock exchange):

Definition

SWOT analysis is a framework used to evaluate a company's competitive position and to

develop strategic planning. SWOT stands for strengths, weaknesses, opportunities, and threats.
SWOT analysis assesses internal and external factors, as well as current and future potential.

A SWOT analysis is designed to facilitate a realistic, fact-based, data-driven look at the strengths
and weaknesses of an organization, its initiatives or an industry. The organization needs to keep
the analysis accurate by avoiding pre-conceived beliefs or gray areas and instead focusing on
real-life contexts. Companies should use it as a guide and not necessarily as a prescription.
Advantages of SWOT Analysis

A SWOT analysis is a great way to guide business-strategy meetings. It's powerful to have
everyone in the room to discuss the company's core strengths and weaknesses and then move
from there to define the opportunities and threats, and finally to brainstorming ideas. Oftentimes,
the SWOT analysis you envision before the session changes throughout to reflect factors you
were unaware of and would never have captured if not for the group’s input. A company can use
a SWOT for overall business strategy sessions or for a specific segment such as marketing,
production or sales.
Swot Analysis of Dhaka stock exchange
Strength

Holds Strong brand image in the country.

The strongest networking throughout major cities in Bangladesh.
Capable of providing single stop service offerings to all its branches.
Exceptional professionalism and quality to provide its clients.
Skilled and dedicated management team.
Dhaka Stock Exchange has a solid trading infrastructure
Dhaka Stock Exchange consistently provides services with expert advice
Order execution promptly and accurately
DSE provides support to assure total satisfaction according to the requirements
Standard settlement and clearing process.

Weakness

Weaknesses of Dhaka Stock Exchange

 Fundamental problems in IPO pricing method. As a result, retail investors get more
benefit than the sponsors.
 Lack of surveillance over share price in the stock exchange. As a result, manipulation
takes place frequently.
 Need to improve guideline process for all types of investors.
 Weakness in the management committee decision making power which needs
decentralization.
 Improvement in the internal audit control system is mandatory.

Opportunities

Opportunities for Dhaka Stock Exchange

 Introducing brokerage houses in the district level will increase the traffic flows
 Introducing online trading will facilitate more to the investors and trader, will attract
more people to stock exchange
 Opening the Media and Call Centre to cater to the need for information will increase the
market efficiency
 Dhaka stock exchange has planned to arrange investors’ awareness programmed
 Major Stock Exchanges from different countries have been visiting and sharing
experiences. If utilized properly, it will increase the efficiency to the development of
Bangladesh Capital Market.
Threats

Threats for Dhaka Stock Exchange

o The imbalance between the supply and demand of shares keeps room for speculators to
manipulate the stock price which is the greatest weakness of Dhaka Stock Exchange.
o Currently, there is shortage of electricity, gas supply in the country. As a result investors
are de motivated to establish new investment in the major sectors like manufacturing
industries. By this, the national economy is being hampered. As a result DSE failed to
expand its market.
o SEC has serious adroit manpower shortage. With the current number of manpower the
market regulator is not capable of doing its activities with activities in the country’s
capital market.
 Chapter 5: Findings

Findings:
From the above brief discussion, following challenges comes to up about financial products of
capital market in Bangladesh.

Excessive demand for stock

To some extent, individual investors’ confidence increased significantly due to positive measures taken
by regulatory authorities for the developments of Bangladesh capital market. Thousands of new investors
(more than six thousands new BO account opened every day in CDBL) entered the market with millions
of Taka in cash since the beginning of 2009. Huge amounts of margin loans and direct investments by
commercial banks, NBFIs, and insurance companies from their own portfolio have contributed to
the excess liquidity that has been reflected in the daily turnover. With the liquidity glut, share
prices are also on the rise, as excess liquidity increases demand. On the other hand, new issues, right and
bonus shares alleviated only marginally the market supply situation. Given this supply constraint,
investors had no other option but to put funds on the existing stocks, most of which have become
over bought, as huge demand for shares beat scanty supply of securities.

