Bangladesh stock market -- possibilities and problems
Wednesday, 21 April 2010
Faruq A Siddiqi
BANGLADESH'S stock market has witnessed impressive growth since 2007. Listing of Grameen Phone was a major recent event. It was expected that listing of GP would be a catalyst for other companies to follow. That is yet to happen. It appears that progress of new listing rather has slowed down. It has to get out of current stagnation and move towards further expansion. A large number of new investors from across the country are entering the market. Institutional investors are active in the market. Asset management companies are growing and their activities are visible. A number of proposals for new mutual funds are awaiting approval. These developments need to be seen positively. Policies regarding different methods of listing, IPO pricing, approval of new mutual funds and other market related matters should be made keeping long term market interest in view. It is desirable that short term policy interventions just to address a temporary market crisis are avoided. In a small but rapidly developing stock market, there will be problems like market manipulation, over pricing of stock, panic created by vested interest, price distortion, regulatory shortcomings and so on. In any stock market, there will bullish and bearish trends. Regulatory policies should be framed with long term vision. In recent months, some policy decisions are being taken to address current problems at the cost of long term market interest. These policy changes include fixation of minimum size of new public issue, imposing restriction on private placements, disqualifying private sector companies under direct listing and discouraging new mutual funds.
Many of the stocks are over priced and this is a serious risk factor for the inexperienced investors. Entry of new companies in the market can help reduce gap between demand and supply and help bring stability in the market. New companies need to be encouraged to come to the bourse through market friendly policy. But recent policy interventions do not seem to be moving towards that end. The state-owned companies are not coming forward for listing despite repeated assurances given by the authorities. Immediate entry of at least two or three large companies could be extremely helpful for a balanced growth of the market. Currently, Grameen Phone alone accounts for a large portion of the market capitalisation. As a result, normal movement of its price affects the index substantially and entire market is influenced by it. Entry of a few more large companies could balance the market. In this backdrop the proposal on entry of Janata Bank with its big capital was a welcome move. Perhaps, proposed premium was excessive and the balance sheet called for a close examination. But these are problems that could be settled. However, it now seems that the proposal has been shelved for the time being. This has been done in spite of regulatory requirement of listing for all banks and financial institutions. BTCL with its huge asset is another public sector company that could make immense contribution to supply side of the market. But the way things are moving, it may take months or even years for that to happen. Recently, we have been hearing about Bangladesh Biman's plan of raising fund from capital market. This is a losing company with huge accumulated debt. It may be difficult for the company to raise fund from the market unless it starts with a clean balance sheet.
It has to be admitted that it is not the responsibility of the government to ensure listing of the state-owned companies for expansion of the market. This alone can not be the solution either. But the government and the SEC do have a responsibility to promote environment in which private sector companies feel encouraged to raise fund from capital market. Private sector companies are generally reluctant to be listed for variety of reasons. Therefore, it will be difficult to bring them to the stock markets without liberal policy packages. Recent trend appears to be just in the opposite direction. By imposing different conditions and limitations, the intending companies are actually being discouraged.
On 11 March, 2010 SEC imposed certain conditions through a notification restricting further the scope of public issue. Henceforth, minimum paid up capital (existing + proposed) required for public issue will be Taka 400 million. It means that a smaller company that does not need that much of capital will not be able to raise fund from the capital market. The notification also provides that public offer at IPO up to paid up capital of Taka 750 million will be minimum 40% of the said capital and no private placement will be allowed. For companies with paid up capital between Taka 750 million and 1500 million, public offer at IPO has to be at least 25% of the said capital or Taka 300 million whichever is higher. There will be no private placement. Where paid up capital exceeds Taka 1500 million, IPO size has to be minimum 15% or Taka 400 million whichever is higher. It appears from the notification that for this category of companies there is no restriction on private placement. Determination of IPO size by the SEC seems to be unwarranted. It should be for the concerned company to decide how much additional fund it needs to raise for running the business. How can the SEC determine requirement of the company? If a company does not need that much of fund, why should it be disqualified from listing with a stock exchange? It seems to be an unnecessary policy intervention that will go against smaller companies and discourage them to come to the capital market.
Private placements have been stopped in case of smaller companies. It is true that scope of private placement has been misused in some cases recently and the problem called for intervention. However, stopping private placement altogether does not seem to be the proper response. Private placements have certain positive aspects also which should be taken into account while formulating policy. Private placements help distributing ownership to a larger segment of investors. It can generate confidence among investors if placements are made to credible and reputed institutions. Proper placements can add to the strength of the company. Therefore, policy intervention could be made to ensure placements on the basis of certain criteria instead of doing away with it altogether. Besides, this measure may not be effective. If a company wants to distribute shares, it can do so much before coming to SEC for listing.
