Working towards vibrant capital market

The capital market is the engine of growth for an economy and it acts as an intermediary between savers and companies seeking additional funds for business expansion. A vibrant capital market is an indispensable part of an economy. Without a sound and efficient capital market, rapid economic development could be hampered as capital market provides long-term funds to entrepreneurs.

Bangladesh's capital market started its journey on April 28, 1954. Sixty three years have passed since then. But the stock market has still remained immature and failed to be an important force in shaping the economy of the country. The predominant source of funding for the private sector investments has always been the banking sector and the contribution of the stock market has been marginal.

In its sixty-three years' history, the capital market of Bangladesh had two major debacles which occurred in 1996 and 2010-11, leaving some shocking impacts upon the investors.

The market first crashed in December 1996 and the index had started declining significantly since then resulting in a cumulative decline of 83.44 per cent from 1996 to 1999. That time share trading was paper-based. There was no graph nor computer-based trade system. Investors traded on the basis of rumour dished out by big market players.

During the crash in1996 some local and foreign initiatives succeeded in drawing some international attention following an international conference in 1994. The conference was followed by some regional as well as international market destabilising events, some hedge fund managers started investing in the local capital market. The market was neither operational nor in terms of legal structure ready to absorb such a sudden surge in demand both at home and abroad.

The market regulators failed to handle the demand-supply mismatch one of the causes of the stock market crash in 1996. Stock exchanges did not take any action against the dramatic price increase of listed securities during June to November 1996. Bubble formed due to abnormal demand for securities from new investors where the number of listed securities was very few.

As the index was rising sharply and everyone was making money, many people started investing in the heated market that made a bigger bubble and finally it burst. Thousands of investors lost their money that made them reluctant to invest in the capital market again. It took one decade for them to recover from the shock. After that, regulators had taken some measures to stabilise the market.

Hundreds of new issues entered the market. Central depository, circuit breaker, online trading, etc. were introduced in the market to attract investors. As a result, the market started rising again. This time most investors were new and young with little knowledge about stocks and did not care about market risks.

They invested their money and finally lost everything when the bubble started to burst in December, 2010. The bubble had started forming since 2009. This time the benchmark index came down to 3,438 points in April 2013 from its highest level of 8,918 on December 5, 2010. Thousands of investors lost their money and came down to the street. This is the picture of the stock market crashes in Bangladesh in a nutshell.

In both cases regulators had failed to take proactive measures against the bubble formation and caused losses to millions of investors when the bubbles burst.

One of the main reasons behind this unstable stock market is the lacuna in the regulatory frameworks and weaknesses in stock market governance. In this situation, sustainable improvement of the legal framework for the stock market is a vital issue when it comes to protection of the investors and the development of its economy.

Some constructive reforms were undertaken after the market collapse of 2011. Most important one of these reforms was demutualisation of the exchanges. Demutualisation is likely to bring about a long-term qualitative change in the management of the exchanges. But implementation of the demutualisation process seems to be slow.

The capital market of Bangladesh is still highly speculative and lacks transparency due to a poor regulatory framework. Investment options for an investor in this market are ordinary shares, debenture, bond and mutual funds and the Bangladesh stock market is dominated by retail investors. In Bangladesh, the financial sector was historically driven by banks and the capital market had fewer roles to play as people had mixed perception about the risk pattern that discouraged them mostly to invest there.

Up to October 2017, the country's two bourses-Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) -- witnessed a number of positive signs -- higher index and turnover. As such volatility affects many investors, it is essential to try to minimise such volatility by identifying the causes and solving the problems.

Some big investors, stockbrokers coupled with sponsors of some listed companies remained active behind the stock price manipulation as many "Z" category companies' share prices remained high despite many of them failing to pay dividend or not in operation over the years.

Market operators believe the supply shortage of quality shares in the capital market is leading many investors to buy low quality shares at higher prices that may cause a massive loss in their portfolios. The fundamental strength of the market essentially comes from financial strength of the listed companies. But the number of listed companies is inadequate and companies with excellent track records are fewer still. The growth in market demand for stocks was much more than that of supply that inflated the market in recent years and made the market most volatile.

About 300 companies got listed with the capital market, which is less than 1.0 per cent of companies registered by the Registrar of Joint Stock Companies and Firms (RJSCF). Currently, approximately 0.15 million companies are registered with the RJSCF. This demand-supply mismatch along with inadequate investor's knowledge allowed the stock prices to bloat and finally invited a big depression that is still going on.

The supply side response was poor, stock prices might go up due to excess liquidity. Bangladesh Securities & Exchange Commission (BSEC) 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 market stakeholders had long been calling for listing of state-owned enterprises (SoEs) and multinational firms with the bourses to increase the number of quality shares in the secondary market. But, that hardly made any progress due to reluctance of the relevant ministries and divisions.

Experts and stockbrokers opined that for increasing the market depth, the availability of good shares in the market should be increased since the market is facing a dearth of quality issues. The listing of state-owned companies in the capital is a long discussed issue: the government in January 2010 had selected 26 state-owned companies and instructed them to offload shares in the next six months, but it has never happened till date.

There are allegations that the board members, especially those who come from different ministries and divisions, do not want to get the companies listed in the stock market. They fear they will no longer get to enjoy different benefits and they will also have to become more accountable and transparent by complying with the corporate governance guideline, if listed.

As there are players who do not like it, the government should come forward with an effective initiative to offload the state-owned enterprises' shares in the stock market. It will encourage the private sector companies to enter the capital market and thus its depth will increase.

In spite of these limitations, stock markets have the potential to grow in the course of time. Stock market funding has certain advantages. It offers lower costs of funds without the obligation of repayment. It also helps reduce financial expenses of the corporate sector, making it more competitive. It dilutes ownership concentration and contributes to improved corporate governance practices. We need to build-up an effective stock market to mobilise savings, provide relatively low-cost funding, improve transparency of companies, and advance corporate governance in the interest of long-term development of commerce and industry.

The writer is Staff Reporter at The Financial Express. [email protected]