Keeping the fingers crossed

Mr Ian Beauchamp, director and chief economist at Hambros Fund Management, was quoted in the 'Treasury in Wisdom' as saying: "The first move of being defensive is to diversify. As markets become more and more global, that becomes increasingly difficult."
It is very relevant for Bangladesh's stock market that is undergoing reforms, including demutualisation of its stock exchanges, which is associated with some risks in the global perspective. So, it is very important to find out to what extent the demutualisation of bourses will work as far as the present state of Bangladesh's stock market is concerned. The market here is not that diversified.
Most of the stock exchanges, including those in developed and developing countries, have underwent demutualisation. Most of them have completed the process while many others  are still implementing it. Demutualisation has now become a buzzword  in the modern finance world.
After the stock market crash in 2010-11 the  regulatory authority of Bangladesh's stock market also felt the necessity of demutualisation. Accordingly, they went for it. They started implementing demutualisation and it will take three years to complete the process. But many cast doubts about its efficacy as the stock market in Bangladesh is not that diversified.
Bangladesh's capital market already experienced two massive debacles. The first market plunge happened in 1996 when a spurt of foreign investments in the capital market was greeted with withdrawal of the lock-in system leaving at risk the small investors doing paper-based trading at the kerb market.
What is to be noted is that after the 1996 stock market debacle, the authorities in Bangladesh's capital market adopted a lot of market-friendly policies like automated trading, dematerialisation of securities and a strong software surveillance system, but those failed to avert the second big stock market crash which happened in the fiscal year 2010-11.
This time experts blamed the market infrastructure system for the debacle. They identified the lack of transparency and accountability, inaction of the market regulators and lack of coordination among themselves, greed of the market players, both small and big, lack of diversified market instruments and lack of political will as the main factors behind the second stock market crash. Market experts suggested separation of management of stock exchanges from ownership to address the problem. The mechanism of doing it is the demutualisation that sees transformation of a member-owned stock exchange into a shareholder-owned company, which could be listed with a stock exchange. Demutualisation ensures one vote per share instead of one-vote-one-member. The aim of segregation of management from ownership is expected to establish indispensible transparency, accountability and good governance inside the stock market.
Keeping the international capital market trend and the prospective benefit of demutualisation in mind, the Jatiya Sangsad (Parliament) passed the Demutualisation Actl-2013 and the Exchange Demutualisation Act-2013. The laws were published in the Bangladesh Gazette on May 2, 2013. Now the stock market is witnessing implementation of the demutualisation process.
In developed countries their stock markets have undergone demutualisation alongside introduction of key market instruments including derivative and hedge products, private equity market, strong bond market, commodity exchanges and so on. They have also adopted the international financial reporting standard. But in Bangladesh we are far off the mark.
Whether demutualisation is the eventual remedial measure that can found the stock market in Bangladesh on sound footing is a matter of debate. There are people on both sides of the divide who have logics in favour of their stances. Some say there is no guarantee that on demutualisation of the stock exchanges everything will be alright and no stock market crash will happen again.
However, it has many positive aspects. The benefits of demutualisation include better corporate governance, access to economic and human capital, enhancement of listings and international alliances. On the other hand, it also provides some challenges, which include a regulatory framework, conflicts of interest, ownership structure issues and agency cost.
Though demutualisation has some positive aspects, it cannot be the ultimate solution to any stock market debacle, unless the other key market instruments are there. As the concept of demutualisation is new in Bangladesh, we have to wait for few years to evalutae its efficacy. The government deserves thanks for coming up with a positive mindset. As the ball of demutualisation has started rolling, now what remains to be seen is how the market functions in the preliminary phase. Changes in the mindset of those at the helm of the exchanges and the attitude of other key market players are crucial for further development.

The author is a stock market analyst and now is serving as a Young Professional at BRAC.
 toufique2010@gmail.com