High PER

The average PER of DGENI was the highest among the major regional stock exchanges. At the end of
June 2010, the PER on DSE reached to 24.1. Whereas the PER in India was slightly over 20, while the
ratio was 8 in Pakistan, 14 in Sri Lanka, 12 in Thailand, 16 in Malaysia, 19 in Hong Kong and 14 in
Singapore. The reason behind the higher PER on DSE is mainly a mismatch between demand and supply.

Inactive bond market

Among the total listed securities (company, mutual fund, Govt. Treasury Bond-TB, corporate
bond and debenture), only companies and mutual funds’ shares are traded on the floor;
TBs and the debentures were never traded on the floor, meaning it is an inactive bond market.

The limited number of listed securities

The limited number of listed securities has always been a constraint on improving the liquidity
and market capitalization of the stock market. The main impediments include an inefficient
pricing mechanism, issuer’s concerns over poor corporate governance, and high listing costs. For
primary market development, the IPO approval process, pricing methods, and the capacity of
merchant banks need to be improved. Mechanisms that facilitate securities transactions in the
capital market, such as securities borrowing and lending, need to be introduced.

Market participants
Including brokers, dealers, and merchant bankers, require a license to trade from the SEC.
However there are no professional standards and minimal qualification requirements (e.g.,
examinations and professional training) imposed by the SEC or the exchanges on any of the
intermediaries. To strengthen governance and the quality of market intermediaries, an
examination and minimum qualification standards need to be introduced as a prerequisite for
licensing by the SEC. Only qualified and duly licensed personnel should be al-lowed to deal with
the public in transactions involving securities. Currently, there are no institutions in Bangladesh
which offer courses specifically related to the functions and regulation of financial
intermediaries.

Capital market is expanding

Bangladesh capital market is expanding, but the supply side remains poor in comparison with the
growing demand of the investors. Thus, in DSE and CSE, there is inadequate supply of stocks
and securities with good fundamentals, and corporate and government bonds are in short supply.

Slow growth of institutional investments

The stocks of slow-growth companies are just what the name implies. These are companies that
have increased their sales and earnings over at least three years, but at less than the rate of GDP
(gross domestic product) growth. Slow growth of institutional investments including mutual
funds, pension funds and professional portfolio managed fund

Public awareness

The measures have to be implemented immediately and should include strong public
pronouncements urging common people not to come to the stock market in the near term until the
situation stabilizes

Despite various measures taken by the SEC, there are still some identified structural weaknesses
of the capitalmarketofBangladeshthathinderitsoveralldevelopment.Someofthekeyweaknessesare:

 Lack of enforcement with the compliance of rules and regulations

Corporate governance—sponsor-owners are managing the firm. In al-most all cases, no
professional managements are hired to run the affairs of the listed company.
 Lack of ethical orientation, education about capital & securities markets.
 Lack of trust, self-respect amongst interest groups. These are important preconditions for
building up a healthy and investment friendly market atmosphere.
 Lack of potential securities and narrow options for the investors.
 Disclosure problem-inadequate disclosure, concealment of facts or some-times fabricated
disclosures appear in the annual reports.
 Infusion of fake shares.
 Exaggerated projection in prospectuses.
 Credit facilities are inadequate and interest rates are exorbitant.
 Problem of rebuilding the image of presently depressed market.
 Chapter 6: Problems & Suggestions

Problems & Suggestions:

