Capital market is generally considered the main financing source of businesses. Cost of industries comes down when finance is collected from capital market. On the other hand, industries set up with bank borrowings involve higher project costs and eventually higher production costs.
In this country, primary shares are usually oversubscribed and are distributed by lottery. In most cases, the primary shareholders sell their shares at the first available opportunity to make a profit. The institutional and secondary investors buy these shares from the market. In developed countries most of the institutional and individual investors involved with share trading, purchase shares from the secondary market.
However, buying shares from the secondary market entails great risks for an investor. In such cases, prior to purchasing shares from the secondary market, an investor has to take into consideration the authorised and paid-up capital of the company, cash and stock dividend paid the previous year, lowest and highest share value of that year, price and time of share purchase, PE ratio of the company, net asset value (NAV) of the company etc. On the other hand, in case of developed countries, risk is minimal if shares are procured from the secondary market.
Brokers are looked upon as manipulators, but they exist in all capital markets across the world. They are harmful only when they team up with investors to raise share prices through organised insider trading. In developed countries, the insider traders are identified through high quality software and brought to justice which is not possible in most countries. Here insider traders are very active and at times instrumental in destabilising the market. Capital markets of both Dhaka and Chittagong have lately installed automated software to prevent insider trading. But immediately after installation of the software, share prices of companies recorded abnormal rise for some unknown reasons.
Subsidiary companies of commercial banks are the main institutional investors in this country. It has been found that the lion's share of these banks' profit from 2004 to 2010 came from capital market. With steep rise in share prices prior to each share scam, the banks upped their financing by several times and fell into a quagmire later. As a result, banks were left with no other choice but to resort to forced sale of shares which destroyed the stability of the market and aggravated the overall situation. In order to salvage the banks, the Bangladesh Bank extended the deadline for adjustment of additional capital invested up to 2020 and fixed the rate of adjustment per year.
At the same time, provision is there for Tk 500 billion to make up the deficit of capital of the nationalised banks. This amount will be collected from tax-payers' money.
Ordinary investors who provide half the markets' total fund have lost their trust in the market. Banks and mutual fund play an important role to keep the capital market stable. In this country, share prices of these two sectors are either below or a little above the book values. Although some companies under these two sectors have the capacity to pay stock or cash dividends, they are not being able to keep the share prices stable. In order to remove the crisis of trust created by the two major scams, BSEC, Ministry of Finance, Bangladesh Bank, councils of the two stock exchanges, and institutional investors will have to assume greater responsibility. That they have not been adequately responsible is evident from the fact that share index rose up to 5,300 and then slumped down to 3,900 last year. As long as an investor-friendly environment is not created, erosion of trust can not be arrested. Crisis of trust will persist in the minds of retail investors in particular. The ordinary and retail investors, who provide more than half the capital in the market, will remain either hesitant or reluctant to invest and as such the crisis of trust about the overall capital market shall continue to prevail.
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