Difficult time for capital market regulator
Shamsul Huq Zahid | Tuesday, 10 June 2008
THE capital market regulator-the Securities and Exchange Commission (SEC), is considering amendments to the existing rules for the merchant banks to force the latter for accomplishing one of their basic jobs-to bring in new issues to the stock market.
The chairman of the SEC at a function held in Dhaka last week warned that merchant banks failing to lure at least one new issue each annually would face cancellation of their licences.
The SEC chief had also reminded in the recent past the merchant banks of their obligation to brining in new issues in the market.
It is not just the failure of the merchant banks to lure new issues to the market. Questions were also raised about the performance of the merchant banks very often in the past. A good number of so-called merchant banks did none of the jobs they were meant to do. A few active ones remained busy in their portfolio management. Nor they were that much interested in providing margin loans to their clients. Despite all these developments, the capital market regulator, at that time, preferred to be a passive onlooker and seldom warned the merchant banks of taking actions for their failure to carry out the designated jobs.
However, when the share market situation turned relatively buoyant since the early part of 2007, some more entities, including some private commercial banks, took up licences from the SEC to work as merchant banks. However, only a few of them until now have worked as issue mangers and done underwriting.
The reason behind the SEC issuing a tough warning to the merchant banks is not difficult to understand. Despite alleged behind-the-scene tactics, it has, of late, become difficult for the regulator and the bourses to rein in the upswing in stock prices. The entry of substantial amount of funds into the market from different directions with virtually dried-up flow of new issues, the market is a bit over-heated. The investors who have entered the market with large funds, for understandable reasons, are not willing to withdraw from the market and they are now playing a sort of poker game. They are switching over from one category of shares to the other spreading rumours. The small investors who are aware of the risks involved in such game are reaping profits as best they can without clinging on to particular shares for a long time. However, it remains a risky game for those who have invested their life's savings in stocks in such an unpredictable market.
It is actually is the worst time for the informed and long-time investors, who prefer to go by company fundamentals. How can an informed investor stay in a market where the prices of many issues go up three times soon after the expiry of the record date? Rumours, such as 'X' Company is set to take over 'Y' Bank and 'Z' Insurance Company would float a mutual fund soon, are spread deliberately by vested quarters. Is there any earthly reason for the prices of mutual funds reaching to such a height? These crazy investors are not even ready to believe the answers to the queries made by the SEC or the DSE.
But the saying-what goes up must come down-has proved true time and again in case of stock prices. The glaring example is 1996 stock boom (the situation, however, is not yet that serious now. But there are a few ominous symptoms.
The SEC can amend margin rules or go for other measures to restrict flow of funds to the market. But that would immediately invite backlash from the investors, including a few organized demonstrations on the streets by the so-called small investors who are seen sitting on the front rows at the annual general meetings of the listed companies. They are equally effective in both trouble-making on behalf of the 'investors' and trouble-shooting if engaged by the board of directors of the listed companies.
But the prevailing situation demands of the SEC some actions on its part to advise the small investors not to be misguided by rumours while investing their hard earned money in stocks.
It seems that the market desperately needs some large initial public offerings (IPOs) to help divert a sizeable amount of capital from the market. There were talks about some big issues, including the GrameenPhone (GP), coming to the market. But those issues are yet to hit the market.
The SEC chief's warning against the errant merchant banks is the manifestation of his organisation's desperation to cool off an overheated (the SEC chairman, however, preferred to call the market over-priced) market.
However, one does need to understand the problems of the merchant banks as far as wooing companies to float IPOs. There is no compulsion on the part of the privately-owned enterprises to come to the stock market. They would do so only if they feel it proper to mobilise funds from the market, not from banks, or find the incentives offered by the government are worth enough to court the troubles of becoming listed.
Had luring the companies been that easy, some efficient merchant banks would have brought in a good number of private companies to the stock market almost every month.
The government does need to review the incentives, particularly the fiscal ones, offered to the listed companies. It is a fact that most privately owned companies being family-owned ones are unwilling to come to the market and expose themselves to all the scrutiny by shareholders, capital market regulator and the media. Some more incentives in the form of corporate tax and value added tax might encourage them to float IPOs and help cool off the market. Such a possibility, at this moment, seems remote.