Direct listing is another area of current interest. Private sector companies have been disqualified under this scheme. This has resulted in an uneven playing field between public and private sector companies which is difficult to justify in principle. This is a valid criticism that direct listing does not help a company. Their beneficiaries are the share holders who offload the shares and make extra profit from an overheated market. But private sector companies were coming to the market under this provision and that was helping supply side in the market. In the past, public sector companies derived the same benefit from an over priced market. Therefore allowing only the government to take advantage of the over priced market can hardly be justified. It is true that pricing mechanism under direct listing needs to be revisited. Current practice of price discovery under book building is not justified under direct listing Institutional investors are taking advantage of indicative price and getting allotment at the cut off price while the small investors are obliged to buy the same normally at a much higher price after trading starts. If this policy is to be continued, small investors should also get the shares at the cut off price through lottery as in the case of IPO allotment under book building scheme. Under no circumstances, institutional investors should be allowed to get allotment at a price lower than the price at which smaller investors will be able to buy subsequently.
In the interest of improving supply of shares in the market, direct listing could also be allowed for the private sector companies with some modifications. There should be an improved price discovery mechanism so that general investors get the shares at an acceptable price and manipulations are controlled. Provisions can be made to ensure investment of the generated fund in the prescribed priority sectors. At present, new companies can not mobilize fund from capital market. Only companies with proven track record are allowed to make public offer. There is only one green field company now. However, direct listing method offers an opportunity where the entrepreneurs may invest the sale proceeds of their shares of a company in another new company. There can be many other ways of effective utilization of funds generated under direct listing method. But disqualifying private sector companies altogether will only slow down the process of new enlisting and deprive the market of new supply.
Growth of mutual fund in Bangladesh has been slow. Only recently there has been a rush for new funds. Many banks and financial institutions are in the queue with proposals for their funds. Mutual fund is often a misunderstood subject in Bangladesh. Many investors do not understand the difference between mutual fund shares and other company shares. Mutual fund share is not the share of a company. It is a fund under a trust. Investment in mutual fund is ideal for investors who do not want to take risk because the fund is managed professionally and the collective investment is diversified. The price of a closed-end fund share is normally determined by the value of the investment in the fund. Therefore, the market price of a fund share is often close to the per share NAV. However, in Bangladesh that may not always be the case. It is seen that market price of a mutual fund share can at times be much higher than their NAV justify. Mutual fund share price can also fluctuate heavily and be subject to wild speculation. As a result the safe investment tool often becomes a risky area. In recent times, price of a share of a new fund has been a few times higher on the very first day of trading defying the basic characteristic of mutual fund. So the rush for getting private placement in the proposed mutual funds is understandable. The concern of the regulator is also a normal response. However, negative attitude in respect of mutual fund should be avoided. Compared to our neighboring countries, mutual fund size in Bangladesh is very low. New mutual fund increases both demand and supply. In the interest of professional investment and balanced market growth, new mutual funds must be encouraged. It is true that massive influx of new funds at a time is not desirable in such a small market. SEC policy of allowing these funds in phases seems to be rational. But impediments should not be created in their normal growth and development of mutual fund should be encouraged. More institutional and professional investment is likely to stabilise the market and help reduce rumour based investment. However, private placement policy and allotment criteria may perhaps be reviewed.
The expanding stock market needs a strong and efficient regulator to steer its growth. The Securities and Exchange Commission will have to be more efficient and professional. It simply can not run with the present manpower. It needs more professionals, more training at home and abroad and more logistic support. But it is just not possible to attract the right kind of professionals with the current pay structure. Housing and other facilities are shockingly absent. The Commission deserves more attention of the government for its capacity building. The authority of the Commission seems to have eroded in recent times. While the Commission has to work within overall government policy, frequent intervention is not desirable. Public image of the Commission must not be undermined.
Similarly, the stock exchanges will have to improve their professional management and practice principles of corporate governance. It is desirable that Board of Directors or any of the exchange members do not interfere with professional management of the exchange and leave day to day management to the Chief Executive Officer. This may not always be the case now. Research wing, surveillance department and many other areas will have to be more professional and efficient. With increased daily turnover income of the exchanges must have gone up and it should not be difficult to spend more for improved management.
Bangladesh's stock market is poised for rapid development. For this the SEC, DSE , CSE and all market players should work together with the support of the government. Market confidence is sure to erode if conflicting signals are received from different authorities. At the same time investors will have to understand that in any stock market there are ups and downs and they can not blame others whenever stock prices slide down. Fortunately, investors are getting matured gradually and hopefully we may not have to see shouting and slogan in front of the exchanges any longer.
