Stock boom, rumours and SEC

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Shamsul Huq Zahid
It is a welcome development that the investors' size in the country's bourses is bulging with every passing day. But the worrisome aspect of the resurgence of the investors' interest is that rumours are playing a part in it.
These days, most stock broker houses are mini rumour mills. Investment decisions are very often influenced by rumours. On every business day, you will inevitably hear people whispering in around the bourses about the possibility of declaring stock dividend or issuing right shares or starting a new subsidiary by this or that company.
The rumour mongering has reached such a height that the Dhaka Stock Exchange, which has been buzzing with investors' excitement for some months, is now advising investors to make investment decisions being guided by fundamentals of the listed issues. The valuable piece of advice has been put on display on the DSE website.
The Securities and Exchange Commission (SEC) being the capital market regulator is rather in an uncomfortable state. On one hand, the regulator that had come under fire for its alleged inaction following the 1996 share scam cannot take any measures that would hurt investors' renewed interest in the market; on the other, it cannot allow overheating of the market.
So, it has, apparently, chosen a soft approach to the problem. As a part of that approach, whenever the price of a particular issue starts rising at a faster pace, the SEC immediately makes a query to the management concerned whether they have any undisclosed sensitive information. In most cases, the replies to such queries come in the negative.
Yet a section of overzealous investors tend to believe that the companies are actually hiding sensitive information and they would be coming out in the open with handsome disclosures soon.
Other measures that the SEC has applied with a view to having a cooling effect on the market relate to changes in the margin rules, withdrawal of financial adjustment facilities for all categories of shares and strict monitoring of credit facilities offered by the merchant banks to the general investors. Such measures have produced some results and the daily turnover that had crossed Tk. 2.0 billion a couple of weeks back has now come down substantially.
Looking at the ongoing developments in the bourses, one would like to ask a couple of questions to market pundits: Why is market rising so fast when the people are hard-pressed by the soaring prices of essentials? Does the bull-run in the stock market reflect the overall business climate in the country?
Prior to the takeover by the present interim administration, the average daily turnover at the DSE used to hover between Tk. 250 million and Tk. 400 million. There is no reason to believe that the profitability of the issues listed with the bourses has remarkably gone up. Yet there has been substantial rise in fund-flow to the stock market.
According to the DSE, over 60 per cent fund used in daily transactions come from institutional investors, including commercial banks, insurance companies and merchant banks.
The commercial banks are now sitting on tonnes of idle money and it could be that some of them, which have merchant bank wings, might have gone for portfolio investment. But is the current price level of shares of listed companies having strong fundamentals worth new investment?
Another reason for upsurge in share prices could be the flow of undisclosed yet lawfully earned money or black money in larger volumes to the stock market. The ongoing anti-corruption drive and NBR drive against tax dodgers might have prompted many to seek shelter in stock market out of the feeling that the authorities concerned would think twice before embarking on any fact-finding drive in bourses because of its serious negative effect on investing public.
Besides, it is assumed that many small savers have cashed their savings certificate following the latest imposition of 10 per cent tax on interest income and invested their funds in stocks. The surge in stock prices has helped them to make a definitive choice.
However, in spite of a few signs of abnormality, the situation in the stock market is not anyway alarming. The correction of share prices after every brief bull-run speaks of a sort of maturity on the part of the market and the investors. A close watch on the developments by the regulator coupled with exercise of sixth sense by the investors would be enough to prevent the recurrence of the 1996 bubble-burst.