Innovations in capital market needed for more stable investment climate
Tuesday, 7 August 2007
Ahmed Showkat Masud
THE investors in the capital market in our country do not make investment decision by reading and understanding the prospectus in most cases. Because they are not educated enough to make investment decision by analysing the information furnished in the prospectus.
Prospectus comprises the whole picture of the company whose securities are to be floated in the stock market. Before publication of prospects, the Securities and Exchange Commission (SEC) gives approval, subject to fulfilling some criteria set out by it. Prospectus is prepared as per Company's Act and Securities and Exchange Commission Act, Rules etc.
A prospectus comprises: highlights of the company; risk factors; objectives of issuing initial public offering (IPO); where the money is to be used and collected through floating IPO. That is, future plan of the company; total shares, face value of the same; if the securities are offered at a premium, then what is the reason or what is the strength of the company so that they can float securities at premium?; information on issue manager, underwriters, bankers' to the issue; rights of the shareholders; information regarding application and allocation of shares; information regarding target amount of fund to be collected from stock market; audited financial statements; information on management, sponsor shareholders of the company; product of the company, market of the product, its demand in the local and international market; present position in the market and future of the market for the company's product; technology used presently and if modification and expansion are needed, what will be the future technology?; internal rate of return, payback period; and management risk, industry risk, political risk, risk regarding policy change, supply of raw materials and their related risks.
Investors must be educated enough to minimise the risk involved in taking the investment decision about the securities. Lack of good analytical ability is responsible for making investment decision without going through the prospectus.
Investors of our country take decisions about stock business mostly on subjective judgements. Supply of stocks is far below as compared to the that of the neighbouring countries. Market capitalisation is around 8.0% to 9.0% of GDP. In India, market capitalisation is 80% of GDP and in Pakistan, it is 40% of GDP.
Due to insufficient supply of securities, if any company floats IPO, it receives oversubscription by more than 30 to 50 times. It proves that there is excess liquidity in capital market. Investors do not care about understanding the prospectus. Their observation is that, if the securities go to the secondary market, they would be able to sell it with a good profit margin. Most of the investors who are only active in the primary market, have this attitude. The short supply of IPO is giving this chance to the investors. But there are some investors who like to hold the securities for a longer period. Investors who like to get good return on their invested fund will have to consider the following things: earning per share (EPS); price earning ratio (P/E); dividend yield; net asset value per share; and tracking of price sensitive information.
As the prices of a good number of securities have continued to rise in the secondary market, the SEC has taken the decision to suspend the financial adjustment facility to control the price spiral of securities. The observation of the SEC was that price spirals caused by liquidity-pulled demand along with shortage of quality shares could lead the small investors to face huge losses. The interesting aspect of the situation is that the countrywide flood and the ongoing drive by the Anti-Corruption Commission (ACC) against corruption have not restrained the investors from making of their investment in the capital market. They consider the investment in capital market is hassle-free when compared that of keeping deposits with the banks.
To protect the interest of the small investors, the regulator -- the SEC -- has taken some praise-worthy moves, no doubt. But to minimise the risk of investors, there is a need to ascertain the views of the stake-holders in the share market and also to increase the number of the enlisted companies. Innovation is needed for bringing about more stable conditions in the capital market. Derivatives, factoring etc., can make their way into the capital market. More bonds, mutual funds can be floated for the investors who like to bear no risk.
(The writer works with ONE Bank Ltd., at Khatunganj Branch, Chittagong)
THE investors in the capital market in our country do not make investment decision by reading and understanding the prospectus in most cases. Because they are not educated enough to make investment decision by analysing the information furnished in the prospectus.
Prospectus comprises the whole picture of the company whose securities are to be floated in the stock market. Before publication of prospects, the Securities and Exchange Commission (SEC) gives approval, subject to fulfilling some criteria set out by it. Prospectus is prepared as per Company's Act and Securities and Exchange Commission Act, Rules etc.
A prospectus comprises: highlights of the company; risk factors; objectives of issuing initial public offering (IPO); where the money is to be used and collected through floating IPO. That is, future plan of the company; total shares, face value of the same; if the securities are offered at a premium, then what is the reason or what is the strength of the company so that they can float securities at premium?; information on issue manager, underwriters, bankers' to the issue; rights of the shareholders; information regarding application and allocation of shares; information regarding target amount of fund to be collected from stock market; audited financial statements; information on management, sponsor shareholders of the company; product of the company, market of the product, its demand in the local and international market; present position in the market and future of the market for the company's product; technology used presently and if modification and expansion are needed, what will be the future technology?; internal rate of return, payback period; and management risk, industry risk, political risk, risk regarding policy change, supply of raw materials and their related risks.
Investors must be educated enough to minimise the risk involved in taking the investment decision about the securities. Lack of good analytical ability is responsible for making investment decision without going through the prospectus.
Investors of our country take decisions about stock business mostly on subjective judgements. Supply of stocks is far below as compared to the that of the neighbouring countries. Market capitalisation is around 8.0% to 9.0% of GDP. In India, market capitalisation is 80% of GDP and in Pakistan, it is 40% of GDP.
Due to insufficient supply of securities, if any company floats IPO, it receives oversubscription by more than 30 to 50 times. It proves that there is excess liquidity in capital market. Investors do not care about understanding the prospectus. Their observation is that, if the securities go to the secondary market, they would be able to sell it with a good profit margin. Most of the investors who are only active in the primary market, have this attitude. The short supply of IPO is giving this chance to the investors. But there are some investors who like to hold the securities for a longer period. Investors who like to get good return on their invested fund will have to consider the following things: earning per share (EPS); price earning ratio (P/E); dividend yield; net asset value per share; and tracking of price sensitive information.
As the prices of a good number of securities have continued to rise in the secondary market, the SEC has taken the decision to suspend the financial adjustment facility to control the price spiral of securities. The observation of the SEC was that price spirals caused by liquidity-pulled demand along with shortage of quality shares could lead the small investors to face huge losses. The interesting aspect of the situation is that the countrywide flood and the ongoing drive by the Anti-Corruption Commission (ACC) against corruption have not restrained the investors from making of their investment in the capital market. They consider the investment in capital market is hassle-free when compared that of keeping deposits with the banks.
To protect the interest of the small investors, the regulator -- the SEC -- has taken some praise-worthy moves, no doubt. But to minimise the risk of investors, there is a need to ascertain the views of the stake-holders in the share market and also to increase the number of the enlisted companies. Innovation is needed for bringing about more stable conditions in the capital market. Derivatives, factoring etc., can make their way into the capital market. More bonds, mutual funds can be floated for the investors who like to bear no risk.
(The writer works with ONE Bank Ltd., at Khatunganj Branch, Chittagong)