The writer can be reached at email: faruqasiddiqi@yahoo.com
BANGLADESH'S stock market has witnessed impressive growth since 2007. Listing of Grameen Phone was a major recent event. It was expected that listing of GP would be a catalyst for other companies to follow. That is yet to happen. It appears that progress of new listing rather has slowed down. It has to get out of current stagnation and move towards further expansion. A large number of new investors from across the country are entering the market. Institutional investors are active in the market. Asset management companies are growing and their activities are visible. A number of proposals for new mutual funds are awaiting approval. These developments need to be seen positively. Policies regarding different methods of listing, IPO pricing, approval of new mutual funds and other market related matters should be made keeping long term market interest in view. It is desirable that short term policy interventions just to address a temporary market crisis are avoided. In a small but rapidly developing stock market, there will be problems like market manipulation, over pricing of stock, panic created by vested interest, price distortion, regulatory shortcomings and so on. In any stock market, there will bullish and bearish trends. Regulatory policies should be framed with long term vision. In recent months, some policy decisions are being taken to address current problems at the cost of long term market interest. These policy changes include fixation of minimum size of new public issue, imposing restriction on private placements, disqualifying private sector companies under direct listing and discouraging new mutual funds.
Many of the stocks are over priced and this is a serious risk factor for the inexperienced investors. Entry of new companies in the market can help reduce gap between demand and supply and help bring stability in the market. New companies need to be encouraged to come to the bourse through market friendly policy. But recent policy interventions do not seem to be moving towards that end. The state-owned companies are not coming forward for listing despite repeated assurances given by the authorities. Immediate entry of at least two or three large companies could be extremely helpful for a balanced growth of the market. Currently, Grameen Phone alone accounts for a large portion of the market capitalisation. As a result, normal movement of its price affects the index substantially and entire market is influenced by it. Entry of a few more large companies could balance the market. In this backdrop the proposal on entry of Janata Bank with its big capital was a welcome move. Perhaps, proposed premium was excessive and the balance sheet called for a close examination. But these are problems that could be settled. However, it now seems that the proposal has been shelved for the time being. This has been done in spite of regulatory requirement of listing for all banks and financial institutions. BTCL with its huge asset is another public sector company that could make immense contribution to supply side of the market. But the way things are moving, it may take months or even years for that to happen. Recently, we have been hearing about Bangladesh Biman's plan of raising fund from capital market. This is a losing company with huge accumulated debt. It may be difficult for the company to raise fund from the market unless it starts with a clean balance sheet.
It has to be admitted that it is not the responsibility of the government to ensure listing of the state-owned companies for expansion of the market. This alone can not be the solution either. But the government and the SEC do have a responsibility to promote environment in which private sector companies feel encouraged to raise fund from capital market. Private sector companies are generally reluctant to be listed for variety of reasons. Therefore, it will be difficult to bring them to the stock markets without liberal policy packages. Recent trend appears to be just in the opposite direction. By imposing different conditions and limitations, the intending companies are actually being discouraged.
On 11 March, 2010 SEC imposed certain conditions through a notification restricting further the scope of public issue. Henceforth, minimum paid up capital (existing + proposed) required for public issue will be Taka 400 million. It means that a smaller company that does not need that much of capital will not be able to raise fund from the capital market. The notification also provides that public offer at IPO up to paid up capital of Taka 750 million will be minimum 40% of the said capital and no private placement will be allowed. For companies with paid up capital between Taka 750 million and 1500 million, public offer at IPO has to be at least 25% of the said capital or Taka 300 million whichever is higher. There will be no private placement. Where paid up capital exceeds Taka 1500 million, IPO size has to be minimum 15% or Taka 400 million whichever is higher. It appears from the notification that for this category of companies there is no restriction on private placement. Determination of IPO size by the SEC seems to be unwarranted. It should be for the concerned company to decide how much additional fund it needs to raise for running the business. How can the SEC determine requirement of the company? If a company does not need that much of fund, why should it be disqualified from listing with a stock exchange? It seems to be an unnecessary policy intervention that will go against smaller companies and discourage them to come to the capital market.
Private placements have been stopped in case of smaller companies. It is true that scope of private placement has been misused in some cases recently and the problem called for intervention. However, stopping private placement altogether does not seem to be the proper response. Private placements have certain positive aspects also which should be taken into account while formulating policy. Private placements help distributing ownership to a larger segment of investors. It can generate confidence among investors if placements are made to credible and reputed institutions. Proper placements can add to the strength of the company. Therefore, policy intervention could be made to ensure placements on the basis of certain criteria instead of doing away with it altogether. Besides, this measure may not be effective. If a company wants to distribute shares, it can do so much before coming to SEC for listing.
