The puzzle of junks shining in a drab market

Shamsul Huq Zahid | Published: March 04, 2009 00:00:00 | Updated: February 01, 2018 00:00:00

Country's stock market is now facing a kind of trouble that is hardly encountered in any of its counterpart in the world.

All on a sudden junk shares belonging to the 'Z' category of the stocks listed with the two bourses have started shining with a section of investors displaying 'unusual' interest in those.

The market regulator, the Securities and Exchange Commission (SEC), management of the bourses and stock brokers have failed to make head or tail of this unprecedented development taking place for about a month or so.

The shares that the investors abhorred until recently have, apparently, turned out to be gold mines for some people. For about a month, the junk shares have been dominating the list of top gainers in the bourses. Even on last Monday the 10 top gainers came from the 'Z' category companies. Of the 69 worst-performing issues traded on that day, 52 advanced.

The 'Z' category issues have earned notoriety for failing to hold annual general meetings and declaring any dividends for years together. There are some junk listed issues which even do not exist. In some cases, the sponsor directors of these issues have leased out their factory premises to others and in one case, the land area of a textile mill is being used for farming.

The state of affairs with the junk shares does make them unfit for trading on the bourses. Yet they are very much alive and kicking because of lack of appropriate action on the part of the capital market regulator. Generally, the SEC serves show cause notices or imposes fines on the sponsor directors who give a damn to such actions. In some cases, the directors move to higher court and easily obtain stay orders on the SEC actions.

This cat and mouse game has been going on for years after years. But the situation with junk shares has remained where it was even a decade back. Those who made investments at the initial stage have failed to retrieve their money.

The SEC, reportedly, has stopped trading of some junk shares in the last few days on the plea of investigations and advised the brokers to request their clients not to make investment in junk shares.

But why are the junks issues thriving now? If the past is any guide, a section of investors play a sort of poker game among themselves with junk issues when the market lacks in the required warmth.

A close look at the trading pattern in the bourses for more than a couple of months would make it clear that the market is very much unstable with its daily turnover fluctuating heavily.

The SEC has tried a few measures to boost investors' confidence but it is yet to be successful in its venture. Though the daily turnover has increased for the last few days, the market mood is rather sullen and dull.

The most striking feature of the present market trend is that despite a healthy operating profit earned by the banks in the last calendar year (2008), investors are showing lack of interest in their shares. Even the announcements by the banks to raise their paid up capital substantially have failed to create any impact on the investors. If the buoyancy in 'Z' category share trading is a puzzle, the lack of response from the investors to stocks of banking issues should be viewed as a greater puzzle.

Some market pundits might refer to the global financial meltdown and consequent deplorable state of the stock markets in most countries, both developed and developing, to justify the prevailing situation in the Bangladesh capital market. Theoretically, Bangladesh is not immune to the negative developments in the global economy. But in practice it is. On many occasions, when stock markets in major countries were going down consistently, it went up. The local stock market shrugged off the impact of serious political developments in the past and went up. No market in the world would behave this way. The absence of any large-scale foreign portfolio investment could be one of the major reasons for the Bangladesh market behaving differently.

One of the major weaknesses of the local stock market appears to be the absence of the long-term investors who would invest their money in stocks having strong fundamentals to enjoy handsome dividends for years together.

Enlightened investors prefer mutual funds to other stocks. There are some funds listed with the bourses. But the number is far less than the market demand. However, two big close-end mutual funds worth Tk 8.0 billion are expected to hit the market this year. The arrival of these funds would help meet the demand for the same to a large extent.

The SEC while trying to restore investors' confidence should devise some mechanism to make the sponsor directors of the junk issues either to pay back the money the people invested in those or subject them to tough punishment. If necessary, it might consider making a few pieces of tough legislation to meet such objectives to help overcome the lacunae in the existing legal framework to take any firm action against such sponsors.