Capital market in intensive care

The capital market of our country is in a total disarray. More specifically, it is under intensive care and curative doses need to be applied immediately if we want it to recuperate and survive. Nobody appears to be bothered except the ill-fated investors. The capital market, which provides all-important capital for the entrepreneurs, is built up and nourished by public money. The liabilities of issuers and investors, being the two main players in the market, towards one another should not be forgotten or overlooked. Particularly, liabilities of the issuers towards the investors, deserve more attention because investors comprise all sections of the public.
Investors are actually the lifeline of capital market and as a matter of fact, apart from banks and financial institutions, are an important source of finance for the entrepreneurs.  The vast expanse of stock market around the world bears ample testimony to that effect.
The responsibility to rear up the capital market and place it on a strong foundation lies with the Securities and Exchange Commission (SEC) in our country which is the regulatory body for capital market. The Commission is actually the guardian of the market where the investors put their money. Unfortunately, performance of the SEC over the last two decades leaves a lot to be desired.
Readers will remember the catastrophic consequences befalling the investors of capital market in 1996 and 2010. Common investors lost everything due to market manipulations by an organised group of unscrupulous businessmen.  The Commission could do nothing to reverse the situation. Generally, a very few moves of the Commission in last two decades were market or investment-friendly. On the contrary, some of the steps actually retarded the normal growth of the market.
The visible activities of the Commission included name change from the EC to the BSEC, D-gen to D-sex, demutualisation of the exchanges, and allowing the issuer companies to flourish with investors' money rendering the market devoid of liquidity.
Besides, the Commission issued some unrealistic and arguably illegal orders, like, making holding of 2 per cent shares individually by each Director and 30 per cent collectively by all Directors mandatory, appointment of independent Director and keeping the number of Directors to at least 5. But ground reality confirms, none of these steps could help develop the market. On the other hand, the Commission has been blaming the Bangladesh Bank and other institutional investors for not investing more to support the market. But in a situation where investment of Tk 100 becomes Tk 90 the next day and Tk 80 the day after, banks and institutional investors feel naturally disinclined to come forward with more investment.
The present capital market of our country can be compared to a monkey struggling to climb the top of a slippery bamboo pole smeared with oil. The monkey climbs 10 feet up and next moment slips 20 feet down. It keeps on trying over and over again and each time, the result is the same. The oily substance in the capital market comprises premium, book building, direct listing etc. For the last five years or so, a number of new issues and right issues landed in the market. Excepting a few, most of those issues were released in the market at 300 to 2500 per cent higher than the face value. Investors bought those shares in good faith and issuing companies amassed a huge amount of money in this way, which is actually unaccounted for (may be unearned) company income.  
Examples of such highs and lows in capital markets are not uncommon or unforeseen. So the evils rising out of such highs and lows can be defeated and good days can be brought back if the SEC asserts its authority and pursues market and investment-friendly policies and ensures full compliance of the policies. Some of the recommendations outlined below can prove effective in normalising and developing the capital market:
1. Premium for any IPO and right issue should not be allowed. IPO at face value and right issue at par value should be allowed.
2. Practice of issuing IPO in so-called book building or direct listing method should be stopped permanently. The SEC is to make this system effective by rising above all external or internal influences and pressures. The investors, on the other hand, should be equally conscious and decline to invest in any issue or IPO with premium value or under book building or book listing methods.
3. The SEC introduced a regulation that has restricted face values of all shares irrespective of size and variety, to Tk 10, which should be scratched. Face value of shares should be determined by issuer companies and the SEC or the government should not be involved in the process. According to many experts, minimum face value of shares should be fixed at Tk 100 and a regulation to this effect should be introduced immediately. It must be remembered, shares of lesser face value create more opportunities for manipulation and malpractices. In 2010-11, the capital market was totally destroyed by some dishonest issuers with the help of this weapon. It is, therefore, desirable that shares whose face values were brought down from Tk 100 or Tk 1,000 to Tk 10 should be reverted to their previous positions.
3 The provision of independent Director imposed by the SEC should be scratched. The provision is conflicting with clause 92(1) and sub-clause (b) of the same clause of Companies Act 1994,  According to sub-clause (b), a person is entitled to become a Director of a company by holding shares according to his/her eligibility, signing the Memorandum of Association and taking possession of the shares after payment of full value. Therefore, the provision for appointment of an independent Director in a public company should be abolished.
4 Another provision which requires a Director of a listed company to hold 2 per cent of shares individually and 30 per cent collectively, has so far failed to produce any result. Although it was approved by the highest court of the country, it appears to be conflicting with Companies Act, because details of eligible share holding for the Directors are clearly mentioned in Memorandum & Articles of Association of the Company. Whether the provisions under the Securities Act can supersede the Companies Act calls for a legal clarification.
5 Number of Directors in public companies (except banks) has been clearly specified in the Companies Act 1994. Another provision by the SEC fixing the number at 5 or 7, is superfluous and redundant.  
6 The central bank has a crucial role to play. It should make all efforts to safeguard the interest of the depositors and keep a constant vigil on people's money at the banks so that the money is not propelled to high-risk investments. However, any decision or policy of the central bank with regard to capital market should be taken in consultation and coordination with the SEC.
7 As the caretaker of the capital market, the SEC's first and foremost responsibility is to safeguard the interest of the market and investments made by the investors into it. It should learn from its mistakes and come down hard on the market forces with a regulatory role. The singular responsibility of protecting the market and the investors lies with the SEC, and not with the Bangladesh Bank or the Bangladesh government.
8 In order to pull the capital market out of the present quagmire, the SEC will have to make another bold decision immediately. Issuer companies which plundered investors' money through various forms of manipulation should be made to refund the money so collected. This will help restore investors' confidence in the authority and will inject new life into the capital market. This is difficult, but not impossible.
9 The Securities and Exchange Board of India has set a  powerful example in this regard by asking the influential Sahara group to return Rs 200 billion collected immorally to the concerned investors.
10 Apart from these, some other controversial and undesirable activities of SEC are continuously pushing the capital market down. While the main responsibility of the SEC is to control issue and issuers, it should not meddle into the day-to-day affairs of market transactions and operations.
11 The same settlement procedure should be followed for all shares regardless of their categories.
The SEC is already empowered with sufficient legal authority to translate into action any or all of the above recommendations and is not required to seek anybody's approval or permission. It may be recalled that the Dhaka Stock Exchange had been operating for a few decades since it was set up in 1950s. There was no SEC at that time and the  controlling authority was the Controller of Capital Issues. Later, the SEC was constituted to better manage and develop the capital market. In order to keep the market dynamic and healthy, the SEC will have to be efficient in its analysis and policy formulation. Otherwise, the pace of economic development is bound to slow down.
If the above recommendations are immediately implemented, investments by banks or through bank loans will not be required. It must be remembered that nowhere in the world the capital market is stationery. There shall always be ups and downs, rumours and speculations like anywhere else. The area that needs special attention is investors' interest. The SEC must be careful so that investors are not subjected to fraudulent or deceitful activities.
On the other hand, all investors, individual and institutional, should refrain from purchasing any share at premium value in order to prevent overvaluation of shares. It should not be forgotten that investors are the main driving force and highest risk-bearing stakeholders of the capital market. All possible care should be taken to protect their interests. Issuer companies draw investors' money through the market to build their own fortune. They are not doing the investors any favour.  
The lead role in this respect rests with the Securities and Exchange Commission, the regulatory body. According to some experts, the Commission has so far failed to take any move which could be termed as either market - or investment-friendly. On the contrary, the Commission through some superfluous and redundant policy decisions pushed the capital market to the brink of disaster.
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