Then again some people do often demand that private companies, including foreign ones, be forced to offer their shares for public subscription. How can a company be forced to go public? Is such coercion consistent with the principles of free market economy?
...................................
[email protected]
The chairman of the SEC at a function held in Dhaka last week warned that merchant banks failing to lure at least one new issue each annually would face cancellation of their licences.
The SEC chief had also reminded in the recent past the merchant banks of their obligation to brining in new issues in the market.
It is not just the failure of the merchant banks to lure new issues to the market. Questions were also raised about the performance of the merchant banks very often in the past. A good number of so-called merchant banks did none of the jobs they were meant to do. A few active ones remained busy in their portfolio management. Nor they were that much interested in providing margin loans to their clients. Despite all these developments, the capital market regulator, at that time, preferred to be a passive onlooker and seldom warned the merchant banks of taking actions for their failure to carry out the designated jobs.
However, when the share market situation turned relatively buoyant since the early part of 2007, some more entities, including some private commercial banks, took up licences from the SEC to work as merchant banks. However, only a few of them until now have worked as issue mangers and done underwriting.
The reason behind the SEC issuing a tough warning to the merchant banks is not difficult to understand. Despite alleged behind-the-scene tactics, it has, of late, become difficult for the regulator and the bourses to rein in the upswing in stock prices. The entry of substantial amount of funds into the market from different directions with virtually dried-up flow of new issues, the market is a bit over-heated. The investors who have entered the market with large funds, for understandable reasons, are not willing to withdraw from the market and they are now playing a sort of poker game. They are switching over from one category of shares to the other spreading rumours. The small investors who are aware of the risks involved in such game are reaping profits as best they can without clinging on to particular shares for a long time. However, it remains a risky game for those who have invested their life's savings in stocks in such an unpredictable market.
It is actually is the worst time for the informed and long-time investors, who prefer to go by company fundamentals. How can an informed investor stay in a market where the prices of many issues go up three times soon after the expiry of the record date? Rumours, such as 'X' Company is set to take over 'Y' Bank and 'Z' Insurance Company would float a mutual fund soon, are spread deliberately by vested quarters. Is there any earthly reason for the prices of mutual funds reaching to such a height? These crazy investors are not even ready to believe the answers to the queries made by the SEC or the DSE.
But the saying-what goes up must come down-has proved true time and again in case of stock prices. The glaring example is 1996 stock boom (the situation, however, is not yet that serious now. But there are a few ominous symptoms.
The SEC can amend margin rules or go for other measures to restrict flow of funds to the market. But that would immediately invite backlash from the investors, including a few organized demonstrations on the streets by the so-called small investors who are seen sitting on the front rows at the annual general meetings of the listed companies. They are equally effective in both trouble-making on behalf of the 'investors' and trouble-shooting if engaged by the board of directors of the listed companies.
But the prevailing situation demands of the SEC some actions on its part to advise the small investors not to be misguided by rumours while investing their hard earned money in stocks.
It seems that the market desperately needs some large initial public offerings (IPOs) to help divert a sizeable amount of capital from the market. There were talks about some big issues, including the GrameenPhone (GP), coming to the market. But those issues are yet to hit the market.
The SEC chief's warning against the errant merchant banks is the manifestation of his organisation's desperation to cool off an overheated (the SEC chairman, however, preferred to call the market over-priced) market.
However, one does need to understand the problems of the merchant banks as far as wooing companies to float IPOs. There is no compulsion on the part of the privately-owned enterprises to come to the stock market. They would do so only if they feel it proper to mobilise funds from the market, not from banks, or find the incentives offered by the government are worth enough to court the troubles of becoming listed.
Had luring the companies been that easy, some efficient merchant banks would have brought in a good number of private companies to the stock market almost every month.
The government does need to review the incentives, particularly the fiscal ones, offered to the listed companies. It is a fact that most privately owned companies being family-owned ones are unwilling to come to the market and expose themselves to all the scrutiny by shareholders, capital market regulator and the media. Some more incentives in the form of corporate tax and value added tax might encourage them to float IPOs and help cool off the market. Such a possibility, at this moment, seems remote.
Then again some people do often demand that private companies, including foreign ones, be forced to offer their shares for public subscription. How can a company be forced to go public? Is such coercion consistent with the principles of free market economy?
...................................
[email protected]