Problems

The adoption of new legislative and regulatory measures and important issues involving the
control and distribution of financial products for cutting-edge expertise and strategic assistance
in the establishment of financial institutions and distribution networks for financial instruments.
The
recent performance of the financial instruments of capital markets in Bangladesh, notably from
December 2016 till February of 2017, has been very poor compared with its performance over
the last five years. The index fell from a high of around 12000 points to 10,200 points, a drop of
almost 42 percent in just three months. Bangladesh capital markets have been in the top three
best performing markets in the world over the last three years. However, its recent performance
has cast a big doubt about its future performance. It is a case of “too much money chasing too
few stocks”. The problems of the financial instruments of capital markets in Bangladesh are
structural, and, actually quite far-reaching than what meets the eye. As we all know, the capital
markets here, notably the Dhaka Stock Exchange (DSE), is way overvalued due to, firstly, the
DSE index calculations being incorrect. Secondly, there are big syndicates acting together to
artificially influence the prices resulting in huge profits for them at the expense of the average
investors who put in their hard earned lifetime savings. And last, but definitely not least, is the
Securities and Exchange Commission (SEC) whose total policy and regulations favors’ the
syndicates which primarily consists of high net worth people and the stock exchange members
resulting in an “artificial demand driven market”. Until and unless these fundamental issues are
addressed the capital markets here will fail to see the light of the day.
So, if we look at the issues individually like the DSE Index, the syndicates, comprising of stock
exchange members and the SEC we can find the common link, which is the stock exchanges and
the SEC.

Suggestions

The capital market is not strong in Bangladesh. Stock exchanges are not functioning well due to
many constraints. Some recommendations to improve capital market in Bangladesh are given
below:

Increase number of stock

 Bond Market Promotion
 Government should encourage about capital market products
Have to increase Derivatives products
Creating awareness among society so that people are encouraged to invest in the stock
market on the basis of the company merit.
Providing loan convenient for the general people.
The management of stock exchanges should be more efficient and effective.
Developing and following strict rules and regulations of SEC.
Using recent technologies to ease transactions.
 Increasing institutional investors.
Enlarging number of members.
Monitoring and regulating ensiles so that they follow the rules and regulations.
 Policy formulating and taking decisions speedily and implementation.
Declaring the income from share market as tax-free.
Attracting foreign investments by taking necessary actions.
Automation in the transaction and keeping records of transactions.
Emphasizing on privatization.
Arranging adequate training for both investors and companies.
 Minimizing restrictions to increase the number of registered companies.
Protecting fraudulence and speculation.
The listed companies that pay regular dividend should be given tax incentives and tax
rebates as well.
The mode of privatization of industries will be implemented through public issue of
shares. This will deepen the securities market, diffuse ownership and bring in market
disciplines.
The government should off-load its equity holdings in SOEs and MNCs through stock
market. This will improve the supply of securities in the market.
Bond market needs to be developed. The implementation of government securities with
medium-term and long-term maturities will also broaden the base of bond market.
Establishment of a separate judicial security tribunal for dealing with cases related to
securities market.
 Disclosure of information to the public in the fullest possible dissemination system can
make the people aware about the latest situation.
 Prompt clarification or confirmation of rumors and reports that may likely to have an
effect on the trading of securities or would likely to have a bear-in on investment
decision.
The companies concerned must refrain from disclosure like exaggerated.
 Chapter seven: Conclusion

The performance of existing financial instruments is an important issue in the capital market to
increase the new products for reducing the risk of dependency on common stocks. There are only
five products are traded including three types of bonds. The average growth rate of market
capitalization of common stocks, treasury bonds, mutual funds, corporate bonds & debentures
are 71.02%, 124.74%, 99.85% and 105.41% respectively. The growth of market capitalization of
all products is high. The share of common stocks, treasury bond, corporate bond, debentures,
mutual funds to total market capitalizations are 87.73%, 12.25%, 0.24%, 0.17% and 0.83%
respectively. So, the market is common stock based. The government bonds are traded among
the institutional investors. The corporate bond market is very small. There is lot of scope in the
market for absorbing the new products. So, there should be increased new financial instruments
in the capital market to reduce the dependency on share only. The proposed financial instruments
are various types of preferred stock, bond, SWAP, option, futures, and forwards. There are lots
of research scopes in this field to study the products which will be effective for this market.