Direct listing is another area of current interest. Private sector companies have been disqualified under this scheme. This has resulted in an uneven playing field between public and private sector companies which is difficult to justify in principle. This is a valid criticism that direct listing does not help a company. Their beneficiaries are the share holders who offload the shares and make extra profit from an overheated market. But private sector companies were coming to the market under this provision and that was helping supply side in the market. In the past, public sector companies derived the same benefit from an over priced market. Therefore allowing only the government to take advantage of the over priced market can hardly be justified. It is true that pricing mechanism under direct listing needs to be revisited. Current practice of price discovery under book building is not justified under direct listing Institutional investors are taking advantage of indicative price and getting allotment at the cut off price while the small investors are obliged to buy the same normally at a much higher price after trading starts. If this policy is to be continued, small investors should also get the shares at the cut off price through lottery as in the case of IPO allotment under book building scheme. Under no circumstances, institutional investors should be allowed to get allotment at a price lower than the price at which smaller investors will be able to buy subsequently.
In the interest of improving supply of shares in the market, direct listing could also be allowed for the private sector companies with some modifications. There should be an improved price discovery mechanism so that general investors get the shares at an acceptable price and manipulations are controlled. Provisions can be made to ensure investment of the generated fund in the prescribed priority sectors. At present, new companies can not mobilize fund from capital market. Only companies with proven track record are allowed to make public offer. There is only one green field company now. However, direct listing method offers an opportunity where the entrepreneurs may invest the sale proceeds of their shares of a company in another new company. There can be many other ways of effective utilization of funds generated under direct listing method. But disqualifying private sector companies altogether will only slow down the process of new enlisting and deprive the market of new supply.
Growth of mutual fund in Bangladesh has been slow. Only recently there has been a rush for new funds. Many banks and financial institutions are in the queue with proposals for their funds. Mutual fund is often a misunderstood subject in Bangladesh. Many investors do not understand the difference between mutual fund shares and other company shares. Mutual fund share is not the share of a company. It is a fund under a trust. Investment in mutual fund is ideal for investors who do not want to take risk because the fund is managed professionally and the collective investment is diversified. The price of a closed-end fund share is normally determined by the value of the investment in the fund. Therefore, the market price of a fund share is often close to the per share NAV. However, in Bangladesh that may not always be the case. It is seen that market price of a mutual fund share can at times be much higher than their NAV justify. Mutual fund share price can also fluctuate heavily and be subject to wild speculation. As a result the safe investment tool often becomes a risky area. In recent times, price of a share of a new fund has been a few times higher on the very first day of trading defying the basic characteristic of mutual fund. So the rush for getting private placement in the proposed mutual funds is understandable. The concern of the regulator is also a normal response. However, negative attitude in respect of mutual fund should be avoided. Compared to our neighboring countries, mutual fund size in Bangladesh is very low. New mutual fund increases both demand and supply. In the interest of professional investment and balanced market growth, new mutual funds must be encouraged. It is true that massive influx of new funds at a time is not desirable in such a small market. SEC policy of allowing these funds in phases seems to be rational. But impediments should not be created in their normal growth and development of mutual fund should be encouraged. More institutional and professional investment is likely to stabilise the market and help reduce rumour based investment. However, private placement policy and allotment criteria may perhaps be reviewed.
The expanding stock market needs a strong and efficient regulator to steer its growth. The Securities and Exchange Commission will have to be more efficient and professional. It simply can not run with the present manpower. It needs more professionals, more training at home and abroad and more logistic support. But it is just not possible to attract the right kind of professionals with the current pay structure. Housing and other facilities are shockingly absent. The Commission deserves more attention of the government for its capacity building. The authority of the Commission seems to have eroded in recent times. While the Commission has to work within overall government policy, frequent intervention is not desirable. Public image of the Commission must not be undermined.
Similarly, the stock exchanges will have to improve their professional management and practice principles of corporate governance. It is desirable that Board of Directors or any of the exchange members do not interfere with professional management of the exchange and leave day to day management to the Chief Executive Officer. This may not always be the case now. Research wing, surveillance department and many other areas will have to be more professional and efficient. With increased daily turnover income of the exchanges must have gone up and it should not be difficult to spend more for improved management.
Bangladesh's stock market is poised for rapid development. For this the SEC, DSE , CSE and all market players should work together with the support of the government. Market confidence is sure to erode if conflicting signals are received from different authorities. At the same time investors will have to understand that in any stock market there are ups and downs and they can not blame others whenever stock prices slide down. Fortunately, investors are getting matured gradually and hopefully we may not have to see shouting and slogan in front of the exchanges any longer.
The writer can be reached at email: faruqasiddiqi@yahoo.com